10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-08323
CIGNA Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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06-1059331 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
Two Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania 19192(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (215) 761-1000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of October 16, 2009, 273,436,995 shares of the issuers common stock were
outstanding.
CIGNA CORPORATION
INDEX
As used herein, CIGNA or the Company refers to one or more of CIGNA Corporation and its
consolidated subsidiaries.
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CIGNA Corporation
Consolidated Statements of Income
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|
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|
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Unaudited |
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Unaudited |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
|
(In millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
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|
Premiums and fees |
|
$ |
3,985 |
|
|
$ |
4,128 |
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|
$ |
12,049 |
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|
$ |
12,197 |
|
Net investment income |
|
|
263 |
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|
|
272 |
|
|
|
752 |
|
|
|
802 |
|
Mail order pharmacy revenues |
|
|
316 |
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|
|
300 |
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|
|
944 |
|
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|
882 |
|
Other revenues |
|
|
(61 |
) |
|
|
175 |
|
|
|
73 |
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|
|
431 |
|
Realized investment gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other-than-temporary impairments on debt securities, net |
|
|
(16 |
) |
|
|
(66 |
) |
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|
(42 |
) |
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|
(92 |
) |
Other realized investment gains |
|
|
30 |
|
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|
43 |
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|
2 |
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64 |
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|
|
|
|
|
|
|
|
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|
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|
Total realized investment gains (losses) |
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|
14 |
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|
(23 |
) |
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|
(40 |
) |
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|
(28 |
) |
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|
|
|
|
|
|
|
|
|
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|
Total revenues |
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|
4,517 |
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|
|
4,852 |
|
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|
13,778 |
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|
|
14,284 |
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|
|
|
|
|
|
|
|
|
|
|
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Benefits and Expenses |
|
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|
|
|
|
|
|
|
|
|
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|
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Health Care medical claims expense |
|
|
1,698 |
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|
1,819 |
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|
5,226 |
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|
|
5,480 |
|
Other benefit expenses |
|
|
754 |
|
|
|
1,049 |
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|
2,551 |
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|
2,877 |
|
Mail order pharmacy cost of goods sold |
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|
255 |
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|
238 |
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|
762 |
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|
704 |
|
Guaranteed minimum income benefits (income) expense |
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(19 |
) |
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|
98 |
|
|
|
(215 |
) |
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|
353 |
|
Other operating expenses |
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|
1,342 |
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|
1,415 |
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|
4,064 |
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|
4,150 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Total benefits and expenses |
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|
4,030 |
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|
|
4,619 |
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|
12,388 |
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|
|
13,564 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Income from Continuing Operations before Income Taxes |
|
|
487 |
|
|
|
233 |
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|
1,390 |
|
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefits): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current |
|
|
68 |
|
|
|
65 |
|
|
|
138 |
|
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|
274 |
|
Deferred |
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|
89 |
|
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|
(3 |
) |
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|
279 |
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|
(54 |
) |
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|
|
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|
|
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|
Total taxes |
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|
157 |
|
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|
62 |
|
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|
417 |
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|
220 |
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|
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|
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|
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Income from Continuing Operations |
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330 |
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|
171 |
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|
973 |
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|
500 |
|
Income from Discontinued Operations, Net of Taxes |
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|
1 |
|
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|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net Income |
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330 |
|
|
|
172 |
|
|
|
974 |
|
|
|
503 |
|
Less: Net Income Attributable to Noncontrolling Interest |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
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Shareholders Net Income |
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$ |
329 |
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|
$ |
171 |
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|
$ |
972 |
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$ |
501 |
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Basic Earnings Per Share: |
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Shareholders income from continuing operations |
|
$ |
1.20 |
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|
$ |
0.62 |
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|
$ |
3.55 |
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|
$ |
1.79 |
|
Shareholders income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
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|
0.01 |
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|
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|
|
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|
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|
|
|
|
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|
|
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Shareholders net income |
|
$ |
1.20 |
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|
$ |
0.62 |
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|
$ |
3.55 |
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|
$ |
1.80 |
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|
Diluted Earnings Per Share: |
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|
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|
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Shareholders income from continuing operations |
|
$ |
1.19 |
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|
$ |
0.62 |
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|
$ |
3.54 |
|
|
$ |
1.77 |
|
Shareholders income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Shareholders net income |
|
$ |
1.19 |
|
|
$ |
0.62 |
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|
$ |
3.54 |
|
|
$ |
1.78 |
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|
|
|
|
|
|
|
|
|
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|
Dividends Declared Per Share |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.040 |
|
|
$ |
0.040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Amounts Attributable to CIGNA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
329 |
|
|
$ |
170 |
|
|
$ |
971 |
|
|
$ |
498 |
|
Shareholders income from discontinued operations |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Net Income |
|
$ |
329 |
|
|
$ |
171 |
|
|
$ |
972 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
1
CIGNA Corporation
Consolidated Balance Sheets
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|
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Unaudited |
|
|
|
|
|
|
|
|
|
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|
|
|
|
As of |
|
|
|
|
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|
As of |
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
December 31, |
|
(In millions, except per share amounts) |
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost, $12,471; $11,492) |
|
|
|
|
|
$ |
13,488 |
|
|
|
|
|
|
$ |
11,781 |
|
Equity securities, at fair value (cost, $131; $140) |
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
112 |
|
Commercial mortgage loans |
|
|
|
|
|
|
3,607 |
|
|
|
|
|
|
|
3,617 |
|
Policy loans |
|
|
|
|
|
|
1,530 |
|
|
|
|
|
|
|
1,556 |
|
Real estate |
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
53 |
|
Other long-term investments |
|
|
|
|
|
|
592 |
|
|
|
|
|
|
|
632 |
|
Short-term investments |
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
|
|
|
|
19,646 |
|
|
|
|
|
|
|
17,987 |
|
Cash and cash equivalents |
|
|
|
|
|
|
836 |
|
|
|
|
|
|
|
1,342 |
|
Accrued investment income |
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
225 |
|
Premiums, accounts and notes receivable, net |
|
|
|
|
|
|
1,481 |
|
|
|
|
|
|
|
1,407 |
|
Reinsurance recoverables |
|
|
|
|
|
|
6,689 |
|
|
|
|
|
|
|
6,973 |
|
Deferred policy acquisition costs |
|
|
|
|
|
|
886 |
|
|
|
|
|
|
|
789 |
|
Property and equipment |
|
|
|
|
|
|
827 |
|
|
|
|
|
|
|
804 |
|
Deferred income taxes, net |
|
|
|
|
|
|
1,017 |
|
|
|
|
|
|
|
1,617 |
|
Goodwill |
|
|
|
|
|
|
2,876 |
|
|
|
|
|
|
|
2,878 |
|
Other assets, including other intangibles |
|
|
|
|
|
|
1,166 |
|
|
|
|
|
|
|
1,520 |
|
Separate account assets |
|
|
|
|
|
|
6,964 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
42,653 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder deposit funds |
|
|
|
|
|
$ |
8,488 |
|
|
|
|
|
|
$ |
8,539 |
|
Future policy benefits |
|
|
|
|
|
|
8,304 |
|
|
|
|
|
|
|
8,754 |
|
Unpaid claims and claim expenses |
|
|
|
|
|
|
4,006 |
|
|
|
|
|
|
|
4,037 |
|
Health Care medical claims payable |
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
924 |
|
Unearned premiums and fees |
|
|
|
|
|
|
424 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance and contractholder liabilities |
|
|
|
|
|
|
22,154 |
|
|
|
|
|
|
|
22,668 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
5,805 |
|
|
|
|
|
|
|
6,869 |
|
Short-term debt |
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
301 |
|
Long-term debt |
|
|
|
|
|
|
2,435 |
|
|
|
|
|
|
|
2,090 |
|
Nonrecourse obligations |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
16 |
|
Separate account liabilities |
|
|
|
|
|
|
6,964 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
37,485 |
|
|
|
|
|
|
|
37,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies Note 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (par value per share, $0.25; shares issued, 351) |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
Additional paid-in capital |
|
|
|
|
|
|
2,510 |
|
|
|
|
|
|
|
2,502 |
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
402 |
|
|
|
|
|
|
$ |
(147 |
) |
|
|
|
|
Net unrealized appreciation, equity securities |
|
|
4 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
|
(27 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
Net translation of foreign currencies |
|
|
(17 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
Postretirement benefits liability adjustment |
|
|
(878 |
) |
|
|
|
|
|
|
(861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(516 |
) |
|
|
|
|
|
|
(1,074 |
) |
Retained earnings |
|
|
|
|
|
|
8,303 |
|
|
|
|
|
|
|
7,374 |
|
Less treasury stock, at cost |
|
|
|
|
|
|
(5,228 |
) |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
5,157 |
|
|
|
|
|
|
|
3,592 |
|
Noncontrolling interest |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
5,168 |
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
|
|
|
$ |
42,653 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity Per Share |
|
|
|
|
|
$ |
18.86 |
|
|
|
|
|
|
$ |
13.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
2
CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
2009 |
|
|
2008 |
|
|
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
|
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
Three Months Ended September 30 |
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
Common Stock, September 30 |
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, July 1 |
|
|
|
|
|
|
2,506 |
|
|
|
|
|
|
|
2,493 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, September 30 |
|
|
|
|
|
|
2,510 |
|
|
|
|
|
|
|
2,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, July 1 |
|
|
|
|
|
|
(837 |
) |
|
|
|
|
|
|
(84 |
) |
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
302 |
|
|
|
302 |
|
|
$ |
(133 |
) |
|
|
(133 |
) |
Net unrealized appreciation (depreciation), equity securities |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on securities |
|
|
299 |
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
Net unrealized appreciation (depreciation), derivatives |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
14 |
|
|
|
14 |
|
Net translation of foreign currencies |
|
|
29 |
|
|
|
29 |
|
|
|
(56 |
) |
|
|
(56 |
) |
Postretirement benefits liability adjustment |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
321 |
|
|
|
|
|
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, September 30 |
|
|
|
|
|
|
(516 |
) |
|
|
|
|
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, July 1 |
|
|
|
|
|
|
7,986 |
|
|
|
|
|
|
|
7,412 |
|
Shareholders net income |
|
|
329 |
|
|
|
329 |
|
|
|
171 |
|
|
|
171 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, September 30 |
|
|
|
|
|
|
8,303 |
|
|
|
|
|
|
|
7,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, July 1 |
|
|
|
|
|
|
(5,254 |
) |
|
|
|
|
|
|
(5,155 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125 |
) |
Other,
primarily issuance of treasury stock for employee benefit plans |
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, September 30 |
|
|
|
|
|
|
(5,228 |
) |
|
|
|
|
|
|
(5,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Comprehensive Income and Shareholders Equity |
|
|
650 |
|
|
|
5,157 |
|
|
|
1 |
|
|
|
4,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, July 1 |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
7 |
|
Net income attributable to noncontrolling interest |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Accumulated other comprehensive income attributable to noncontrolling interest |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, September 30 |
|
|
2 |
|
|
|
11 |
|
|
|
1 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income and Total Equity |
|
$ |
652 |
|
|
$ |
5,168 |
|
|
$ |
2 |
|
|
$ |
4,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
3
CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
2009 |
|
|
2008 |
|
|
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
|
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
Nine Months Ended September 30 |
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
Common Stock, September 30 |
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, January 1 |
|
|
|
|
|
|
2,502 |
|
|
|
|
|
|
|
2,474 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, September 30 |
|
|
|
|
|
|
2,510 |
|
|
|
|
|
|
|
2,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), January 1 |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
51 |
|
Implementation effect of updated guidance on other-than-temporary impairments |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
567 |
|
|
|
567 |
|
|
$ |
(247 |
) |
|
|
(247 |
) |
Net unrealized appreciation (depreciation), equity securities |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on securities |
|
|
564 |
|
|
|
|
|
|
|
(245 |
) |
|
|
|
|
Net unrealized appreciation (depreciation), derivatives |
|
|
(14 |
) |
|
|
(14 |
) |
|
|
3 |
|
|
|
3 |
|
Net translation of foreign currencies |
|
|
43 |
|
|
|
43 |
|
|
|
(79 |
) |
|
|
(79 |
) |
Postretirement benefits liability adjustment |
|
|
(17 |
) |
|
|
(17 |
) |
|
|
16 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
576 |
|
|
|
|
|
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, September 30 |
|
|
|
|
|
|
(516 |
) |
|
|
|
|
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, January 1 |
|
|
|
|
|
|
7,374 |
|
|
|
|
|
|
|
7,113 |
|
Shareholders net income |
|
|
972 |
|
|
|
972 |
|
|
|
501 |
|
|
|
501 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
(21 |
) |
Implementation effect of updated guidance on other-than-temporary impairments |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
Common dividends declared (per share: $0.04; $0.04) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, September 30 |
|
|
|
|
|
|
8,303 |
|
|
|
|
|
|
|
7,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, January 1 |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
(4,978 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(347 |
) |
Other,
primarily issuance of treasury stock for employee benefit plans |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, September 30 |
|
|
|
|
|
|
(5,228 |
) |
|
|
|
|
|
|
(5,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Comprehensive Income and Shareholders Equity |
|
|
1,548 |
|
|
|
5,157 |
|
|
|
196 |
|
|
|
4,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, January 1 |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Net income attributable to noncontrolling interest |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Accumulated other comprehensive income attributable to noncontrolling interest |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, September 30 |
|
|
5 |
|
|
|
11 |
|
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income and Total Equity |
|
$ |
1,553 |
|
|
$ |
5,168 |
|
|
$ |
198 |
|
|
$ |
4,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
4
CIGNA Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Nine Months Ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
974 |
|
|
$ |
503 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(1 |
) |
|
|
(3 |
) |
Income attributable to noncontrolling interest |
|
|
(2 |
) |
|
|
(2 |
) |
Insurance liabilities |
|
|
(271 |
) |
|
|
185 |
|
Reinsurance recoverables |
|
|
(1 |
) |
|
|
47 |
|
Deferred policy acquisition costs |
|
|
(60 |
) |
|
|
(74 |
) |
Premiums, accounts and notes receivable |
|
|
(72 |
) |
|
|
16 |
|
Other assets |
|
|
350 |
|
|
|
(425 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(1,126 |
) |
|
|
717 |
|
Current income taxes |
|
|
(29 |
) |
|
|
(5 |
) |
Deferred income taxes |
|
|
279 |
|
|
|
(54 |
) |
Realized investment losses |
|
|
40 |
|
|
|
28 |
|
Depreciation and amortization |
|
|
207 |
|
|
|
181 |
|
Gains on sales of businesses (excluding discontinued operations) |
|
|
(24 |
) |
|
|
(28 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
1 |
|
|
|
|
|
Other, net |
|
|
4 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
269 |
|
|
|
1,050 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from investments sold: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
655 |
|
|
|
1,123 |
|
Equity securities |
|
|
21 |
|
|
|
5 |
|
Commercial mortgage loans |
|
|
23 |
|
|
|
48 |
|
Other (primarily short-term and other long-term investments) |
|
|
485 |
|
|
|
279 |
|
Investment maturities and repayments: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
791 |
|
|
|
660 |
|
Commercial mortgage loans |
|
|
44 |
|
|
|
31 |
|
Investments purchased: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(2,257 |
) |
|
|
(2,237 |
) |
Equity securities |
|
|
(8 |
) |
|
|
(18 |
) |
Commercial mortgage loans |
|
|
(121 |
) |
|
|
(359 |
) |
Other (primarily short-term and other long-term investments) |
|
|
(489 |
) |
|
|
(344 |
) |
Property and equipment purchases |
|
|
(218 |
) |
|
|
(179 |
) |
Acquisition of Great-West Healthcare, net of cash acquired |
|
|
|
|
|
|
(1,301 |
) |
Other (primarily other acquisitions/dispositions) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,074 |
) |
|
|
(2,304 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Deposits and interest credited to contractholder deposit funds |
|
|
1,011 |
|
|
|
989 |
|
Withdrawals and benefit payments from contractholder deposit funds |
|
|
(946 |
) |
|
|
(901 |
) |
Change in cash overdraft position |
|
|
82 |
|
|
|
(3 |
) |
Net change in short-term debt |
|
|
(199 |
) |
|
|
312 |
|
Net proceeds on issuance of long-term debt |
|
|
346 |
|
|
|
297 |
|
Repayment of long-term debt |
|
|
(2 |
) |
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
(340 |
) |
Issuance of common stock |
|
|
9 |
|
|
|
37 |
|
Common dividends paid |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
290 |
|
|
|
377 |
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes on cash and cash equivalents |
|
|
9 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(506 |
) |
|
|
(892 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,342 |
|
|
|
1,970 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
836 |
|
|
$ |
1,078 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Information: |
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
171 |
|
|
$ |
267 |
|
Interest paid |
|
$ |
107 |
|
|
$ |
96 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
5
CIGNA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
The Consolidated Financial Statements include the accounts of CIGNA Corporation, its significant
subsidiaries, and variable interest entities of which CIGNA Corporation is the primary beneficiary
(referred to collectively as the Company). Intercompany transactions and accounts have been
eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity
with accounting principles generally accepted in the United States of America (GAAP).
The interim consolidated financial statements are unaudited but include all adjustments (including
normal recurring adjustments) necessary, in the opinion of management, for a fair statement of
financial position and results of operations for the periods reported. The interim consolidated
financial statements and notes should be read in conjunction with the Consolidated Financial
Statements and Notes in the Companys Form 10-K for the year ended December 31, 2008.
The preparation of interim consolidated financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of portions of the health
care and related benefits business as well as competitive and other market conditions, call for
caution in estimating full year results based on interim results of operations.
In preparing these interim consolidated financial statements, the Company has evaluated events that
occurred between the balance sheet date and November 5, 2009.
Certain reclassifications and restatements have been made to prior period amounts to conform to the
current presentation. In addition, certain restatements have been made in connection with
the adoption of new accounting pronouncements. See Note 2 for further information.
Discontinued operations for the nine months ended September 30, 2009 primarily represented a tax
benefit associated with a past divestiture, resolved at the completion of the 2005 and 2006 IRS
examinations.
Discontinued operations for the third quarter of 2008 included a gain of $1 million after-tax from
the settlement of certain issues related to a past divestiture. Discontinued operations for the
nine months ended September 30, 2008 included a gain of $3 million after-tax from the settlement of
certain issues related to a past divestiture.
Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.
Note 2 Recent Accounting Pronouncements
Accounting Standards Codification. The Financial Accounting Standards Board (FASB) has established
the Accounting Standards Codification (Codification or ASC) as the single source of authoritative
accounting guidance effective for reporting in the third quarter of 2009. Therefore, the Company
will use the Codification section or description when referring to GAAP except for very recent
guidance that has not yet been incorporated into the Codification.
Other-than-temporary impairments. On April 1, 2009, the Company adopted the FASBs updated
guidance for evaluating whether an impairment is other than temporary for fixed maturities with
declines in fair value below amortized cost (ASC 320). It requires assessing the Companys intent
to sell or whether it is more likely than not that the Company will be required to sell such fixed
maturities before their fair values recover. If so, an impairment loss is recognized in net
income for the excess of the amortized cost over fair value. The Company must also determine if it
does not expect to recover the amortized cost of fixed maturities with declines in fair value (even
if it does not intend to sell or will not be required to sell these fixed maturities). In this
case, the credit portion of the impairment loss is recognized in net income and the non-credit
portion of an impairment loss is recognized in a separate component of shareholders equity. A
reclassification adjustment from retained earnings to accumulated other comprehensive income was
required for previously impaired fixed maturities that have a non-credit loss as of the date of
adoption, less related tax effects.
The cumulative effect of adoption increased the Companys retained earnings with an offsetting
decrease to accumulated other comprehensive income of $18 million, with no overall change to
shareholders equity. See Note 9 for information on the Companys other-than-temporary impairments
including additional required disclosures.
6
Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted the
FASBs updated guidance on accounting for noncontrolling interests (ASC 810) through retroactive
restatement of prior financial statements and reclassified $6 million of noncontrolling interest as
of January 1, 2009 and 2008 from Accounts payable, accrued expenses and other liabilities to
Noncontrolling interest in total equity. In addition, for the nine months ended September 30,
2008, net income of $2 million attributable to the noncontrolling interest has been reclassified to
be included in net income, with a reduction to net income to determine net income attributable to
the Companys shareholders (shareholders net income).
Earnings per share. Effective January 1, 2009, the Company adopted the FASBs updated earnings per
share guidance (ASC 260) for determining participating securities which requires unvested
restricted stock awards that contain rights to nonforfeitable dividends to be included in the
denominator of both basic and diluted earnings per share (EPS) calculations. Prior period EPS
data have been restated to reflect the adoption of this guidance. See Note 4 for the effects of
this guidance on previously reported EPS amounts.
Business combinations. Effective January 1, 2009, the Company adopted the FASBs guidance on
accounting for business combinations (ASC 805) that requires fair value measurements for all future
acquisitions, including contingent purchase price and certain contingent assets or liabilities of
the entity to be acquired, requires acquisition related and restructuring costs to be expensed as
incurred and requires changes in tax items after the acquisition date to be reported in income tax
expense. There were no effects to the Companys Consolidated Financial Statements at adoption.
Derivatives disclosures. Effective January 1, 2009, the Company expanded its disclosures on
derivatives and hedging activities to comply with the FASBs updated guidance (ASC 815) that
requires the Company to disclose the purpose for using derivative instruments, their accounting
treatment and related effects on financial condition, results of operations and liquidity. See
Note 10 for information on the Companys derivative financial instruments including these
additional required disclosures.
Fair value measurements. Effective January 1, 2008, the Company adopted the FASBs fair value
disclosure and measurement guidance (ASC 820) that expands disclosures about fair value
measurements and clarifies how to measure fair value by focusing on the price that would be
received when selling an asset or paid to transfer a liability (exit price). In addition, the FASB
amended the fair value guidance in 2008 to provide additional guidance for determining the fair
value of a financial asset when the market for that instrument is not active. See Note 8 for
information on the Companys fair value measurements.
The Company carries certain financial instruments at fair value in the financial statements
including approximately $13.8 billion in invested assets at September 30, 2009. The Company also
carries derivative instruments at fair value, including assets and liabilities for reinsurance
contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain
variable annuity contracts issued by other insurance companies and related retrocessional
contracts. The Company also reports separate account assets at fair value; however, changes in the
fair values of these assets accrue directly to policyholders and are not included in the Companys
revenues and expenses. At the adoption of this fair value guidance, there were no effects to the
Companys measurements of fair values for financial instruments other than for GMIB assets and
liabilities discussed below. In addition, there were no effects to the Companys measurements of
financial assets of adopting the FASBs 2008 amendment to this fair value guidance.
At adoption, the Company was required to change certain assumptions used to estimate the fair
values of GMIB assets and liabilities. Because there is no market for these contracts, the
assumptions used to estimate their fair values at adoption were determined using a hypothetical
market participants view of exit price, rather than using historical market data and actual
experience to establish the Companys future expectations. Certain of these assumptions have
limited or no observable market data so determining an exit price requires the Company to exercise
significant judgment and make critical accounting estimates. On adoption, the Company recorded a
charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off
Reinsurance.
The Companys results of operations related to this business are expected to continue to be
volatile in future periods because several underlying assumptions will be based on current
market-observable inputs which will likely change each period. See Note 8 for additional
information.
During the first nine months of 2009, the Company adopted FASB guidance that clarifies how to
determine fair value for various assets and liabilities with no material effects to the Companys
Consolidated Financial Statements.
In the
third quarter of 2009, the FASB issued guidance on measuring the fair
value of liabilities and for investments
in certain entities to provide a practical alternative under certain conditions to determine the fair
value of these investments using their net asset value or its equivalent. The Company expects no
material effects on its Consolidated Financial Statements at adoption in the fourth quarter of
2009.
7
Transfers of financial assets. In 2009, the FASB issued SFAS No. 166 Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140, which changes the requirements for
recognizing the transfer of financial assets and requires additional disclosures about a
transferors continuing involvement in transferred financial assets. The guidance also eliminates
the concept of a qualifying special purpose entity when assessing transfers of financial
instruments. The recognition and measurement provisions of this guidance must be applied to
transfers that occur on or after January 1, 2010. On adoption, the Company does not expect a
material effect to the results of operations or financial condition.
Variable interest entities. In 2009, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 167, Amendments to FASB Interpretation No. 46(R), which amended guidance requiring
periodic qualitative analyses to determine whether a variable interest entity must be consolidated
by the Company. In addition, this guidance requires the Company to disclose any significant
judgments and assumptions made in determining whether it must consolidate a variable interest
entity. Any changes in consolidated entities resulting from these requirements must be applied
through retrospective restatement of prior financial statements beginning in 2010. The Company is
presently evaluating the impact of these new requirements.
8
Note 3 Acquisitions and Dispositions
The Company may from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division
of Great-West Life and Annuity, Inc. (Great-West Healthcare or the acquired business) through
100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets
and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion
consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and
the assumption of net liabilities under the reinsurance agreement of approximately $0.1
billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss
coverage to select and regional employer groups. Great-West Healthcares offerings also include
the following specialty products: stop loss, life, disability, medical, dental, vision,
prescription drug coverage, and accidental death and dismemberment insurance. The acquisition,
which was accounted for as a purchase, was financed through a combination of cash and the issuance
of both short and long-term debt.
In the first quarter of 2009, the Company completed its allocation of the total purchase price to
the tangible and intangible net assets acquired based on managements estimates of their fair
values without material changes from December 31, 2008.
The results of Great-West Healthcare are included in the Companys Consolidated Financial
Statements from the date of acquisition.
The following table presents selected unaudited pro forma information for the Company assuming the
acquisition had occurred as of January 1, 2008. The pro forma information does not purport to
represent what the Companys actual results would have been if the acquisition had occurred as of
that date or what such results will be for any future periods.
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
(In millions, except per share amounts) |
|
2008 |
|
Total revenues |
|
$ |
14,652 |
|
Shareholders income from continuing operations |
|
$ |
526 |
|
Shareholders net income |
|
$ |
529 |
|
Earnings per share: |
|
|
|
|
Shareholders income from continuing operations |
|
|
|
|
Basic |
|
$ |
1.89 |
|
Diluted |
|
$ |
1.87 |
|
Shareholders net income |
|
|
|
|
Basic |
|
$ |
1.90 |
|
Diluted |
|
$ |
1.88 |
|
|
|
|
|
9
Note 4 Earnings Per Share
Basic and diluted earnings per share were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
(In millions, except per share amounts) |
|
Basic |
|
|
Dilution |
|
|
Diluted |
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
329 |
|
|
$ |
|
|
|
$ |
329 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
274,398 |
|
|
|
|
|
|
|
274,398 |
|
Options |
|
|
|
|
|
|
1,732 |
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
274,398 |
|
|
|
1,732 |
|
|
|
276,130 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
1.20 |
|
|
$ |
(0.01 |
) |
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
170 |
|
|
$ |
|
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
275,141 |
|
|
|
|
|
|
|
275,141 |
|
Options |
|
|
|
|
|
|
1,665 |
|
|
|
1,665 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
275,141 |
|
|
|
1,665 |
|
|
|
276,806 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
0.62 |
|
|
$ |
|
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
(In millions, except per share amounts) |
|
Basic |
|
|
Dilution |
|
|
Diluted |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
971 |
|
|
$ |
|
|
|
$ |
971 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
273,698 |
|
|
|
|
|
|
|
273,698 |
|
Options |
|
|
|
|
|
|
993 |
|
|
|
993 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
273,698 |
|
|
|
993 |
|
|
|
274,691 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
3.55 |
|
|
$ |
(0.01 |
) |
|
$ |
3.54 |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
498 |
|
|
$ |
|
|
|
$ |
498 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
278,912 |
|
|
|
|
|
|
|
278,912 |
|
Options |
|
|
|
|
|
|
2,035 |
|
|
|
2,035 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
278,912 |
|
|
|
2,035 |
|
|
|
280,947 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
1.79 |
|
|
$ |
(0.02 |
) |
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
10
As described in Note 2, effective in 2009, the Company adopted the FASBs new guidance for
determining participating securities which requires the Companys unvested restricted stock awards
to be included in weighted average shares instead of being considered a common stock equivalent.
Prior period share information has been restated as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
|
As originally |
|
|
|
|
|
|
As originally |
|
|
|
|
|
|
reported |
|
|
As adjusted |
|
|
reported |
|
|
As adjusted |
|
Shareholders income from continuing operations |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
|
As originally |
|
|
|
|
|
|
As originally |
|
|
|
|
|
|
reported |
|
|
As adjusted |
|
|
reported |
|
|
As adjusted |
|
Shareholders income from continuing operations |
|
$ |
1.80 |
|
|
$ |
1.79 |
|
|
$ |
1.78 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding employee stock options were not included in the computation of
diluted earnings per share because their effect would have increased diluted earnings per share
(antidilutive) as their exercise price was greater than the average share price of the Companys
common stock for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Antidilutive options |
|
|
8.7 |
|
|
|
4.9 |
|
|
|
10.0 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company held 77,475,700 shares of common stock in Treasury as of September 30, 2009, and
78,693,702 shares as of September 30, 2008.
Note 5 Health Care Medical Claims Payable
Medical claims payable for the Health Care segment reflects estimates of the ultimate cost of
claims that have been incurred but not yet reported, those which have been reported but not yet
paid (reported claims in process) and other medical expense payable, which primarily comprises
accruals for provider incentives and other amounts payable to providers. Incurred but not yet
reported comprises the majority of the reserve balance as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Incurred but not yet reported |
|
$ |
814 |
|
|
$ |
782 |
|
Reported claims in process |
|
|
101 |
|
|
|
114 |
|
Other medical expense payable |
|
|
17 |
|
|
|
28 |
|
|
|
|
|
|
|
|
Medical claims payable |
|
$ |
932 |
|
|
$ |
924 |
|
|
|
|
|
|
|
|
11
Activity in medical claims payable was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the period ended |
|
|
|
September 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
924 |
|
|
$ |
975 |
|
Less: Reinsurance and other amounts recoverable |
|
|
211 |
|
|
|
258 |
|
|
|
|
|
|
|
|
Balance at January 1, net |
|
|
713 |
|
|
|
717 |
|
Acquired April 1, 2008 net |
|
|
|
|
|
|
90 |
|
Incurred claims related to: |
|
|
|
|
|
|
|
|
Current year |
|
|
5,265 |
|
|
|
7,312 |
|
Prior years |
|
|
(39 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
Total incurred |
|
|
5,226 |
|
|
|
7,252 |
|
Paid claims related to: |
|
|
|
|
|
|
|
|
Current year |
|
|
4,560 |
|
|
|
6,716 |
|
Prior years |
|
|
643 |
|
|
|
630 |
|
|
|
|
|
|
|
|
Total paid |
|
|
5,203 |
|
|
|
7,346 |
|
Ending Balance, net |
|
|
736 |
|
|
|
713 |
|
Add: Reinsurance and other amounts recoverable |
|
|
196 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
932 |
|
|
$ |
924 |
|
|
|
|
|
|
|
|
Reinsurance and other amounts recoverable reflect amounts due from reinsurers and
policyholders to cover incurred but not reported and pending claims for minimum premium products
and certain administrative services only business where the right of offset does not exist. See
Note 11 for additional information on reinsurance. For the nine months ended September 30, 2009,
actual experience differed from the Companys key assumptions resulting in favorable incurred
claims related to prior years medical claims payable of $39 million, or 0.5% of the current year
incurred claims as reported for the year ended December 31, 2008. Actual completion factors
resulted in a reduction in medical claims payable of $18 million, or 0.2% of the current year
incurred claims as reported for the year ended December 31, 2008 for the insured book of business.
Actual medical cost trend resulted in a reduction in medical claims payable of $21 million, or 0.3%
of the current year incurred claims as reported for the year ended December 31, 2008 for the
insured book of business.
For the year ended December 31, 2008, actual experience differed from the Companys key
assumptions, resulting in favorable incurred claims related to prior years medical claims payable
of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December
31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29
million, or 0.4% of the current year incurred claims as reported for the year ended December 31,
2007 for the insured book of business. Actual medical cost trend resulted in a reduction of the
medical claims payable of $31 million, or 0.5% of the current year incurred claims as reported for
the year ended December 31, 2007 for the insured book of business.
The favorable impacts in 2009 and 2008 relating to completion factors and medical cost trend
variances are primarily due to the release of the provision for moderately adverse conditions,
which is a component of the assumptions for both completion factors and medical cost trend,
established for claims incurred related to prior years. This release was substantially offset by
the provision for moderately adverse conditions established for claims incurred related to the
current year.
The corresponding impact of prior year development on shareholders net income was not material for
the three months and nine months ended September 30, 2009 and 2008. The change in the amount of the
incurred claims related to prior years in the medical claims payable liability does not directly
correspond to an increase or decrease in the Companys shareholders net income recognized for the
following reasons:
First, due to the nature of the Companys retrospectively experience-rated business, only
adjustments to medical claims payable on accounts in deficit affect shareholders net income. An
increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the
Company and directly impacts shareholders net income. An account is in deficit when the
accumulated medical costs and administrative charges, including profit charges, exceed the
accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue
directly to the policyholder with no impact on the Companys shareholders net income. An account
is in surplus when the accumulated premium received exceeds the accumulated medical costs and
administrative charges, including profit charges.
12
Second, the Company consistently recognizes the actuarial best estimate of the ultimate liability
within a level of confidence, as required by actuarial standards of practice, which require that
the liabilities be adequate under moderately adverse conditions. As the Company establishes the
liability for each incurral year, the Company ensures that its assumptions appropriately consider
moderately adverse conditions. When a portion of the development related to the prior year incurred
claims is offset by an increase determined appropriate to address moderately adverse conditions for
the current year incurred claims, the Company does not consider that offset amount as having any
impact on shareholders net income.
The determination of liabilities for Health Care medical claims payable required the Company to
make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the
Companys 2008 Form 10-K.
Note 6 Cost Reduction
During 2009, the Company continued its previously announced comprehensive review to reduce the
operating expenses of its ongoing businesses. As a result, the Company recognized severance
related charges in other operating expenses as follows:
|
|
during the third quarter of 2009, a charge of $10 million pre-tax ($7 million after-tax),
for severance resulting from reductions of approximately 230
positions in its workforce; and |
|
|
during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax),
for severance resulting from reductions of approximately 480 positions in its workforce. |
Substantially all of these charges were recorded in the Health Care segment, and are expected to be
paid in cash by June 30, 2010.
Cost reduction activity for 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Severance |
|
|
Real estate |
|
|
Total |
|
Balance, January 1, 2009 |
|
$ |
44 |
|
|
$ |
11 |
|
|
$ |
55 |
|
Add: Second quarter 2009 charge |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Add: Third quarter 2009 charge |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal cost reduction actions |
|
|
68 |
|
|
|
11 |
|
|
|
79 |
|
Less: Payments |
|
|
36 |
|
|
|
3 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
32 |
|
|
$ |
8 |
|
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
Note 7 Guaranteed Minimum Death Benefit Contracts
The Companys reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured guaranteed minimum death benefits (GMDB), also known as
variable annuity death benefits (VADBe), under certain variable annuities issued by other insurance
companies. These variable annuities are essentially investments in mutual funds combined with a
death benefit. The Company has equity and other market exposures as a result of this product. In
periods of declining equity markets and in periods of flat equity markets following a decline, the
Companys liabilities for these guaranteed minimum death benefits increase. Conversely, in periods
of rising equity markets, the Companys liabilities for these guaranteed minimum death benefits
decrease.
In order to substantially reduce the equity market exposures relating to guaranteed minimum death
benefit contracts, the Company operates a dynamic hedge program (GMDB equity hedge program), using
exchange-traded futures contracts. The hedge program is designed to substantially offset both
positive and negative impacts of changes in equity markets on the GMDB liability. The hedge
program involves detailed, daily monitoring of equity market movements and rebalancing the futures
contracts within established parameters. While the hedge program is actively managed, it may not
exactly offset changes in the GMDB liability due to, among other things, divergence between the
performance of the underlying mutual funds and the hedge instruments, high levels of volatility in
the equity markets, and differences between actual contractholder behavior and what is assumed. In
addition, underlying mutual fund data is not reported and incorporated into the required hedge
position on a real time basis, which also impacts the performance of the hedge program. Although
this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it
is designed and operated to substantially reduce equity market exposures resulting from this
product. The results of these futures contracts are included in other revenue and amounts
reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits
and expenses, consistent with GAAP when a premium deficiency exists.
13
The GMDB reinsurance business is considered premium deficient because the expected present value of
future claims and expenses exceeds the expected present value of future premiums and investment
income using revised assumptions based on actual and expected experience. The Company performs a
reserve review on a quarterly basis using current market conditions and assumptions. Under premium
deficiency accounting if the recorded reserve is determined insufficient, an increase to the
reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does
not recognize gains on premium deficient long duration products.
The Company had future policy benefit reserves for GMDB contracts of $1.4 billion as of September
30, 2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB
requires the Company to make critical accounting estimates. The Company estimates its liabilities
for GMDB exposures using a complex internal model run using many scenarios and based on assumptions
regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance
and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a
contractholders death. Future partial surrender refers to the fact that most contractholders have
the ability to withdraw substantially all of their mutual fund investments while retaining the
death benefit coverage in effect at the time of the withdrawal. Mean investment performance refers
to market rates to be earned over the life of the GMDB equity hedge program, and market volatility
refers to market fluctuation. These assumptions are based on the Companys experience and future
expectations over the long-term period, consistent with the long-term nature of this product. The
Company regularly evaluates these assumptions and changes its estimates if actual experience or
other evidence suggests that assumptions should be revised. If actual experience differs from the
assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility)
used in estimating these liabilities, the result could have a material adverse effect on the
Companys consolidated results of operations, and in certain situations, could have a material
adverse effect on the Companys financial condition.
The following provides information about the Companys reserving methodology and assumptions for
GMDB as of September 30, 2009:
|
|
The reserve represents estimates of the present value of net amounts expected to be paid,
less the present value of net future premiums. Included in net amounts expected to be paid is
the excess of the guaranteed death benefits over the values of the contractholders accounts
(based on underlying equity and bond mutual fund investments). |
|
|
The reserve includes an estimate for future partial surrenders that essentially lock in the
death benefit for a particular policy based on annual election rates that vary from 0-20%
depending on the net amount at risk for each policy and whether surrender charges apply. |
|
|
The mean investment performance assumption is 5% considering the Companys GMDB equity
hedge program using futures contracts. This is reduced by fund fees ranging from 1-3% across
all funds. The results of futures contracts are reflected in the liability calculation as a
component of investment returns. |
|
|
The volatility assumption is based on a review of historical monthly returns for each key
index (e.g. S&P 500) over a period of at least ten years. Volatility represents the
dispersion of historical returns compared to the average historical return (standard
deviation) for each index. The assumption is 16-30%, varying by equity fund type; 4-10%,
varying by bond fund type; and 2% for money market funds. These volatility assumptions are
used along with the mean investment performance assumption to project future return scenarios. |
|
|
The discount rate is 5.75%. |
|
|
The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1%
annual improvement beginning January 1, 2000. |
|
|
The annual lapse rate assumption is 0-21%, depending on contract type, policy duration and
the ratio of the net amount at risk to account value. |
|
|
The reserve includes a provision for future policy maintenance and hedging expenses. |
14
Although the year to date results include a first quarter charge of $73 million pre-tax ($47
million after-tax) to strengthen GMDB reserves, no additional reserve strengthening has been
required for GMDB since the first quarter of 2009, primarily due to the stabilization and recovery
of equity markets. The components of the first quarter charge were:
|
|
adverse impacts of overall market declines of $50 million pre-tax ($32 million after-tax).
This is comprised of (a) $39 million pre-tax ($25 million after-tax) primarily related to the
provision for future partial surrenders, and (b) $11 million pre-tax ($7 million after-tax)
related to declines in the values of contractholders non-equity investments such as bond
funds, neither of which is included in the GMDB equity hedge program; |
|
|
adverse volatility-related impacts of $11 million pre-tax ($7 million after-tax) due to
turbulent equity market conditions, including higher than expected claims and the performance
of the diverse mix of equity fund investments held by contractholders being different than
expected; and |
|
|
adverse interest rate impacts of $12 million pre-tax ($8 million after-tax). Interest rate
risk is not covered by the GMDB equity hedge program, and the interest rate returns on the
futures contracts were less than the Companys long-term assumption for mean investment
performance. |
Activity in future policy benefit reserves for the GMDB business was as follows: |
|
|
|
|
|
|
|
|
|
|
|
For the period ended |
|
|
|
September 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
1,609 |
|
|
$ |
848 |
|
Add: Unpaid Claims |
|
|
34 |
|
|
|
21 |
|
Less: Reinsurance and other amounts recoverable |
|
|
83 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Balance at January 1, net |
|
|
1,560 |
|
|
|
850 |
|
Add: Incurred benefits |
|
|
(86 |
) |
|
|
822 |
|
Less: Paid benefits |
|
|
139 |
|
|
|
112 |
|
|
|
|
|
|
|
|
Ending balance, net |
|
|
1,335 |
|
|
|
1,560 |
|
Less: Unpaid Claims |
|
|
39 |
|
|
|
34 |
|
Add: Reinsurance and other amounts recoverable |
|
|
56 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,352 |
|
|
$ |
1,609 |
|
|
|
|
|
|
|
|
Benefits paid and incurred are net of ceded amounts. Incurred benefits reflect the favorable
or unfavorable impact of a rising or falling equity market on the liability, and include the
charges discussed above. As discussed below, losses or gains have been recorded in other revenues
as a result of the GMDB equity hedge program to reduce equity market exposures.
As of September 30, 2009, the aggregate value of the underlying mutual fund investments was $17.1
billion. The death benefit coverage in force as of that date (representing the estimated amount of
death claims that the Company would have to pay if all of the approximately 600,000 contractholders
had submitted death claims as of that date) was $7.7 billion. As of December 31, 2008, the
aggregate value of the underlying mutual fund investments was $16.3 billion. The death benefit
coverage in force as of that date (representing the estimated amount of death claims that the
Company would have to pay if all of the approximately 650,000 contractholders had submitted death
claims as of that date) was $11.1 billion. The death benefit coverage in force represents the
excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.
As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the
equity market exposures of this business by selling exchange-traded futures contracts, which are
expected to rise in value as the equity market declines and decline in value as the equity market
rises. In addition, the Company uses foreign currency futures contracts to reduce the
international equity market and foreign currency risks associated with this business. The notional
amount of futures contract positions held by the Company at September 30, 2009 was $1.2
billion. The Company recorded in other revenues pre-tax losses of $161 million for the three
months ended September 30, 2009 and $232 million for the nine months ended September 30, 2009, and
pre-tax gains of $70 million for the three months ended September 30, 2008 and $118 million for the
nine months ended September 30, 2008.
The Company has also written reinsurance contracts with issuers of variable annuity contracts that
provide annuitants with certain guarantees related to minimum income benefits (GMIB). All reinsured
GMIB policies also have a GMDB benefit reinsured by the Company. See Note 8 for further
information.
15
Note 8 Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements
including fixed maturities, equity securities, short-term investments and derivatives. Other
financial instruments are measured at fair value under certain conditions, such as when impaired
or, for commercial mortgage loans, when classified as held for sale.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction
between market participants at the balance sheet date. A liabilitys fair value is defined as the
amount that would be paid to transfer the liability to a market participant, not the amount that
would be paid to settle the liability with the creditor.
Fair values are based on quoted market prices when available. When market prices are not
available, fair value is generally estimated using discounted cash flow analyses, incorporating
current market inputs for similar financial instruments with comparable terms and credit
quality. In instances where there is little or no market activity for the same or similar
instruments, the Company estimates fair value using methods, models and assumptions that the
Company believes a hypothetical market participant would use to determine a current transaction
price. These valuation techniques involve some level of estimation and judgment by the Company
which becomes significant with increasingly complex instruments or pricing models. Where
appropriate, adjustments are included to reflect the risk inherent in a particular methodology,
model or input used.
The Companys financial assets and liabilities carried at fair value have been classified based
upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values
determined using unadjusted quoted prices in active markets for identical assets and liabilities
(Level 1) and the lowest ranking to fair values determined using methodologies and models with
unobservable inputs (Level 3). An assets or a liabilitys classification is based on the lowest
level input that is significant to its measurement. For example, a Level 3 fair value measurement
may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The
levels of the fair value hierarchy are as follows:
|
|
Level 1 Values are unadjusted quoted prices for identical assets and liabilities in
active markets accessible at the measurement date. Active markets provide pricing data for
trades occurring at least weekly and include exchanges and dealer markets. |
|
|
Level 2 Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices from those willing to trade in markets that are not active, or other
inputs that are observable or can be corroborated by market data for the term of the
instrument. Such inputs include market interest rates and volatilities, spreads and yield
curves. An instrument is classified in Level 2 if the Company determines that unobservable
inputs are insignificant. |
|
|
Level 3 Certain inputs are unobservable (supported by little or no market activity) and
significant to the fair value measurement. Unobservable inputs reflect the Companys best
estimate of what hypothetical market participants would use to determine a transaction price
for the asset or liability at the reporting date. |
16
Financial Assets and Financial Liabilities Carried at Fair Value
The following tables provide information as of September 30, 2009 and December 31, 2008 about the
Companys financial assets and liabilities carried at fair value. Similar disclosures for separate
account assets, which are also recorded at fair value on the Companys Consolidated Balance Sheets,
are provided separately as gains and losses related to these assets generally accrue directly to
policyholders.
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Financial assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government and agency |
|
$ |
44 |
|
|
$ |
577 |
|
|
$ |
1 |
|
|
$ |
622 |
|
State and local government |
|
|
|
|
|
|
2,566 |
|
|
|
|
|
|
|
2,566 |
|
Foreign government |
|
|
|
|
|
|
1,040 |
|
|
|
17 |
|
|
|
1,057 |
|
Corporate |
|
|
|
|
|
|
8,041 |
|
|
|
489 |
|
|
|
8,530 |
|
Federal agency mortgage-backed |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
35 |
|
Other mortgage-backed |
|
|
|
|
|
|
117 |
|
|
|
6 |
|
|
|
123 |
|
Other asset-backed |
|
|
|
|
|
|
92 |
|
|
|
463 |
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1) |
|
|
44 |
|
|
|
12,468 |
|
|
|
976 |
|
|
|
13,488 |
|
Equity securities |
|
|
2 |
|
|
|
78 |
|
|
|
24 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
46 |
|
|
|
12,546 |
|
|
|
1,000 |
|
|
|
13,592 |
|
Short-term investments |
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
201 |
|
GMIB assets (2) |
|
|
|
|
|
|
|
|
|
|
614 |
|
|
|
614 |
|
Other derivative assets (3) |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value, excluding separate accounts |
|
$ |
46 |
|
|
$ |
12,766 |
|
|
$ |
1,614 |
|
|
$ |
14,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,126 |
|
|
$ |
1,126 |
|
Other derivative liabilities |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities at fair value |
|
$ |
|
|
|
$ |
28 |
|
|
$ |
1,126 |
|
|
$ |
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities includes $392 million of net appreciation required to
adjust future policy benefits for the run-off settlement annuity business
including $60 million of appreciation for securities classified in Level 3. |
|
(2) |
|
The Guaranteed Minimum Income Benefit (GMIB) assets represent
retrocessional contracts in place from two external reinsurers which cover 55%
of the exposures on these contracts. The assets are net of a liability of $14
million for the future cost of reinsurance. |
|
(3) |
|
Other derivative assets includes $15 million of interest rate and foreign
currency swaps qualifying as cash flow hedges and $4 million of interest rate
swaps not designated as accounting hedges. |
17
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Financial assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government and agency |
|
$ |
38 |
|
|
$ |
724 |
|
|
$ |
|
|
|
$ |
762 |
|
State and local government |
|
|
|
|
|
|
2,486 |
|
|
|
|
|
|
|
2,486 |
|
Foreign government |
|
|
|
|
|
|
923 |
|
|
|
21 |
|
|
|
944 |
|
Corporate |
|
|
|
|
|
|
6,526 |
|
|
|
330 |
|
|
|
6,856 |
|
Federal agency mortgage-backed |
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
Other mortgage-backed |
|
|
|
|
|
|
121 |
|
|
|
4 |
|
|
|
125 |
|
Other asset-backed |
|
|
|
|
|
|
57 |
|
|
|
514 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1) |
|
|
38 |
|
|
|
10,874 |
|
|
|
869 |
|
|
|
11,781 |
|
Equity securities |
|
|
8 |
|
|
|
84 |
|
|
|
20 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
46 |
|
|
|
10,958 |
|
|
|
889 |
|
|
|
11,893 |
|
Short-term investments |
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
236 |
|
GMIB assets (2) |
|
|
|
|
|
|
|
|
|
|
953 |
|
|
|
953 |
|
Other derivative assets (3) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value, excluding separate accounts |
|
$ |
46 |
|
|
$ |
11,239 |
|
|
$ |
1,842 |
|
|
$ |
13,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,757 |
|
|
$ |
1,757 |
|
Other derivative liabilities |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities at fair value |
|
$ |
|
|
|
$ |
36 |
|
|
$ |
1,757 |
|
|
$ |
1,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities includes $514 million of net appreciation required to
adjust future policy benefits for the run-off settlement annuity business
including $111 million of appreciation for securities classified in Level 3. |
|
(2) |
|
The Guaranteed Minimum Income Benefit (GMIB) assets represent
retrocessional contracts in place from two external reinsurers which cover 55%
of the exposures on these contracts. The assets are net of a liability of $17
million for the future cost of reinsurance. |
|
(3) |
|
Other derivative assets include $40 million of interest rate and foreign
currency swaps qualifying as cash flow hedges and $5 million of interest rate
swaps not designated as accounting hedges. |
Level 1 Financial Assets
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity
securities. Given the narrow definition of Level 1 and the Companys investment asset strategy to
maximize investment returns, a relatively small portion of the Companys investment assets are
classified in this category.
Level 2 Financial Assets and Financial Liabilities
Fixed maturities and equity securities. Approximately 92% of the Companys investments in fixed
maturities and equity securities are classified in Level 2 including most public and private
corporate debt and equity securities, federal agency and municipal bonds, non-government
mortgage-backed securities and preferred stocks. Because many fixed maturities and preferred
stocks do not trade daily, fair values are often derived using recent trades of securities with
similar features and characteristics. When recent trades are not available, pricing models are
used to determine these prices. These models calculate fair values by discounting future cash
flows at estimated market interest rates. Such market rates are derived by calculating the
appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry
and structure of the asset.
Typical inputs and assumptions to pricing models include, but are not limited to, benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, liquidity, benchmark securities, bids,
offers, reference data, and industry and economic events. For mortgage-backed securities, inputs
and assumptions may also include characteristics of the issuer, collateral attributes, prepayment
speeds and credit rating.
18
Short-term investments. Short-term investments are carried at fair value, which approximates
cost. On a regular basis the Company compares market prices for these securities to recorded
amounts to validate that current carrying amounts approximate exit prices. The short-term nature of
the investments and corroboration of the reported amounts over the holding period support their
classification in Level 2.
Other derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as
interest rate and foreign currency swap contracts. Fair values for these instruments are
determined using market observable inputs including forward currency and interest rate curves and
widely published market observable indices. Credit risk related to the counterparty and the
Company is considered when estimating the fair values of these derivatives. However, the Company
is largely protected by collateral arrangements with counterparties, and determined that no
adjustment for credit risk was required as of September 30, 2009 or December 31, 2008. The nature
and use of these other derivatives are described in Note 10.
Level 3 Financial Assets and Financial Liabilities
The Company classifies certain newly issued, privately placed, complex or illiquid securities, as
well as assets and liabilities relating to GMIB in Level 3.
Fixed maturities and equity securities. Approximately 7% of fixed maturities and equity securities
are priced using significant unobservable inputs and classified in this category, including:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Mortgage and asset-backed securities |
|
$ |
469 |
|
|
$ |
518 |
|
Primarily private corporate bonds |
|
|
434 |
|
|
|
270 |
|
Subordinated loans and private equity investments |
|
|
97 |
|
|
|
101 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,000 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
Fair values of mortgage and asset-backed securities and corporate bonds are determined using
pricing models that incorporate the specific characteristics of each asset and related assumptions
including the investment type and structure, credit quality, industry and maturity date in
comparison to current market indices, spreads and liquidity of assets with similar
characteristics. For mortgage and asset-backed securities, inputs and assumptions to pricing may
also include collateral attributes and prepayment speeds. Recent trades in the subject security or
similar securities are assessed when available, and the Company may also review published research
as well as the issuers financial statements in its evaluation. Subordinated loans and private
equity investments are valued at transaction price in the absence of market data indicating a
change in the estimated fair values.
Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and
assets are affected by equity markets and interest rates but are without significant life insurance
risk and are settled in lump sum payments, the Company reports these liabilities and assets as
derivatives at fair value. The Company estimates the fair value of the assets and liabilities for
GMIB contracts using assumptions regarding capital markets (including market returns, interest
rates and market volatilities of the underlying equity and bond mutual fund investments), future
annuitant and retrocessionaire behavior (including mortality, lapse, annuity election rates and
retrocessional credit), as well as risk and profit charges. At adoption of the FASBs new guidance
for fair value measurements in 2008, the Company updated assumptions to reflect those that the
Company believes a hypothetical market participant would use to determine a current exit price for
these contracts, and recorded a charge to shareholders net income as described in Note 2. As
certain assumptions used to estimate fair values for these contracts are largely unobservable, the
Company classifies GMIB assets and liabilities in Level 3. The Company considered the following in
determining the view of a hypothetical market participant:
|
|
that the most likely transfer of these assets and liabilities would be through a
reinsurance transaction with an independent insurer having a market capitalization and credit
rating similar to that of the Company; and |
|
|
that because this block of contracts is in run-off mode, an insurer looking to acquire
these contracts would have similar existing contracts with related administrative and risk
management capabilities. |
19
These GMIB assets and liabilities are estimated with a complex internal model using many scenarios
to determine the present value of net amounts expected to be paid, less the present value of net
future premiums expected to be received adjusted for risk and profit charges that the Company
estimates a hypothetical market participant would require to assume this business. Net amounts
expected to be paid include the excess of the expected value of the income benefits over the values
of the annuitants accounts at the time of annuitization. Generally, market return, interest rate
and volatility assumptions are based on market observable information. Assumptions related to
annuitant behavior reflect the Companys belief that a hypothetical market participant would
consider the actual and expected experience of the Company as well as other relevant and available
industry resources in setting policyholder behavior assumptions. The significant assumptions used
to value the GMIB assets and liabilities as of September 30, 2009 were as follows:
|
|
The market return and discount rate assumptions are based on the market-observable LIBOR swap curve. |
|
|
|
The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at
the time of annuitization (claim interest rate) based on contractual terms. That rate was 2.93% at September 30, 2009
and must be projected for future time periods. These projected rates vary by economic scenario and are determined by an
interest rate model using current interest rate curves and the prices of instruments available in the market including
various interest rate caps and zero-coupon bonds. For a subset of the business, there is a contractually guaranteed
floor of 3% for the claim interest rate. |
|
|
|
The market volatility assumptions for annuitants underlying mutual fund investments that are modeled based on the S&P
500, Russell 2000 and NASDAQ Composite are based on the market-implied volatility for these indices for three to seven
years grading to historical volatility levels thereafter. For the remaining 57% of underlying mutual fund investments
modeled based on other indices (with insufficient market-observable data), volatility is based on the average
historical level for each index over the past 10 years. Using this approach, volatility ranges from 17% to 33% for
equity funds, 4% to 11% for bond funds and 1% to 2% for money market funds. |
|
|
|
The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January
1, 2000. |
|
|
|
The annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable
annuity contracts, ranges from 2% to 23% and depends on the time since contract issue and the relative value of the
guarantee. |
|
|
|
The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying
variable annuity contracts and depends on the annuitants age, the relative value of the guarantee and whether a
contractholder has had a previous opportunity to elect the benefit. Immediately after the expiration of the waiting
period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For
the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%.
Actual data is still emerging for the Company as well as the industry and the estimates are based on this limited data. |
|
|
|
The risk and profit charge assumption is based on the Companys estimate of the capital and return on capital that
would be required by a hypothetical market participant. |
In addition, the Company has considered other assumptions related to model, expense and
nonperformance risk in calculating the GMIB liability.
The Company regularly evaluates each of the assumptions used in establishing these assets and
liabilities by considering how a hypothetical market participant would set assumptions at each
valuation date. Capital markets assumptions are expected to change at each valuation date
reflecting current observable market conditions. Other assumptions may also change based on a
hypothetical market participants view of actual experience as it emerges over time or other
factors that impact the net liability. If the emergence of future experience or future assumptions
differs from the assumptions used in estimating these assets and liabilities, the resulting impact
could be material to the Companys consolidated results of operations, and in certain situations,
could be material to the Companys financial condition.
GMIB liabilities are reported in the Companys Consolidated Balance Sheets in Accounts payable,
accrued expenses and other liabilities. GMIB assets associated with these contracts represent net
receivables in connection with reinsurance that the Company has purchased from two external
reinsurers and are reported in the Companys Consolidated Balance Sheets in Other assets, including
other intangibles. As of September 30, 2009, Standard & Poors (S&P) has given a financial
strength rating of AA to one reinsurer and a financial strength rating of A- to the parent company
that guarantees the receivable from the other reinsurer.
20
Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following tables summarize the changes in financial assets and financial liabilities classified
in Level 3 for the three months and nine months ended September 30, 2009 and 2008. These tables
exclude separate account assets as changes in fair values of these assets accrue directly to
policyholders. Gains and losses reported in these tables may include changes in fair value that
are attributable to both observable and unobservable inputs.
For the Three Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 7/1/09 |
|
$ |
923 |
|
|
$ |
685 |
|
|
$ |
(1,224 |
) |
|
$ |
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB |
|
|
|
|
|
|
(27 |
) |
|
|
46 |
|
|
|
19 |
|
Other |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
(9 |
) |
|
|
(27 |
) |
|
|
46 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains required to adjust future policy benefits for settlement annuities (1) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
7 |
|
|
|
(44 |
) |
|
|
52 |
|
|
|
8 |
|
Transfers out of Level 3 |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 9/30/09 |
|
$ |
1,000 |
|
|
$ |
614 |
|
|
$ |
(1,126 |
) |
|
$ |
(512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses) included in income attributable to instruments held at the reporting date |
|
$ |
(9 |
) |
|
$ |
(27 |
) |
|
$ |
46 |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
For the Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 7/1/08 |
|
$ |
695 |
|
|
$ |
447 |
|
|
$ |
(836 |
) |
|
$ |
(389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB, excluding adoption effect |
|
|
|
|
|
|
123 |
|
|
|
(221 |
) |
|
|
(98 |
) |
Other |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
4 |
|
|
|
123 |
|
|
|
(221 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains required to adjust future policy benefits for settlement annuities (1) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
25 |
|
|
|
7 |
|
Transfers into Level 3 |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 9/30/08 |
|
$ |
749 |
|
|
$ |
552 |
|
|
$ |
(1,032 |
) |
|
$ |
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses) included in income attributable to instruments held at the reporting date |
|
$ |
3 |
|
|
$ |
123 |
|
|
$ |
(221 |
) |
|
$ |
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
21
For the Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 1/1/09 |
|
$ |
889 |
|
|
$ |
953 |
|
|
$ |
(1,757 |
) |
|
$ |
(804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB |
|
|
|
|
|
|
(263 |
) |
|
|
478 |
|
|
|
215 |
|
Other |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
(19 |
) |
|
|
(263 |
) |
|
|
478 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses required to adjust future policy benefits for settlement annuities (1) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
(3 |
) |
|
|
(76 |
) |
|
|
153 |
|
|
|
77 |
|
Transfers into Level 3 |
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 9/30/09 |
|
$ |
1,000 |
|
|
$ |
614 |
|
|
$ |
(1,126 |
) |
|
$ |
(512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses) included in income attributable to instruments held at the reporting date |
|
$ |
(19 |
) |
|
$ |
(263 |
) |
|
$ |
478 |
|
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
For the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 1/1/08 |
|
$ |
732 |
|
|
$ |
173 |
|
|
$ |
(313 |
) |
|
$ |
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of adoption of new fair value measurement guidance |
|
|
|
|
|
|
244 |
|
|
|
(446 |
) |
|
|
(202 |
) |
Results of GMIB, excluding adoption effect |
|
|
|
|
|
|
190 |
|
|
|
(341 |
) |
|
|
(151 |
) |
Other |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
3 |
|
|
|
434 |
|
|
|
(787 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains required to adjust future policy benefits for settlement annuities (1) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
2 |
|
|
|
(55 |
) |
|
|
68 |
|
|
|
13 |
|
Transfers into Level 3 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 9/30/08 |
|
$ |
749 |
|
|
$ |
552 |
|
|
$ |
(1,032 |
) |
|
$ |
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses) included in income attributable to instruments held at the reporting date |
|
$ |
6 |
|
|
$ |
434 |
|
|
$ |
(787 |
) |
|
$ |
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
As noted in the tables above, total gains and losses included in shareholders net income are
reflected in the following captions in the Consolidated Statements of Income:
|
|
other-than-temporary impairments on debt securities, net; other realized investment gains
(losses) and net investment income for amounts related to fixed maturities and equity
securities; and |
|
|
guaranteed minimum income benefits (income) expense for amounts related to GMIB assets and
liabilities. |
Reclassifications impacting Level 3 financial instruments are reported as transfers in or out of
the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore
gains and losses in income only reflect activity for the period the instrument was
classified in Level 3. Typically, investments that transfer out of Level 3 are classified in Level
2 as market data on the securities becomes more readily available.
22
The company provided reinsurance for insurance companies that offer a guaranteed minimum income
benefit, and then retroceded a portion of the risk to other insurance companies. Because these
GMIB reinsurance arrangements remain in effect at the reporting date, the Company has reflected the
total gain or loss for the period as the total gain or loss included in income attributable to
instruments still held at the reporting date. However, the Company reduces the GMIB assets and
liabilities resulting from these reinsurance arrangements when annuitants lapse, die, elect their
benefit, or reach the age after which the right to elect their benefit expires.
Under FASBs guidance for fair value measurements, the Companys GMIB assets and liabilities are
expected to be volatile in future periods because the underlying assumptions will be based largely
on market-observable inputs at the close of each reporting period including interest rates and
market-implied volatilities.
The net pre-tax gain for GMIB was $19 million for the three months ended September 30, 2009, and
was primarily due to the following factors:
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($50 million); and |
|
|
updates to the risk and profit charge estimates ($7 million) |
These favorable effects were partially offset by:
|
|
decreases in interest rates ($31 million); and |
|
|
other amounts, including experience varying from assumptions, model and in-force updates
($7 million) |
For the nine months ended September 30, 2009, the net pre-tax gain for GMIB was $215 million, and
was primarily due to the following factors:
|
|
increases in interest rates ($175 million); |
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($82 million); and |
|
|
updates to the risk and profit charge estimates ($25 million). |
These favorable effects were partially offset by:
|
|
increases to the annuitization assumption, reflecting higher utilization experience ($21
million); |
|
|
updates to the lapse assumption ($14 million); and |
|
|
other amounts, including experience varying from assumptions, model and in-force updates
($32 million). |
For the three months ended September 30, 2008, the increase in the net GMIB liability was primarily
driven by the decline in underlying account values in the period, driven by declines in equity
markets and bond fund returns and decreases in interest rates since June 30, 2008. Excluding the
charge for the effect of adoption of FASBs guidance for fair value measurement, the increase in
the net GMIB liability for the nine months ended September 30, 2008 was primarily driven by the
impact of declines in underlying account values in the period, driven by declines in equity markets
and bond fund returns, resulting in increased exposure and decreases in interest rates since
December 31, 2007.
23
Separate account assets
Fair values and changes in the fair values of separate account assets generally accrue directly to
the policyholders and are excluded from the Companys revenues and expenses. As of September 30,
2009 and December 31, 2008 separate account assets were as follows:
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Guaranteed separate accounts (See Note 17) |
|
$ |
265 |
|
|
$ |
1,538 |
|
|
$ |
|
|
|
$ |
1,803 |
|
Non-guaranteed separate accounts (1) |
|
|
1,660 |
|
|
|
2,917 |
|
|
|
584 |
|
|
|
5,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total separate account assets |
|
$ |
1,925 |
|
|
$ |
4,455 |
|
|
$ |
584 |
|
|
$ |
6,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-guaranteed separate accounts include $2.3 billion in assets supporting the Companys pension plans, including $553 million classified in Level 3. |
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Guaranteed separate accounts (See Note 17) |
|
$ |
233 |
|
|
$ |
1,557 |
|
|
$ |
|
|
|
$ |
1,790 |
|
Non-guaranteed separate accounts (1) |
|
|
1,093 |
|
|
|
2,506 |
|
|
|
475 |
|
|
|
4,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total separate account assets |
|
$ |
1,326 |
|
|
$ |
4,063 |
|
|
$ |
475 |
|
|
$ |
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-guaranteed separate accounts include $1.5 billion in assets supporting the Companys pension plans, including $435 million classified in Level 3. |
Separate account assets in Level 1 include exchange-listed equity securities. Level 2 assets
primarily include:
|
|
equity securities and corporate and structured bonds valued using recent trades of similar
securities or pricing models that discount future cash flows at estimated market interest
rates as described above; and |
|
|
actively-traded institutional and retail mutual fund investments and separate accounts
priced using the daily net asset value which is their exit price. |
Separate account assets classified in Level 3 include investments primarily in securities
partnerships and real estate generally valued based on the separate accounts ownership share of
the equity of the investee including changes in the fair values of its underlying investments.
24
The following tables summarize the changes in separate account assets reported in Level 3 for the
three months and nine months ended September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at 7/1 |
|
$ |
625 |
|
|
$ |
417 |
|
Policyholder gains (losses) (1) |
|
|
(18 |
) |
|
|
1 |
|
Purchases, issuances, settlements |
|
|
(23 |
) |
|
|
13 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Balance at 9/30 |
|
$ |
584 |
|
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of $20 million and gains of $1 million attributable to instruments still held at September 30, 2009 and September 30, 2008 respectively. |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at 1/1 |
|
$ |
475 |
|
|
$ |
403 |
|
Policyholder gains (losses) (1) |
|
|
(85 |
) |
|
|
21 |
|
Purchases, issuances, settlements |
|
|
34 |
|
|
|
22 |
|
Transfers in (out) of Level 3 |
|
|
160 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
Balance at 9/30 |
|
$ |
584 |
|
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of $88 million and gains of $6 million attributable to instruments still held at September 30, 2009 and September 30, 2008 respectively. |
Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value each reporting period, but may
be measured using fair value only under certain conditions, such as investments in real estate
entities when they become impaired. During the nine months ended September 30, 2009, impaired real
estate entities carried at cost of $41 million were written down to their fair values of $8
million, resulting in realized investment losses of $33 million. These fair value measurements
were based on discounted cash flow analyses using significant unobservable inputs, and were
classified in Level 3. For the three months ended September 30, 2009 and the twelve months ended
December 31, 2008, the amounts required to adjust these assets and liabilities to their fair values
were not significant.
25
Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
Most financial instruments that are subject to fair value disclosure requirements are carried in
the Companys consolidated financial statements at amounts that approximate fair value. The following table
provides the fair values and carrying values of the Companys financial instruments not recorded at
fair value that are subject to fair value disclosure requirements at September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
Commercial mortgage loans |
|
$ |
3,393 |
|
|
$ |
3,607 |
|
|
$ |
3,401 |
|
|
$ |
3,617 |
|
Contractholder deposit funds, excluding universal life products |
|
$ |
932 |
|
|
$ |
934 |
|
|
$ |
889 |
|
|
$ |
915 |
|
Long-term debt, excluding capital leases |
|
$ |
2,430 |
|
|
$ |
2,427 |
|
|
$ |
1,684 |
|
|
$ |
2,077 |
|
The fair values presented in the table above have been estimated using market information when
available. The following is a description of the valuation methodologies and inputs used by the
Company to determine fair value.
Commercial mortgage loans. The Company estimates the fair value of commercial mortgage loans
generally by discounting the contractual cash flows at estimated market interest rates that reflect
the Companys assessment of the credit quality of the loans. Market interest rates are derived by
calculating the appropriate spread over comparable U.S. Treasury rates, based on the property type,
quality rating and average life of the loan. The quality ratings reflect the relative risk of the
loan, considering debt service coverage, the loan to value ratio and other factors. Fair values of
impaired mortgage loans are based on the estimated fair value of the underlying collateral
generally determined using an internal discounted cash flow model.
Contractholder deposit funds, excluding universal life products. Generally, these
funds do not have stated maturities. Approximately 45% of these balances can be withdrawn by the
customer at any time without prior notice or penalty. The fair value for these contracts is the
amount estimated to be payable to the customer as of the reporting date, which is generally the
carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of
the individual life and annuity and retirement benefits businesses. The fair value for these
contracts is determined using the fair value of these buyers assets supporting these reinsured
contracts. The Company had a reinsurance recoverable equal to the carrying value of these
reinsured contracts.
Long-term debt, excluding capital leases. The fair value of long-term debt is based on quoted
market prices for recent trades. When quoted market prices are not available, fair value is
estimated using a discounted cash flow analysis and the Companys estimated current borrowing rate
for debt of similar terms and remaining maturities.
Fair values of off-balance-sheet financial instruments were not material.
Note 9 Investments
Total Realized Investment Gains and Losses
The following total realized gains and losses on investments include other-than-temporary
impairments on debt securities but exclude amounts required to adjust future policy benefits for
the run-off settlement annuity business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fixed maturities |
|
$ |
2 |
|
|
$ |
(67 |
) |
|
$ |
(9 |
) |
|
$ |
(108 |
) |
Equity securities |
|
|
16 |
|
|
|
(20 |
) |
|
|
10 |
|
|
|
(19 |
) |
Commercial mortgage loans |
|
|
(4 |
) |
|
|
3 |
|
|
|
(4 |
) |
|
|
1 |
|
Other investments, including derivatives |
|
|
|
|
|
|
61 |
|
|
|
(37 |
) |
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), before income taxes |
|
|
14 |
|
|
|
(23 |
) |
|
|
(40 |
) |
|
|
(28 |
) |
Less income
taxes (benefits) |
|
|
5 |
|
|
|
(8 |
) |
|
|
(16 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) |
|
$ |
9 |
|
|
$ |
(15 |
) |
|
$ |
(24 |
) |
|
$ |
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Included in pre-tax realized investment gains (losses) above were other-than-temporary
impairments on debt securities, asset write-downs and changes in valuation reserves as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Credit-related (1) |
|
$ |
18 |
|
|
$ |
23 |
|
|
$ |
72 |
|
|
$ |
27 |
|
Other (2) |
|
|
3 |
|
|
|
40 |
|
|
|
12 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21 |
|
|
$ |
63 |
|
|
$ |
84 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit-related losses include other-than-temporary declines in value of
fixed maturities and equity securities, and impairments of commercial mortgage
loans and real estate entities. The amount related to credit losses on fixed
maturities for which a portion of the impairment was recognized in other
comprehensive income was not significant. |
|
(2) |
|
Prior to adoption of new GAAP guidance for other-than-temporary impairments
on April 1, 2009, other primarily represented the impact of rising market
yields on investments where the Company could not demonstrate the intent and
ability to hold until recovery. |
Fixed Maturities and Equity Securities
Securities in the following table are included in fixed maturities and equity securities on the
Companys Consolidated Balance Sheets. These securities are carried at fair value with changes in
fair value reported in other realized investment gains and interest and dividends reported in net
investment income. The Companys hybrid investments include preferred stock or debt securities
with call or conversion features. The Company elected fair value accounting for certain hybrid
securities to simplify accounting and mitigate volatility in results of operations and financial
condition.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
|
As of December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Included in fixed maturities: |
|
|
|
|
|
|
|
|
Trading securities (amortized cost: $8; $13) |
|
$ |
9 |
|
|
$ |
13 |
|
Hybrid securities (amortized cost: $32; $10) |
|
|
36 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total |
|
$ |
45 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in equity securities: |
|
|
|
|
|
|
|
|
Hybrid securities (amortized cost: $110; $123) |
|
$ |
79 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
Fixed maturities and equity securities included $239 million at September 30, 2009, which were
pledged as collateral to brokers as required under certain futures contracts. These fixed
maturities and equity securities were primarily corporate securities.
The following information about fixed maturities excludes trading and hybrid securities. The
amortized cost and fair value by contractual maturity periods for fixed maturities were as follows
at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
692 |
|
|
$ |
701 |
|
Due after one year through five years |
|
|
3,813 |
|
|
|
4,023 |
|
Due after five years through ten years |
|
|
4,770 |
|
|
|
5,094 |
|
Due after ten years |
|
|
2,494 |
|
|
|
2,913 |
|
Mortgage and other asset-backed securities |
|
|
662 |
|
|
|
712 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,431 |
|
|
$ |
13,443 |
|
|
|
|
|
|
|
|
Actual maturities could differ from contractual maturities because issuers may have the right
to call or prepay obligations, with or without penalties. Also, in some cases the Company may
extend maturity dates.
Mortgage-backed assets consist principally of commercial mortgage-backed securities and
collateralized mortgage obligations of which $38 million were residential mortgages and home equity
lines of credit, all of which were originated using standard underwriting practices and are not
considered sub-prime loans.
27
Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and
hybrid securities) by type of issuer is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Appre- |
|
|
Depre- |
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
ciation |
|
|
ciation |
|
|
Value |
|
Federal government and agency |
|
$ |
394 |
|
|
$ |
228 |
|
|
$ |
|
|
|
$ |
622 |
|
State and local government |
|
|
2,335 |
|
|
|
236 |
|
|
|
(5 |
) |
|
|
2,566 |
|
Foreign government |
|
|
1,017 |
|
|
|
45 |
|
|
|
(5 |
) |
|
|
1,057 |
|
Corporate |
|
|
8,023 |
|
|
|
570 |
|
|
|
(107 |
) |
|
|
8,486 |
|
Federal agency mortgage-backed |
|
|
33 |
|
|
|
2 |
|
|
|
|
|
|
|
35 |
|
Other mortgage-backed |
|
|
132 |
|
|
|
4 |
|
|
|
(14 |
) |
|
|
122 |
|
Other asset-backed |
|
|
497 |
|
|
|
74 |
|
|
|
(16 |
) |
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,431 |
|
|
$ |
1,159 |
|
|
$ |
(147 |
) |
|
$ |
13,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table includes investments with a fair value of $2.4 billion supporting the
Companys run-off settlement annuity business, with gross unrealized appreciation of $439 million
and gross unrealized depreciation of $47 million at September 30, 2009. Such unrealized amounts
are required to support future policy benefit liabilities of this business and, as such, are not
included in accumulated other comprehensive income.
Sales information for available-for-sale fixed maturities and equity securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Proceeds from sales |
|
$ |
266 |
|
|
$ |
432 |
|
|
$ |
676 |
|
|
$ |
1,128 |
|
Gross gains on sales |
|
$ |
24 |
|
|
$ |
3 |
|
|
$ |
39 |
|
|
$ |
8 |
|
Gross losses on sales |
|
$ |
(5 |
) |
|
$ |
(8 |
) |
|
$ |
(8 |
) |
|
$ |
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Review of declines in fair value. Management reviews fixed maturities and equity securities
with a decline in fair value from cost for impairment based on criteria that include:
|
|
length of time and severity of decline; |
|
|
financial health and specific near term prospects of the issuer; |
|
|
changes in the regulatory, economic or general market environment of the issuers industry
or geographic region; and |
|
|
prior to April 1, 2009, the Companys ability and intent to hold these fixed maturities
until recovery; beginning April 1, 2009, the Companys intent to sell or the likelihood of a
required sale of these fixed maturities prior to their recovery. |
When the Company determines it does not expect to recover the amortized cost basis of fixed
maturities with declines in fair value (even if it does not intend to sell or will not be required
to sell these fixed maturities), the credit portion of the impairment loss is recognized in net
income and the non-credit portion, if any, is recognized in a separate component of shareholders
equity. The credit portion is the difference between the amortized cost basis of the fixed
maturity and the net present value of its projected future cash flows. Projected future cash flows
are based on qualitative and quantitative factors, including probability of default, and the
estimated timing and amount of recovery. For mortgage and asset-backed securities, estimated
future cash flows are based on assumptions about the collateral attributes including prepayment
speeds, default rates and changes in value.
Excluding trading and hybrid securities, as of September 30, 2009, fixed maturities with a decline
in fair value from amortized cost (which were primarily investment grade corporate bonds) were as
follows, including the length of time of such decline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Amortized |
|
|
Unrealized |
|
|
Number |
|
(In millions) |
|
Value |
|
|
Cost |
|
|
Depreciation |
|
|
of Issues |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
679 |
|
|
$ |
706 |
|
|
$ |
(27 |
) |
|
|
169 |
|
Below investment grade |
|
$ |
109 |
|
|
$ |
119 |
|
|
$ |
(10 |
) |
|
|
68 |
|
More than one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
1,117 |
|
|
$ |
1,212 |
|
|
$ |
(95 |
) |
|
|
174 |
|
Below investment grade |
|
$ |
82 |
|
|
$ |
97 |
|
|
$ |
(15 |
) |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized depreciation of investment grade fixed maturities is primarily due to increases
in market yields since purchase. Approximately $52 million of the unrealized depreciation is due
to securities with a decline in value of greater than 20%. The remaining $95 million of the
unrealized depreciation is due to securities with declines in value of less than 20%. There were
no equity securities with a fair value significantly lower than cost as of September 30, 2009.
Note 10 Derivative Financial Instruments
The Companys investment strategy is to manage the characteristics and risks of investment assets
(such as duration, yield, currency and liquidity) to meet the varying demands of the related
insurance and contractholder liabilities (such as paying claims, investment returns and
withdrawals). As part of this investment strategy, the Company typically uses
derivatives to minimize interest rate, foreign currency and equity price risks of chosen investment
assets to conform to the characteristics and risks of the related insurance and contractholder
liabilities. The Company routinely monitors exposure to credit risk associated with derivatives
and diversifies the portfolio among approved dealers of high credit quality to minimize credit
risk. In addition, the Company has written or sold contracts to guarantee minimum income benefits
and to enhance investment returns. See Note 7 for a discussion of derivatives associated with GMDB
contracts and Note 8 for a discussion of derivatives arising from GMIB contracts.
The Company uses hedge accounting when derivatives are designated, qualify and are highly effective
as hedges. Effectiveness is formally assessed and documented at inception and each period
throughout the life of a hedge using various qualitative and quantitative methods appropriate for
each hedge, including regression analysis and dollar offset. Under hedge accounting, the changes
in fair value of the derivative and the hedged risk are generally recognized together and offset
each other when reported in shareholders net income.
29
The Company accounts for derivative instruments as follows:
|
|
Derivatives are reported on the balance sheet at fair value with changes in fair values
reported in shareholders net income or accumulated other comprehensive income. |
|
|
Changes in the fair value of derivatives that hedge market risk related to future cash
flows and that qualify for hedge accounting are reported in a separate caption in
accumulated other comprehensive income. These hedges are referred to as cash flow hedges. |
|
|
A change in the fair value of a derivative instrument may not always equal the change in
the fair value of the hedged item; this difference is referred to as hedge ineffectiveness.
Where hedge accounting is used, the Company reflects hedge ineffectiveness in shareholders
net income (generally as part of other realized investment gains and losses). |
|
|
Features of certain investments and obligations, called embedded derivatives, are accounted
for as derivatives. As permitted under GAAP, derivative accounting has not been applied to
these features of such investments or obligations existing before January 1, 1999. |
Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that
contain provisions requiring both parties to such instruments to post collateral depending on net
liability thresholds and the partys financial strength or credit rating. The collateral posting
requirements vary by counterparty. The aggregate fair value of derivative instruments with such
credit-risk-related contingent features where a subsidiary of the Company was in a net liability
position as of September 30, 2009 was $28 million for which the Company was not required to post
collateral with its counterparties. If the various contingent features underlying the agreements
were triggered as of September 30, 2009, the Company would be required to post collateral equal to
the total net liability. Such subsidiaries are parties to certain other derivative instruments
that contain termination provisions for which the counterparties could demand immediate payment of
the total net liability position if the financial strength rating of the subsidiary were to decline
below specified levels. As of September 30, 2009, there was no net liability position under such
derivative instruments.
The tables below present information about the nature and accounting treatment of the Companys
primary derivative financial instruments including the Companys purpose for entering into specific
derivative transactions, and their locations in and effect on the financial statements as of and
for the three and nine month periods ended September 30, 2009. Derivatives in the Companys
separate accounts are excluded from the tables because associated gains and losses generally accrue
directly to policyholders.
30
|
|
|
|
|
|
|
|
|
Instrument / Volume |
|
|
|
|
|
|
|
|
of Activity |
|
Primary Risk |
|
Purpose |
|
Cash Flows |
|
Accounting Policy |
|
Derivatives Designated as Accounting Hedges Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
Interest rate
swaps $123
million of par
value of related
investments
Foreign currency
swaps $179
million of U.S.
dollar equivalent
par value of
related investments
Combination swaps
(interest rate and
foreign currency)
$54 million of U.S.
dollar equivalent
par value of
related investments
|
|
Interest rate and
foreign currency
|
|
To hedge the
interest and/or
foreign currency
cash flows of fixed
maturities and
commercial mortgage
loans to match
associated
liabilities.
Currency swaps are
primarily euros, Australian
dollars,
Canadian dollars
and British pounds
for periods of up
to 12 years.
|
|
The Company
periodically
exchanges cash
flows between
variable and fixed
interest rates
and/or between two
currencies for both
principal and
interest. Net
interest cash flows are
reported in net
investment income
and included in
operating
activities.
|
|
Using cash flow
hedge accounting,
fair values are
reported in other
long-term
investments or
other liabilities
and accumulated
other comprehensive
income and
amortized into net investment
income
or reported in
other realized
investment gains
and losses as
interest or
principal payments
are received. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Effect on the Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other |
|
|
|
As of September 30, 2009 |
|
|
Comprehensive Income |
|
|
|
|
|
|
|
Accounts Payable, |
|
|
|
|
|
|
|
|
|
Other Long-Term |
|
|
Accrued Expenses and |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Instrument |
|
Investments |
|
|
Other Liabilities |
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Interest rate swaps |
|
$ |
10 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
(4 |
) |
Foreign currency swaps |
|
|
5 |
|
|
|
24 |
|
|
|
(7 |
) |
|
|
(22 |
) |
Interest rate and
foreign currency
swaps |
|
|
|
|
|
|
4 |
|
|
|
(4 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15 |
|
|
$ |
28 |
|
|
$ |
(10 |
) |
|
$ |
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased options
$309 million of
cash surrender
value of related
life insurance
policies
|
|
Interest rate
|
|
To hedge the possibility
of early policyholder
cash surrender when the
amortized cost of
underlying invested
assets is greater than
their fair values.
|
|
The Company pays a fee
and may receive or pay
cash, based on the
difference between the
amortized cost and fair
values of underlying
invested assets at the
time of policyholder
surrender. These cash
flows will be reported
in financing activities.
|
|
Using cash flow hedge
accounting, fair values
are reported in other
assets or other
liabilities, with
changes in fair value
reported in accumulated
other comprehensive
income and amortized to
other benefit expenses
over the life of the
underlying invested
assets. |
|
|
|
|
|
Fair Value Effect on the Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
Fair values reported in other assets and other comprehensive income were less than $1 million. |
|
|
|
|
|
|
|
|
|
Treasury lock
|
|
Interest rate
|
|
To hedge the variability
of and fix at inception
date, the benchmark
Treasury rate component
of future interest
payments on debt to be
issued.
|
|
The Company paid the
fair value of the
contract at the
expiration. Cash flows
are reported in
operating activities.
|
|
Using cash flow hedge
accounting, fair values
are reported in
short-term investments
or other liabilities,
with changes in fair
value reported in
accumulated other
comprehensive income and
amortized to interest
expense over the life of
the debt issued. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Effect on the Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in
other comprehensive income, resulting in net cumulative losses of $26 million, to be amortized to interest expense
over the life of the debt. In the second quarter of 2009, the Company issued debt and began amortizing this loss to
interest expense. |
|
The amount of gains (losses) reclassified from accumulated other comprehensive income into
income was not significant. No gains (losses) were recognized due to ineffectiveness and no
amounts were excluded from the assessment of hedge ineffectiveness.
31
|
|
|
|
|
|
|
|
|
Instrument / Volume |
|
|
|
|
|
|
|
|
of Activity |
|
Primary Risk |
|
Purpose |
|
Cash Flows |
|
Accounting Policy |
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated As Accounting Hedges |
|
Futures
$1,207 million of
U.S. dollar
equivalent market
price of
outstanding
contracts
|
|
Equity and foreign
currency
|
|
To reduce domestic
and international
equity market
exposures for
certain reinsurance
contracts that
guarantee minimum
death benefits
(GMDB) resulting
from changes in
variable annuity
account values
based on underlying
mutual funds.
Currency futures
are primarily
euros, Japanese yen
and British pounds.
|
|
The Company
receives (pays)
cash daily in the
amount of the
change in fair
value of the
futures contracts.
Cash flows are
included in
operating
activities.
|
|
Fair value changes
are reported in
other revenues.
Amounts not yet
settled from the
previous days fair
value change (daily
variation margin)
are reported in
premiums, accounts
and notes
receivable, net or
accounts payable,
accrued expenses
and other
liabilities. |
|
|
|
|
|
Fair Value Effect on the Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenues |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Futures |
|
$ |
(161 |
) |
|
$ |
(232 |
) |
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
$76 million of
par value of
related investments
|
|
Interest rate
|
|
To hedge the
interest cash flows
of fixed maturities
to match associated
liabilities.
|
|
The Company
periodically
exchanges cash
flows between
variable and fixed
interest rates for
both principal and
interest. Net
interest cash flows
are reported in
other realized
investment gains
(losses) and
included in
operating
activities.
|
|
Fair values are
reported in other
long-term
investments or
other liabilities,
with changes in
fair value reported
in other realized
investment gains
and losses. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Effect on the Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 |
|
|
|
|
|
|
Realized Investment (Losses) |
|
|
|
Other Long-Term |
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Investments |
|
|
|
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Interest rate swaps |
|
$ |
4 |
|
|
|
|
|
|
$ |
|
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options
(GMIB liability)
$1,380 million of
maximum potential
undiscounted future
payments as defined
in Note 17
Purchased options
(GMIB asset) $759
million of maximum
potential
undiscounted future
receipts as defined
in Note 17
|
|
Equity and interest rate
|
|
The Company has
written reinsurance
contracts with
issuers of variable
annuity contracts
that provide
annuitants with
certain guarantees
of minimum income
benefits, resulting
from the level of
variable annuity
account values
compared with a
contractually
guaranteed amount.
Payment by the
Company depends on
the actual account
value in the
underlying mutual
funds and the level
of interest rates
when the
contractholders
elect to receive
minimum income
payments. The
Company purchased
reinsurance
contracts to reduce
a portion of the
market risks
assumed. These
contracts are
accounted for as
written and
purchased options.
|
|
The Company
periodically
receives (pays)
fees based on
either
contractholders
account values or
deposits increased
at a contractual
rate. The Company
will also pay
(receive) cash
depending on
changes in account
values and interest
rates when
contractholders
first elect to
receive minimum
income payments.
These cash flows
are reported in
operating
activities.
|
|
Fair values are
reported in other
liabilities (GMIB
liability) and
other assets (GMIB
asset). Changes in
fair value are
reported in
guaranteed minimum
income benefits
(income) expense. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Effect on the Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Minimum Income Benefits |
|
|
|
As of September 30, 2009 |
|
|
(Income) Expense |
|
|
|
|
|
|
|
Accounts Payable, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses and |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Instrument |
|
Other Assets |
|
|
Other Liabilities |
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Written options
(GMIB liability) |
|
$ |
|
|
|
$ |
1,126 |
|
|
$ |
(46 |
) |
|
$ |
(478 |
) |
Purchased options
(GMIB asset) |
|
|
614 |
|
|
|
|
|
|
|
27 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
614 |
|
|
$ |
1,126 |
|
|
$ |
(19 |
) |
|
$ |
(215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Note 11 Reinsurance
The Companys insurance subsidiaries enter into agreements with other insurance companies to assume
and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to
permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and
disposition transactions where the underwriting company is not being acquired. Reinsurance does not
relieve the originating insurer of liability. The Company regularly evaluates the financial
condition of its reinsurers and monitors its concentrations of credit risk.
Retirement benefits business. The Company had a reinsurance recoverable of $1.8 billion as of
September 30, 2009, and $1.9 billion as of December 31, 2008 from Prudential Retirement Insurance
and Annuity Company resulting from the sale of the retirement benefits business, which was
primarily in the form of a reinsurance arrangement. The reinsurance recoverable, which is reduced
as the Companys reinsured liabilities are paid or directly assumed by the reinsurer, is secured
primarily by fixed maturities and mortgage loans equal to or greater than 100% of the reinsured
liabilities. These fixed maturities and mortgage loans are held in a trust established for the
benefit of the Company. As of September 30, 2009, the trust was adequately funded and S&P had
assigned this reinsurer a rating of AA-.
Individual life and annuity reinsurance. The Company had reinsurance recoverables totaling $4.5
billion as of September 30, 2009 and $4.6 billion as of December 31, 2008 from The Lincoln National
Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the
Companys individual life insurance and annuity business through indemnity reinsurance
arrangements. Effective December 31, 2007, a substantial portion of the reinsurance recoverables
are secured by investments held in a trust established for the benefit of the Company. At
September 30, 2009, the trust assets secured approximately 90% of the reinsurance recoverables.
S&P has assigned The Lincoln National Life Insurance Company a rating of AA- and Lincoln Life &
Annuity of New York a rating of AA.
Other Ceded and Assumed Reinsurance
Ceded Reinsurance: Ongoing operations. The Companys insurance subsidiaries have reinsurance
recoverables from various reinsurance arrangements in the ordinary course of business for its
Health Care, Disability and Life, and International segments as well as the non-leveraged and
leveraged corporate-owned life insurance business. Reinsurance recoverables of $324 million as of
September 30, 2009 are expected to be collected from more than 90 reinsurers which have been
assigned the following financial strength ratings from S&P:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Reinsurance |
|
|
|
Reinsurance |
|
|
Percent |
|
|
Recoverable Protected |
|
Ongoing operations (In millions) |
|
Recoverable |
|
|
of Total |
|
|
by Collateral |
|
AA- (Single reinsurer) |
|
$ |
47 |
|
|
|
15 |
% |
|
|
0 |
% |
AA- or higher (Other reinsurers) |
|
|
32 |
|
|
|
10 |
% |
|
|
0 |
% |
A (Single reinsurer) |
|
|
30 |
|
|
|
9 |
% |
|
|
0 |
% |
A+ to A- (Other reinsurers) |
|
|
118 |
|
|
|
37 |
% |
|
|
3 |
% |
Unrated (Single reinsurer) |
|
|
34 |
|
|
|
10 |
% |
|
|
96 |
% |
Below A- or unrated (Other reinsurers) |
|
|
63 |
|
|
|
19 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
324 |
|
|
|
100 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
The collateral protecting the recoverables includes assets held in trust and letters of
credit. The Company reviews its reinsurance arrangements and establishes reserves against the
recoverables in the event that recovery is not considered probable. As of September 30, 2009, the
Companys recoverables related to these segments were net of a reserve of $11 million.
Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Companys Run-off Reinsurance
operations assumed risks related to GMDB contracts, GMIB contracts, workers compensation, and
personal accident business. The Companys Run-off Reinsurance operations also purchased
retrocessional coverage to reduce the risk of loss on these contracts.
Liabilities related to GMDB, workers compensation and personal accident are included in future
policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under
GAAP, the asset related to GMIB is recorded in the caption Other assets, including other
intangibles and the liability related to GMIB is recorded in the caption Accounts payable, accrued
expenses, and other liabilities on the Companys Consolidated Balance Sheets (see Notes 8 and 17
for additional discussion of the GMIB assets and liabilities).
33
The reinsurance recoverables for GMDB, workers compensation, and personal accident of $122 million
as of September 30, 2009 are expected to be collected from more than 100 retrocessionaires which
have been assigned the following financial strength ratings from S&P:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Reinsurance |
|
|
|
Reinsurance |
|
|
Percent |
|
|
Recoverable Protected |
|
Run-off Reinsurance segment (In millions) |
|
Recoverable |
|
|
of Total |
|
|
by Collateral |
|
AA- or higher |
|
$ |
34 |
|
|
|
28 |
% |
|
|
10 |
% |
A (Single reinsurer) |
|
|
37 |
|
|
|
30 |
% |
|
|
100 |
% |
A- (Single reinsurer) |
|
|
19 |
|
|
|
16 |
% |
|
|
0 |
% |
A+ to A- (Other reinsurers) |
|
|
17 |
|
|
|
14 |
% |
|
|
1 |
% |
Below A- or unrated |
|
|
15 |
|
|
|
12 |
% |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
122 |
|
|
|
100 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
The collateral protecting the recoverables is primarily in the form of letters of credit. The
Company reviews its reinsurance arrangements and establishes reserves against the recoverables in
the event that recovery is not considered probable. As of September 30, 2009, the Companys
recoverables related to this segment were net of a reserve of $11 million.
The Companys payment obligations for underlying reinsurance exposures assumed by the Company under
these contracts are based on the ceding companies claim payments. For GMDB, claim payments vary
because of changes in equity markets and interest rates, as well as mortality and contractholder
behavior. For workers compensation and personal accident, the payments relate to accidents and
injuries. Any of these claim payments can extend many years into the future, and the amount of the
ceding companies ultimate claims, and therefore the amount of the Companys ultimate payment
obligations and corresponding ultimate collection from retrocessionaires, may not be known with
certainty for some time.
Summary. The Companys reserves for underlying reinsurance exposures assumed by the Company, as
well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and
the run-off reinsurance operation, are considered appropriate as of September 30, 2009, based on
current information. However, it is possible that future developments could have a material
adverse effect on the Companys consolidated results of operations and, in certain situations, such
as if actual experience differs from the assumptions used in estimating reserves for GMDB, could
have a material adverse effect on the Companys financial condition. The Company bears the risk of
loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to
the Company.
Effects of reinsurance. In the Companys Consolidated Statements of Income, premiums and fees were
net of ceded premiums, and benefits and expenses were net of reinsurance recoveries, in the
following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Ceded premiums and fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual life insurance and annuity business sold |
|
$ |
49 |
|
|
$ |
51 |
|
|
$ |
150 |
|
|
$ |
165 |
|
Other |
|
|
56 |
|
|
|
81 |
|
|
|
171 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105 |
|
|
$ |
132 |
|
|
$ |
321 |
|
|
$ |
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual life insurance and annuity business sold |
|
$ |
87 |
|
|
$ |
67 |
|
|
$ |
214 |
|
|
$ |
246 |
|
Other |
|
|
42 |
|
|
|
70 |
|
|
|
124 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
129 |
|
|
$ |
137 |
|
|
$ |
338 |
|
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Note 12 Pension and Other Postretirement Benefit Plans
The Company and certain of its subsidiaries provide pension, health care and life insurance defined
benefits to eligible retired employees, spouses and other eligible dependents through various
plans.
On May 8, 2009, the Company announced a freeze of its primary domestic pension plans effective July
1, 2009. A curtailment of benefits occurred as a result of this action since it eliminated the
accrual of benefits effective July 1, 2009 for active employees enrolled in the domestic pension
plans. Accordingly, the Company recognized an after-tax curtailment gain of $30 million during the
second quarter of 2009, which was the remaining unamortized negative prior service cost at May 31,
2009. As a result of the plan freeze, the Company re-measured the benefit obligations of the
affected plans effective May 31, 2009, causing a reduction in the pension obligation of $47 million
in the second quarter of 2009. The reduction primarily reflects an increase in the discount rates
used to re-measure the pension plan obligations from 6.25% at December 31, 2008 to 6.5% at May 31,
2009 reflecting the change in market interest rates. Significant changes from the Companys
disclosures at December 31, 2008 as a result of the decision to freeze the domestic pension plans
are as follows:
|
|
The Companys postretirement benefit liability adjustment increased by $27 million pre-tax
($17 million after-tax) for the nine months ended September 30, 2009, resulting in a decrease
to accumulated other comprehensive income. The increase to the liability was primarily due to
the effect of the curtailment, partially offset by net amortization of actuarial losses. |
|
|
As a result of the curtailment discussed above, there will be no pre-tax amortization of
negative prior service costs after June 30, 2009. The Company previously disclosed that it
expected to record amortization of negative prior service costs of $11 million pre-tax in
2009. The Company had been amortizing negative prior service costs related to previous plan
amendments over a 6-year period. |
|
|
The Company now expects estimated amortization of actuarial losses for the pension plans to be approximately $34 million pre-tax for the full year 2009, compared with the previous
estimate of $54 million. The decline primarily reflects two factors: |
|
1) |
|
The weighted average amortization period for the frozen plans is now based on
the average expected remaining life of plan participants, which is approximately 31
years. This compares with the Companys previous amortization period of six years,
which reflected the expected remaining future service of active employees. This change
in amortization period occurred after the plan freeze because the workforce is
considered inactive for pension accounting purposes as these employees will no longer
earn pension benefits. |
|
2) |
|
The increase in the discount rate lowered the net actuarial loss to be
amortized. |
Pension benefits. Components of net pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
1 |
|
|
$ |
19 |
|
|
$ |
43 |
|
|
$ |
56 |
|
Interest cost |
|
|
64 |
|
|
|
60 |
|
|
|
187 |
|
|
|
181 |
|
Expected long-term return on plan assets |
|
|
(60 |
) |
|
|
(58 |
) |
|
|
(180 |
) |
|
|
(175 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from past experience |
|
|
3 |
|
|
|
15 |
|
|
|
30 |
|
|
|
43 |
|
Prior service cost |
|
|
|
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
8 |
|
|
$ |
34 |
|
|
$ |
76 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company funds its qualified pension plans at least at the minimum amount required by the
Pension Protection Act of 2006, which requires companies to fully fund defined benefit pension
plans over a seven-year period beginning in 2008. The Internal Revenue Service recently issued
regulations providing relief in measuring pension plan funding obligations for 2009. As a result,
only approximately $90 million of the Companys $354 million in domestic pension plan contributions
during the nine months ended September 30, 2009 were necessary to meet minimum funding requirements
and the remaining contributions were voluntary. Although not
required, the Company may make
additional voluntary contributions of approximately $55 million during the remainder of 2009.
35
Other postretirement benefits. Components of net other postretirement benefit cost were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest cost |
|
|
6 |
|
|
|
6 |
|
|
|
18 |
|
|
|
18 |
|
Expected long-term return on plan assets |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain from past experience |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
Prior service cost |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other postretirement benefit cost |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
13 Debt
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Short-term: |
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
100 |
|
|
$ |
299 |
|
Current maturities of long-term debt |
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total short-term debt |
|
$ |
104 |
|
|
$ |
301 |
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
Uncollateralized debt: |
|
|
|
|
|
|
|
|
7% Notes due 2011 |
|
$ |
222 |
|
|
$ |
222 |
|
6.375% Notes due 2011 |
|
|
226 |
|
|
|
226 |
|
5.375% Notes due 2017 |
|
|
250 |
|
|
|
250 |
|
6.35% Notes due 2018 |
|
|
300 |
|
|
|
300 |
|
8.5% Notes due 2019 |
|
|
349 |
|
|
|
|
|
6.37% Notes due 2021 |
|
|
78 |
|
|
|
78 |
|
7.65% Notes due 2023 |
|
|
100 |
|
|
|
100 |
|
8.3% Notes due 2023 |
|
|
17 |
|
|
|
17 |
|
7.875% Debentures due 2027 |
|
|
300 |
|
|
|
300 |
|
8.3% Step Down Notes due 2033 |
|
|
83 |
|
|
|
83 |
|
6.15% Notes due 2036 |
|
|
500 |
|
|
|
500 |
|
Other |
|
|
10 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
2,435 |
|
|
$ |
2,090 |
|
|
|
|
|
|
|
|
Under a universal shelf registration statement filed with the Securities and Exchange
Commission, the Company issued $350 million of 8.5% Notes on May 4, 2009 ($349 million, net of debt
discount, with an effective interest rate of 9.90% per year). The difference between the stated
and effective interest rates primarily reflects the effect of a treasury lock. See Note 10 for
further information. Interest is payable on May 1 and November 1 of each year beginning November
1, 2009. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate
of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning
September 15, 2008. These Notes will mature on March 15, 2018.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal
to the greater of:
|
|
100% of the principal amount of the Notes to be redeemed; or |
|
|
|
the present value of the remaining principal and interest payments
on the Notes being redeemed discounted at the applicable treasury
rate plus 50 basis points (8.50% Notes due 2019) or 40 basis
points (6.35% Notes due 2018). |
36
On March 14, 2008, the Company entered into a new commercial paper program (the Program). Under
the Program, the Company is authorized to sell from time to time short-term unsecured commercial
paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share repurchases. The Company
uses the credit facility entered into in June 2007, as back-up liquidity to support the outstanding
commercial paper. If at any time funds are not available on favorable terms under the Program, the
Company may use its credit agreement for funding. In October 2008, the Company added an additional
dealer to its Program. As of September 30, 2009, the Company had $100 million in commercial paper
outstanding at a weighted average interest rate of 0.53% and remaining maturities ranging from five
to 55 days.
Note 14 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss excludes amounts required to adjust future policy benefits for
the run-off settlement annuity business. Changes in accumulated other comprehensive loss were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
(Expense) |
|
|
After- |
|
(In millions) |
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation on securities arising during the period |
|
$ |
479 |
|
|
$ |
(168 |
) |
|
$ |
311 |
|
Reclassification adjustment for (gains) included in shareholders net income |
|
|
(18 |
) |
|
|
6 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities |
|
$ |
461 |
|
|
$ |
(162 |
) |
|
$ |
299 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
$ |
(9 |
) |
|
$ |
3 |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
46 |
|
|
$ |
(17 |
) |
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
$ |
(3 |
) |
|
$ |
2 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
(3 |
) |
|
$ |
2 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation on securities arising during the period |
|
$ |
(290 |
) |
|
$ |
104 |
|
|
$ |
(186 |
) |
Reclassification adjustment for losses included in shareholders net income |
|
|
87 |
|
|
|
(32 |
) |
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities |
|
$ |
(203 |
) |
|
$ |
72 |
|
|
$ |
(131 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, derivatives |
|
$ |
23 |
|
|
$ |
(9 |
) |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
(85 |
) |
|
$ |
29 |
|
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
$ |
6 |
|
|
$ |
(3 |
) |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
6 |
|
|
$ |
(3 |
) |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
(Expense) |
|
|
After- |
|
(In millions) |
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
Nine
Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Implementation effect of updated guidance on other-than-temporary impairments |
|
$ |
(27 |
) |
|
$ |
9 |
|
|
$ |
(18 |
) |
Net unrealized appreciation on securities arising during the year |
|
|
867 |
|
|
|
(300 |
) |
|
|
567 |
|
Reclassification adjustment for (gains) included in shareholders net income |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities |
|
$ |
839 |
|
|
$ |
(293 |
) |
|
$ |
546 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
$ |
(22 |
) |
|
$ |
8 |
|
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
68 |
|
|
$ |
(25 |
) |
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
$ |
9 |
|
|
$ |
(2 |
) |
|
$ |
7 |
|
Curtailment gain |
|
|
(46 |
) |
|
|
16 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment included in shareholders net income |
|
|
(37 |
) |
|
|
14 |
|
|
|
(23 |
) |
Net change due to valuation update |
|
|
10 |
|
|
|
(4 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
(27 |
) |
|
$ |
10 |
|
|
$ |
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation on securities arising during the year |
|
$ |
(504 |
) |
|
$ |
177 |
|
|
$ |
(327 |
) |
Reclassification adjustment for losses included in shareholders net income |
|
|
127 |
|
|
|
(45 |
) |
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities |
|
$ |
(377 |
) |
|
$ |
132 |
|
|
$ |
(245 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, derivatives |
|
$ |
5 |
|
|
$ |
(2 |
) |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
(119 |
) |
|
$ |
40 |
|
|
$ |
(79 |
) |
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past experience and prior service costs |
|
$ |
16 |
|
|
$ |
(6 |
) |
|
$ |
10 |
|
Net change due to valuation update |
|
|
9 |
|
|
|
(3 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
25 |
|
|
$ |
(9 |
) |
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
Note 15 Income Taxes
The Company has historically accrued U.S. income taxes on the undistributed earnings of foreign
subsidiaries. In 2009, the Company determined that the prospective earnings of its South Korean
operation are to be permanently invested overseas. Income taxes for this operation will therefore
be accrued at the tax rate of the foreign jurisdiction. As a result, shareholders net income
increased for the nine months ended September 30, 2009 by $24 million, which included $22 million
representing the unrecognized deferred tax liabilities attributable to its investment in the South
Korean subsidiary that are considered permanent in nature. Management is currently assessing
whether the undistributed earnings of certain other foreign operations will be permanently invested
overseas.
During the first quarter of 2009, the IRS completed its examination of the Companys 2005 and 2006
consolidated federal income tax returns, resulting in an increase to shareholders net income of
$21 million ($20 million in continuing operations and $1 million in discontinued operations). This
increase reflected a reduction in net unrecognized tax benefits of $8 million ($17 million reported
in income tax expense, partially offset by a $9 million pre-tax charge) and a reduction of interest
and penalties of $13 million (reported in income tax expense).
Gross unrecognized tax benefits declined for the nine months ended September 30, 2009 by $6
million. This decline was primarily due to completion of the IRS examination noted above which
increased shareholders net income by $8 million, partially offset by non-audit related changes in
net unrecognized tax benefits which decreased shareholder net income by $4 million.
38
Over the next twelve months, the Company has determined it reasonably possible that the level of
unrecognized tax benefits could increase or decrease significantly, subject to developments in
certain matters in dispute with the IRS. It is also reasonably possible there could be a
significant change in the level of valuation allowances recorded against deferred tax benefits of
the reinsurance operations and certain unrealized investment losses within the next twelve months.
The Company, however, is currently unable to reasonably estimate the potential impact of such
changes.
During the first quarter of 2009, final resolution was reached in one of the two disputed issues
associated with the IRS examination of the Companys 2003 and 2004 consolidated federal income tax
returns. The second of these disputed matters remains unresolved and on June 4, 2009 the Company
initiated litigation of this matter by filing a petition in the United States Tax Court. Due to
the nature of the litigation process, the timing of the resolution of this matter is uncertain.
Though the Company expects to prevail, unfavorable resolution of this litigation would result in a
charge to shareholders net income of up to $15 million, representing net interest expense on the
cumulative incremental tax for all affected years. In addition, there remain two unresolved issues
from the IRS examination of the Companys 2005 and 2006 consolidated federal income tax returns.
The Company initiated a regulatory appeal of these matters on March 31, 2009 by filing a formal
protest of the proposed adjustments. One of these unresolved issues is the same matter which
remains in dispute from the prior IRS examination.
The Company continues to evaluate income tax specific provisions that were included in the 2010
federal budget proposal, particularly those related to the U.S. taxation of foreign operations.
Also, certain of the healthcare reform proposals under consideration by Congress include provisions
which, if enacted as currently proposed, could increase the Companys effective tax rate.
Note
16 Segment Information
The Companys operating segments generally reflect groups of related products, except for the
International segment which is generally based on geography. In accordance with GAAP, operating
segments that do not require separate disclosure have been combined into Other Operations. The
Company measures the financial results of its segments using segment earnings (loss), which
subsequent to implementing the FASBs guidance for noncontrolling interests, is defined as
shareholders income (loss) from continuing operations excluding after-tax realized investment
gains and losses.
Summarized segment financial information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees, Mail order pharmacy revenues and Other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
$ |
3,194 |
|
|
$ |
3,357 |
|
|
$ |
9,723 |
|
|
$ |
9,841 |
|
Disability and Life |
|
|
684 |
|
|
|
656 |
|
|
|
2,074 |
|
|
|
1,986 |
|
International |
|
|
486 |
|
|
|
476 |
|
|
|
1,392 |
|
|
|
1,434 |
|
Run-off Reinsurance |
|
|
(149 |
) |
|
|
81 |
|
|
|
(211 |
) |
|
|
152 |
|
Other Operations |
|
|
42 |
|
|
|
47 |
|
|
|
132 |
|
|
|
138 |
|
Corporate |
|
|
(17 |
) |
|
|
(14 |
) |
|
|
(44 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,240 |
|
|
$ |
4,603 |
|
|
$ |
13,066 |
|
|
$ |
13,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
$ |
200 |
|
|
$ |
187 |
|
|
$ |
549 |
|
|
$ |
482 |
|
Disability and Life |
|
|
64 |
|
|
|
70 |
|
|
|
220 |
|
|
|
211 |
|
International |
|
|
38 |
|
|
|
44 |
|
|
|
144 |
|
|
|
144 |
|
Run-off Reinsurance |
|
|
30 |
|
|
|
(105 |
) |
|
|
116 |
|
|
|
(252 |
) |
Other Operations |
|
|
23 |
|
|
|
20 |
|
|
|
63 |
|
|
|
64 |
|
Corporate |
|
|
(35 |
) |
|
|
(31 |
) |
|
|
(97 |
) |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings |
|
|
320 |
|
|
|
185 |
|
|
|
995 |
|
|
|
516 |
|
Realized investment gains (losses), net of taxes |
|
|
9 |
|
|
|
(15 |
) |
|
|
(24 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
329 |
|
|
$ |
170 |
|
|
$ |
971 |
|
|
$ |
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Note
17 Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various financial guarantees
provided in the ordinary course of business.
Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business
Separate account assets are contractholder funds maintained in accounts with specific investment
objectives. The Company records separate account liabilities equal to separate account assets. In
certain cases, primarily associated with the sold retirement benefits business (which was sold in
April 2004), the Company guarantees a minimum level of benefits for retirement and insurance
contracts, written in separate accounts. The Company establishes an additional liability if
management believes that the Company will be required to make a payment under these guarantees.
The Company guarantees that separate account assets will be sufficient to pay certain retiree or
life benefits. The sponsoring employers are primarily responsible for ensuring that assets are
sufficient to pay these benefits and are required to maintain assets that exceed a certain
percentage of benefit obligations. This percentage varies depending on the asset class within a
sponsoring employers portfolio (for example, a bond fund would require a lower percentage than a
riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers
do not maintain the required levels of separate account assets, the Company or an affiliate of the
buyer has the right to redirect the management of the related assets to provide for benefit
payments. As of September 30, 2009, employers maintained assets that exceeded the benefit
obligations. Benefit obligations under these arrangements were $1.8 billion as of September 30,
2009. Approximately 76% of these guarantees are reinsured by an affiliate of the buyer of the
retirement benefits business. The remaining guarantees are provided by the Company with minimal
reinsurance from third parties. There were no additional liabilities required for these guarantees
as of September 30, 2009. Separate account assets supporting these guarantees are classified in
Levels 1 and 2 of the GAAP fair value hierarchy. See Note 8 for further information on the fair
value hierarchy.
Other Financial Guarantees
Guaranteed minimum income benefit contracts. The Companys reinsurance operations, which were
discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income
benefits under certain variable annuity contracts issued by other insurance companies. A
contractholder can elect the guaranteed minimum income benefit (GMIB) within 30 days of any
eligible policy anniversary after a specified contractual waiting period. The Companys exposure
arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the
policys current account value. At the time of annuitization, the Company pays the excess (if any)
of the guaranteed benefit over the benefit based on the current account value in a lump sum to the
direct writing insurance company.
In periods of declining equity markets or declining interest rates, the Companys GMIB liabilities
increase. Conversely, in periods of rising equity markets and rising interest rates, the Companys
liabilities for these benefits decrease.
The Company estimates the fair value of the GMIB assets and liabilities using assumptions for
market returns and interest rates, volatility of the underlying equity and bond mutual fund
investments, mortality, lapse, annuity election rates, nonperformance risk, and risk and profit
charges. Assumptions were updated beginning at January 1, 2008 to reflect requirements for fair
value measurements. See Note 8 for additional information on how fair values for these liabilities
and related receivables for retrocessional coverage are determined.
The Company is required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits. Under these guarantees, the future payment amounts
are dependent on equity and bond fund market and interest rate levels prior to and at the date of
annuitization election, which must occur within 30 days of a policy anniversary, after the
appropriate waiting period. Therefore, the future payments are not fixed and determinable under
the terms of the contract. Accordingly, the Company has estimated the maximum potential
undiscounted future payments using hypothetical adverse assumptions, defined as follows:
|
|
no annuitants surrendered their accounts; |
|
|
all annuitants lived to elect their benefit; |
|
|
all annuitants elected to receive their benefit on the next available date (2009 through
2014); and |
|
|
all underlying mutual fund investment values remained at the September 30, 2009 value of
$1.3 billion with no future returns. |
40
The maximum potential undiscounted payments that the Company would make under those assumptions
would aggregate $1.4 billion before reinsurance recoveries. The Company expects the amount of
actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The
Company has retrocessional coverage in place from two external reinsurers which covers 55% of the
exposures on these contracts. The Company bears the risk of loss if its retrocessionaires do not
meet or are unable to meet their reinsurance obligations to the Company.
Certain other guarantees. The Company had indemnification obligations to lenders of up to $239
million as of September 30, 2009 related to borrowings by certain real estate joint ventures which
the Company either records as an investment or consolidates. These borrowings, which are
nonrecourse to the Company, are secured by the joint ventures real estate properties with fair
values in excess of the loan amounts and mature at various dates beginning in 2010 through
2017. The Companys indemnification obligations would require payment to lenders for any actual
damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of
rental payments by others or environmental damages. Based on initial and ongoing reviews of
property management and operations, the Company does not expect that payments will be required
under these indemnification obligations. Any payments that might be required could be recovered
through a refinancing or sale of the assets. In some cases, the Company also has recourse to
partners for their proportionate share of amounts paid. There were no liabilities required for
these indemnification obligations as of September 30, 2009.
As of September 30, 2009, the Company guaranteed that it would compensate the lessors for a
shortfall of up to $44 million in the market value of certain leased equipment at the end of the
lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had
liabilities for these guarantees of $8 million as of September 30, 2009.
As part of the reinsurance and administrative service arrangements acquired from Great-West Life
and Annuity, Inc., the Company is responsible to pay claims for the group medical and long-term
disability business of Great-West Healthcare and collect related amounts due from their third party
reinsurers. Any such amounts not collected will represent additional assumed liabilities of the
Company and decrease shareholders net income if and when these amounts are determined
uncollectible. At September 30, 2009, there were no receivables recorded for paid claims due from
third party reinsurers for this business and unpaid claims related to this business were estimated
at $24 million.
The Company had indemnification obligations as of September 30, 2009 in connection with acquisition
and disposition transactions. These indemnification obligations are triggered by the breach of
representations or covenants provided by the Company, such as representations for the presentation
of financial statements, the filing of tax returns, compliance with law or the identification of
outstanding litigation. These obligations are typically subject to various time limitations,
defined by the contract or by operation of law, such as statutes of limitation. In some cases, the
maximum potential amount due is subject to contractual limitations based on a percentage of the
transaction purchase price, while in other cases limitations are not specified or applicable. The
Company does not believe that it is possible to determine the maximum potential amount due under
these obligations, since not all amounts due under these indemnification obligations are subject to
limitation. There were no liabilities required for these indemnification obligations as of
September 30, 2009.
The Company does not expect that these guarantees will have a material adverse effect on the
Companys consolidated results of operations, liquidity or financial condition.
Regulatory and Industry Developments
Employee benefits regulation. The business of administering and insuring employee benefit
programs, particularly health care programs, is heavily regulated by federal and state laws and
administrative agencies, such as state departments of insurance and the Federal Departments of
Labor and Justice, as well as the courts. Regulation and judicial decisions have resulted in
changes to industry and the Companys business practices and will continue to do so in the
future. In addition, the Companys subsidiaries are routinely involved with various claims,
lawsuits and regulatory and IRS audits and investigations that could result in financial liability,
changes in business practices, or both. Health care regulation in its various forms could have an
adverse effect on the Companys health care operations if it inhibits the Companys ability to
respond to market demands or results in increased medical or administrative costs without improving
the quality of care or services.
41
Other possible regulatory and legislative changes or judicial decisions that could have an adverse
effect on the Companys employee benefits businesses include:
|
|
additional mandated benefits or services that increase costs; |
|
|
legislation that would grant plan participants broader rights to sue their health
plans; |
|
|
changes in public policy and in the political environment, which could affect
state and federal law, including legislative and regulatory proposals related to health care
issues, which could increase cost and affect the market for the Companys health care products
and services; |
|
|
changes in Employee Retirement Income Security Act (ERISA) regulations resulting
in increased administrative burdens and costs; |
|
|
additional restrictions on the use of prescription drug formularies and rulings
from pending purported class action litigation, which could result in adjustments to or the
elimination of the average wholesale price or AWP of pharmaceutical products as a benchmark
in establishing certain rates, charges, discounts, guarantees and fees for various
prescription drugs; |
|
|
additional privacy legislation and regulations that interfere with the proper use
of medical information for research, coordination of medical care and disease and disability
management; |
|
|
additional variations among state laws mandating the time periods and
administrative processes for payment of health care provider claims; |
|
|
legislation that would exempt independent physicians from antitrust laws; and |
|
|
changes in federal tax laws, such as amendments that could affect the taxation of
employer provided benefits. |
The employee benefits industry remains under scrutiny by various state and federal government
agencies and could be subject to government efforts to bring criminal actions in circumstances that
could previously have given rise only to civil or administrative proceedings.
Concentration of risk. For the Companys International segment, South Korea is the single largest
geographic market. South Korea generated 29% of the segments revenues for the third quarter of
2009 and 28% of the segments revenues for the nine months ended September 30, 2009. South Korea
generated 37% of the segments earnings for the third quarter of 2009 and 43% of the segments
earnings for the nine months ended September 30, 2009. Due to the concentration of business in
South Korea, the International segment is exposed to potential losses resulting from economic and
geopolitical developments in that country, as well as foreign currency movements affecting the
South Korean currency, which could have a significant impact on the segments results and the
Companys consolidated financial results.
Litigation and Other Legal Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits,
investigations and other legal matters arising, for the most part, in the ordinary course of the
business of administering and insuring employee benefit programs including payments to providers
and benefit level disputes. Litigation of income tax matters is accounted for under FASBs
accounting guidance for uncertainty in income taxes. Further information can be found in Note
15. An increasing number of claims are being made for substantial non-economic, extra-contractual
or punitive damages. The outcome of litigation and other legal matters is always uncertain, and
outcomes that are not justified by the evidence can occur. The Company believes that it has valid
defenses to the legal matters pending against it and is defending itself vigorously and has
recorded accruals in accordance with GAAP. Nevertheless, it is possible that resolution of one or
more of the legal matters currently pending or threatened could result in losses material to the
Companys consolidated results of operations, liquidity or financial condition.
Managed care litigation. On April 7, 2000, several pending actions were consolidated in the United
States District Court for the Southern District of Florida in a multi-district litigation
proceeding captioned In re Managed Care Litigation challenging, in general terms, the mechanisms
used by managed care companies in connection with the delivery of or payment for health care
services. The consolidated cases include Shane v. Humana, Inc., et al., Mangieri v. CIGNA
Corporation, Kaiser and Corrigan v. CIGNA Corporation, et al. and Amer. Dental Assn v. CIGNA Corp.
et al.
In 2004, the court approved a settlement agreement between the physician class and CIGNA. However,
a dispute over disallowed claims under the settlement submitted by a representative of certain
class member physicians is in arbitration. Separately, in 2005, the court approved a settlement
between CIGNA and a class of non-physician health care providers. Only the American Dental
Association case remains unresolved. On March 2, 2009, the Court dismissed five of the six counts
of the complaint with prejudice. On March 20, 2009, the Court declined to exercise supplemental
jurisdiction over the remaining state law claim and dismissed the case. Plaintiffs filed a notice
of appeal on April 17, 2009. CIGNA denies the allegations and will continue to vigorously defend
itself.
42
CIGNA has received insurance recoveries related to this litigation. In 2008, the trial court ruled
that the Company is not entitled to insurance recoveries from one of the two insurers from which
the Company is pursuing further recoveries. CIGNA appealed that decision and on June 3, 2009, the
Superior Court of Pennsylvania reversed the trial courts decision remanding the case to the trial
court for further proceedings.
Broker compensation. Beginning in 2004, the Company, other insurance companies and certain
insurance brokers received subpoenas and inquiries from various regulators, including the New York
and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorneys
Office for the Southern District of California and the U.S. Department of Labor relating to their
investigations of insurance broker compensation. CIGNA has cooperated with the inquiries and
investigations.
On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life
Insurance Company of North America, were named as defendants in a multi-district litigation
proceeding, In re Insurance Brokerage Antitrust Litigation, consolidated in the United States
District Court for the District of New Jersey. The complaint alleges that brokers and insurers
conspired to hide commissions, increasing the cost of employee benefit plans, and seeks treble
damages and injunctive relief. Numerous insurance brokers and other insurance companies are named
as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in
favor of the defendants. Plaintiffs have filed an appeal. CIGNA denies the allegations and will
continue to vigorously defend itself.
Amara cash balance pension plan litigation. On December 18, 2001, Janice Amara filed a class
action lawsuit, now captioned Janice C. Amara, Gisela R. Broderick, Annette S. Glanz, individually
and on behalf of all others similarly situated v. CIGNA Corporation and CIGNA Pension Plan, in the
United States District Court for the District of Connecticut against CIGNA Corporation and the
CIGNA Pension Plan on behalf of herself and other similarly situated participants in the CIGNA
Pension Plan affected by the 1998 conversion to a cash balance formula. The plaintiffs allege
various ERISA violations including, among other things, that the Plans cash balance formula
discriminates against older employees; the conversion resulted in a wear away period (during which
the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are
not adequately disclosed in the Plan.
In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension
Plan on the age discrimination and wear away claims. However, the court found in favor of the
plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from
the existing cash balance formula for the majority of the class, requiring class members to receive
their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under
the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment
and post-judgment interest. The court stayed implementation of the decision until the parties
appeals have been exhausted. Both parties appealed the courts decisions. In the second quarter
of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax), which
principally reflects the Companys best estimate of the liabilities related to the court order. On
October 6, 2009, the Second Circuit Court of Appeals issued a decision affirming the District
Courts judgment and order on all issues. On October 26,
2009 the Company moved the Second Circuit Court of Appeals to continue
to stay the implementation of the decision citing its intention to
seek to appeal to the United States Supreme Court. The Company will continue to vigorously defend itself in
this case.
Ingenix. On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an
industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of
UnitedHealthcare, used to calculate payments for services provided by out-of-network
providers. The Company received four subpoenas from the New York Attorney Generals office in
connection with this investigation and responded appropriately. On February 17, 2009, the Company
entered into an Assurance of Discontinuance resolving the investigation. In connection with the
industry-wide resolution, the Company contributed $10 million to the establishment of a new
non-profit company that will compile and provide the data currently provided by Ingenix. In
addition, on March 28, 2008, the Company received a voluntary request for production of documents
from the Connecticut Attorney Generals office seeking certain out-of-network claim payment
information. The Company has responded appropriately. Since January 2009, the Company has
received and responded to inquiries regarding the use of Ingenix data from the Texas Attorney
General and the Departments of Insurance in Illinois, Florida, Vermont, Georgia, Pennsylvania,
Connecticut and Alaska and will be responding to a letter from the Illinois Attorney General
received on October 9, 2009.
43
The Company was named as a defendant in seven putative nationwide class actions
asserting that due to the use of data from Ingenix, Inc., the Company
improperly underpaid claims, an industry-wide issue. Two actions were
brought on behalf of members, (Franco v.
CIGNA Corp. et al., and Chazen v. CIGNA Corp. et al.), and
five actions were brought on behalf of providers, (American Medical
Association et al. v. CIGNA Corp. et al., Shiring et al. v. CIGNA Corp. et al., Higashi et al. v.
CGLIC et al. and Pain Management and Surgery Center of
Southeast Indiana v. CGLIC et al. and North Peninsula Surgical
Center v. Connecticut General Life Insurance Co. et al.). Six of
the seven matters have been consolidated into the Franco case
pending in the United States District Court for the District of New
Jersey. The
consolidated amended complaint, filed on August 7, 2009, asserts claims under ERISA, the RICO
statute, the Sherman Antitrust Act and New Jersey state law. CIGNA filed a motion to dismiss the
consolidated amended complaint on September 9, 2009. Discovery is ongoing and class certification
is scheduled to be litigated in March and April of 2010. The one remaining class action that has
not yet been consolidated in the Franco case is North
Peninsula Surgical Center filed on July 6, 2009, in the United States District Court for
the Central District of California, asserting claims under ERISA, the Sherman Antitrust Act and
state unfair competition law.
On June 9, 2009, CIGNA filed motions in the United States District Court for the Southern District
of Florida to enforce the Managed Care MDL settlement by enjoining the RICO and antitrust causes of
action asserted by the provider plaintiffs on the ground that they arose prior to and were released
in the April, 2004 settlement. The motions are now fully briefed and pending.
It is reasonably possible that others could initiate additional litigation or additional regulatory
action against the Company with respect to use of data provided by Ingenix, Inc. The Company
denies the allegations asserted in the investigations and litigation and will vigorously defend
itself in these matters.
44
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
47 |
|
|
|
|
51 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
60 |
|
|
|
|
62 |
|
|
|
|
64 |
|
|
|
|
67 |
|
|
|
|
68 |
|
|
|
|
68 |
|
|
|
|
69 |
|
|
|
|
70 |
|
|
|
|
76 |
|
|
|
|
81 |
|
|
|
|
82 |
|
|
INTRODUCTION
In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (the
Company) make certain forward-looking statements relating to the Companys financial condition and
results of operations, as well as to trends and assumptions that may affect the
Company. Generally, forward-looking statements can be identified through the use of predictive
words (e.g., Outlook for 2009). Actual results may differ from the Companys predictions. Some
factors that could cause results to differ are discussed throughout Managements Discussion and
Analysis (MD&A), including in the Cautionary Statement beginning on page 82. The forward-looking
statements contained in this filing represent managements current estimate as of the date of this
filing. Management does not assume any obligation to update these estimates.
The following discussion addresses the financial condition of the Company as of September 30, 2009,
compared with December 31, 2008, and its results of operations for the third quarter of 2009 and
nine months ended September 30, 2009 compared with the same periods last year. This discussion
should be read in conjunction with MD&A included in the Companys 2008 Form 10-K, to which the
reader is directed for additional information.
The preparation of interim consolidated financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of portions of the health
care and related benefits business as well as competitive and other market conditions, call for
caution in estimating full year results based on interim results of operations.
Certain reclassifications and restatements have been made to prior period amounts to conform to the
current presentation. In addition, certain amounts have been restated as a result of the
adoption of new accounting pronouncements. See Note 2 to the Consolidated Financial Statements for
additional information.
Overview
The Company constitutes one of the largest investor-owned health service organizations in the
United States. Its subsidiaries are major providers of health care and related benefits, the
majority of which are offered through the workplace. In addition, the Company has an international
operation that offers life, accident and supplemental health insurance products as well as
international health care products and services to businesses and individuals in selected markets.
The Company also has certain inactive businesses, including a Run-off Reinsurance segment.
45
Ongoing Operations
The Companys ability to increase revenue, shareholders net income and operating cash flow from
ongoing operations is directly related to progress on the execution of its strategic initiatives,
the success of which is measured by certain key factors, including the Companys ability to:
|
|
profitably price products and services at competitive levels that reflect emerging
experience; |
|
|
maintain and grow its customer base; |
|
|
cross sell its various health and related benefit products; |
|
|
invest available cash at attractive rates of return for appropriate durations; |
|
|
effectively manage other operating expenses; and |
|
|
effectively deploy capital. |
Run-off Operations
Effectively managing the various exposures of its run-off operations is important to the Companys
ongoing profitability, operating cash flows and available capital. The results are influenced by a
range of economic factors, especially movements in equity markets and interest rates. In order to
substantially reduce the impact of equity market movements on the liability for guaranteed minimum
death benefits (GMDB), the Company operates an equity hedge program. The Company actively monitors
the performance of the hedge program, and evaluates the cost/benefit of hedging other risks.
Results are also influenced by behavioral factors, including future partial surrender election
rates for GMDB contracts, annuity election rates for guaranteed minimum income benefits (GMIB)
contracts, annuitant lapse rates, as well as the collection of amounts recoverable from
retrocessionaires. The Company actively studies policyholder behavior experience and adjusts
future expectations based on the results of the studies, as warranted. The Company also performs
regular audits of ceding companies to ensure that premiums received and claims paid properly
reflect the underlying risks, and to maximize the probability of subsequent collection of claims
from retrocessionaires. Finally, the Company monitors the financial strength and credit standing
of the retrocessionaires and establishes or collects collateral when warranted.
Summary
The Companys overall results are influenced by a range of economic and other factors, especially:
|
|
cost trends and inflation for medical and related services; |
|
|
utilization patterns of medical and other services; |
|
|
the tort liability system; |
|
|
developments in the political environment both domestically and internationally, including
efforts to reform the U.S. health care system; |
|
|
interest rates, equity market returns, foreign currency fluctuations and credit market
volatility, including the availability and cost of credit in the future; and |
|
|
federal and state regulation. |
The Company regularly monitors the trends impacting operating results from the above mentioned key
factors and economic and other factors affecting its operations. The Company develops strategic and
tactical plans designed to improve performance and maximize its competitive position in the markets
it serves. The Companys ability to achieve its financial objectives is dependent upon its ability
to effectively execute these plans and to appropriately respond to emerging economic and
company-specific trends.
The Company seeks to improve the performance of and profitably grow its ongoing businesses and
manage the risks associated with the run-off reinsurance operations.
46
Acquisition of Great-West Healthcare
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc.
(Great-West Healthcare or the acquired business) through 100% indemnity reinsurance agreements
and the acquisition of certain affiliates and other assets and liabilities of Great-West
Healthcare. The purchase price was approximately $1.5 billion and consisted of a payment to the
seller of approximately $1.4 billion for the net assets acquired and the assumption of net
liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare
primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional
employer groups. Great-West Healthcares offerings also include the following specialty
products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and
accidental death and dismemberment insurance. The acquisition, which was accounted for as a
purchase, was financed through a combination of cash and the issuance of both short and long-term
debt.
See Note 3 to the Consolidated Financial Statements for additional information.
Initiatives to Lower Operating Expenses
During 2009, the Company continued its previously announced comprehensive review to reduce the
operating expenses of its ongoing businesses. As a result, the Company recognized severance
related charges in other operating expenses as follows:
|
|
during the third quarter of 2009, a charge of $10 million pre-tax ($7 million after-tax),
for severance resulting from reductions of approximately 230 positions in its
workforce; and |
|
|
during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax),
for severance resulting from reductions of approximately 480 positions in its workforce. |
Substantially all of these charges were recorded in the Health Care segment, and are expected to be
paid in cash by June 30, 2010. As a result of these actions, the Company expects annualized
after-tax savings of approximately $30 million in 2010 and beyond. A portion of the savings is
being realized in 2009.
CONSOLIDATED RESULTS OF OPERATIONS
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
3,985 |
|
|
$ |
4,128 |
|
|
$ |
12,049 |
|
|
$ |
12,197 |
|
Net investment income |
|
|
263 |
|
|
|
272 |
|
|
|
752 |
|
|
|
802 |
|
Mail order pharmacy revenues |
|
|
316 |
|
|
|
300 |
|
|
|
944 |
|
|
|
882 |
|
Other revenues |
|
|
(61 |
) |
|
|
175 |
|
|
|
73 |
|
|
|
431 |
|
Total realized investment gains (losses) |
|
|
14 |
|
|
|
(23 |
) |
|
|
(40 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,517 |
|
|
|
4,852 |
|
|
|
13,778 |
|
|
|
14,284 |
|
Benefits and expenses |
|
|
4,030 |
|
|
|
4,619 |
|
|
|
12,388 |
|
|
|
13,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
487 |
|
|
|
233 |
|
|
|
1,390 |
|
|
|
720 |
|
Income taxes |
|
|
157 |
|
|
|
62 |
|
|
|
417 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
330 |
|
|
|
171 |
|
|
|
973 |
|
|
|
500 |
|
Shareholders income from discontinued operations, net of taxes |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
330 |
|
|
|
172 |
|
|
|
974 |
|
|
|
503 |
|
Less: Net income attributable to noncontrolling interest |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders net income |
|
$ |
329 |
|
|
$ |
171 |
|
|
$ |
972 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
9 |
|
|
$ |
(15 |
) |
|
$ |
(24 |
) |
|
$ |
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Special Items
In order to facilitate an understanding and comparison of results of operations and permit analysis
of trends in underlying revenue, expenses and shareholders income from continuing operations,
presented below are special items, which management believes are not representative of the
underlying results of operations.
SPECIAL ITEMS
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
After-Tax |
|
|
|
Benefit |
|
|
Benefit |
|
(In millions) |
|
(Charge) |
|
|
(Charge) |
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Cost reduction charge |
|
$ |
(10 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
46 |
|
|
$ |
30 |
|
Cost reduction charge |
|
|
(24 |
) |
|
|
(16 |
) |
Completion of IRS examination |
|
|
(9 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Charges related to litigation matters |
|
$ |
(117 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
See Note 12 to the Consolidated Financial Statements for additional information related to the
curtailment gain and Note 6 to the Consolidated Financial Statements for further discussion of the
cost reduction charge. The other special item for 2009 is a result of the completion of the 2005
and 2006 IRS examinations. See Note 15 to the Consolidated Financial Statements for additional
information.
See Note 17 to the Consolidated Financial Statements for further discussion of the litigation
charge associated with the pension plan reported in the second quarter of 2008. The remaining
special item for 2008 consisted of charges related to certain litigation matters which were
reported in the Health Care segment.
Overview of Consolidated Results of Operations
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
Shareholders income from continuing operations for the three months ended September 30, 2009
increased significantly compared with the three months ended September 30, 2008, as a result of:
|
|
significantly improved results in the Run-off Reinsurance segment resulting from the
absence of the third quarter 2008 charge related to the GMDB business and favorable results
from the GMIB business in 2009 compared with losses in 2008. See the Run-off Reinsurance
section of this MD&A for further discussion; |
|
|
increased segment earnings in the Health Care segment; and |
|
|
more favorable realized investment results. |
48
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
Shareholders income from continuing operations was also significantly higher for the nine months
ended September 30, 2009 compared with the same period in 2008. In addition to the items cited
above related to the three months ended September, the increase for the nine months resulted from:
|
|
the absence of the $131 million charge in the GMIB business resulting from the adoption of guidance for fair value measurements; |
|
|
|
favorable results from the GMIB business in 2009 compared with losses in 2008 (excluding the $131 million charge from adopting the new fair
value guidance); and |
|
|
|
the favorable year over year impact of the following special items as noted in the above table: |
|
|
|
completion of the IRS examination; |
|
|
|
|
the curtailment gain on the pension plan, partially offset by cost reduction charges; and |
|
|
|
|
litigation charges reported for the nine months ended September 30, 2008. There
were no litigation charges reported as special items for the nine months ended September
30, 2009. |
Higher
segment earnings in the Health Care segment also contributed to the increase in shareholders income
from continuing operations for the nine months ended September 30, 2009. Partially offsetting
these favorable effects were higher net realized investment losses in 2009.
See the Segment reporting section of the MD&A for further information regarding segment earnings
for each of the Companys segments for both the three months and nine months ended September 30,
2009 compared with the same periods in 2008.
Outlook for 2009 and 2010
The Company expects full-year 2009 shareholders income from continuing operations, excluding
realized investment results, the results of the GMIB business, and special items, to be higher than
2008 due to lower losses in the Run-off Reinsurance segment. Overall
segment earnings in the ongoing
operating segments (Health Care, Disability and Life, and International) are expected to be
slightly higher than 2008. Information is not available for management to reasonably estimate the
future results of the GMIB business, realized investment gains (losses), or to identify or
reasonably estimate special items for the remainder of 2009. Special items for the remainder of
2009 may include potential charges associated with the previously announced cost reduction plan, as
well as litigation related items.
The Company expects 2010 shareholders income from continuing operations, excluding realized
investment results, the results of the GMIB business, and special
items, to be comparable to or slightly higher than 2009. As discussed above, information is not
available for management to reasonably estimate future realized investment gains (losses), the
results of the GMIB business or to identify or reasonably estimate future special items in 2010.
The Companys outlook for both 2009 and 2010 reflects
managements assumption that equity market
conditions and volatility will continue to be stable for the remainder of 2009 and 2010. However,
that assumption, together with the other earnings projections used to develop this outlook, is
subject to the factors cited in the Cautionary Statement beginning on page 82 and the sensitivities
discussed in the Critical Accounting Estimates section of the MD&A beginning on page 51 and in the
Companys 2008 Form 10-K. If unfavorable equity market and interest rate movements occur, the
Company could experience losses related to investment impairments and the GMIB and GMDB business.
These losses could adversely impact the Companys consolidated results of operations and financial
condition by potentially reducing the capital of the Companys insurance subsidiaries and reducing
their dividend paying capabilities.
49
Revenues
Total revenue decreased by 7% for the three months ended September 30, 2009, compared with the
three months ended September 30, 2008 and decreased by 4% for the nine months ended September 30,
2009 compared with the nine months ended September 30, 2008. Changes in the components of total
revenue are described more fully below.
Premiums and Fees
Premiums and fees decreased by 3% for the three months ended September 30, 2009, compared with the
three months ended September 30, 2008, primarily reflecting membership declines in the Health Care
segment largely due to disenrollment. See segment reporting discussions for additional detail and
drivers.
Premiums and fees decreased by 1% for the nine months ended September 30, 2009, compared with the
nine months ended September 30, 2008, reflecting membership declines in Health Care and the
unfavorable effect of foreign currency translation in International,
offset by the absence of premiums and fees from the acquired business
in the first quarter of 2008 since this business was acquired
April 1, 2008.
Net Investment Income
Net investment income decreased by 3% for the three months ended September 30, 2009, compared with
the three months ended September 30, 2008, primarily due to lower income from real estate funds
which reflects declines in market values due to the continued weakness in commercial real estate
market fundamentals, and lower investment yields driven by declines in short-term interest rates
partially offset by higher assets.
For the nine months ended September 30, 2009, net investment income decreased by 6% compared with
the nine months ended September 30, 2008 due to lower income from real estate funds and security
partnerships and lower investment yields partially offset by higher invested assets.
Mail Order Pharmacy Revenues
Mail order pharmacy revenues increased by 5% for the three months ended September 30, 2009,
compared with the three months ended September 30, 2008 and increased by 7% for the nine months
ended September 30, 2009 compared with the nine months ended September 30, 2008. These changes
were primarily due to rate increases.
Other Revenues
Other revenues include the impact of the futures contracts associated with the GMDB equity hedge
program. The Company reported losses of $161 million for the three months ended and $232 million
for the nine months ended September 30, 2009 associated with the GMDB equity hedge program,
compared with gains of $70 million for the three months ended and $118 million for the nine months
ended September 30, 2008. The losses in 2009 reflect increases in stock market values, while the
gains in 2008 primarily reflect declines in stock market values. Excluding the impact of these
futures contracts, other revenues decreased by 5% for the three months ended September 30, 2009,
and decreased by 3% for the nine months ended September 30, 2009 compared with the same periods in
2008. These decreases primarily reflect declines in amortization of deferred gains on the sales of
the retirement benefits and individual life insurance and annuity businesses.
Realized Investment Results
Realized investment results improved significantly for the three months ended September 30, 2009,
compared with the three months ended September 30, 2008 primarily due to improving market
conditions which resulted in:
|
|
lower impairment losses; |
|
|
fair value gains on hybrid securities in 2009 compared with losses in 2008 (changes in fair
value for these securities are reported in realized investment results); and |
|
|
gains on sales of fixed maturities and equities in 2009 compared with losses on sales in
2008. |
These favorable factors were substantially offset by the absence of a gain on sale of a real estate
venture in the third quarter of 2008.
50
Realized investment losses were higher for the nine months ended September 30, 2009 compared with
the nine months ended September 30, 2008, primarily due to the absence of significant gains on the
sales of real estate ventures reported in the first and third quarters of 2008, partially offset by
the following items which largely resulted from improving market conditions:
|
|
gains on sales of fixed maturities and equities in 2009 compared with losses in 2008; |
|
|
gains on hybrid securities in 2009 compared with losses in 2008; and |
|
|
lower impairment losses. |
See Note 9 to the Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures in the consolidated financial
statements. Management considers an accounting estimate to be critical if:
|
|
it requires assumptions to be made that were uncertain at the time the estimate was made;
and |
|
|
changes in the estimate or different estimates that could have been selected could have a
material effect on the Companys consolidated results of operations or financial condition. |
Management has discussed the development and selection of its critical accounting estimates with
the Audit Committee of the Companys Board of Directors and the Audit Committee has reviewed the
disclosures presented below.
The Companys most critical accounting estimates, as well as the effects of hypothetical changes in
material assumptions used to develop each estimate, are described in the Companys 2008 Form 10-K
beginning on page 49 and are as follows:
|
|
future policy benefits guaranteed minimum death benefits; |
|
|
Health Care medical claims payable; |
|
|
accounts payable, accrued expenses and other liabilities, and other assets guaranteed
minimum income benefits; |
|
|
reinsurance recoverables for Run-off Reinsurance; |
|
|
accounts payable, accrued expenses and other liabilities pension liabilities; and |
|
|
investments fixed maturities. |
51
The Company regularly evaluates items which may impact critical accounting estimates. During the
nine months ended September 30, 2009, the Company updated the following critical accounting
estimates:
|
|
|
|
|
Balance Sheet Caption / |
|
|
|
|
Nature of Critical Accounting Estimate |
|
Assumptions / Approach Used |
|
Effect if Different Assumptions Used |
Future policy benefits
Guaranteed minimum death benefits
These liabilities are estimates of
the present value of net amounts
expected to be paid, less the present
value of net future premiums expected
to be received. The amounts to be
paid represent the excess of the
guaranteed death benefit over the
values of contractholders accounts.
The death benefit coverage in force
as of September 30, 2009
(representing the estimated amount
payable if all of approximately
600,000 contractholders had submitted
death claims as of that date) was
approximately $7.7 billion.
Liabilities for future policy
benefits for these contracts were as
follows (in millions):
September 30, 2009 $1,352
December 31, 2008 $1,609
|
|
The Company estimates
these liabilities based on assumptions
for lapse,
partial surrender,
mortality, interest rates
(mean investment
performance and discount
rate), and volatility.
These assumptions are
based on the Companys
experience and future
expectations over the
long-term period. The
Company monitors actual
experience to update these
estimates as necessary.
Lapse refers to the full surrender
of an annuity
prior to a
contractholders death.
Partial surrender refers
to the fact that most
contractholders have the
ability to withdraw
substantially all of their
mutual fund investments
while retaining any
available death benefit
coverage in effect at the
time of the withdrawal.
Once a partial surrender
is made, the liability
increases reflecting lower
future assumed premiums, a
lower likelihood of lapse,
and a lower likelihood of
account values recovering
sufficiently to reduce the
death benefit exposure in
future periods. These
effects are not covered by
the Companys GMDB equity
hedge program. Market
declines could expose the
Company to higher amounts
of death benefit exposure
that can be retained by
contractholders subsequent
to a significant partial
surrender and to higher
election rates of future
partial surrenders. Thus,
if equity markets decline,
the Companys liability
for partial surrenders
increases and there is no
corresponding offset from
the hedge program. The
election rate for expected
future partial surrenders
is updated quarterly based
on emerging experience.
Interest rates include
both (a) the mean
investment performance
assumption considering the
Companys GMDB equity
hedge program which
reflects the average
short-term interest rate
to be earned over the life
of the program, and (b)
the liability discount
rate assumption.
Volatility refers to the
degree of variation of
future market returns of
the underlying mutual fund
investments.
|
|
Current assumptions used to estimate these
liabilities are detailed in Note 7 to the Consolidated
Financial Statements. Based on
current and historical market, industry and
Company-specific experience and managements
judgment, the Company believes that it is
reasonably likely that the unfavorable changes in
the key assumptions and/or conditions described
below could occur. If these unfavorable
assumption changes were to occur when the recorded
reserve is insufficient, the approximate after-tax
decrease in shareholders net income would be as follows:
5% increase in mortality rates $30
million
10% decrease in lapse rates $20 million
10% increase in election rates for future
partial surrenders $5 million
50 basis point decrease in interest rates:
Mean Investment Performance $30 million
Discount Rate $30 million
10% increase in volatility $20 million
As of September 30, 2009, if contractholder
account values invested in underlying equity
mutual funds declined by 10% due to equity market
performance, the after-tax decrease in shareholders net income
resulting from an increase in the provision for
partial surrenders would be approximately $20
million.
As of September 30, 2009, if contractholder
account values invested in underlying bond/money
market mutual funds declined by 3% due to
bond/money market performance, the after-tax
decrease in shareholders net income resulting from an increase
in the provision for partial surrenders and an
increase in unhedged exposure would be
approximately $15 million.
The amounts would be reflected in the Run-off
Reinsurance segment. |
52
|
|
|
|
|
Balance Sheet Caption / |
|
|
|
|
Nature of Critical Accounting Estimate |
|
Assumptions / Approach Used |
|
Effect if Different Assumptions Used |
Accounts payable, accrued
expenses and other liabilities, and
Other assets
Guaranteed minimum income benefits
These liabilities are estimates of
the present value of net amounts
expected to be paid, less the present
value of net future premiums expected
to be received. The amounts to be
paid represent the excess of the
expected value of the income benefit
over the value of the annuitants
accounts at the time of
annuitization.
The assets associated with these
contracts represent receivables in
connection with reinsurance that the
Company has purchased from two
external reinsurers, which covers 55%
of the exposures on these contracts.
As discussed in Note 2 to the
Consolidated Financial Statements,
the Company implemented new guidance
for fair value measurements on
January 1, 2008. At adoption, the
Company was required to change
certain assumptions. As a result,
the Company recorded a charge of $131
million after-tax, net of reinsurance
($202 million pre-tax).
Liabilities related to these
contracts were as follows (in
millions):
September 30, 2009 $1,126
December 31, 2008 $1,757
Estimated amounts receivable related
to these contracts from two external
reinsurers, were as follows (in
millions):
September 30, 2009 $614
December 31, 2008 $953
|
|
With the adoption of new guidance for fair value
measurements, the Company updated assumptions to reflect
those that the Company believes a hypothetical market
participant would use to determine a current exit price.
The Company estimates a hypothetical market participants
view of these assumptions considering market observable
information, the actual and expected experience of the
Company, and other relevant and available industry sources.
Resulting changes in fair value are reported in GMIB
expense.
The Company considers the various assumptions used to
estimate the fair values of assets and liabilities
associated with these contracts in two categories. The
first group of assumptions used to estimate these fair
values consist of capital market inputs including market
returns and discount rates, claim interest rates and market
volatility.
Interest rates include (a) market returns, (b) the liability
discount rate assumption and (c) the projected interest
rates used to calculate the reinsured income benefit at the
time of annuitization (claim interest rate).
Volatility refers to the degree of variation of future
market returns of the underlying mutual fund investments.
The second group of assumptions consists of future annuitant
behavior including annuity election rates, lapse, and
mortality, retrocessionnaire credit risk, and a risk and
profit charge.
Annuity election rates refer to the proportion of annuitants
who elect to receive their income benefit as an annuity.
Lapse refers to the full surrender of an annuity prior to
annuitization of the policy.
Credit risk refers to the ability of these reinsurers to pay.
Risk and profit charge refers to the amount that a
hypothetical market participant would include in the
valuation to cover the uncertainty of outcomes and the
desired return on capital.
|
|
Current assumptions used to estimate these
liabilities are detailed in Note 8 to the
Consolidated Financial Statements. With the
adoption of new guidance for fair value
measurements, the Companys results of
operations are expected to be more volatile in
future periods because several assumptions will
be based largely on market-observable inputs
at the close of each period including interest
rates and market implied volatilities.
Based on current and historical market,
industry and Company-specific experience and
managements judgment, the Company believes
that it is reasonably likely that the
unfavorable changes in the key assumptions
and/or conditions described below could occur.
If these unfavorable assumption changes were
to occur, the approximate after-tax decrease
in shareholders net income, net of estimated amounts
receivable from reinsurers, would be as
follows:
50 basis point decrease in interest
rates (which are aligned with LIBOR) used for
projecting market returns and discounting
$15 million
50 basis point decrease in interest
rates used for projecting claim exposure
(7-year Treasury rates) $30 million
20% increase in implied market
volatility $5 million
5% decrease in mortality $1 million
10% increase in annuity election rates
$5 million
10% decrease in lapse rates $5
million
10% decrease in amounts receivable
from reinsurers (credit risk) $40 million
10% increase to the risk and profit
charge $5 million
Market declines which reduce annuitants
account values expose the Company to higher
potential claims which results in a larger net
liability. If annuitants account values as
of September 30, 2009 declined by 10% due to
the performance of the underlying mutual
funds, the approximate after-tax decrease in
shareholders net income, net of estimated amounts
receivable from reinsurers, would be
approximately $30 million.
All of these estimated impacts due to
unfavorable changes in assumptions could vary
from quarter to quarter depending on actual
reserve levels, the actual market conditions
or changes in the anticipated view of a
hypothetical market participant as of any
future valuation date.
The amounts would be reflected in the Run-off
Reinsurance segment. |
53
Investments Fixed Maturities. Losses for other-than-temporary impairments of fixed
maturities must be recognized in shareholders net income based on an estimate of fair value or the
present value of expected cash flows by management. Determining whether a decline in value is
other-than-temporary includes an evaluation of the reasons for, the significance of, and the
duration of the decrease in value of the security and the Companys intent to sell or likelihood of
a required sale of the security before recovery. For all fixed maturities with cost in excess of
their fair value, if this excess was determined to be other-than-temporary, shareholders net income as of September 30, 2009 would have decreased by $96 million after-tax.
See Note 9 to the Consolidated Financial Statements for more information.
Summary
There are other accounting estimates used in the preparation of the Companys Consolidated
Financial Statements, including estimates of liabilities for future policy benefits other than
those identified above, as well as estimates with respect to unpaid claims and claim expenses,
post-employment and postretirement benefits other than pensions, certain compensation accruals and
income taxes.
Management believes the current assumptions used to estimate amounts reflected in the Companys
Consolidated Financial Statements are appropriate. However, if actual experience differs from the
assumptions used in estimating amounts reflected in the Companys Consolidated Financial
Statements, the resulting changes could have a material adverse effect on the Companys
consolidated results of operations, and in certain situations, could have a material adverse effect
on liquidity and the Companys financial condition.
54
SEGMENT REPORTING
Operating segments generally reflect groups of related products, but the International segment is
generally based on geography. The Company measures the financial results of its segments using
segment earnings (loss), which is defined as shareholders income (loss) from continuing
operations excluding after-tax realized investment gains and losses.
Health Care Segment
Segment Description
The Health Care segment includes medical, dental, behavioral health, prescription drug and other
products and services that may be integrated to provide consumers with comprehensive health care
solutions. This segment also includes group disability and life insurance products that were
historically sold in connection with certain experience-rated medical products. These products and
services are offered through a variety of funding arrangements such as guaranteed cost,
retrospectively experience-rated and administrative services only arrangements.
The Company measures the operating effectiveness of the Health Care segment using the following key
factors:
|
|
sales of specialty products to core medical customers; |
|
|
changes in operating expenses per member; and |
|
|
medical expense as a percentage of premiums (medical cost ratio) in the guaranteed cost
business. |
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL SUMMARY |
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
2,812 |
|
|
$ |
2,991 |
|
|
$ |
8,578 |
|
|
$ |
8,760 |
|
Net investment income |
|
|
52 |
|
|
|
54 |
|
|
|
132 |
|
|
|
154 |
|
Mail order pharmacy revenues |
|
|
316 |
|
|
|
300 |
|
|
|
944 |
|
|
|
882 |
|
Other revenues |
|
|
66 |
|
|
|
66 |
|
|
|
201 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
3,246 |
|
|
|
3,411 |
|
|
|
9,855 |
|
|
|
9,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mail order pharmacy cost of goods sold |
|
|
255 |
|
|
|
238 |
|
|
|
762 |
|
|
|
704 |
|
Benefits and other expenses |
|
|
2,681 |
|
|
|
2,892 |
|
|
|
8,243 |
|
|
|
8,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
|
2,936 |
|
|
|
3,130 |
|
|
|
9,005 |
|
|
|
9,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
310 |
|
|
|
281 |
|
|
|
850 |
|
|
|
742 |
|
Income taxes |
|
|
110 |
|
|
|
94 |
|
|
|
301 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
200 |
|
|
$ |
187 |
|
|
$ |
549 |
|
|
$ |
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
(1 |
) |
|
$ |
15 |
|
|
$ |
(17 |
) |
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
|
|
|
$ |
|
|
|
$ |
25 |
|
|
$ |
|
|
Cost reduction charge |
|
$ |
(4 |
) |
|
$ |
|
|
|
$ |
(12 |
) |
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Charge related to litigation matters |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(24 |
) |
55
Excluding the special items noted in the table above, the Health Care segments earnings for
the three months ended September 30, 2009 were higher than the same period last year, primarily
due to:
|
|
lower operating expenses reflecting volume related declines, as well as a favorable impact
resulting from the comprehensive review of ongoing expenses, including the impact of pension
changes; |
|
|
improved specialty earnings; and |
|
|
higher net stop loss earnings driven by improved total medical cost management in the
acquired business, tempered by revenue pressure in the remaining stop
loss business primarily due to disenrollment. |
These favorable effects were partially offset by:
|
|
lower experience-rated earnings reflecting lower underwriting margins; and |
|
|
lower guaranteed cost earnings primarily reflecting a higher
medical cost ratio in part due
to an increase in flu-related and other facility-based claims. |
Segment earnings for the nine months ended September 30, 2009, as compared with the nine months
ended September 30, 2008, were favorably impacted by the absence
of a $7 million after-tax adjustment related
to a large experience-rated life and non-medical account in run-out recorded in
the first quarter of 2008.
Excluding
this item and the special items noted in the table above, segment earnings for the nine
months ended September 30, 2009 were higher compared to the nine months ended September 30, 2008
reflecting:
|
|
improved specialty earnings; |
|
|
higher stop loss earnings largely benefiting from the acquired business (effective April 1,
2008); and |
|
|
higher Medicare risk earnings due in part to higher membership. |
These favorable effects were largely offset by:
|
|
lower investment income, primarily reflecting lower real estate and security partnership
income; |
|
|
lower guaranteed cost earnings primarily reflecting a higher
medical cost ratio in part due
to an increase in flu-related and other facility-based claims; and |
|
|
lower Medicare Part D earnings reflecting lower margins, as well as a decline in
membership. |
56
Revenues
The table below shows premiums and fees for the Health Care segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Medical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed cost excluding voluntary / limited benefits(1),(2) |
|
$ |
784 |
|
|
$ |
857 |
|
|
$ |
2,367 |
|
|
$ |
2,647 |
|
Voluntary / Limited Benefits |
|
|
58 |
|
|
|
49 |
|
|
|
176 |
|
|
|
151 |
|
Experience-rated(2),(3) |
|
|
418 |
|
|
|
512 |
|
|
|
1,276 |
|
|
|
1,499 |
|
Stop loss |
|
|
312 |
|
|
|
348 |
|
|
|
965 |
|
|
|
859 |
|
Dental |
|
|
179 |
|
|
|
195 |
|
|
|
550 |
|
|
|
589 |
|
Medicare |
|
|
152 |
|
|
|
104 |
|
|
|
443 |
|
|
|
300 |
|
Medicare Part D |
|
|
71 |
|
|
|
63 |
|
|
|
273 |
|
|
|
273 |
|
Other (4) |
|
|
124 |
|
|
|
127 |
|
|
|
382 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical |
|
|
2,098 |
|
|
|
2,255 |
|
|
|
6,432 |
|
|
|
6,702 |
|
Life and other non-medical |
|
|
46 |
|
|
|
44 |
|
|
|
142 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
2,144 |
|
|
|
2,299 |
|
|
|
6,574 |
|
|
|
6,840 |
|
Fees(2),(5) |
|
|
668 |
|
|
|
692 |
|
|
|
2,004 |
|
|
|
1,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees |
|
$ |
2,812 |
|
|
$ |
2,991 |
|
|
$ |
8,578 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes guaranteed cost premiums primarily associated with open access and commercial
HMO, as well as other risk-related products. |
|
(2) |
|
Premiums and/or fees associated with certain specialty products are also included. |
|
(3) |
|
Includes minimum premium members who have a risk profile similar to experience-rated
funding arrangements. The risk portion of minimum premium revenue is reported in
experience-rated medical premium whereas the self funding portion of minimum premium
revenue is recorded in fees. Also, includes certain non-participating cases for which
special customer level reporting of experience is required. |
|
(4) |
|
Other medical premiums include risk revenue for specialty products. |
|
(5) |
|
Represents administrative service fees for medical members and related specialty
product fees for non-medical members as well as fees related to Medicare Part D of $11
million for the three months ended September 30, 2009 and $28 million for the nine months
ended September 30, 2009 and $19 million for the three months ended September 30,
2008 and $48 million for the nine months ended September 30, 2008. |
Premiums and fees decreased by 6% for the three months ended September 30, 2009 and decreased
by 2% for the nine months ended September 30, 2009, compared with the same periods of 2008. This
primarily reflects lower membership largely due to disenrollment.
This impact was partially offset by rate increases, as well as membership growth in the Medicare
private fee for services product.
Net investment income decreased by 4% for the three months ended September 30, 2009 and decreased
by 14% for the nine months ended September 30, 2009 compared with the same periods of 2008
reflecting lower income from real estate funds and security partnerships partially offset by higher
invested assets.
Other revenues for the Health Care segment consist of revenues earned on direct channel sales of
certain specialty products, including behavioral health and disease management.
57
Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Medical claims expense |
|
$ |
1,698 |
|
|
|
1,819 |
|
|
$ |
5,226 |
|
|
|
5,480 |
|
Other benefit expenses |
|
|
48 |
|
|
|
49 |
|
|
|
134 |
|
|
|
151 |
|
Mail order pharmacy cost of goods sold |
|
|
255 |
|
|
|
238 |
|
|
|
762 |
|
|
|
704 |
|
Other operating expenses |
|
|
935 |
|
|
|
1,024 |
|
|
|
2,883 |
|
|
|
2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
$ |
2,936 |
|
|
$ |
3,130 |
|
|
$ |
9,005 |
|
|
$ |
9,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims expense decreased by 7% for the three months ended September 30, 2009 and
decreased by 5% for the nine months ended September 30, 2009 compared with the same periods in 2008
largely due to lower membership, particularly in the experience-rated and guaranteed cost
businesses; partially offset by increases in medical expenses related to claim trend and Medicare
member driven growth.
Other operating expenses include expenses related to:
|
|
both retail and mail order pharmacy; |
|
|
|
disease management; |
|
|
|
voluntary and limited benefits; |
|
|
|
Medicare claims administration businesses; and |
|
|
|
integration costs associated with the acquired business. |
Excluding the items noted above, as well as the special items noted in the Results of Operations
table, other operating expenses for the three months ended September 30, 2009 were lower than the
same period last year reflecting volume related declines, as well as a
favorable impact resulting from the comprehensive review of ongoing
expenses, including the impact of pension changes. Operating expenses increased for the nine
months ended September 30, 2009, compared with the nine months ended September 30, 2008, primarily
due to expenses related to the acquired business (effective April 1, 2008), partially offset by the
impact of pension changes.
Other Items Affecting Health Care Results
Medical Membership
The Companys medical membership includes any individual for whom the Company retains medical
underwriting risk, who uses the Companys network for services covered under their medical coverage
or for whom the Company administers medical claims. As of September 30 , estimated medical
membership was as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Guaranteed cost excluding voluntary/limited benefits (1) |
|
|
762 |
|
|
|
902 |
|
Voluntary/limited benefits |
|
|
220 |
|
|
|
202 |
|
Medicare |
|
|
51 |
|
|
|
35 |
|
|
|
|
|
|
|
|
Total guaranteed cost |
|
|
1,033 |
|
|
|
1,139 |
|
Experience-rated (2) |
|
|
764 |
|
|
|
913 |
|
Service |
|
|
9,307 |
|
|
|
9,848 |
|
|
|
|
|
|
|
|
Total medical membership |
|
|
11,104 |
|
|
|
11,900 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes guaranteed cost members primarily associated with open access and commercial
HMO, as well as other risk-related products. |
|
(2) |
|
Includes minimum premium members, who have a risk profile similar to experience-rated
members. |
The net decrease in the Companys medical membership is 7% as of September 30, 2009 when
compared with September 30, 2008, primarily driven by disenrollment across all funding arrangements
as a result of the current economic environment.
58
Operational Improvement Initiatives
The Company is focused on several initiatives including developing and enhancing a customer focused
service model. This effort is expected to require significant investments over the next three to
five years. These investments are expected to enable the Company to grow its membership and to
improve operational effectiveness and profitability by developing innovative products and services
that promote customer engagement at a competitive cost. Executing on these operational improvement
initiatives is critical to attaining a leadership position in the health care marketplace.
The operational improvement initiatives currently underway are discussed below.
Reducing other operating expenses. The Company operates in an intensely competitive marketplace
and its ability to establish a competitive cost advantage is key to achieving its initiatives.
Accordingly, the Company is focused on reducing operating expenses in three key areas primarily to
facilitate operating efficiency and responsiveness to customers. These three areas include:
customer acquisition, which encompasses spending on sales, the account management process,
underwriting and marketing; fulfillment, mainly claims processing and billing; and reducing
overhead in various administrative and staffing functions. In connection with these efforts, in
the fourth quarter of 2008, the Company reviewed staffing levels and organization and announced a
plan to reorganize its business model and supporting areas to more tightly align the ongoing
operating segments. As part of this ongoing review of operating expenses, during the third quarter
of 2009 the Company identified additional job eliminations, in order to facilitate operating
efficiency and meet the challenges and opportunities presented by the current economic environment.
Maintaining and upgrading information technology systems. The Companys current business model and
long-term strategy require effective and reliable information technology systems. The Companys
current systems architecture will require continuing investment to meet the challenges of
increasing customer demands from both our existing and emerging client base to support its business
growth and strategies, improve its competitive position and provide appropriate levels of service
to customers. The Company is focused on providing these enhanced strategic capabilities in
response to increasing customer expectations, while continuing to provide a consistent, high
quality customer service experience with respect to the Companys current programs. Accordingly, in
2009, the Companys efforts will be focused primarily on optimizing the technology underlying our
claims processing and call servicing capabilities with specific emphasis on reducing handling time
and improving customer service. Continued integration of the Companys multiple administrative
and customer facing platforms is also required to support the Companys growth strategies, and to
ensure reliable, efficient and effective customer service both in todays employer focused model as
well as in a customer directed model. The Companys ability to effectively deploy capital to make
these investments will influence the timing and the impact these initiatives will have on its
operations.
Profitable sales and customer retention. The Company continues to focus on selling profitable new
business and retaining current customers by:
|
|
focusing on targeted segments where buyers value our health improvement capabilities; |
|
|
|
providing a diverse product portfolio that meets current market needs as well as emerging consumer-directed trends; |
|
|
|
developing and implementing the systems, information technology and infrastructure to deliver member service that keeps
pace with the emerging consumer-directed market trends; |
|
|
|
ensuring competitive provider networks; |
|
|
|
maintaining a strong clinical quality in medical, specialty health care and disability management; and |
|
|
|
increasing specialty penetration. |
The Company is also focused on segment and product expansion. With respect to segment expansion,
our focus is predominantly in the Select (employers with 51-250 employees), and individual
segments. As part of its effort to achieve these objectives, the Company completed the acquisition
of Great-West Healthcare of Denver, Colorado on April 1, 2008. This acquisition will enable the
Company to broaden its distribution reach and health care professional network, particularly in the
western regions of the United States, and expand the range of health benefits and product
offerings.
The Company has also recently developed new product offerings for its guaranteed cost and
experienced-rated portfolios. These offerings will provide our employer clients with lower-cost
options for providing medical, pharmacy and dental benefits.
Driving additional cross-selling is also key to our integrated benefits value proposition. We are
expanding network access for our dental product and improving network flexibility to ensure better
alignment with our customers needs. Also, with the acquisition of Great-West Healthcare, we will
be working in 2009 to transition this book to CIGNA pharmacy and increase pharmacy penetration
across the entire book.
59
Offering products that meet emerging customer and market trends. In order to meet emerging customer
and market trends, the Companys suite of products (CIGNATURE®, CareAllies®, and CIGNA Choice
Fund®) offers various options to customers and employers and is key to our customer engagement
strategy. Offerings include: choice of benefit, participating provider network, funding, medical
management, and health advocacy options. Through the CIGNA Choice Fund®, the Company offers a set
of customer-directed capabilities that includes options for health reimbursement arrangements
and/or health savings accounts and enables customers to make effective health decisions using
information tools provided by the Company.
Underwriting and pricing products effectively. One of the Companys key priorities is to achieve
strong profitability in a competitive health care market. The Company is focused on effectively
managing pricing and underwriting decisions at both the case and overall book of business level,
particularly for the guaranteed cost book, as well as its experience-rated, ASO businesses and stop
loss coverages.
Effectively managing medical costs. The Company operates under a centralized medical management
model, which helps facilitate consistent levels of care for its members and reduces infrastructure
expenses.
The Company is focused on continuing to effectively manage medical utilization and unit costs. The
Company believes that by increasing the quality of medical care and improving access to care we can
drive reductions in total medical cost and better outcomes, resulting in healthier members. To
help achieve this, the Company continues to focus on contracting with providers, enhancing clinical
activities, as well as engaging our members and clients/employers. In addition, the Company seeks
to strengthen its network position in selected markets. In connection with the Great-West
Healthcare acquisition in April 2008, the Company has made significant progress converting and
integrating these acquired members to its extensive preferred provider network which offers access
to a broad range of utilization review and case management services at a reduced medical cost. The
integration is progressing well, with savings from medical cost management initiatives (including
contract integration and enhancement of clinical activities) projected to be on target, with most
to be achieved by the end of 2009.
Delivering quality service to customers and health care professionals. The Company is focused on
delivering competitive service to customers, health care professionals and clients. The Company
believes that further enhancing quality service can improve customer retention and, when combined
with useful health information and tools, can help motivate customers to become more engaged in
their personal health, and will help promote healthy outcomes thereby removing cost from the
system. The evolution of the consumer-driven health care market is driving increased product and
service complexity and is raising customers expectations with respect to service levels, which is
expected to require significant investment, management attention and heightened interaction with
customers.
The Company is focused on the development and enhancement of a service model that is capable of
meeting the challenges brought on by the increasing product and service complexity and the
heightened expectations of health care customers. The Company continues to make significant
investments in the development and implementation of systems and technology to improve the provider
service experience for customers and health care professionals, enhance its capabilities and
improve its competitive position.
The Companys health advocacy
capabilities support its recent membership efforts. The
Company must be able to deliver those capabilities efficiently and cost-effectively. The Company
continues to identify additional cost savings to further improve its competitive cost
position. Savings generated from the Companys operating efficiency initiatives provide capital to
make investments that will enhance its capabilities in the areas of customer engagement,
particularly product development, the delivery of customer service and health advocacy and related
technology.
Disability and Life Segment
Segment Description
The Disability and Life segment includes group disability, life, accident and specialty insurance
and case management services for disability and workers compensation.
Key factors for this segment are:
|
|
premium and fee growth, including new business and customer retention; |
|
|
|
net investment income; |
|
|
|
benefits expense as a percentage of earned premium (loss ratio); and |
|
|
|
other operating expense as a percentage of earned premiums and fees (expense ratio). |
60
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
654 |
|
|
$ |
627 |
|
|
$ |
1,987 |
|
|
$ |
1,896 |
|
Net investment income |
|
|
62 |
|
|
|
65 |
|
|
|
180 |
|
|
|
193 |
|
Other revenues |
|
|
30 |
|
|
|
29 |
|
|
|
87 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
746 |
|
|
|
721 |
|
|
|
2,254 |
|
|
|
2,179 |
|
Benefits and expenses |
|
|
656 |
|
|
|
624 |
|
|
|
1,952 |
|
|
|
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
90 |
|
|
|
97 |
|
|
|
302 |
|
|
|
295 |
|
Income taxes |
|
|
26 |
|
|
|
27 |
|
|
|
82 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
64 |
|
|
$ |
70 |
|
|
$ |
220 |
|
|
$ |
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
5 |
|
|
$ |
(17 |
) |
|
$ |
(2 |
) |
|
$ |
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
|
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
|
|
Cost reduction charge |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
|
|
Segment
earnings for the three months ended September 30, 2009 include a
special item for a cost reduction charge. Excluding the special item,
segment results reflect lower earnings from the disability business
primarily resulting from higher expenses including an
expense charge related to a settlement, less favorable life and
specialty claims experience and lower net investment income, partially offset by
favorable accident claims experience. Segment earnings continue
to reflect competitively strong
margins driven by the sustained value the Company delivers to its
customers from its disability management programs.
Segment earnings for the nine months ended September 30, 2009 include the favorable after-tax
impact of reserve studies of $34 million of which $20 million reflects strong results from
the Companys disability management programs over the past several years, an expense charge and
special items for the pension curtailment gain, cost reduction charge and completion of an IRS
examination. Segment earnings for the nine months ended September 30, 2008 include the favorable
after-tax impact of reserve studies of $16 million. Excluding the impact of the reserve studies,
an expense charge and special items, segment earnings decreased due to lower investment
income and less favorable life, specialty and disability claims experience, partially offset by
favorable accident claims experience.
Revenues
Premiums and fees increased 4% for the three months ended September 30, 2009 and 5% for the nine
months ended September 30, 2009 compared with the same periods of 2008 reflecting new sales growth
and solid customer retention in the disability and life lines of business, partially offset by less
favorable customer retention in the specialty line of business.
Net investment income decreased 5% for the three months ended September 30, 2009 and 7% for the
nine months ended September 30, 2009 reflecting lower yields and lower real estate and security
partnership income.
Benefits and Expenses
Benefits
and expenses for the three months ended September 30, 2009 include the favorable pre-tax
impact of reserve studies of $7 million, an expense charge and
the special item for cost reduction charge. Benefits and expenses for
the three months ended September 30, 2008 include the favorable
pre-tax impact of reserve studies of $7 million. Excluding the
impact of the reserve studies, an expense charge and the special item
for cost reduction charge, benefits and
expenses increased 4%, primarily reflecting disability and life
business growth and less favorable
life, specialty and disability claims experience, partially offset by more favorable accident
claims experience. The less favorable life claims experience was driven by the higher average
size of death claims. The less favorable disability claims experience was driven by higher new
claims partially offset by higher resolutions. The more favorable accident claim experience was
driven by lower claim counts. The overall flat expense ratio reflects effective operating expense
management offset by investments in the claim operations and strategic information technology
initiatives.
61
Benefits and expenses for the nine months ended September 30, 2009 include the net favorable
pre-tax impact of reserve studies of $49 million, an expense charge and special items.
Benefits and expenses for the nine months ended September 30, 2008 include the favorable pre-tax
impact of reserve studies of $23 million. Excluding the impact of the reserve studies,
an expense charge and special items, benefits and expenses increased 5%, primarily
reflecting disability and life business growth and less favorable life, specialty and disability
claims experience partially offset by more favorable accident claims experience. The less
favorable life claims experience was driven by the higher average size of death claims. The less
favorable disability claims experience was driven by higher new claims partially offset by higher
resolutions. The more favorable accident claim experience was driven by lower claim counts. The
overall flat expense ratio reflects effective operating expense management offset by investments in the
claim operations and strategic information technology initiatives.
International Segment
Segment Description
The International segment includes life, accident and supplemental health insurance products and
international health care products and services, including those offered to expatriate employees of
multinational corporations.
The key factors for this segment are:
|
|
premium growth, including new business and customer retention; |
|
|
|
benefits expense as a percentage of earned premium (loss ratio); and |
|
|
|
operating expense as a percentage of earned premium (expense ratio). |
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
482 |
|
|
$ |
471 |
|
|
$ |
1,378 |
|
|
$ |
1,422 |
|
Net investment income |
|
|
17 |
|
|
|
23 |
|
|
|
50 |
|
|
|
62 |
|
Other revenues |
|
|
4 |
|
|
|
5 |
|
|
|
14 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
503 |
|
|
|
499 |
|
|
|
1,442 |
|
|
|
1,496 |
|
Benefits and expenses |
|
|
447 |
|
|
|
428 |
|
|
|
1,251 |
|
|
|
1,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
56 |
|
|
|
71 |
|
|
|
191 |
|
|
|
227 |
|
Income taxes |
|
|
17 |
|
|
|
26 |
|
|
|
45 |
|
|
|
81 |
|
Income attributable to noncontrolling interest |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
38 |
|
|
$ |
44 |
|
|
$ |
144 |
|
|
$ |
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency movements included in segment earnings |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
(18 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains (losses), net of taxes |
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
1 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction charge |
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
|
|
Curtailment gain |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
62
During the second quarter of 2009, the Companys International Segment implemented a capital
management strategy to permanently invest the earnings of its South Korean operation overseas.
Income taxes for this operation will therefore be recorded at the tax rate of the foreign
jurisdiction. Segment earnings reflect favorable tax adjustments of $14 million for the
implementation of this strategy for the nine months ended September 30, 2009. In addition to the
implementation effect, segment earnings also reflect the ongoing impact of the lower tax rate on
the permanently invested earnings of $3 million for the three months ended September 30, 2009 and
$8 million for the nine months ended September 30, 2009. Excluding the impact of the Korean tax
adjustments, foreign currency movements and the special items noted above, International segment
earnings decreased 11% for the three months ended September 30, 2009 and 3% for the nine months
ended September 30, 2009, compared with the same periods last year. The decreases for the three
and nine months ended September 30, 2009 were primarily driven by unfavorable claims experience in
the life, accident and supplemental health insurance business and the expatriate employee benefits
business. The unfavorable effects were partially offset by strong
revenue growth and competitively strong margins
in both businesses. The impact of foreign currency movements is calculated by comparing the
reported results to what the results would have been had the exchange rates remained constant with
the prior years comparable period exchange rates.
Revenues
Premiums and fees. Premiums and fees increased 2% for the three months ended September 30, 2009
and decreased 3% for the nine months ended September 30, 2009, compared with the same periods last
year. The increase for the three months ended September 30, 2009 was primarily attributable to new
sales growth in the life, accident and supplemental health insurance operations, particularly in
South Korea, and membership growth in the expatriate employee benefits business partially offset by
unfavorable foreign currency movements. The decrease for the nine months ended September 30, 2009
was primarily attributable to unfavorable currency movements partially offset by new sales growth
in the life, accident and supplemental health insurance operations, particularly in South Korea,
and membership growth in the expatriate employee benefits business.
Premiums and fees, excluding the effect of foreign currency movements, were $517 million for the
three months ended September 30, 2009 and $1,572 million for the nine months ended September 30,
2009, compared with $496 million for the three months ended September 30, 2008 and $1,442 million
for the nine months ended September 30, 2008.
Benefits and Expenses
Benefits and expenses increased 4% for the three months ended September 30, 2009 and decreased 1%
for the nine months ended September 30, 2009, compared with the same periods last year. The
increase in the third quarter of 2009 was primarily due to business growth, higher loss ratios and
increased amortization of deferred acquisition costs partially offset by foreign currency
movements. The decrease for the nine months ended September 30, 2009 was primarily due to foreign
currency movements partially offset by business growth, higher loss ratios and increased
amortization of acquisition costs.
Loss ratios increased for the three months and for the nine months ended September 30, 2009, in the
life accident and supplemental health and the expatriate benefits businesses due to unfavorable
claims experience.
Policy acquisition expenses were level for the three months ended September 30, 2009 in the life,
accident and supplemental health business, reflecting business growth and higher amortization of
deferred acquisition costs associated with lower persistency, offset by foreign currency movements.
Policy acquisition expenses decreased for the nine months ended September 30, 2009 in the life,
accident and supplemental health business due to foreign currency movements, partially offset by
business growth and higher amortization of deferred acquisition costs associated with lower
persistency.
Expense ratios decreased for the three months and for the nine months ended September 30, 2009,
reflecting effective expense management.
Other Items Affecting International Results
For the Companys International segment, South Korea is the single largest geographic market. South
Korea generated 29% of the segments revenues for the third quarter of 2009 and 28% of the
segments revenues for the nine months ended September 30, 2009. South Korea generated 37% of the
segments earnings for the third quarter of 2009 and 43% of the segments earnings for the nine
months ended September 30, 2009. Due to the concentration of business in South Korea, the
International segment is exposed to potential losses resulting from economic and geopolitical
developments in that country, as well as foreign currency movements affecting the South Korean
currency, which could have a significant impact on the segments results and the Companys
consolidated financial results.
63
Run-off Reinsurance Segment
Segment Description
The Companys reinsurance operations were discontinued and are now an inactive business in run-off
mode since the sale of the U.S. individual life, group life and accidental death reinsurance
business in 2000. This segment is predominantly comprised of guaranteed minimum death benefit
(GMDB, also known as VADBe), guaranteed minimum income benefit (GMIB), workers compensation and
personal accident reinsurance products.
The determination of liabilities for GMDB and GMIB required the Company to make critical accounting
estimates. The Company describes the assumptions used to develop the reserves for GMDB in Note 7
to the Consolidated Financial Statements and for the assets and liabilities associated with GMIB in
Note 8 to the Consolidated Financial Statements.
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
11 |
|
|
$ |
10 |
|
|
$ |
23 |
|
|
$ |
35 |
|
Net investment income |
|
|
28 |
|
|
|
25 |
|
|
|
86 |
|
|
|
70 |
|
Other revenues |
|
|
(160 |
) |
|
|
71 |
|
|
|
(234 |
) |
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
(121 |
) |
|
|
106 |
|
|
|
(125 |
) |
|
|
222 |
|
Benefits and expenses |
|
|
(159 |
) |
|
|
286 |
|
|
|
(295 |
) |
|
|
638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefits |
|
|
38 |
|
|
|
(180 |
) |
|
|
170 |
|
|
|
(416 |
) |
Income taxes (benefits) |
|
|
8 |
|
|
|
(75 |
) |
|
|
54 |
|
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (loss) |
|
$ |
30 |
|
|
$ |
(105 |
) |
|
$ |
116 |
|
|
$ |
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
4 |
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB business (after-tax) included in segment earnings (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge on adoption of fair value measurements for GMIB contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(131 |
) |
Results of GMIB business excluding charge on adoption |
|
$ |
16 |
|
|
$ |
(61 |
) |
|
$ |
149 |
|
|
$ |
(91 |
) |
Segment results for the three months ended September 30, 2009 improved from the same period
last year due to favorable results for the GMIB business (presented in the table above) and the
absence of a charge for reserve strengthening in the GMDB business in 2009, both resulting from
improved equity market conditions in 2009. The three months ended September 30, 2008 included
reserve strengthening for the GMDB business of $72 million after-tax. No reserve strengthening has
been required for GMDB since the first quarter of 2009, primarily due to the stabilization and
recovery of equity markets. Segment results include the favorable after-tax impact of reserve
studies for the workers compensation and personal accident businesses of $14 million for the three
months ended September 30, 2009 and $25 million for the three months ended September 30, 2008.
Segment results for the nine months ended September 30, 2009 improved significantly from the same
period last year due to favorable results for the GMIB business (presented in the table above), and
a smaller amount of reserve strengthening for the GMDB business in 2009 ($47 million after-tax for
the nine months ended September 30, 2009, compared to $72 million after-tax for the nine months
ended September 30, 2008). Segment results include the favorable after-tax impact of reserve
studies for the workers compensation and personal accident businesses of $16 million for the nine
months ended September 30, 2009 and $25 million for the same period of 2008.
See the Benefits and Expenses section for further discussion around the results of the GMIB and
GMDB businesses.
64
Other Revenues
Other revenues included pre-tax losses from futures contracts used in the GMDB equity hedge program
(see Note 7 to the Consolidated Financial Statements) of $161 million for the three months ended
and $232 million for the nine months ended September 30, 2009, compared with pre-tax gains of $70
million for the three months ended and $118 million for the nine months ended September 30, 2008.
Amounts reflecting corresponding changes in liabilities for GMDB contracts were included in
benefits and expenses consistent with GAAP when a premium deficiency exists (see below Other
Benefits and Expenses). The notional amount of the futures contract positions held by the Company
at September 30, 2009 related to this program was $1.2 billion.
Benefits and Expenses
Benefits and expenses were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
GMIB (income) expense |
|
$ |
(19 |
) |
|
$ |
98 |
|
|
$ |
(215 |
) |
|
$ |
353 |
|
Other benefits and expenses |
|
|
(140 |
) |
|
|
188 |
|
|
|
(80 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
$ |
(159 |
) |
|
$ |
286 |
|
|
$ |
(295 |
) |
|
$ |
638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB
(Income) Expense. Under GAAP for fair value measurements, the Companys results of operations are
expected to be volatile in future periods because several assumptions will be based largely on
market-observable inputs at the close of each reporting period including interest rates (LIBOR swap
curve) and market-implied volatilities.
The pre-tax income for GMIB was $19 million for the three months ended September 30, 2009 and was
primarily due to the following factors:
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($50 million); and |
|
|
|
updates to the risk and profit charge estimates ($7 million). |
These favorable effects were partially offset by:
|
|
decreases in interest rates ($31 million); and |
|
|
|
other amounts, including experience varying from assumptions, model and in-force updates
($7 million). |
For the nine months ended September 30, 2009, the pre-tax income for GMIB was $215 million, and was
primarily due to the following factors:
|
|
increases in interest rates ($175 million); |
|
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($82 million); and |
|
|
|
updates to the risk and profit charge estimates ($25 million). |
These favorable effects were partially offset by:
|
|
increases to the annuitization assumption, reflecting higher utilization experience ($21
million); |
|
|
|
updates to the lapse assumption ($14 million); and |
|
|
|
other amounts, including experience varying from assumptions, model and in-force updates
($32 million). |
During the three months ended September 30, 2008, the pre-tax expense for GMIB of $98 million was
primarily driven by declines in equity markets and bond fund returns. For the nine months ended
September 30, 2008, GMIB pre-tax expense of $353 million included a pre-tax charge of $202 million
for the adoption of guidance for fair value measurements, which is discussed further in Note 2 to
the Consolidated Financial Statements. Excluding this one-time effect of adopting fair value
measurements, expense for the nine months ended September 30, 2008 was primarily the result of
declines in equity markets and bond fund returns.
65
The GMIB liabilities and related assets are calculated using a complex internal model and
assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and
related asset) is higher than the Company believes will ultimately be required to settle claims
primarily because market-observable interest rates are used to project growth in account values of
the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market
participant. The Companys payments for GMIB claims are expected to occur over the next 15 to 20
years and will be based on actual values of the underlying mutual funds and the 7-year treasury
rate at the dates benefits are elected. Management does not believe that current market-observable
interest rates reflect actual growth expected for the underlying mutual funds over that timeframe,
and therefore believes that the recorded liability and related asset do not represent what will
ultimately be required as this business runs off.
However, significant declines in mutual fund values that underlie the contracts (increasing the
exposure to the Company) together with declines in the 7-year treasury rates (used to determine
claim payments) similar to what occurred during 2008 would increase the expected amount of claims
that would be paid out for contractholders who choose to annuitize. It is also possible that such
unfavorable market conditions would have an impact on the level of contractholder annuitizations,
particularly if these unfavorable market conditions persisted for an extended period.
Other Benefits and Expenses. Other benefits and expenses reflected income for the three and nine
months ended September 30, 2009, compared to expense during the comparable periods in 2008. These
fluctuations reflect the impact of significant improvements in the equity markets on guaranteed
minimum death benefit contracts, compared with equity market declines during 2008. Equity market
improvements result in increases in the underlying annuity account values, which decreases the
exposure under the contracts. Equity market declines result in decreases in the underlying annuity
account values, which increases the exposure under the contracts. These changes in benefits
expense are partially offset by futures gains and losses, discussed in Other Revenues above.
The Company recorded additional other benefits and expenses of $73 million ($47 million after-tax)
primarily to strengthen GMDB reserves during the first quarter of 2009. These amounts were
primarily due to:
|
|
adverse impacts of overall market declines of $50 million ($32 million after-tax). This
includes (a) $39 million ($25 million after-tax) primarily related to the provision for future
partial surrenders and (b) $11 million ($7 million after-tax) related to declines in the
values of contractholders non-equity investments such as bond funds, neither of which is
included in the GMDB equity hedge program; |
|
|
|
adverse volatility-related impacts of $11 million ($7 million after-tax) due to turbulent
equity market conditions, including higher than expected claims and the performance of the
diverse mix of equity fund investments held by contractholders being different than expected;
and |
|
|
|
adverse interest rate impacts of $12 million ($8 million after-tax). Interest rate risk is
not covered by the GMDB equity hedge program, and the interest rate returns on the futures
contracts were less than the Companys long-term assumption for mean investment performance. |
The Company recorded additional other benefits and expenses of $111 million ($72 million after-tax)
primarily to strengthen GMDB reserves during the third quarter of 2008. These amounts were
primarily due to:
|
|
adverse impacts of overall market declines of $51 million ($33 million after-tax). This
includes an increase in the provision for expected future partial surrenders and declines in
the values of contractholders non-equity investments such as bond funds, neither of which is
covered by the GMDB equity hedge program; |
|
|
|
adverse volatility-related impacts due to turbulent equity market conditions. Volatility
risk is not covered by the GMDB equity hedge program, and equity market volatility in the
quarter impacted the effectiveness of the program. In aggregate, these volatility-related
impacts totaled $55 million of the charge ($36 million after-tax); and |
|
|
|
adverse interest rate impacts of $5 million ($3 million after-tax). Interest rate risk is
not covered by the GMDB equity hedge program, and the interest rate returns on the futures
contracts were less than the Companys long-term assumption for mean investment performance. |
See Note 7 to the Consolidated Financial Statements for additional information about assumptions
and reserve balances related to GMDB.
66
Segment Summary
The Companys payment obligations for underlying reinsurance exposures assumed by the Company under
these contracts are based on ceding companies claim payments. For GMDB and GMIB, claim payments
vary because of changes in equity markets and interest rates, as well as mortality and policyholder
behavior. For workers compensation and personal accident, the claim payments relate to accidents
and injuries. Any of these claim payments can extend many years into the future, and the amount of
the ceding companies ultimate claims, and therefore the amount of the Companys ultimate payment
obligations and corresponding ultimate collection from retrocessionaires may not be known with
certainty for some time.
The Companys reserves for underlying reinsurance exposures assumed by the Company, as well as for
amounts recoverable from retrocessionaires, are considered appropriate as of September 30, 2009,
based on current information. However, it is possible that future developments, which could
include but are not limited to worse than expected claim experience and higher than expected
volatility, could have a material adverse effect on the Companys consolidated results of
operations and could have a material adverse effect on the Companys financial condition. The
Company bears the risk of loss if its payment obligations to cedents increase or if its
retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to
the Company.
Other Operations Segment
Segment Description
Other Operations consist of:
|
|
non-leveraged and leveraged corporate-owned life insurance (COLI); |
|
|
|
deferred gains recognized from the 1998 sale of the individual life insurance and annuity
business and the 2004 sale of the retirement benefits business; and |
|
|
|
run-off settlement annuity business. |
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
26 |
|
|
$ |
29 |
|
|
$ |
83 |
|
|
$ |
84 |
|
Net investment income |
|
|
104 |
|
|
|
104 |
|
|
|
304 |
|
|
|
313 |
|
Other revenues |
|
|
16 |
|
|
|
18 |
|
|
|
49 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
146 |
|
|
|
151 |
|
|
|
436 |
|
|
|
451 |
|
Benefits and expenses |
|
|
111 |
|
|
|
120 |
|
|
|
353 |
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
35 |
|
|
|
31 |
|
|
|
83 |
|
|
|
97 |
|
Income taxes |
|
|
12 |
|
|
|
11 |
|
|
|
20 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
23 |
|
|
$ |
20 |
|
|
$ |
63 |
|
|
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
1 |
|
|
$ |
(8 |
) |
|
$ |
(4 |
) |
|
$ |
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special item (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Segment earnings for Other Operations for the three months ended September 30, 2009 increased
compared with the same period last year due to higher COLI earnings reflecting increased investment
income partially offset by the continued decline in deferred gain amortization associated with sold
businesses. For the nine months ended September 30, 2009, earnings declined compared with the same
period last year due to the continued decline in deferred gain amortization associated with sold
businesses partially offset by increased COLI earnings driven by higher investment income and
favorable mortality.
67
Corporate
Description
Corporate reflects amounts not allocated to segments, such as net interest expense (defined as
interest on corporate debt less net investment income on investments not supporting segment
operations), interest on uncertain tax positions, certain litigation matters, intersegment
eliminations, compensation cost for stock options and certain corporate overhead expenses such as
directors expenses.
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Segment loss |
|
$ |
(35 |
) |
|
$ |
(31 |
) |
|
$ |
(97 |
) |
|
$ |
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
12 |
|
|
$ |
|
|
Charges related to litigation matters |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(52 |
) |
Excluding the special items noted above (see Consolidated Results of Operations section of the
MD&A beginning on page 47 for more information on special items), Corporate losses were higher for
both the three months ended and the nine months ended September 30, 2009, compared with same
periods last year. The increase in losses primarily reflects higher net interest expense
attributable to lower average invested assets and increased debt to finance the acquired business.
In addition, directors expenses increased due to increases in the Companys stock price during the
three months ended and nine months ended September 30, 2009 compared with decreases during the
three months ended and nine months ended September 30, 2008.
DISCONTINUED OPERATIONS
Description
Discontinued operations represent results associated with certain investments or businesses that
have been sold or are held for sale.
Discontinued operations for the nine months ended September 30, 2009 primarily represented a tax
benefit from a past divestiture resolved at the completion of the 2005 and 2006 IRS examinations.
Discontinued
operations for the third
quarter of 2008 included a gain of $1 million after-tax
from the settlement of certain issues related to a past divestiture. Discontinued operations for the
nine months ended September 30, 2008, also included a gain of $3 million after-tax from the
settlement of certain issues related to a past divestiture.
68
INDUSTRY DEVELOPMENTS AND OTHER MATTERS
Proposed Health Care Reform
Addressing the affordability and availability of health insurance, including reducing the number of
uninsured, is a major initiative of President Obama and the U.S. Congress, and proposals that may
address these issues are pending in the U.S. Congress. The proposals vary and include measures
that would change the dynamics of the health care industry and/or the employers role in the
provision of benefits, such as the potential creation of a new government-run health plan(s) that
would compete with the Company and other private health plans; the potential creation of federal
or state-level Exchanges (or similar constructs) that could serve as a distribution mechanism
and/or additional regulatory structure for certain segments of the
health care market; potential
changes to medical coverage, such as expansion of eligibility under existing public programs,
minimum medical benefit ratios for health plans, mandatory issuance of insurance coverage;
requirements that would limit the ability of health plans and insurers to vary premiums based on
assessments of underlying risk; and new taxes and assessments
specific to health care insurers
and/or certain benefit plan designs. Any comprehensive health care reform package enacted will
likely be phased in over a number of years and would be subject to a
broader regulatory
process. Because of the unsettled nature of these initiatives and the numerous steps required to
implement them the Company remains uncertain as to the ultimate impact these changes will have on
its business. For additional discussion regarding our risks related to health care reform, see
Item 1A. Risk Factors.
Other Matters
The disability industry is under continuing review by regulators and legislators with respect to
its offset practices regarding Social Security Disability Insurance (SSDI). There has been
specific inquiry as to the industrys role in assisting individuals with their applications for
SSDI. The Company has received one Congressional inquiry and has responded to the information
request. Also, legislation prohibiting the offset of SSDI payments against private disability
insurance payments for prospectively issued policies was introduced but not enacted in the
Connecticut state legislature. The Company is also involved in related pending litigation. If the
industry is forced to change its offset SSDI procedures, the practices and products for the
Companys Disability and Life segment could be significantly impacted.
In 1998, the Company sold its individual life insurance and annuity business to Lincoln National
Life Insurance Company and its affiliates (Lincoln). Because this business was sold in an
indemnity reinsurance transaction, the Company is not relieved of primary liability for the
reinsured business and had reinsurance recoverables totaling $4.5 billion as of September 30, 2009.
Lincoln has secured approximately 90% of its reinsurance obligations under these arrangements by
placing assets into a trust which qualifies under Regulation 114 of the New York Insurance
Department.
The Companys remaining reinsurance recoverables are unsecured. If Lincoln does not maintain a
specified financial strength rating, at the Companys request, Lincoln is contractually required to
provide additional assurance that it will meet its reinsurance obligations, to include placing
assets in a trust to secure these remaining reinsurance recoverables.
Since the filing of the Companys 2008 Form 10-K, Moodys has downgraded the financial strength
rating of the Lincoln affiliated reinsurer to A2 from A1 and S&P has downgraded its rating to AA-
from AA. In light of the downgrades, the Company is closely monitoring the situation.
69
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company maintains liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
|
|
claim and benefit payments to policyholders; and |
|
|
|
operating expense requirements, primarily for employee compensation and benefits. |
The Companys subsidiaries normally meet their operating requirements by:
|
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
|
|
|
using cash flows from operating activities; |
|
|
|
selling investments; |
|
|
|
matching investment maturities to the estimated duration of the related insurance and contractholder liabilities; and |
|
|
|
borrowing from its parent company. |
Liquidity requirements at the parent level generally consist of:
|
|
debt service and dividend payments to shareholders; and |
|
|
|
funding of pension plans. |
The parent normally meets its liquidity requirements by:
|
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
|
|
|
collecting dividends from its subsidiaries; |
|
|
|
using proceeds from issuance of debt and equity securities; and |
|
|
|
borrowing from its subsidiaries. |
Cash flows for the nine months ended September 30, were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
|
2008 |
|
Operating activities |
|
$ |
269 |
|
|
$ |
1,050 |
|
Investing activities |
|
$ |
(1,074 |
) |
|
$ |
(2,304 |
) |
Financing activities |
|
$ |
290 |
|
|
$ |
377 |
|
Cash flows from operating activities consist of cash receipts and disbursements for premiums
and fees, gains (losses) recognized in connection with the Companys GMDB equity hedge program,
investment income, taxes, benefits and expenses.
Because certain income and expense transactions do not generate cash, and because cash transactions
related to revenue and expenses may occur in periods different from when those revenues and
expenses are recognized in shareholders net income, cash flows from operating activities can be
significantly different from shareholders net income.
Cash flows from investing activities generally consist of net investment purchases or sales and net
purchases of property and equipment, which includes capitalized software, as well as cash used to
acquire businesses.
Cash flows from financing activities are generally comprised of issuances and re-payment of debt at
the parent level, proceeds on the issuance of common stock resulting from stock option exercises,
and stock repurchases. In addition, the subsidiaries report net deposits/withdrawals to/from
investment contract liabilities (which include universal life insurance liabilities) because such
liabilities are considered financing activities with policyholders.
70
2009:
Operating activities
For the nine months ended September 30, 2009, cash flows from operating activities were less than
net income by $705 million. Net income contains certain after-tax non-cash income and expense
items, including:
|
|
GMIB income of $149 million; |
|
|
|
a curtailment gain of $30 million, net of a cost reduction charge of $16 million; |
|
|
|
tax benefits related to the IRS examination of $20 million; |
|
|
|
depreciation and amortization charges of $135 million; and |
|
|
|
realized investment losses of $24 million. |
Cash flows from operating activities were lower than net income excluding the non-cash items noted
above by $681 million. This decrease was primarily due to cash outflows of $232 million associated
with the GMDB equity hedge program which did not affect shareholders net income, contributions to
the qualified domestic pension plan of $354 million and increases in receivables.
Cash flows from operating activities decreased by $781 million compared with the nine months ended
September 30, 2008. Excluding the results of the GMDB equity hedge program (which did not affect
shareholders net income), cash flows from operating activities decreased by $431 million. This
decrease primarily reflects contributions to the qualified domestic pension plan of $354 million
for the nine months ended September 30, 2009, compared with none for the nine months ended
September 30, 2008 as well as increases in receivables in 2009 compared with decreases in 2008.
Investing activities
Cash used in investing activities was $1.1 billion. This use of cash primarily consisted of net
purchases of investments of $856 million and net purchases of property and equipment of $218
million.
Financing activities
Cash provided from financing activities primarily consisted of net proceeds from the issuance of
long-term debt of $346 million, offset by repayments of short-term debt, principally commercial
paper, of $199 million. Financing activities also included net deposits to contractholder deposit
funds of $65 million.
2008:
Operating activities
For the nine months ended September 30, 2008, cash flows from operating activities were greater
than net income by $547 million. Net income contains certain after-tax non-cash income and expense
items, including:
|
|
GMIB expense of $222 million; |
|
|
|
litigation accruals of $76 million; |
|
|
|
depreciation and amortization charges of $118 million; and |
|
|
|
realized investment losses of $18 million. |
Cash flows from operating activities were higher than net income excluding the non-cash items noted
above by $113 million. This increase was primarily due to cash inflows associated with the GMDB
equity hedge program of $118 million.
71
Investing activities
The Company used net cash of $1.3 billion to fund the acquisition of Great-West Healthcare.
Excluding this item, cash used in investing activities was $1.0 billion. This use of cash
primarily consisted of net purchases of investments of $812 million and net purchases of property
and equipment of $179 million.
Financing activities
Cash provided from financing activities primarily consisted of proceeds from the net issuance of
short-term debt and long-term debt of $312 million and $297 million, respectively. These borrowing
arrangements were entered into for general corporate purposes, including the financing of the
acquisition of Great-West Healthcare. Financing activities also included net deposits to
contractholder deposit funds of $88 million and proceeds from the issuance of common stock under
the Companys stock plans of $37 million and dividends on and repurchases of common stock of $354
million.
Interest Expense
Interest expense on long-term debt, short-term debt and capital leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest expense |
|
$ |
43 |
|
|
$ |
38 |
|
|
$ |
122 |
|
|
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense for the nine months ended September 30, 2009 was primarily
due to the issuance of debt in connection with the Great-West Healthcare acquisition.
Capital Resources
The Companys capital resources (primarily retained earnings and the proceeds from the issuance of
debt and equity securities) provide protection for policyholders, furnish the financial strength to
underwrite insurance risks and facilitate continued business growth.
Management, guided by regulatory requirements and rating agency capital guidelines, determines the
amount of capital resources that the Company maintains. Management allocates resources to new
long-term business commitments when returns, considering the risks, look promising and when the
resources available to support existing business are adequate.
The Company prioritizes its use of capital resources to:
|
|
provide capital necessary to support growth and maintain or improve the financial strength
ratings of subsidiaries; |
|
|
|
consider acquisitions that are strategically and economically advantageous; and |
|
|
|
return capital to investors through share repurchase. |
The availability of capital resources will be impacted by equity and credit market conditions.
Extreme volatility in credit or equity market conditions may reduce the Companys ability to issue
debt or equity securities. Significant volatility and deterioration of the equity markets during
2008 resulted in reduced retained earnings and reduced the capital available for growth,
acquisitions, and share repurchase.
72
On May 4, 2009, the Company issued $350 million of 8.50% Notes ($349 million, net of debt discount,
with an effective interest rate of 9.90% per year). The difference between the stated and
effective interest rates primarily reflects the effect of a treasury lock. See Note 10 to the
Consolidated Financial Statements for further information. Interest is payable on May 1 and
November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for
general corporate purposes, including the repayment of some of the Companys outstanding commercial
paper. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate
of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning
September 15, 2008. The proceeds of this debt were used for general corporate purposes, including
financing the acquisition of Great-West Healthcare. These Notes will mature on March 15, 2018.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal
to the greater of:
|
|
100% of the principal amount of the Notes to be redeemed; or |
|
|
|
the present value of the remaining principal and interest payments on the Notes being
redeemed discounted at the applicable treasury rate plus 50 basis points (8.50% Notes due
2019) or 40 basis points (6.35% Notes due 2018). |
On March 14, 2008, the Company entered into a new commercial paper program (the Program). Under
the Program, the Company is authorized to sell from time to time short-term unsecured commercial
paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share repurchases. The Company
uses the credit facility described below as back-up liquidity to support the outstanding commercial
paper. If at any time funds are not available on favorable terms under the Program, the Company
may use the Credit Agreement (see below) for funding. In October 2008, the Company added an
additional dealer to its Program. As of September 30, 2009, the Company had $100 million in
commercial paper outstanding, at a weighted average interest rate of 0.53% and remaining maturities
ranging from five to 55 days.
Liquidity and Capital Resources Outlook
At
September 30, 2009, there was approximately $210 million in cash and short-term investments
available at the parent company level. For the remainder of 2009, the parent companys cash
requirements include scheduled interest payments of approximately $50 million on outstanding
long-term debt of $2.4 billion at September 30, 2009 and approximately $100 million of commercial
paper that will mature over the next three months. There are no scheduled long-term debt repayments
in 2009. The parent company expects to fund these cash requirements with subsidiary dividends and
by refinancing the maturing commercial paper borrowings with new commercial paper.
The Internal Revenue Service recently issued regulations providing relief in measuring pension plan
funding obligations for 2009. As a result, only approximately $90 million of the Companys $354
million in domestic pension plan contributions during the nine months ended September 30, 2009 were
necessary to meet minimum funding requirements and the remaining contributions were voluntary.
Although not required, the Company may make approximately $55 million of voluntary
pre-tax contributions to the domestic qualified pension plan for the remainder of 2009. The
estimated remaining contributions to the domestic qualified pension plan during 2009 do not include
funding requirements related to the litigation matter discussed in Note 17 to the Consolidated
Financial Statements, as management does not expect this matter to be resolved in 2009. Future
years contributions will ultimately be based on a wide range of factors including but not limited
to asset returns, discount rates, and funding targets.
The availability of resources at the parent company level is partially dependent on dividends from
the Companys subsidiaries, most of which are subject to regulatory restrictions and rating agency
capital guidelines, and partially dependent on the availability of liquidity from the issuance of
debt or equity securities.
The Company expects, based on current projections for cash activity, to have sufficient liquidity
to meet its obligations.
However, the Companys cash projections may not be realized and the demand for funds could exceed
available cash if:
|
|
ongoing businesses experience unexpected shortfalls in earnings; |
|
|
|
regulatory restrictions or rating agency capital guidelines reduce the amount of dividends available to be distributed
to the parent company from the insurance and HMO subsidiaries (including the impact of equity market deterioration and
volatility on subsidiary capital); |
|
|
|
significant disruption or volatility in the capital and credit markets reduces the Companys ability to raise capital
or creates unexpected losses related to the GMDB and GMIB businesses; |
|
|
|
a substantial increase in funding over current projections is required for the Companys pension plans; or |
|
|
|
a substantial increase in funding is required for the Companys GMDB equity hedge program. |
73
In those cases, the Company expects to have the flexibility to satisfy liquidity needs through a
variety of measures, including intercompany borrowings and sales of liquid investments. The parent
company may borrow up to $400 million from Connecticut General Life Insurance Company (CGLIC)
without prior state approval. As of September 30, 2009, the parent company had no outstanding
borrowings from CGLIC. In addition, the Company may use short-term borrowings, such as the
commercial paper program and the committed line of credit agreement of up to $1.75 billion subject
to the maximum debt leverage covenant in its line of credit agreement. As of September 30, 2009,
the Company had an additional $1.275 billion of borrowing capacity within the maximum debt leverage
covenant in the line of credit agreement in addition to the $2.5 billion of debt outstanding as of
September 30, 2009.
Though the Company believes it has adequate sources of liquidity, continued significant disruption
or volatility in the capital and credit markets could affect the Companys ability to access those
markets for additional borrowings or increase costs associated with borrowing funds.
Solvency regulation. Many states have adopted some form of the National Association of
Insurance Commissioners (NAIC) model solvency-related laws and risk-based capital rules (RBC
rules) for life and health insurance companies. The RBC rules recommend a minimum level of
capital depending on the types and quality of investments held, the types of business written and
the types of liabilities incurred. If the ratio of the insurers adjusted surplus to its
risk-based capital falls below statutory required minimums, the insurer could be subject to
regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based
upon solvency, liquidity and reserve coverage measures. During 2008, the Companys HMOs and life
and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with
applicable RBC and non-U.S. surplus rules.
In 2008, the NAIC adopted Actuarial Guideline VACARVM, which will be effective December 31, 2009
for the Companys principal life insurance subsidiary Connecticut General Life Insurance Company
(CGLIC). VACARVM is applicable to CGLICs statutory reserves for GMDB and GMIB contracts totaling
$1.6 billion as of September 30, 2009. Upon implementation, it is anticipated that statutory
reserves for these contracts will increase and statutory surplus for CGLIC will be reduced. The
Actuarial Guideline states that a company may request a grade-in period, not to exceed three years
from the Domiciliary Commissioner. The actual impact on these reserves and surplus, as of December
31, 2009 will depend on equity market and interest rate levels at the time of implementation,
whether a grade-in period is granted, and how that grade-in is implemented. As of September 30,
2009, management estimates that the implementation of VACARVM would increase these statutory
reserves by up to 10%, assuming no grade-in. Management continues to evaluate the impact on
CGLICs surplus from this reserving change, as well as from potential further regulatory and/or IRS
guidance. Though still evaluating, management does not anticipate
that this implementation will have a material impact on the
amount of dividends expected to be paid by CGLIC to the parent
company in 2010.
74
Guarantees and Contractual Obligations
The Company, through its subsidiaries, is contingently liable for various contractual obligations
entered into in the ordinary course of business. See Note 17 to the Consolidated Financial
Statements for additional information.
Contractual obligations. The Company has updated its contractual obligations previously provided
on page 71 of the Companys 2008 Form 10-K for certain items as follows:
|
|
other long-term liabilities associated with GMIB contracts primarily as a result of
increasing interest rates, as well as equity market improvements during 2009; |
|
|
|
future policy benefit liabilities associated with GMDB contracts as a result of
improvements in the equity market environment during 2009; |
|
|
|
short-term debt, primarily as a result of maturing commercial paper. See Note 13 to the
Consolidated Financial Statements for additional information; and |
|
|
|
long-term debt, primarily due to the issuance of new debt in the second quarter of 2009,
see Note 13 to the Consolidated Financial Statements for additional information. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
4-5 |
|
|
After 5 |
|
(In millions, on an undiscounted basis) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
On-Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
11,479 |
|
|
$ |
483 |
|
|
$ |
890 |
|
|
$ |
771 |
|
|
$ |
9,335 |
|
Short-term debt |
|
$ |
103 |
|
|
$ |
103 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
$ |
4,772 |
|
|
$ |
150 |
|
|
$ |
782 |
|
|
$ |
281 |
|
|
$ |
3,559 |
|
Other long-term liabilities |
|
$ |
1,673 |
|
|
$ |
847 |
|
|
$ |
374 |
|
|
$ |
166 |
|
|
$ |
286 |
|
75
INVESTMENT ASSETS
The Companys investment assets do not include separate account assets. Additional information
regarding the Companys investment assets and related accounting policies is included in Notes 2,
8, 9 and 14 to the Consolidated Financial Statements. More detailed information about the fixed
maturities and mortgage loan portfolios by type of issuer, maturity dates, and, for mortgages by
property type and location is included in Note 9 to the Consolidated Financial Statements and Notes
2, 12, 13 and 16 to the Consolidated Financial Statements in the Companys 2008 Form 10-K.
As of September 30, 2009, the Companys mix of investments and their primary characteristics have
not materially changed since December 31, 2008. The Companys fixed maturity portfolio continues
to be diversified by issuer and industry type, with no single industry constituting more than 10%
of total invested assets as of September 30, 2009. The Companys commercial mortgage loans
continue to be diversified by property type, location and borrower to reduce exposure to potential
losses.
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor
and trading securities. Fixed maturities and equity securities include hybrid securities. Fair
values are based on quoted market prices when available. When market prices are not available,
fair value is generally estimated using discounted cash flow analyses, incorporating current market
inputs for similar financial instruments with comparable terms and credit quality. In instances
where there is little or no market activity for the same or similar instruments, the Company
estimates fair value using methods, models and assumptions that the Company believes a hypothetical
market participant would use to determine a current transaction price.
The Company performs ongoing analyses on prices to conclude that they represent reasonable
estimates of fair value. This process involves quantitative and qualitative analysis and is
overseen by the Companys investment professionals. This process also includes review of pricing
methodologies, pricing statistics and trends and backtesting recent trades.
The value of the Companys fixed maturity portfolio increased $728 million in 2009 driven by a
decline in market yields. Although asset values have improved
significantly, there are securities
with amortized cost in excess of fair value by $147 million.
As of September 30, 2009, approximately 64% or $1,653 million of the Companys total investments in
state and local government securities of $2,566 million were guaranteed by monoline bond insurers.
The quality ratings of these investments with and without this guaranteed support as of September
30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
September 30, |
|
|
|
|
|
2009 |
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
Without |
|
(In millions) |
|
Quality Rating |
|
With Guarantee |
|
|
Guarantee |
|
State and local governments |
|
Aaa |
|
$ |
67 |
|
|
$ |
56 |
|
|
|
Aa1-Aa3 |
|
|
1,157 |
|
|
|
977 |
|
|
|
A1-A3 |
|
|
360 |
|
|
|
467 |
|
|
|
Baa1-Baa3 |
|
|
29 |
|
|
|
36 |
|
|
|
Not available |
|
|
40 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
Total state and local governments |
|
|
|
$ |
1,653 |
|
|
$ |
1,653 |
|
|
|
|
|
|
|
|
|
|
76
As of September 30, 2009, approximately 80% or $445 million of the Companys total investments
in other asset-backed securities of $555 million were guaranteed by monoline bond insurers. All of
these securities had quality ratings of Baa2 or better. Quality ratings without considering the
guarantees for these other asset-backed securities were not available.
As of September 30, 2009, the Company had no direct investments in monoline bond insurers.
Guarantees provided by various monoline bond insurers for certain of the Companys investments in
state and local governments and other asset-backed securities as of September 30, 2009 were:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
September 30, |
|
(In millions) |
|
Guarantor |
|
2009 |
|
Guarantor |
|
Quality Rating |
|
Indirect Exposure |
|
AMBAC |
|
Caa2 |
|
$ |
205 |
|
MBIA, Inc. |
|
Baa1 |
|
|
1,249 |
|
Financial Security Assurance |
|
Aa3 |
|
|
604 |
|
Financial Guaranty Insurance Co. |
|
NR |
|
|
40 |
|
|
|
|
|
|
|
Total |
|
|
|
$ |
2,098 |
|
|
|
|
|
|
|
The Company continues to underwrite investments in these securities focusing on the underlying
issuers credit quality, without regard for guarantees. As such, this portfolio of state and local
government securities, guaranteed by monoline bond insurers is of high quality with approximately
91% rated A3 or better without their guarantees.
Commercial Mortgage Loans
The Companys commercial mortgage loans are made exclusively to commercial borrowers; therefore the
Company has no exposure to either prime or sub-prime residential mortgages. These fixed rate loans
are diversified by property type, location and borrower to reduce exposure to potential losses.
Loans are secured by the related property and are generally made at less than 75% of the propertys
value at origination of the loan.
The
Company completed an in depth review of its commercial mortgage loan portfolio in July 2009. This
review included an analysis of each propertys audited financial statements as of December 31,
2008, rent rolls and operating plans and budgets for 2009, a physical inspection of the property
and other pertinent factors. Based on each propertys value determined during this review, the
portfolios average loan to value ratio increased from 64% as of December 31, 2008 to 77% at
September 30, 2009, driven by an average decline in property values of 16% since completion of the
previous review during the third quarter of 2008. This 16% decrease is less than reported declines
in commercial real estate values of 20% to 30% from peak prices achieved in late 2006 and into
early 2007. This is driven by managements decision to not fully reflect peak prices in prior
valuations, along with declines in value recognized during the Companys 2008 portfolio review. In
2009, the overall estimated cash flows from the portfolios properties exceed their required debt
payments by 50% (debt service coverage) which was unchanged since the 2008 portfolio review. This
debt service coverage improved in 2009 from increased occupancy in properties previously under
rehabilitation (predominantly apartments) and from foreclosure and removal of a non-performing
office loan during the second quarter of 2009. This improvement during 2009 was largely offset by
modest increases in vacancy rates and declines in rental rates for most loans secured by stabilized
properties across all property types, with more significant changes for loans secured by hotel
properties.
77
The following table reflects the commercial mortgage loan portfolio summarized by loan to value
ratio based on the annual loan review completed in July, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to Value Distribution |
|
|
|
Amortized Cost |
|
|
|
|
Loan to Value Ratios |
|
Senior |
|
|
Subordinated |
|
|
Total |
|
|
% of Mortgage Loans |
|
Below 50% |
|
$ |
221 |
|
|
$ |
152 |
|
|
$ |
373 |
|
|
|
10 |
% |
50% to 59% |
|
|
285 |
|
|
|
|
|
|
|
285 |
|
|
|
8 |
% |
60% to 69% |
|
|
415 |
|
|
|
38 |
|
|
|
453 |
|
|
|
13 |
% |
70% to 79% |
|
|
526 |
|
|
|
72 |
|
|
|
598 |
|
|
|
17 |
% |
80% to 89% |
|
|
885 |
|
|
|
47 |
|
|
|
932 |
|
|
|
26 |
% |
90% to 99% |
|
|
719 |
|
|
|
17 |
|
|
|
736 |
|
|
|
20 |
% |
100% or above |
|
|
215 |
|
|
|
15 |
|
|
|
230 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,266 |
|
|
$ |
341 |
|
|
$ |
3,607 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As summarized above, $341 million or 9.5% of the commercial mortgage loan portfolio is
comprised of subordinated notes and loans, including
$320 million of loans secured by first mortgages, which were fully underwritten and originated by the Company using its standard underwriting
procedures. Senior interests in these first mortgage loans were then sold to other institutional investors. This strategy allowed
the Company to effectively utilize its origination capabilities to underwrite high quality loans
with strong borrower sponsorship, limit individual loan exposures, and achieve attractive risk
adjusted yields. In the event of a default, the Company would pursue remedies up to and including
foreclosure jointly with the holders of the senior interests, but
would receive repayment after satisfaction of the senior interest.
There are nine loans where the aggregate carrying value of the mortgage loans exceeds the value of
the underlying properties by $23 million. Six of these loans have current debt service coverage of
1.0x or greater and three with debt service coverage below 1.0x have other mitigating factors
including strong borrower sponsorship. The decline in property values and current underwater
position are better than management expectations reflecting a combination of factors including
prior year property values not fully reflecting peak market pricing, a more modest allocation to
the more depressed property types such as retail and hotel and the overall quality of the Companys
portfolio.
Although the property value declines increased the portfolio loan to value ratios, all but four of
the 184 loans that comprise our total mortgage loan portfolio continue to perform under their
contractual terms, and the actual aggregate default rate is 2.8%. Given the quality and diversity
of the underlying real estate, positive debt service coverage, significant borrower cash investment
averaging nearly 30%, and only $143 million of loans maturing in the next twelve months, the
Company remains confident that the vast majority of borrowers will continue to perform as required
and the mortgage loan portfolio will perform well competitively.
Other Long-term Investments
The Companys Other long-term investments include $556 million in private equity and real estate
funds as well as direct real estate joint ventures. The funds typically invest in mezzanine debt
or equity of privately held companies and real estate partnerships. Because these investments have
a subordinate position in the capital structure, the Company assumes a higher level of risk for
higher expected returns. Many of these entities have experienced a decline in value over the last
several quarters due to economic weakness and the disruption in the capital markets. To mitigate
risk, these investments are diversified across approximately 55 separate partnerships, and
approximately 35 general partners who manage one or more of those partnerships. Also, the funds
underlying investments are diversified by industry sector, property type, and geographic region.
No single partnership investment exceeds 7% of the Companys private equity and real estate
partnership portfolio. Given the current weak economic conditions there continues to be downward
pressure on asset values that could result in future losses but management does not expect any
losses to have a material adverse effect on the Companys liquidity or financial condition.
78
Problem and Potential Problem Investments
Problem bonds and commercial mortgage loans are either delinquent by 60 days or more or have been
restructured as to terms (interest rate or maturity date). Potential problem bonds and
commercial mortgage loans are considered current (no payment more than 59 days past due), but
management believes they have certain characteristics that increase the likelihood that they may
become problems. These characteristics include, but are not limited to, the following:
|
|
request from the borrower for restructuring; |
|
|
|
principal or interest payments past due by more than 30 but fewer than 60 days; |
|
|
|
downgrade in credit rating; |
|
|
|
collateral losses on asset-backed securities; and |
|
|
|
for commercial mortgages, deterioration of debt service coverage below 1.0x and/or value
declines resulting in estimated loan-to-value ratios increasing to 100% or above. |
The Company recognizes interest income on problem bonds and commercial mortgage loans only when
payment is actually received because of the risk profile of the underlying investment. The amount
that would have been reflected in net income if interest on non-accrual investments had been
recognized in accordance with the original terms was not significant for the nine months ended
September 30, 2009 and 2008.
The following table shows problem and potential problem investments at amortized cost, net of
valuation reserves and write-downs:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
Gross |
|
|
Reserve |
|
|
Net |
|
Problem bonds |
|
$ |
128 |
|
|
$ |
(73 |
) |
|
$ |
55 |
|
Potential problem bonds |
|
$ |
117 |
|
|
$ |
(5 |
) |
|
$ |
112 |
|
Problem commercial mortgage loans |
|
$ |
100 |
|
|
$ |
|
|
|
$ |
100 |
|
Potential problem commercial mortgage loans |
|
$ |
241 |
|
|
$ |
(2 |
) |
|
$ |
239 |
|
Foreclosed real estate |
|
$ |
59 |
|
|
$ |
|
|
|
$ |
59 |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Problem bonds |
|
$ |
94 |
|
|
$ |
(59 |
) |
|
$ |
35 |
|
Potential problem bonds |
|
$ |
140 |
|
|
$ |
(14 |
) |
|
$ |
126 |
|
Potential problem commercial mortgage loans |
|
$ |
92 |
|
|
$ |
|
|
|
$ |
92 |
|
Potential problem commercial mortgage loans represent 7% of the total loan portfolio. These
increased $147 million from December 31, 2008 to September 30, 2009, primarily reflecting the
results of managements in-depth portfolio loan review. As a result of this review, management
added nine loans totaling $169 million to the potential problem loan list that are exhibiting signs
of distress such as an elevated loan to value ratio or a low or negative debt service coverage.
These loans were all performing according to their contractual terms as of September 30, 2009 and
although they are showing signs of stress, most of these loans are well collateralized. Given the
current economic environment, future impairments are possible; however, management does not expect
those losses to have a material effect on the Companys financial condition.
79
Summary
The Company recorded after-tax realized investment losses for investment asset write-downs and
changes in valuation reserves as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Credit related (1) |
|
$ |
12 |
|
|
$ |
15 |
|
|
$ |
47 |
|
|
$ |
17 |
|
Other (2) |
|
|
2 |
|
|
|
26 |
|
|
|
8 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14 |
|
|
$ |
41 |
|
|
$ |
55 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit-related losses include other-than-temporary declines in value of
fixed maturities and equity securities, and impairments of commercial mortgage
loans and real estate entities. The amount related to credit losses on fixed
maturities for which a portion of the impairment was recognized in other
comprehensive income was not significant. |
|
(2) |
|
Prior to adoption of new GAAP guidance for other-than-temporary impairments
on April 1, 2009, Other primarily represented the impact of rising market
yields on investments where the Company could not demonstrate the intent and
ability to hold until recovery. |
The financial markets experienced a significant rally in the second and third quarters of
2009. Both investment grade and below investment grade corporate credit indices reported
significantly lower credit spreads and the S&P 500 posted a return of 30% during this period.
While credit spreads eased in 2009 and asset values increased significantly, substantial
uncertainty remains concerning the economic environment, along with increasing default rates and
the potential for rising treasury rates. Commercial real estate fundamentals continued to weaken
as the struggling economy negatively impacted occupancy levels and rental rates for all major
property types. The corporate and commercial real estate debt and equity markets are expected to
remain challenging until economic stability returns. As a result of this economic environment,
risks in the Companys investment portfolio remain elevated.
Continued economic weakness for an extended period could cause the Company to recognize impairment
losses if default rates increase and/or recoveries decline. Future realized and unrealized
investment results will be impacted largely by market conditions that exist when a transaction
occurs or at the reporting date. These future conditions are not reasonably predictable.
Management believes that the vast majority of the Companys fixed maturity investments will
continue to perform under their contractual terms, and that declines in their fair values below
carrying value are temporary. Based on the Companys strategy to match the duration of invested
assets to the duration of insurance and contractholder liabilities, it has both the intent and
ability to hold these assets to recovery. Therefore, future credit-related losses are not expected
to have a material adverse effect on the Companys liquidity or financial condition.
While the results of the portfolio loan review were better than expected, and management believes
the portfolio is positioned to perform competitively well due to the solid aggregate loan to value
ratio, strong debt service coverage and minimal underwater position, the commercial real estate
market continues to exhibit significant signs of stress and if these conditions remain for an
extended period or worsen substantially it could result in an increase in problem and potential
problem loans. Given the current economic environment, future impairments are possible; however,
management does not expect those losses to have a material effect on the Companys financial
condition.
80
MARKET RISK
Financial Instruments
The Companys assets and liabilities include financial instruments subject to the risk of potential
losses from adverse changes in market rates and prices. The Companys primary market risk
exposures are interest-rate risk, foreign currency exchange rate risk and equity price risk.
The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce
the effect of equity market changes on certain reinsurance contracts that guarantee minimum death
benefits based on unfavorable changes in underlying variable annuity account values. The
hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX
(Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to
the Japanese yen, British pound and euro would have been a decrease of approximately $110 million
in the fair value of the futures contracts outstanding under this program as of September 30, 2009.
A corresponding decrease in liabilities for GMDB contracts would result from the hypothetical 10%
increase in these equity indices and 10% weakening in the U.S. dollar. See Note 7 to the
Consolidated Financial Statements for further discussion of this program and related GMDB
contracts.
Stock Market Performance
The performance of equity markets can have a significant effect on the Companys businesses,
including on:
|
|
risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial
Statements) and GMIB contracts (see Note 8 to the Consolidated Financial Statements); and |
|
|
|
pension liabilities since equity securities comprise a significant portion of the assets of
the Companys employee pension plans. See Liquidity and Capital Resources section of the
MD&A beginning on page 70 for further information. |
81
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company and its representatives may from time to time make written and oral forward-looking
statements, including statements contained in press releases, in the Companys filings with the
Securities and Exchange Commission, in its reports to shareholders and in meetings with analysts
and investors. Forward-looking statements may contain information about financial prospects,
economic conditions, trends and other uncertainties. These forward-looking statements are based on
managements beliefs and assumptions and on information available to management at the time the
statements are or were made. Forward-looking statements include but are not limited to the
information concerning possible or assumed future business strategies, financing plans, competitive
position, potential growth opportunities, potential operating performance improvements, trends and,
in particular, the Companys productivity initiatives, litigation and other legal matters,
operational improvement in the health care operations, and the outlook for the Companys full year
2009 and 2010 results. Forward-looking statements include all statements that are not historical
facts and can be identified by the use of forward-looking terminology such as the words believe,
expect, plan, intend, anticipate, estimate, predict, potential, may, should or
similar expressions.
You should not place undue reliance on these forward-looking statements. The Company cautions that
actual results could differ materially from those that management expects, depending on the outcome
of certain factors. Some factors that could cause actual results to differ materially from the
forward-looking statements include:
1. |
|
increased medical costs that are higher than anticipated in establishing premium rates in the
Companys Health Care operations, including increased use and costs of medical services; |
|
2. |
|
increased medical, administrative, technology or other costs resulting from new legislative
and regulatory requirements imposed on the Companys employee benefits businesses; |
|
3. |
|
challenges and risks associated with implementing operational improvement initiatives and
strategic actions in the ongoing operations of the businesses, including those related to: (i)
offering products that meet emerging market needs, (ii) strengthening underwriting and pricing
effectiveness, (iii) strengthening medical cost and medical membership results, (iv)
delivering quality member and provider service using effective technology solutions, (v)
lowering administrative costs and (vi) transitioning to an integrated operating company model,
including operating efficiencies related to the transition; |
|
4. |
|
risks associated with pending and potential state and federal class action lawsuits, disputes
regarding reinsurance arrangements, other litigation and regulatory actions challenging the
Companys businesses, government investigations and proceedings, and tax audits and related
litigation; |
|
5. |
|
heightened competition, particularly price competition, which could reduce product margins
and constrain growth in the Companys businesses, primarily the Health Care business; |
|
6. |
|
risks associated with the Companys mail order pharmacy business which, among other things,
includes any potential operational deficiencies or service issues as well as loss or
suspension of state pharmacy licenses; |
|
|