Quarterly Report (10-q)

Date : 05/02/2019 @ 7:41PM
Source : Edgar (US Regulatory)
Stock : Cigna Corporation (CI)
Quote : 170.38  0.0 (0.00%) @ 11:59AM
Cigna share price Chart

Quarterly Report (10-q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

o 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)

 

Delaware

 

82-4991898

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

900 Cottage Grove Road Bloomfield, Connecticut

 

06002

(Address of principal executive offices)

 

(Zip Code)

(860) 226-6000

Registrant’s telephone number, including area code

(860) 226-6741 or (215) 761-5511

Registrant’s facsimile number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark

 

YES

 

NO

 

·   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.

 

þ

 

o

 

·   whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

 

þ

 

o

 

·   whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company o

Emerging growth company   o

 

·     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

·     whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

o

 

 

þ

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which
registered

Common Stock, Par Value $0.01

 

CI

 

New York Stock Exchange, Inc.

 

As of April 15, 2019, 379,457,650 shares of the issuer’s common stock were outstanding.

 


Table of Contents

 

Cigna Corporation

 

TABLE OF CONT ENTS

 

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Statements of Income

1

 

Consolidated Statements of Comprehensive Income

2

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Changes in Total Equity

4

 

Consolidated Statements of Cash Flows

5

 

Notes to the Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

63

Item 4.

Controls and Procedures

63

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

63

Item 1. A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 6.

Exhibits

64

SIGNATURE

65

 

 

As used herein, “Cigna” or the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.

 


Table of Contents

 

 

 

 

 

Part I.   FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.    FINANCIAL STATEMENTS

 

 

Cigna Corporation

Consolidated Statements of Income

 

 

 

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions, except per share amounts)

 

2019

 

2018

 

Revenues

 

 

 

 

 

Pharmacy revenues

 

$

25,179

 

$

717

 

Premiums

 

9,971

 

8,999

 

Fees and other revenues

 

2,450

 

1,368

 

Net investment income

 

346

 

329

 

TOTAL REVENUES

 

37,946

 

11,413

 

Benefits and expenses

 

 

 

 

 

Pharmacy and other service costs

 

24,050

 

561

 

Medical costs and other benefit expenses

 

7,620

 

6,772

 

Selling, general and administrative expenses

 

3,303

 

2,745

 

Amortization of acquired intangible assets

 

743

 

27

 

TOTAL BENEFITS AND EXPENSES

 

35,716

 

10,105

 

Income from operations

 

2,230

 

1,308

 

Interest expense and other

 

(452)

 

(57)

 

Net realized investment gains (losses)

 

10

 

(33)

 

Income before income taxes

 

1,788

 

1,218

 

TOTAL INCOME TAXES

 

416

 

301

 

Net income

 

1,372

 

917

 

Less:  net income attributable to noncontrolling interests

 

4

 

2

 

SHAREHOLDERS’ NET INCOME

 

$

1,368

 

$

915

 

Shareholders’ net income per share

 

 

 

 

 

Basic

 

$

3.61

 

$

3.78

 

Diluted

 

$

3.56

 

$

3.72

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

1


Table of Contents

 

Cigna Corporation

Consolidated Statements of Comprehensive Income

 

 

 

Unaudited

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In millions)

 

2019

 

2018

 

Shareholders’ net income

 

$

1,368

 

$

915

 

Shareholders’ other comprehensive income, net of tax

 

 

 

 

 

Net unrealized appreciation (depreciation), securities and derivatives

 

442

 

(284)

 

Net translation of foreign currencies

 

(24)

 

45

 

Postretirement benefits liability adjustment

 

11

 

13

 

Shareholders’ other comprehensive income (loss), net of tax

 

429

 

(226)

 

Shareholders’ comprehensive income

 

1,797

 

689

 

Comprehensive income (loss) attributable to noncontrolling interests

 

 

 

 

 

Net income attributable to redeemable noncontrolling interests

 

3

 

2

 

Net income attributable to other noncontrolling interests

 

1

 

-

 

Other comprehensive (loss) attributable to redeemable noncontrolling interests

 

(2)

 

(2)

 

Total comprehensive income attributable to noncontrolling interests

 

2

 

-

 

TOTAL COMPREHENSIVE INCOME

 

$

1,799

 

$

689

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

2


Table of Contents

 

Cigna Corporation

Consolidated Balance Sheets

 

 

 

Unaudited

 

 

 

As of

 

As of

 

 

 

March 31,

 

December 31,

 

(In millions, except per share amounts)

 

2019

 

2018

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

4,976

 

$

3,855

 

Investments

 

1,662

 

2,045

 

Accounts receivable, net

 

10,941

 

10,473

 

Inventories

 

2,382

 

2,821

 

Other current assets

 

1,175

 

1,236

 

   Total current assets

 

21,136

 

20,430

 

Long-term investments

 

27,257

 

26,929

 

Reinsurance recoverables

 

5,385

 

5,507

 

Deferred policy acquisition costs

 

2,817

 

2,821

 

Property and equipment

 

4,523

 

4,562

 

Goodwill

 

44,537

 

44,505

 

Other intangible assets

 

38,338

 

39,003

 

Other assets

 

2,276

 

1,630

 

Separate account assets

 

8,079

 

7,839

 

TOTAL ASSETS

 

$

154,348

 

$

153,226

 

Liabilities

 

 

 

 

 

Current insurance and contractholder liabilities

 

$

7,060

 

$

6,801

 

Pharmacy and service costs payable

 

11,145

 

10,702

 

Accounts payable

 

4,488

 

4,366

 

Accrued expenses and other liabilities

 

7,361

 

7,071

 

Short-term debt

 

2,915

 

2,955

 

   Total current liabilities

 

32,969

 

31,895

 

Non-current insurance and contractholder liabilities

 

20,043

 

19,974

 

Deferred tax liabilities, net

 

9,403

 

9,453

 

Other non-current liabilities

 

3,832

 

3,470

 

Long-term debt

 

37,571

 

39,523

 

Separate account liabilities

 

8,079

 

7,839

 

TOTAL LIABILITIES

 

111,897

 

112,154

 

Contingencies — Note 16

 

 

 

 

 

Redeemable noncontrolling interests

 

38

 

37

 

Shareholders’ equity

 

 

 

 

 

Common stock (1)

 

4

 

4

 

Additional paid-in capital

 

27,855

 

27,751

 

Accumulated other comprehensive loss

 

(1,282)

 

(1,711)

 

Retained earnings

 

16,426

 

15,088

 

Less:  treasury stock, at cost

 

(595)

 

(104)

 

TOTAL SHAREHOLDERS’ EQUITY

 

42,408

 

41,028

 

Other noncontrolling interests

 

5

 

7

 

Total equity

 

42,413

 

41,035

 

Total liabilities and equity

 

$

154,348

 

$

153,226

 

SHAREHOLDERS’ EQUITY PER SHARE

 

$

111.52

 

$

107.71

 

 

(1) Par value per share, $0.01; shares issued, 384 million as of March 31, 2019 and 381 million as of December 31, 2018; authorized shares; 600 million.

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

3


Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

Unaudited

Three Months Ended March 31, 2019
(In millions)

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
(Loss)

 

Retained
Earnings

 

Treasury
Stock

 

Shareholders’
Equity

 

Other Non-
controlling
Interests

 

Total
Equity

 

Redeemable
Non-
controlling
Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

4

 

$

27,751

 

$

(1,711)

 

$

15,088

 

$

(104)

 

$

41,028

 

$

7

 

$

41,035

 

$

37

 

Cumulative effect of adopting new lease accounting guidance (ASU 2016-02) (1)

 

 

 

 

 

 

 

(15)

 

 

 

(15)

 

 

 

(15)

 

 

 

Effect of issuing stock for employee benefit plans

 

 

 

104

 

 

 

 

 

(29)

 

75

 

 

 

75

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

429

 

 

 

 

 

429

 

 

 

429

 

(2)

 

Net income

 

 

 

 

 

 

 

1,368

 

 

 

1,368

 

1

 

1,369

 

3

 

Common dividends declared (per share:  $0.04)

 

 

 

 

 

 

 

(15)

 

 

 

(15)

 

 

 

(15)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(462)

 

(462)

 

 

 

(462)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-

 

(3)

 

(3)

 

-

 

Balance at March 31, 2019

 

$

4

 

$

27,855

 

$

(1,282)

 

$

16,426

 

$

(595)

 

$

42,408

 

$

5

 

$

42,413

 

$

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018
(In millions)

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
(Loss)

 

Retained
Earnings

 

Treasury
Stock

 

Shareholders’
Equity

 

Other Non-
controlling
Interests

 

Total
Equity

 

Redeemable
Non-
controlling
Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

 74

 

$

 2,940

 

$

(1,082)

 

$

15,800

 

$

(4,021)

 

$

13,711

 

$

-

 

$

13,711

 

$

49

 

Cumulative effect of accounting for financial instruments and hedging

 

 

 

 

 

(10)

 

68

 

 

 

58

 

 

 

58

 

 

 

Reclassification adjustment related to U.S. tax reform legislation

 

 

 

 

 

(229)

 

229

 

 

 

-

 

 

 

-

 

 

 

Effect of issuing stock for employee benefit plans

 

 

 

23

 

 

 

(69)

 

68

 

22

 

 

 

22

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(226)

 

 

 

 

 

(226)

 

 

 

(226)

 

(2)

 

Net income

 

 

 

 

 

 

 

915

 

 

 

915

 

 

 

915

 

2

 

Common dividends declared (per share:  $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(275)

 

(275)

 

 

 

(275)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

Balance at March 31, 2018

 

$

 74

 

$

 2,963

 

$

 (1,547)

 

$

16,933

 

$

 (4,228)

 

$

14,195

 

$

 -

 

$

14,195

 

$

49

 

 

(1)  See Note 2 for further information about the Company’s adoption of new leasing guidance (ASU 2016-02).

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

4


Table of Contents

 

Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

Unaudited

 

 

 

Three Months Ended March 31,

 

(In millions)

 

2019

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,372

 

$

917

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

       Depreciation and amortization

 

897

 

140

 

       Realized investment (gains) losses, net

 

(10)

 

33

 

       Deferred income tax (benefit) expense

 

(162)

 

9

 

     Net changes in assets and liabilities, net of non-operating effects:

 

 

 

 

 

       Accounts receivable

 

(396)

 

(53)

 

       Inventories

 

440

 

94

 

       Deferred policy acquisition costs

 

(51)

 

(76)

 

       Reinsurance recoverable and other assets

 

124

 

51

 

       Insurance liabilities

 

360

 

849

 

       Pharmacy and service costs payable

 

444

 

(124)

 

       Accounts payable and accrued expenses and other liabilities

 

91

 

193

 

       Other, net

 

83

 

(8)

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

3,192

 

2,025

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

       Debt and equity securities

 

1,471

 

499

 

Investment maturities and repayments:

 

 

 

 

 

       Debt and equity securities

 

319

 

297

 

       Commercial mortgage loans

 

89

 

28

 

Other sales, maturities and repayments (primarily short-term and other long-term investments)

 

367

 

112

 

Investments purchased or originated:

 

 

 

 

 

       Debt and equity securities

 

(1,088)

 

(2,259)

 

       Commercial mortgage loans

 

(95)

 

(68)

 

       Other (primarily short-term and other long-term investments)

 

(388)

 

(206)

 

Property and equipment purchases, net

 

(194)

 

(103)

 

Acquisitions, net of cash acquired

 

(6)

 

-

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

475

 

(1,700)

 

Cash Flows from Financing Activities

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

247

 

292

 

Withdrawals and benefit payments from contractholder deposit funds

 

(251)

 

(306)

 

Net change in short-term debt

 

(1,048)

 

(3)

 

Repayment of long-term debt

 

(1,000)

 

(131)

 

Repurchase of common stock

 

(462)

 

(310)

 

Issuance of common stock

 

53

 

20

 

Other, net

 

(73)

 

(92)

 

NET CASH (USED IN) FINANCING ACTIVITIES

 

(2,534)

 

(530)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

(12)

 

4

 

Net increase (decrease) in cash and cash equivalents

 

1,121

 

(201)

 

Cash and cash equivalents, January 1,

 

3,855

 

2,972

 

Cash and cash equivalents, March 31,

 

$

4,976

 

$

2,771

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

     Income taxes paid, net of refunds

 

$

29

 

$

31

 

     Interest paid

 

$

377

 

$

46

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

5


 

Table of Contents

 

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TABLE OF CONTENTS

 

Note
Number

Footnote

Page

 

 

 

BUSINESS AND CAPITAL STRUCTURE

 

1

Description of Business

7

2

Summary of Significant Accounting Policies

8

3

Accounts Receivable, Net

9

4

Mergers and Acquisitions

9

5

Earnings Per Share

10

6

Debt

11

INSURANCE INFORMATION

 

7

Insurance and Contractholder Liabilities

12

8

Reinsurance

15

INVESTMENTS

 

9

Investments

17

10

Fair Value Measurements

21

11

Variable Interest Entities

27

12

Accumulated Other Comprehensive Income (Loss)

28

WORKFORCE MANAGEMENT AND COMPENSATION

 

13

Pension and Other Postretirement Benefit Plans

28

PROPERTY, LEASES AND OTHER ASSET BALANCES

 

14

Leases

29

COMPLIANCE, REGULATION AND CONTINGENCIES

 

15

Income Taxes

31

16

Contingencies and Other Matters

31

17

Condensed Consolidating Financial Information

34

RESULTS DETAILS

 

18

Segment Information

41

 

6


Table of Contents

 

Note 1 — Description of Business

 

 

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”) is a global health service organization dedicated to a mission of helping those we serve improve their health, well-being and peace of mind.  Our evolved strategy in support of our mission is Go Deeper, Go Local, Go Beyond using a differentiated set of pharmacy, medical, dental, disability, life and accident insurance and related products and services offered by our subsidiaries.

 

The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations.  Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the United States and selected international markets.  In addition to these ongoing operations, Cigna also has certain run-off operations.

 

As described more fully in Note 4, o n December 20, 2018, Cigna completed the acquisition of Express Scripts Holding Company (“Express Scripts”).  As a result, our segments have changed as described below, effective in the fourth quarter of 2018.  Prior year f inancial data presented in this Form 10-Q has been restated to reflect this new segment presentation.

 

Health Services includes pharmacy benefits management, pharmacy home delivery and certain medical management services.  This segment includes Express Scripts’ business from the date of acquisition with the exception of Express Scripts’ Medicare Part D business that is reported in the Government operating segment.

 

Integrated Medical offers a variety of medical solutions to employers and individuals.

 

·

The Commercial operating segment serves employers (also referred to as “clients”) and their employees (also referred to as “customers”) and other groups.  This segment provides deeply integrated medical and specialty offerings including medical, pharmacy, dental, behavioral health and vision, health advocacy programs and other products and services to insured and self-insured clients.

 

 

·

The Government operating segment offers Medicare Advantage, Medicare Supplement, and Medicare Part D plans to Medicare-eligible beneficiaries as well as Medicaid plans.  This operating segment also offers health insurance coverage to individual customers both on and off public exchanges.  This segment includes the acquired Express Scripts’ Medicare Part D business.

 

International Markets includes supplemental health, life and accident insurance products and health care coverage in our international markets as well as health care benefits to globally mobile employees of multinational organizations.

 

The remainder of our business operations are reported in Group Disability and Other, consisting of the following:

 

·

Group Disability and Life provides group long-term and short-term disability, group life, accident, voluntary and specialty insurance products and related services.

 

 

·

Corporate-Owned Life Insurance (“COLI”) offers permanent insurance contracts sold to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations.

 

 

·

Run-off businesses:

 

 

 

·

Reinsurance: predominantly comprised of guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) in 2013.

 

 

 

 

·

Settlement Annuity business in run-off.

 

 

 

 

·

Individual Life Insurance and Annuity and Retirement Benefits Businesses: deferred gains from the sales of these businesses.

 

 

 

 

·

Certain international run-off businesses

 

Corporate reflects amounts not allocated to operating segments, including interest expense, net investment income on investments not supporting segment and other operations, interest on uncertain tax positions, certain litigation matters, expense associated with our frozen pension plans, severance, certain enterprise-wide projects and intersegment eliminations for products and services sold between segments.  Prior to 2019, compensation cost for stock options was also included in Corporate.  Beginning in the first quarter of 2019, this cost is recorded by the segments.

 

7


Table of Contents

 

Note 2 — Summary of Significant Accounting Policies

 

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of Cigna Corporation and its consolidated subsidiaries.  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 Company adopted Article 5 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”) effective December 31, 2018 in conjunction with the acquisition of Express Scripts.  As a result, the Company now presents current assets and liabilities on its balance sheet.  The Company reclassified realized investment gains (losses) from revenue and now reports them below income from operations with interest expense in our Consolidated Statements of Income, in conformity with Article 5.  Prior years’ information was reclassified to conform to this new presentation.

 

Amounts recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment and receivable valuations, interest rates and other factors.  Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates.  The impact of a change in estimate is generally included in earnings in the period of adjustment.

 

These 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 included in the 2018 Annual Report on Form 10-K (“2018 Form 10-K”).  The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates.  This and certain other factors, including 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.

 

Recent Accounting Pronouncements

 

The 2018 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.  The following information provides updates on recently adopted or recently issued accounting pronouncements that have occurred since the Company filed its 2018 Form 10-K.

 

Recently Adopted Accounting Guidance

 

The Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases¸ as of January 1, 2019 (the adoption date) on a modified retrospective basis for leases in effect as of and after the adoption date.  This new guidance requires balance sheet recognition of assets and liabilities arising from leases, as well as additional disclosures regarding the amount, timing and uncertainty of cash flows from leases.  The Company implemented a new lease system and corresponding internal controls to administer our leases and facilitate compliance with this new standard.

 

The Company elected the practical expedient package, allowing the Company to carry forward the assessment of 1) whether our contracts contain or are leases, 2) lease classification and 3) whether previously capitalized costs continue to qualify as initial direct costs.  Upon adoption, the Company recognized new right-of-use assets and lease liabilities related to our operating leases, because finance (capital) leases were already reflected on the Company’s Consolidated Balance Sheets.  The impact of adoption on the Company’s net assets and retained earnings was not material, nor was there a material impact on our Consolidated Statements of Income or Cash Flows.  See Note 14 for additional disclosures about the Company’s leases.

 

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Accounting Guidance Not Yet Adopted

 

Accounting Standard and
Effective Date

 

 

Requirements and Expected Effects of New Guidance Not Yet Adopted

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

 

 

Required as of January 1, 2020

 

 

Requires:

 

· A new approach using expected credit losses to estimate and recognize credit losses for certain financial instruments (such as mortgage loans, reinsurance recoverables and other receivables) when such instruments are first originated or acquired.

· Changes in the criteria for impairment of available-for-sale debt securities

· Adoption using a modified retrospective approach with a cumulative-effect adjustment recorded in retained earnings

 

Expected effects:

 

· The Company is continuing to evaluate this new standard and its expected effects on our financial statements and disclosures.  We will adopt the standard as of January 1, 2020.

· An additional allowance for future expected credit losses for certain financial instruments will be required at adoption.

 

 

 

Note 3 — Accounts Receivable, Net

 

 

The following amounts were included within accounts receivable, net of our allowance for doubtful accounts, customer credit allowances and contractual allowances that, in the aggregate, were $456 million as of March 31, 2019 and $217 million as of December 31, 2018:

 

(In millions)

 

March 31, 2019

 

December 31, 2018

 

Insurance customer receivables

 

$

2,261

 

$

1,888

 

Noninsurance customer receivables

 

4,635

 

4,988

 

Pharmaceutical manufacturers receivable (1)

 

3,682

 

3,321

 

Other receivables

 

363

 

276

 

Total accounts receivable, net

 

$

10,941

 

$

10,473

 

 

(1)  Includes $624 million at March 31, 2019 and $406 million at December 31, 2018 of receivables under noninsurance customer contracts.

 

Note 4 — Mergers and Acquisitions

 

 

A. Acquisition of Express Scripts

 

On December 20, 2018, Cigna acquired Express Scripts through a series of mergers (collectively, the “Merger”).  Cigna Holding Company (formerly named Cigna Corporation and referred to as “Old Cigna”) and Express Scripts each merged with and into a wholly-owned subsidiary of Cigna.  As a result of these transactions, Cigna became the parent of the combined company.  Our 2018 Form 10-K includes detailed disclosures of merger consideration, purchase price allocation and intangible assets identified in this transaction.  The purchase price allocation was based on management’s preliminary estimates of their fair values and may change as additional information becomes available.  For the three months ended March 31, 2019, there were no changes to the purchase price allocation.

 

B. Integration and Transaction-related Costs

 

The Company incurred integration and transaction costs related to Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”) and other transactions of $136 million pre-tax ($108 million after-tax) for the three months ended March 31, 2019, compared with $60 million pre-tax ($50 million after-tax) for the three months ended March 31, 2018.  These costs consisted

 

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primarily of fees for legal, advisory and other professional services, certain employment-related costs and, in 2018, amortization of  Bridge Facility fees.

 

Note 5 — Earnings Per Share (“EPS”)

 

 

Basic and diluted earnings per share were computed as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

March 31, 2018

 

(Shares in thousands, dollars in millions, except per
share amounts)

 

Basic

 

Effect of
Dilution

 

Diluted

 

Basic

 

Effect of
Dilution

 

Diluted

 

Shareholders’ net income

 

$

1,368

 

 

 

$

1,368

 

$

915

 

 

 

$

915

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

379,387

 

 

 

379,387

 

242,179

 

 

 

242,179

 

Common stock equivalents

 

 

 

4,637

 

4,637

 

 

 

3,609

 

3,609

 

Total shares

 

379,387

 

4,637

 

384,024

 

242,179

 

3,609

 

245,788

 

EPS

 

$

3.61

 

$

(0.05)

 

$

3.56

 

$

3.78

 

$

(0.06)

 

$

3.72

 

 

The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive.

 

 

 

Three Months Ended
March 31,

 

(In millions)

 

2019

 

2018

 

Anti-dilutive options

 

2.8

 

0.9

 

 

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Note 6 Debt

 

 

The outstanding amounts of debt and finance leases were as follows:

 

 

 

 

 

March 31,

 

December 31,

 

(In millions)

 

Issuer

 

2019

 

2018

 

Short-term debt

 

 

 

 

 

 

 

Current maturities: $1,000 million, 2.25% Senior Notes

 

Express Scripts

 

$

998

 

$

995

 

Current maturities: $337 million, 7.25% Senior Notes

 

ESI

 

340

 

343

 

Current maturities: $1,000 million, Floating Rate Notes due 2020

 

Cigna

 

998

 

-

 

Commercial paper

 

Old Cigna/Cigna

 

558

 

1,500

 

Other, including finance leases

 

Other

 

21

 

117

 

Total short-term debt

 

 

 

$

2,915

 

$

2,955

 

Long-term uncollateralized debt

 

 

 

 

 

 

 

Cigna debt (issued to finance acquisition)

 

 

 

 

 

 

 

$1,000 million, Floating Rate Notes due 2020

 

Cigna

 

$

-

 

$

997

 

$1,750 million, 3.2% Notes due 2020

 

Cigna

 

1,744

 

1,743

 

$1,000 million, Floating Rate Notes due 2021

 

Cigna

 

997

 

996

 

$1,250 million, 3.4% Notes due 2021

 

Cigna

 

1,246

 

1,245

 

$2,000 million, Floating Rate Term Loan due 2021

 

Cigna

 

1,998

 

2,997

 

$700 million, Floating Rate Notes due 2023

 

Cigna

 

697

 

697

 

$3,100 million, 3.75% Notes due 2023

 

Cigna

 

3,085

 

3,085

 

$2,200 million, 4.125% Notes due 2025

 

Cigna

 

2,187

 

2,187

 

$3,800 million, 4.375% Notes due 2028

 

Cigna

 

3,774

 

3,774

 

$2,200 million, 4.8% Notes due 2038

 

Cigna

 

2,178

 

2,178

 

$3,000 million, 4.9% Notes due 2048

 

Cigna

 

2,964

 

2,964

 

 

 

 

 

 

 

 

 

Express Scripts debt (assumed in acquisition)

 

 

 

 

 

 

 

$500 million, 4.125% Senior Notes due 2020

 

Medco

 

505

 

506

 

$500 million, 2.600% Senior Notes due 2020

 

Express Scripts

 

493

 

493

 

$400 million, Floating Rate Senior Notes due 2020

 

Express Scripts

 

400

 

399

 

$500 million, 3.300% Senior Notes due 2021

 

Express Scripts

 

499

 

499

 

$1,250 million, 4.750% Senior Notes due 2021

 

Express Scripts

 

1,282

 

1,285

 

$1,000 million, 3.900% Senior Notes due 2022

 

Express Scripts

 

998

 

998

 

$500 million, 3.050% Senior Notes due 2022

 

Express Scripts

 

482

 

481

 

$1,000 million, 3.000% Senior Notes due 2023

 

Express Scripts

 

961

 

959

 

$1,000 million, 3.500% Senior Notes due 2024

 

Express Scripts

 

968

 

966

 

$1,500 million, 4.500% Senior Notes due 2026

 

Express Scripts

 

1,507

 

1,508

 

$1,500 million, 3.400% Senior Notes due 2027

 

Express Scripts

 

1,390

 

1,386

 

$449 million, 6.125% Senior Notes due 2041

 

Express Scripts

 

493

 

493

 

$1,500 million, 4.800% Senior Notes due 2046

 

Express Scripts

 

1,465

 

1,465

 

 

 

 

 

 

 

 

 

Old Cigna debt (pre-acquisition)

 

 

 

 

 

 

 

$250 million, 4.375% Notes due 2020

 

Old Cigna

 

248

 

248

 

$300 million, 5.125% Notes due 2020

 

Old Cigna

 

298

 

298

 

$78 million, 6.37% Notes due 2021

 

CGC

 

78

 

78

 

$300 million, 4.5% Notes due 2021

 

Old Cigna

 

297

 

297

 

$750 million, 4% Notes due 2022

 

Old Cigna

 

746

 

746

 

$100 million, 7.65% Notes due 2023

 

Old Cigna

 

100

 

100

 

$17 million, 8.3% Notes due 2023

 

Old Cigna

 

17

 

17

 

$900 million, 3.25% Notes due 2025

 

Old Cigna

 

895

 

895

 

$600 million, 3.05% Notes due 2027

 

Old Cigna

 

595

 

595

 

$259 million, 7.875% Debentures due 2027

 

Old Cigna

 

259

 

259

 

$45 million, 8.3% Step Down Notes due 2033

 

Old Cigna

 

45

 

45

 

$191 million, 6.15% Notes due 2036

 

Old Cigna

 

190

 

190

 

$121 million, 5.875% Notes due 2041

 

Old Cigna

 

119

 

119

 

$317 million, 5.375% Notes due 2042

 

Old Cigna

 

315

 

315

 

$1,000 million, 3.875% Notes due 2047

 

Old Cigna

 

988

 

988

 

Other, including finance leases

 

Other

 

68

 

32

 

Total long-term debt

 

 

 

$

37,571

 

$

39,523

 

 

Notes issued to fund the Express Scripts acquisition.  As presented in the table above, the Company issued private placement Notes with registration rights in the third quarter of 2018 to finance the Express Scripts acquisition.  Total proceeds were approximately $20.0 billion.  Interest on this debt is generally paid semi-annually except for quarterly interest payments on the floating rate notes.

 

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Term Loan Credit Agreement.   Cigna borrowed $3.0 billion under its Term Loan Credit Agreement (the “Term Loan Credit Agreement”) to finance the Merger and to pay fees and expenses of the Merger.  The Term Loan Credit Agreement contains customary covenants and restrictions, including a financial covenant that Cigna’s leverage ratio may not exceed 60%.  There is no remaining amount available for borrowing under this agreement.  In the first quarter of 2019, the Company repaid $1 billion principal of the term loan.  The remaining $2 billion term loan principal is diversified among 23 banks.

 

Revolving Credit Agreement.   Cigna has a Revolving Credit and Letter of Credit Agreement (the “Revolving Credit Agreement”) that matures on April 6, 2023 and is diversified among 23 banks.

 

Cigna can borrow up to $3.25 billion for general corporate purposes, with up to $500 million available for issuance of letters of credit, decreased by $22 million of letters of credit under the Revolving Credit Agreement as of March 31, 2019.  The Revolving Credit Agreement also includes an option to increase the facility amount up to $500 million and an option to extend the termination date for additional one-year periods, subject to consent of the banks.

 

The Revolving Credit Agreement contains customary covenants and restrictions including a financial covenant that the Company’s leverage ratio may not exceed 60%.

 

Cigna is the borrower under the Revolving Credit Agreement and the Term Loan Credit Agreement and certain subsidiaries of Cigna may be required to guarantee these obligations under certain circumstances.

 

Commercial Paper .  The commercial paper program had approximately $560 million outstanding at March 31, 2019 at an average interest rate of 2.90%.

 

The Company was in compliance with its debt covenants as of March 31, 2019.

 

Note 7 Insurance and Contractholder Liabilities

 

 

A.      Account Balances — Insurance and Contractholder Liabilities

 

As of March 31, 2019, December 31, 2018 and March 31, 2018, the Company’s insurance and contractholder liabilities were comprised of the following:

 

 

 

March 31, 2019

 

December 31, 2018

 

March 31, 2018

 

(In millions)

 

Current

 

Non-
current

 

Total

 

Current

 

Non-
current

 

Total

 

Total

 

Contractholder deposit funds

 

$

621

 

$

7,326

 

$

7,947

 

$

641

 

$

7,365

 

$

8,006

 

$

8,153

 

Future policy benefits

 

643

 

9,048

 

9,691

 

740

 

8,981

 

9,721

 

9,934

 

Unpaid claims and claim expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Integrated Medical

 

2,943

 

18

 

2,961

 

2,678

 

19

 

2,697

 

2,638

 

Other segments

 

2,421

 

3,304

 

5,725

 

2,394

 

3,230

 

5,624

 

5,502

 

Unearned premiums

 

432

 

347

 

779

 

348

 

379

 

727

 

1,291

 

Total insurance and contractholder liabilities

 

$

7,060

 

$

20,043

 

$

27,103

 

$

6,801

 

$

19,974

 

$

26,775

 

$

27,518

 

 

Insurance and contractholder liabilities expected to be paid within one year are classified as current.

 

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B.       Unpaid Claims and Claim Expenses — Integrated Medical

 

This liability reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.  This liability no longer includes amounts from the international health care business now reported in International Markets following our change in segment reporting in the fourth quarter of 2018.  The prior year presentation has been updated to reflect this segment change.

 

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at March 31, 2019 and $2.5 billion at March 31, 2018.

 

Activity in the unpaid claims liability for the Integrated Medical segment for the three months ended March 31 was as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

(In millions)

 

2019

 

2018

 

Beginning balance

 

$

2,697

 

$

2,420

 

Less: Reinsurance and other amounts recoverable

 

264

 

262

 

Beginning balance, net

 

2,433

 

2,158

 

Incurred costs related to:

 

 

 

 

 

Current year

 

6,095

 

5,284

 

Prior years

 

(117)

 

(115)

 

Total incurred

 

5,978

 

5,169

 

Paid costs related to:

 

 

 

 

 

Current year

 

3,786

 

3,382

 

Prior years

 

1,908

 

1,540

 

Total paid

 

5,694

 

4,922

 

Ending balance, net

 

2,717

 

2,405

 

Add: Reinsurance and other amounts recoverable

 

244

 

233

 

Ending balance

 

$

2,961

 

$

2,638

 

 

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business where the Company administers the plan benefits but the right of offset does not exist.  See Note 8 for additional information on reinsurance.

 

Variances in incurred costs related to prior years’ unpaid claims and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions were as follows for the three months ended March 31:

 

 

 

Three Months Ended

 

(Dollars in millions)

 

March 31, 2019

 

March 31, 2018

 

 

 

$

 

% (1)

 

$

 

% (2)

 

Actual completion factors

 

$

55

 

0.2

  %

$

52

 

0.3

  %

Medical cost trend

 

62

 

0.3

 

54

 

0.3

 

Other

 

-

 

-

 

9

 

-

 

Total favorable variance

 

$

117

 

0.5

  %

$

115

 

0.6

  %

 

(1) Percentage of current year incurred costs as reported for the year ended December 31, 2018.

(2) Percentage of current year incurred costs as reported for the year ended December 31, 2017.

 

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income .   The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

 

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Prior year development increased shareholders’ net income by $ 39 million ($ 50 million before tax) for the three months ended March 31, 2019, compared with $ 40 million ($ 51 million before tax) for the three months ended March 31, 2018.  F avorable prior year development in both periods reflects lower than expected utilization of medical services.

 

C.      Unpaid Claims and Claim Expenses — International Markets and Group Disability and Other

 

This liability now includes amounts from international health care following our change in segment reporting in 2018 as discussed in Note 1.  The prior year presentation has been updated to reflect this segment change.

 

Liability balance details.   The liability details for unpaid claims and claim expenses are as follows:

 

(In millions)

 

March 31, 2019

 

March 31, 2018

 

Group Disability and Other

 

 

 

 

 

Group Disability and Life

 

$

4,786

 

$

4,549

 

Other Operations

 

194

 

175

 

Total Group Disability and Other

 

4,980

 

4,724

 

International Markets

 

745

 

778

 

Unpaid claims and claim expenses Group Disability and Other and International Markets

 

$

5,725

 

$

5,502

 

 

Interest is accreted and recognized in medical costs and other benefit expenses in the Consolidated Statements of Income.

 

Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table.  Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.

 

 

 

Three Months Ended

 

(In millions)

 

March 31, 2019

 

March 31, 2018

 

Beginning balance

 

$

5,432

 

$

5,274

 

Less:  Reinsurance

 

156

 

140

 

Beginning balance, net

 

5,276

 

5,134

 

Incurred claims related to:

 

 

 

 

 

Current year

 

1,428

 

1,393

 

Prior years:

 

 

 

 

 

Interest accretion

 

38

 

38

 

All other incurred

 

(32)

 

(61)

 

Total incurred

 

1,434

 

1,370

 

Paid claims related to:

 

 

 

 

 

Current year

 

474

 

471

 

Prior years

 

856

 

853

 

Total paid

 

1,330

 

1,324

 

Foreign currency

 

(7)

 

2

 

Ending balance, net

 

5,373

 

5,182

 

Add:  Reinsurance

 

158

 

145

 

Ending balance

 

$

5,531

 

$

5,327

 

 

Reinsurance in the table above reflects amounts due from reinsurers related to unpaid claims liabilities.  The Company’s insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses.  See Note 8 for additional information on reinsurance.

 

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The majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts.  Interest earned on assets backing these liabilities is an integral part of pricing and reserving.  Therefore, interest accreted on prior year balances is shown as a separate component of prior year incurred claims.  This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period.  The remaining prior year incurred claims amount primarily reflects updates to the Company’s liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability.  Assumptions reflect the Company’s expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business.  Favorable prior year incurred claims for the three months ended March 31, 2019 primarily reflect favorable life loss ratio experience, partially offset by unfavorable long-term disability resolution rate experience.  Favorable prior year incurred claims reported for the three months ended March 31, 2018 primarily reflected favorable life loss ratio experience.

 

Note 8 Reinsurance

 

 

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance is also used to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance does not relieve the originating insurer of liability.  Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables.  The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.

 

A. Reinsurance Recoverables

 

The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired.  Components of the Company’s reinsurance recoverables are presented in the following table.  The table below includes $280 million as of March 31, 2019 and $297 million as of December 31, 2018 of current reinsurance recoverables that are reported in other current assets.

 

(Dollars in millions)
Line of Business

 

Reinsurer(s)

 

March 31,
2019

 

December 31,
2018

 

Collateral and Other Terms at March 31, 2019

 

Ongoing Operations

 

 

 

 

 

 

 

 

 

Integrated Medical, International Markets, Group Disability, COLI

 

Various

 

$

470

 

$

464

 

Balances range from less than $1 million up to $65 million.  Over 70% of the balance is from companies rated as investment grade by Standard & Poor’s.

 

Total recoverables related to ongoing operations

 

 

 

470

 

464

 

 

 

Acquisition, disposition or runoff activities

 

 

 

 

 

 

 

 

 

Individual Life and Annuity (sold in 1998)

 

Lincoln National Life and Lincoln Life & Annuity of New York

 

3,254

 

3,312

 

Both companies’ ratings were well above the level that would trigger a contractual obligation to fully secure the outstanding balance.

 

GMDB (effectively exited in 2013)

 

Berkshire

 

844

 

893

 

100% secured by assets in a trust.

 

Retirement Benefits Business (sold in 2004)

 

Prudential Retirement Insurance and Annuity

 

761

 

787

 

100% secured by assets in a trust.

 

Supplemental Benefits Business (2012 acquisition)

 

Great American Life

 

254

 

261

 

100% secured by assets in a trust.

 

Other

 

Various

 

82

 

87

 

100% secured by assets in a trust or other deposits.

 

Total recoverables related to acquisition, disposition or runoff activities

 

 

 

5,195

 

5,340

 

 

 

Total reinsurance recoverables

 

 

 

$

5,665

 

$

5,804

 

 

 

 

The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.  The Company reviews its reinsurance arrangements and establishes reserves against the recoverables if recovery is not considered probable.

 

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B. Effects of Reinsurance

 

The following table presents direct, assumed and ceded premiums for both short-duration and long-duration insurance contracts.  It also presents reinsurance recoveries that have been netted against benefit expenses in the Company’s Consolidated Statements of Income.

 

 

 

Three Months Ended

 

(In millions)

 

March 31,
2019

 

March 31,
2018

 

Ceded Premiums

 

 

 

 

 

Individual life insurance and annuity business sold

 

$

34

 

$

37

 

Other

 

96

 

98

 

Total ceded premiums

 

130

 

135

 

Reinsurance recoveries

 

 

 

 

 

Individual life insurance and annuity business sold

 

55

 

57

 

Other

 

4

 

47

 

Total reinsurance recoveries

 

$

59

 

$

104

 

 

The effects of reinsurance on written premiums for short-duration contracts were not materially different from the recognized premium amounts shown in the table above.

 

C. Effective Exit of GMDB and GMIB Business

 

The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013.  Berkshire reinsured 100% of the Company’s future claim payments in this business, net of other reinsurance arrangements existing at that time.  The reinsurance agreement is subject to an overall limit with approximately $3.3 billion remaining at March 31, 2019.

 

GMDB is accounted for as reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below.  GMIB assets are reported in other current assets and other assets, and GMIB liabilities are reported in accrued expenses and other liabilities and other non-current liabilities.

 

GMDB

 

The GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death.  The Company’s exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death.

 

The following table presents the account value, net amount at risk and the number of contractholders for guarantees assumed by the Company in the event of death.  The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date.  Unless the Berkshire reinsurance limit is exceeded, the Company should be reimbursed in full for these payments.

 

(Dollars in millions, excludes impact of reinsurance ceded)

 

March 31, 2019

 

December 31, 2018

 

Account value

 

$

8,996

 

$

8,402

 

Net amount at risk

 

$

1,943

 

$

2,466

 

Number of contractholders (estimated)

 

215,000

 

220,000

 

 

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GMIB

 

The Company reinsured contracts with issuers of GMIB products.  The Company’s exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values.  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 that can only occur within 30 days of a policy anniversary after the appropriate waiting period.  The Company has purchased retrocessional coverage (“GMIB assets”), including retrocessional coverage from Berkshire, for these contracts.

 

Assumptions used in fair value measurement.  GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates).  The Company classifies GMIB assets and liabilities in Level 3 of the fair value hierarchy described in Note 10 because assumptions related to future annuitant behavior are largely unobservable.

 

The only assumption expected to impact future shareholders’ net income is non-performance risk.  The non-performance risk adjustment reflects a market participant’s view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company, and (b) the GMIB assets to be paid by the reinsurers, after considering collateral.  The impact of non-performance risk was immaterial for the three months ended March 31, 2019 and 2018.

 

GMIB liabilities totaling $700 million as of March 31, 2019 and $706 million as of December 31, 2018 were reported in accrued expenses and other liabilities and other non-current liabilities.  There were three reinsurers covering 100% of the GMIB exposures as of March 31, 2019 and December 31, 2018 as follows:

 

(In millions)
Line of Business

 

Reinsurer

 

March 31,
2019

 

December 31,
2018

 

Collateral and Other Terms at March 31, 2019

 

GMIB

 

Berkshire

 

  $

339

 

  $

341

 

100% were secured by assets in a trust.

 

 

 

Sun Life Assurance Company of Canada

 

206

 

208

 

 

 

 

 

Liberty Re (Bermuda) Ltd.

 

183

 

184

 

94% were secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

Total GMIB recoverables reported in other current assets and other assets

 

  $

728

 

  $

733

 

 

 

 

Amounts included in shareholders net income for GMIB assets and liabilities were not material for the three months ended March 31, 2019 or 2018.

 

Note 9 — Investments

 

 

Cigna’s investment portfolio consists of a broad range of investments including debt and equity securities, commercial mortgage loans, policy loans, other long-term investments, short-term investments and derivative financial instruments.  The sections below provide more detail regarding our investment balances, net investment income and realized investment gains and losses.  See Note 10 for information about the valuation of the Company’s investment portfolio.

 

 

 

March 31, 2019

 

December 31, 2018

 

(In millions)

 

Current

 

Long-term

 

Total

 

Current

 

Long-term

 

Total

 

Debt securities

 

   $

1,363

 

   $

21,806

 

   $

23,169

 

    $

1,320

 

    $

21,608

 

    $

22,928

 

Equity securities

 

-

 

210

 

210

 

377

 

171

 

548

 

Commercial mortgage loans

 

32

 

1,832

 

1,864

 

32

 

1,826

 

1,858

 

Policy loans

 

-

 

1,403

 

1,403

 

-

 

1,423

 

1,423

 

Other long-term investments

 

-

 

2,006

 

2,006

 

-

 

1,901

 

1,901

 

Short-term investments

 

267

 

-

 

267

 

316

 

-

 

316

 

Total

 

   $

1,662

 

   $

27,257

 

   $

28,919

 

    $

2,045

 

    $

26,929

 

    $

28,974

 

 

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A. Investment Portfolio

 

Debt Securities

 

The amortized cost and fair value by contractual maturity periods for debt securities were as follows at March 31, 2019:

 

 

 

Amortized

 

Fair

 

(In millions)

 

Cost

 

Value

 

Due in one year or less

 

      $

1,366

 

      $

1,370

 

Due after one year through five years

 

6,516

 

6,684

 

Due after five years through ten years

 

9,529

 

9,682

 

Due after ten years

 

4,231

 

4,925

 

Mortgage and other asset-backed securities

 

494

 

508

 

Total

 

      $

22,136

 

      $

23,169

 

 

Actual maturities of these securities could differ from their contractual maturities used in the table above.  This could occur because issuers may have the right to call or prepay obligations, with or without penalties.

 

Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below.

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In millions)

 

Cost