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cigna10k20121231.pdf
29OCT201118203261
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K � ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012 OR
� 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 1-8323
(Exact name of registrant as specified in its charter)
DELAWARE 06-1059331 (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 Registrant’s facsimile number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Name of each exchange on which registered
Common Stock, Par Value $0.25 New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark YES NO
�if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. �
�if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. � 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. � 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). � if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
�this Form 10-K or any amendment to this Form 10-K. � • 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.
Large accelerated filer � Accelerated filer � Non-accelerated filer � Smaller Reporting Company �
�whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). �
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29, 2012 was approximately $12.7 billion.
As of January 31, 2013, 285,954,499 shares of the registrant’s Common Stock were outstanding.
Part III of this Form 10-K incorporates by reference information from the registrant’s proxy statement to be dated on or about March 15, 2013.
CIGNA CORPORATION
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Table of contents
PART I 1
ITEM 1 Business ..................................................................................................................................... 1 A. Description of Business ......................................................................................................1 B. Global Health Care ............................................................................................................................................ 2
C. Group Disability and Life ...................................................................................................9 D. Global Supplemental Benefits ............................................................................................. 11 E. Run-off Reinsurance ........................................................................................................ 12 F. Other Operations ............................................................................................................ 13 G. Investments and Investment Income ..................................................................................... 13 H. Regulation .................................................................................................................... 14 I. Miscellaneous................................................................................................................. 18
ITEM 1A Risk Factors ............................................................................................................................. 19 ITEM 1B Unresolved Staff Comments ..................................................................................................... 28 ITEM 2 Properties ................................................................................................................................. 28 ITEM 3 Legal Proceedings ..................................................................................................................... 28 ITEM 4 Mine Safety Disclosures ........................................................................................................... 28 EXECUTIVE OFFICERS OF THE REGISTRANT .................................................................................. 29
PART II 30
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................................................. 30
ITEM 6 Selected Financial Data ............................................................................................................ 31 ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ....... 32 ITEM 7A Quantitative and Qualitative Disclosures about Market Risk .................................................... 63 ITEM 8 Financial Statements and Supplementary Data ......................................................................... 64 ITEM 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........ 129 ITEM 9A Controls and Procedures ........................................................................................................ 129 ITEM 9B Other Information ................................................................................................................. 129
PART III 130
ITEM 10 Directors, Executive Officers and Corporate Governance ....................................................... 130 A. Directors of the Registrant................................................................................................130 B. Executive Officers of the Registrant .....................................................................................130 C. Code of Ethics and Other Corporate Governance Disclosures .....................................................130
ITEM 11 Executive Compensation ........................................................................................................ 130 ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ............................................................................................................... 131 ITEM 13 Certain Relationships, Related Transactions and Director Independence ................................ 131 ITEM 14 Principal Accountant Fees and Services .................................................................................. 131
PART IV 132
ITEM 15 Exhibits and Financial Statement Schedules ........................................................................... 132 SIGNATURES ........................................................................................................................................... 133 INDEX TO FINANCIAL STATEMENT SCHEDULES ......................................................................... FS-1 INDEX TO EXHIBITS .............................................................................................................................E-1
PART I
Business
Description of Business
Cigna Corporation was incorporated in the State of Delaware in GO GLOBAL: Cigna delivers a range of differentiated products 1981. Various businesses that are described in this Annual Report on and superior service to meet the distinct needs of a growing global Form 10-K for the fiscal year ended December 31, 2012 middle class and a globally mobile workforce through expansion in (‘‘Form 10-K’’) are conducted by its insurance and other subsidiaries. existing international markets as well as an extension of the As used in this document, ‘‘Cigna’’, the ‘‘Company’’, ‘‘we’’ and ‘‘our’’ Company’s business model to new geographic areas. may refer to Cigna Corporation itself, one or more of its subsidiaries,
GO INDIVIDUAL: Cigna strives to establish a deep understanding or Cigna Corporation and its consolidated subsidiaries.
of its customers’ unique needs and to be a highly customer-centric Cigna had consolidated shareholders’ equity of $9.8 billion and assets organization through simplifying the buying process by providing of $53.7 billion as of December 31, 2012, and revenues of choice, transparency of information, and a personalized customer $29.1 billion for the year then ended. Cigna’s revenues are derived experience. The Company’s goal is to build long-term relationships principally from premiums, fees, mail order pharmacy, and with each of the individuals it serves and meet their needs investment income. throughout the stages of their lives regardless of the customer’s plan
type: employer-based, government-sponsored, or individual coverage.Strategy and Key Developments
Executing on Cigna’s strategy, including the goals of achieving better Cigna is a global health services organization with a mission to help its
health outcomes for our global customers, improving employee customers improve their health, well-being and sense of security. Its
productivity and realizing medical cost savings is being achieved by: insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and focusing on delivery of innovative health and wellness solutions services, the majority of which are offered through employers and tailored to each of our employer and government clients; other groups (e.g. governmental and non-governmental organizations,
ensuring that we focus on the individual customer by providing unions and associations). Cigna also offers Medicare and Medicaid
deep customer insights through customer research and feedback; products and health, life and accident insurance coverages primarily to
and individuals in the U.S. and selected international markets. In addition to its ongoing operations described above, Cigna also has certain enhancing collaboration with physicians and hospitals to offer run-off operations, including a Run-off Reinsurance segment. affordable access to value-based high-quality care.
Cigna’s long-term growth strategy is based on: (1) repositioning the In addition to investing in these capabilities, Cigna executed on its portfolio for growth in targeted geographies, product lines, buying strategy during 2012 with three acquisitions that better position the segments and distribution channels; (2) improving its strategic and Company in several key markets: seniors, individual and global financial flexibility; and (3) pursuing additional opportunities in high supplemental. HealthSpring, the largest of the acquisitions, growth markets with particular focus on individuals. strengthens Cigna’s ability to serve individuals across their life stages as
well as deepens the Company’s presence in a number of geographic Cigna’s mission and focus on delivering value by serving the emerging
markets. The addition of HealthSpring also brings industry leading needs of our global customers is being accomplished through
physician partnership capabilities, deepens Cigna’s existing client and executing on our long-term growth strategy, that is:
customer relationships, and facilitates a broader deployment of GO DEEP: Cigna seeks to increase its presence and brand strength Cigna’s range of health and wellness capabilities and product offerings. in key ‘‘go deep’’ geographic areas, grow in targeted segments or The acquisition of Great American Supplemental Benefits strengthens capabilities, and deepen its relationships with current customers Cigna’s capabilities in the individual market in addition to allowing through cross selling. Cigna to expand into the Medicare supplemental business, and our
CIGNA CORPORATION - 2012 Form 10-K 1
ITEM 1
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joint venture with Finansbank expands Cigna’s global footprint in and supplemental health, life and accident) are now reported as Turkey. follows:
Cigna is also focused on continuing to improve its strategic and substantially all of the international health care business (comprised financial flexibility by driving further operating expense efficiencies, primarily of the global health benefits business) is now reported improving its medical cost competitiveness in targeted markets and with the former Health Care segment and renamed Global Health effectively managing balance sheet exposures. In 2013, Cigna reached Care; and a significant milestone in this strategy related to mitigating the
the supplemental health, life and accident business becomes a financial exposure associated with the Run-off guaranteed minimum
separate reporting segment named Global Supplemental Benefits. death benefit (‘‘GMDB’’ also known as ‘‘VADBe’’) and guaranteed minimum income benefit (‘‘GMIB’’) reinsurance businesses. Effective As a result of these changes, the financial results of Cigna’s businesses February 4, 2013, the Company entered into an agreement with are now reported in the following segments: Berkshire Hathaway Life Insurance Company of Nebraska
Global Health Care aggregates the following two operating (‘‘Berkshire’’) to reinsure 100% of the Company’s future exposures for
segments: these businesses, net of retrocessional arrangements in place as of February 4, 2013, up to a specified limit. See Note 25 to the Commercial (including the international health care business) Consolidated Financial Statements for additional information.
Government
Group Disability and LifeFinancial Information about Business Segments Global Supplemental BenefitsThe financial information included herein is in conformity with
accounting principles generally accepted in the United States of Run-off Reinsurance and America (‘‘GAAP’’), unless otherwise indicated. Certain
Other Operations, including Corporate-owned Life Insurance.reclassifications have been made to prior years’ financial information to conform to the 2012 presentation. Industry rankings and Financial data for each of Cigna’s business segments is set forth in percentages set forth herein are for the year ended December 31, 2012 Note 23 to the Consolidated Financial Statements. Prior year segment unless otherwise indicated. In addition, statements set forth in this information has been conformed to the new segment structure. document concerning Cigna’s rank or position in an industry or particular line of business have been developed internally, based on
Available Informationpublicly available information, unless otherwise noted. Cigna’s annual, quarterly and current reports, proxy statements andEffective December 31, 2012, Cigna changed its external reporting other filings, and any amendments to these filings, are made availablesegments to reflect the Company’s realignment of its businesses to free of charge on its website (http://www.cigna.com, under thebetter leverage distribution and service delivery capabilities for the ‘‘Investors – Quarterly Reports and SEC Filings’’ captions) as soon asbenefit of our global clients and customers. Management believes the reasonably practicable after the Company electronically files theserealignment of its businesses will enable the Company to more materials with, or furnishes them to, the Securities and Exchangeeffectively address global health services challenges by leveraging best Commission (the ‘‘SEC’’). The Company uses its website as a channelpractices across geographies to improve the health, well being and of distribution for material company information. Importantsense of security of the global customers that the Company serves. information, including news releases, analyst presentations andThe changes in the Company’s internal financial reporting structure, financial information regarding Cigna is routinely posted on andto support this realignment, took effect on December 31, 2012 and accessible at www.cigna.com. See ‘‘Code of Ethics and Otherresulted in changes to our external reporting segments. The Corporate Governance Disclosures’’ in Part III, Item 10 beginning onCompany’s results are now aggregated based on the nature of the page 130 of this Form 10-K for additional available information.Company’s products and services, rather than its geographies.
The primary segment reporting change is that the two businesses that comprised the former International segment (international health care
Global Health Care
As explained in Item 1A ‘‘Description of Business’’, in the fourth designed to meet the needs of local and multinational companies and quarter of 2012 Cigna changed its external reporting segments. The organizations and their domestic and globally mobile employees and new Global Health Care segment (previously Health Care) now dependents. includes substantially all of the international health care business
Global Health Care aggregates the following two operating segments: previously reported in the former International segment. This business, that is included in the Commercial operating segment, The Commercial operating segment includes both the U.S. consists principally of global health benefits, products and services commercial and international health care businesses and offers
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PART I ITEM 1 Business
insured and self-insured medical, dental, behavioral health, vision, Financial information, including premiums and fees, is presented in and prescription drug benefit plans, health advocacy programs and the Global Health Care section of the MD&A beginning on page 41 other products and services that may be integrated to provide and in Note 23 to Cigna’s Consolidated Financial Statements comprehensive global health care benefit programs to employers beginning on page 119 of this Form 10-K. and their employees, including globally mobile individuals. Cigna, either directly or through its partners, offers some or all of these
Health Plansproducts and services in all 50 states, the District of Columbia, the U.S. Virgin Islands, Canada, Europe, the Middle East, and Asia. Commercial Medical – U.S. and International Cigna services its globally mobile customers virtually everywhere in
Managed Care Plans. Global Health Care offers a broad product linethe world. These products and services are offered through a variety of managed care benefit plans that use meaningful coinsurance andof funding arrangements such as administrative services only (ASO), copayment differences to encourage the use of ‘‘in-network’’ versusguaranteed cost and retrospectively experience rated. ‘‘out-of-network’’ health care providers and the use of primary care
The Government operating segment offers Medicare Advantage physicians. While these products offer access to a broad national plans to seniors in 13 states and the District of Columbia, Medicare network of ‘‘in-network’’ health care providers (that is somewhat Part D plans in all 50 states and the District of Columbia and smaller than the network used with the preferred provider (‘‘PPO’’) Medicaid plans. plan product line), employers may elect to utilize a subset of Cigna’s
network to better manage costs and quality.Global Health Care seeks to differentiate itself by providing superior customer insights, care delivery, product integration and unique Preferred Provider Plans. Global Health Care also offers an open product offerings. Global Health Care expects to accomplish these access product line that features a network with even broader access goals by deepening its reach in selected geographies and market than the Managed Care Plans with no option to designate a primary segments as well as accelerating its engagement with preferred health care physician, in-network and out-of-network coverage, and may care professionals. For its globally mobile customers, Global Health be at a somewhat higher medical cost. Care’s strategic advantages include unique health care solutions,
Choice Fund� suite of Consumer-Driven Products. In connection withseamless worldwide care delivery and superior customer service. many of the health care products described above, Global Health
With the exception of Health Maintenance Organization (‘‘HMO’’), Care offers the Cigna Choice Fund suite of consumer-driven Medicare, Medicaid and stop loss products, each of Global Health products, including Health Reimbursement Accounts (‘‘HRA’’), Care’s group health benefit products are offered with alternative Health Savings Accounts (‘‘HSA’’) and Flexible Spending Accounts funding options (i.e.: administrative services only (‘‘ASO’’ or (‘‘FSA’’). These plans can be used to pay medical care expenses not ‘‘self-insured’’), insured experience rated, and insured guaranteed covered by a base medical plan and are designed to encourage cost). These funding options are further described on page 5 of this customers to understand and manage their health and health Form 10-K. Approximately 86% of the Company’s commercial benefits. medical customers are enrolled in self-insured and experience-rated
Cigna’s Choice Fund HRA is funded by employerplans, where lower costs of providing health care directly benefit our contributions and is often combined with a high deductiblecorporate clients and their employees, with the remainder being plan. HRA dollars can be rolled over from year-to-year atinsured under guaranteed cost plans. the plan sponsors’ discretion.
HSA plans combine a high deductible health plan with aPrincipal Products and Services tax-advantaged savings account funded by customer
Cigna’s principal health care products (discussed below) include: contributions that offers mutual fund investment options. Funds in an HSA can be used to pay the deductible andHealth Plans – group and individual medical coverage: other IRS-approved health care expenses. The health
Commercial Medical: U.S. and International – medical plans savings account is portable and unused funds accumulate covering domestic-based employees and, for certain from year to year. multinational employers, their globally mobile employees. In
An FSA allows customers to pay for IRS-approved healthorder to engage customers in their health care choices, consumer- care expenses with pre-tax employee contributions. Unuseddriven core medical plans are often combined with the Cigna funds in an FSA do not accumulate from year to year, butChoice Fund suite of accounts. are forfeited by the employee.
Government – Medicare Advantage, Medicare Part D and Stop Loss Coverage. Global Health Care offers stop loss insuranceMedicaid plans sold to Medicare or Medicaid-eligible individuals coverage for self-insured plans. This stop loss coverage reimburses(primarily seniors). the plan for claims in excess of a predetermined amount, for
Specialty Products – products and services that improve quality, lower individuals (‘‘specific’’), the entire group (‘‘aggregate’’), or both. the cost of medical services and help customers achieve better health Global Health Care also includes stop loss features in its experience- outcomes. These products can be sold on a standalone basis but are rated policies (discussed below). most effective when integrated with a Cigna-administered health plan.
CIGNA CORPORATION - 2012 Form 10-K 3
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PART I ITEM 1 Business
healthier life; 3) Cigna’s Well Informed program, that uses clinicalGovernment rules-based software to identify potential gaps and omissions in
Medicare Advantage. Cigna offers Medicare Advantage coordinated customers’ health care by analyzing integrated medical, behavioral, care plans in 13 states and the District of Columbia. Under a pharmacy and lab data allowing Cigna to communicate the gaps to Medicare Advantage plan, Medicare-eligible beneficiaries may receive customers and their doctors; and 4) an array of health coaching health care benefits, including prescription drugs, through a managed offerings to address lifestyle management issues such as stress, weight, care health plan such as the Company’s coordinated care plans, and and tobacco cessation. the Centers for Medicare and Medicaid Services (‘‘CMS’’) reimburse
Cost Containment Service. Cigna administers cost containmentthe Company pursuant to a risk adjustment payment methodology. programs for health care services and supplies that are covered underCigna ensures that our Medicare Advantage customers receive quality health benefit plans. These programs, that may involve contractedmedical care through our innovative plan models that focus on vendors, are designed to control health costs by reducingdeveloping highly engaged physician networks, aligning payment out-of-network utilization, including educating customers regardingincentives to improved health outcomes, and using timely and the availability of lower cost in-network services, reviewing providertransparent data sharing. Approximately 75% of our Medicare bills, and recovering overpayments from other insurance carriers orAdvantage customers are served by physicians in these innovative health care professionals. Cigna charges fees for providing ormodels, and Cigna is focused on expanding these models in the arranging for these services.future. The HealthSpring acquisition expanded the size of Cigna’s
Medicare Advantage customer base. As of December 31, 2012, HealthSpring represented 89% of Cigna’s Medicare Advantage
Behavioral Specialtycustomer base. Cigna also offers Medicaid coverage to low income individuals in selected markets in the U.S. Cigna’s Medicaid Behavioral Health. Cigna arranges for behavioral health care services customers benefit from many of the coordinated care aspects of the for customers through its network of participating behavioral health Company’s Medicare Advantage programs discussed above. care professionals. Cigna offers behavioral health care case
management services, employee assistance programs (EAP), and Medicare Part D. Cigna’s Medicare Part D prescription drug
work/life programs to employers, government entities and other program provides a number of plan options as well as service and
groups sponsoring health benefit plans. Cigna Behavioral Health information support to Medicare and Medicaid eligible customers.
focuses on integrating its programs and services with medical, Cigna’s Part D plans are available in all 50 states and the District of
pharmacy and disability programs to facilitate customized, holistic Columbia. These plans offer the savings of Medicare combined with
care. the flexibility to provide enhanced benefits and a drug list tailored to individuals’ specific needs. Retirees benefit from broad network access As of December 31, 2012, Cigna’s behavioral network had and value-added services that help keep them well and save them approximately 118,000 access points to independent psychiatrists, money. The HealthSpring acquisition expanded the size of Cigna’s psychologists and clinical social workers and approximately 9,800 Medicare Part D customer base. As of December 31, 2012, facilities and clinics that are reimbursed on a contracted fee-for-service HealthSpring represented 49% of Cigna’s Medicare Part D customer basis. base.
Cigna Pharmacy Management Specialty Products
Cigna Pharmacy Management. Cigna Pharmacy Management offers prescription drug plans to its insured and self-funded customers bothMedical Specialty in conjunction with its medical products and on a stand-alone basis.
Health Advocacy. Global Health Care offers a wide array of medical With a network of over 64,000 contracted pharmacies, Cigna management, disease management, and other health advocacy services Pharmacy Management is a comprehensive pharmacy benefits to employers and other plan sponsors to help individuals improve manager (PBM) offering clinical integration programs, specialty their health, well-being and sense of security. These services are pharmacy solutions, and fast, efficient home delivery of prescription offered to customers covered under Global Health Care’s administered medicines. plans or plans insured or administered by competing insurers or third-
Programs that facilitate this integration of medical, behavioral andparty administrators. Cigna offers seamless integration of services that pharmacy offerings include the Well Informed program, that is focusedaddress the clinical and administrative challenges inherent in on chronic conditions requiring strict compliance with a prescriptioncoordinating multiple vendors. Through its health advocacy drug therapy such as asthma, diabetes, back pain or high cholesterol,programs, Global Health Care works to help healthy people stay as well as Step Therapy, that encourages customers to use generichealthy; help people change behaviors that put their health at risk; and and/or preferred brand drugs rather than higher cost brand-namedassist those with problems in accessing quality care. drugs. Step Therapy is implemented through claim management
Health advocacy programs and services include: 1) early intervention protocols, that may include communications with customers and by Cigna’s network of clinical professionals; 2) Cigna’s online health their physicians. The Company coordinates pharmacy management assessment, powered by insights and analytics from the University of with all of Cigna’s health advocacy programs and tools by focusing on Michigan Health Management Research Center, that helps customers patient education, including emphasizing the importance of adhering identify potential health risks and learn what they can do to live a to medication instructions.
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PART I ITEM 1 Business
Cigna Specialty Pharmacy Management. Cigna’s administered optometrist offices, as well as retail eye care centers. Routine vision medical and pharmacy coverage can meet the needs of customers with products are offered in conjunction with Global Health Care’s complex conditions that require specialty pharmaceuticals. These medical and dental product offerings. types of medications are covered under both pharmacy and medical benefits and can be expensive, often requiring associated lab work and
Funding Arrangementsadministration by a health care professional. Therefore, coordination is critical in improving affordability and outcomes. Clients with The segment’s commercial medical products and services are offered Cigna-administered medical and pharmacy coverage benefit from through the following funding arrangements: continuity of care, integrated reporting, and aggressive unit cost
Administrative Services Only (80% of commercial medicaldiscounts on all specialty drugs – regardless of where they are customers);administered.
Insured – Guaranteed Cost (14% of commercial medical Cigna Home Delivery Pharmacy. Cigna also offers cost-effective mail
customers); and order, telephone and on-line pharmaceutical fulfillment services through its home delivery operation. Cigna Home Delivery Pharmacy Insured – Shared ReturnsSM (6% of commercial medical customers). provides a high-quality, efficient home delivery pharmacy
Administrative Services Only. Global Health Care contracts withdistinguished by individual care relating to compliance and specialty employers, unions and other groups sponsoring self-insured plans onmedications. Orders may be submitted through the mail, via phone or an administrative services only (‘‘ASO’’) basis to administer claims andthrough the internet at myCigna.com. perform other plan related services. The key features of an ASO funding arrangement are:
Dental and Vision Global Health Care collects administrative service fees in exchange
Dental. Cigna Dental Health offers a variety of dental care products for providing these self-insured plans with access to Global Health including dental health maintenance organization plans (‘‘Dental Care’s applicable participating provider network and for providing HMO’’), dental preferred provider organization (‘‘Dental PPO’’) other services and programs including: claim administration; plans, dental exclusive provider organization plans, traditional dental quality management; utilization management; cost containment; indemnity plans and a dental discount program. Employers and other health advocacy; 24-hour help line; 24/7 call center; case groups can purchase Cigna Dental Health products as stand-alone management; disease management; pharmacy benefit management; products or integrated with Global Health Care’s medical products. behavioral health care management services (through its provider Additionally, individual customers can purchase Dental PPO plans in networks); or any combination of these services. conjunction with individual medical policies. As of December 31,
The self-insured plan sponsor is responsible for self-funding all2012, Cigna Dental Health customers totaled approximately claims, but may purchase stop loss insurance from Global Health11.4 million. Most of these customers are in self-insured plans. All of Care or other insurers for claims in excess of a predeterminedCigna’s Dental HMO customers participate in guaranteed cost amount, for either individuals (‘‘specific’’), the entire groupinsured plans. Managed dental care products are offered in 37 states (‘‘aggregate’’), or both.for Dental HMO and 42 states and the District of Columbia for
Dental PPO through a network of independent health care In some cases, Global Health Care provides performance guarantees professionals that have contracted with Cigna Dental Health to associated with meeting certain service standards, clinical outcomes, provide dental services. or financial metrics. If these service standards, clinical outcomes, or
financial metrics are not met, Global Health Care may be financiallyCigna Dental Health customers access care from one of the largest at risk up to a stated percentage of the contracted fee or a stateddental PPO networks and dental HMO networks in the U.S., with dollar amount. Global Health Care does not recognize revenues forapproximately 266,400 Dental PPO-contracted access points estimated payouts associated with these guarantees. See Note 2 to(approximately 99,200 unique health care professionals) and the Consolidated Financial Statements for details regarding theseapproximately 68,600 Dental HMO-contracted access points guarantees.(approximately 18,000 unique health care professionals).
Insured – Guaranteed Cost. Charges to policyholders under anCigna Dental Health stresses preventive dentistry; it believes that insured, guaranteed cost policy are established at the beginning of thepromoting preventive care contributes to a healthier workforce, an policy period and are not adjusted to reflect actual claim experienceimproved quality of life, increased productivity and fewer treatment during the policy period. Accordingly, Global Health Care bears theclaims and associated costs over time. Cigna Dental Health offers risk for claims and costs. Generally, guaranteed cost policyholdercustomers a dental treatment cost estimator to educate customers on groups are smaller than retrospectively experience-rated groups;oral health and aid them in their dental health care decision-making. accordingly, claim and expense assumptions may be based in whole or
Vision. Cigna Vision offers flexible, cost-effective PPO coverage that in part on prior experience of the policyholder or on a pool of includes a range of both in and out-of-network benefits for routine accounts, depending on the policyholder’s size and the statistical vision services. Cigna’s national vision care network, which consists of credibility of the experience. approximately 57,500 health care professionals in approximately 23,500 locations, includes private practice ophthalmologist and
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Insured – Shared ReturnsSM (also referred to as experience-rated). U.S. Department of Health and Human Service (‘‘HHS’’) require the Under a Shared Returns funding arrangement, the premium MLR to be calculated on a state-by-state basis for each separate determined at the beginning of the policy period may be adjusted for insurance company or HMO, and then separately within each state the actual claim and, in some cases, administrative cost experience of for large groups, small groups and individuals. The MLR is the policyholder. Favorable cost experience in relation to the premium determined generally as the sum of claims plus health care quality rates may result in a portion of the initial premiums being credited to improvement expenses divided by premiums less taxes and the policyholder as an experience refund. However, if claims and assessments. HHS regulations permit adjustments to be made to the expenses exceed the initial premiums (an ‘‘experience deficit’’), Global claims used in the calculation for Cigna’s international health care and Health Care generally bears the risk. These experience deficits may be limited benefit plans subject to the MLR minimums. The adjustment recovered through future year surpluses, according to contractual for limited benefit plans is only permitted through 2014. To the provisions, provided the policy remains in force. extent the MLR minimums are not met for large groups, small groups
or individual segments within each state, premium rebates are paid to Minimum premium funding arrangements combine insurance
both employers and customers enrolled in the plans based on the protection with an element of self-funding. Key features of insurance
portion of the premium each has contributed. Approximately 20% of policies using a minimum premium funding arrangement are
Cigna’s commercial customers are enrolled in insured plans subject to summarized below:
the MLR requirements. For additional information related to the effects of Health Care Reform on these businesses, see the RegulationThe policyholder is responsible for funding a bank account to pay section of this Form 10-K.all claims up to a predetermined aggregate, maximum monthly
amount, and Global Health Care bears the risk for claim costs Medicare Advantage pricing is determined based upon expected
incurred in excess of that amount. medical services utilization and costs resulting from CMS-required services and Company-specific supplemental plan benefits, as well asThe policyholder must maintain an agreed-upon amount in the expected administrative expenses and profit margin. Revenue for eachaccount. plan customer is received from CMS, with CMS providing a subsidy
The policyholder pays a significantly reduced monthly ‘‘residual’’ payment based on customer demographic data and expected customer
premium while the policy is in effect and a supplemental premium health risk factors compared to the broader Medicare population.
(to cover reserves for run-out claims and administrative expenses) Additional revenue from CMS may be earned by the Company
upon termination. related to quality performance measures. In many markets, the customer pays no premium. In some situations, additional premiumsGlobal Health Care may recover deficits from surplus amounts in may be received from customers, representing the difference betweenfuture years if the policy is renewed. CMS subsidy payments and the revenue assumed by the Company as
Liabilities are established for estimated experience refunds based on part of its annual Medicare Advantage bid submissions. Profits from the results of Shared Returns (retrospectively experience-rated) our Medicare Advantage plans vary depending on the actual policies and applicable contract terms. Global Health Care credits utilization of medical services, the cost of services provided, the costs interest on experience refund balances to these policyholders using to administer the benefit programs, and the receipt of quality rates that are set at Global Health Care’s discretion, taking investment performance revenue from CMS. Beginning in 2014, Health Care performance and market rates into consideration. For 2012, the rates Reform requires Medicare Advantage and Medicare Part D plans to of interest credited ranged from 0.5% to 3.5%, with a weighted meet a minimum MLR of 85%. Under the rules proposed by HHS, if average rate of approximately 1%. the MLR for a CMS contract is less than 85%, the contractor is
required to pay a penalty to CMS and could be subject to additional sanctions if the MLR continues to be less than 85% for successivePricing and Reinsurance years.
Pricing. Premium rates for insured funding arrangements are based Pricing for self-funded arrangements is generally based on theon assumptions about the expected utilization levels of medical expected cost to administer these arrangements and will vary by theservices, costs of medical services and the Company’s administrative services provided and the size and complexity of the benefit programs,costs. The profitability of these arrangements will vary by the actual among other factors.utilization level of medical services, the cost of the services provided
and the costs to administer the benefit programs and the premium Reinsurance. Cigna’s international health care business reduces its charged. In some states, premium rates must be approved by the state exposure to large catastrophic losses under insurance contracts by insurance department and state laws may restrict or limit the use of purchasing reinsurance from unaffiliated reinsurers. rating methods. Premium rates for groups and individuals are subject to state and/or the United States Department of Health and Human
Service and QualityServices (‘‘HHS’’) review for unreasonable increases. The Patient Protection and Affordable Care Act (‘‘Health Care Customer Service Reform’’) requires Cigna’s comprehensive medical insurance products
For U.S.-based customers, Global Health Care operates 19 serviceto meet a minimum medical loss ratio (‘‘MLR’’) of 85% for large centers that together processed approximately 154 million medicalgroups (generally defined as employers with more than 50 employees) claims in 2012. Cigna recognizes that customers with significantand 80% for small groups and individuals. Regulations issued by the
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health events may have additional customer service needs. As of coordinate end-to-end care for a defined population of patients and December 31, 2012, Cigna operated 13 call centers and a virtual team share timely, patient-specific medical information with the physician that customers can call toll-free about their health care benefits, group. Each CAC has an embedded care coordinator that supports wellness programs and claims. Ten of these call centers are available patient care and care plan development. The coordinator uses patient- 24 hours a day, 365 days a year. The remaining three, that service specific information supplied by Cigna to conduct proactive outreach HealthSpring providers and customers, operate for extended hours to coordinate care for patients in three categories: i) patients who are during high volume periods to accommodate customer demands. being discharged from the hospital who are at risk for readmission; Cigna offers the ‘‘My Personal Champion’’ program that provides ii) patients with high priority gaps in care; and iii) patients with high qualified customers with a dedicated point of contact. Personal health risk scores based on Cigna’s predictive models. This approach Champions serve as a resource for benefits and claims questions, assist leverages the role of the physician as the trusted advisor. With the with navigating the complex health care industry, and offer education innovative physician engagement models acquired with HealthSpring, and support to customers and their families. As of December 31, we utilize a variety of business arrangements that shift the physician’s 2012, approximately 5 million Cigna customers had access to the My reimbursement from the traditional fee-for-service approach to one Personal Champion program. that is focused on rewarding quality medical outcomes and an
enhanced customer experience at a lower cost. In these arrangements, With over 1.2 million customers across the globe, Cigna’s
the physician group shares financial risk with Cigna. The international health care business continues to be a leader in providing
HealthSpring clinical model also includes outreach to new and at-risk quality customer service. Its globally mobile customers have access to
customers to ensure they are accessing their primary care physician. medical professionals, case management experts and claims specialists 24 hours a day, 365 days a year, through service centers dedicated to Cigna also continues to engage in a variety of other medical quality their unique needs. Cigna uses a wide range of measurement tools to activities, including: credentialing medical health care professionals better understand customers’ needs – ranging from quick 5-minute and facilities that participate in Global Health Care’s Managed Care surveys of a customer’s call-center experience to more elaborate and PPO networks as well as developing the Cigna Care NetworkSM
tracking of loyalty as measured by customers’ likelihood to refer Cigna specialist physician designation described below. to a friend.
Participating Provider Network. Cigna has an extensive network of Technology. Global Health Care understands the important role that participating health care professionals and hospitals, as well as other information technology plays in improving the level of service that facilities, pharmacies and vendors of health care services and supplies. Cigna can provide to its customers, which is critical to the continued In most instances, Global Health Care contracts directly with the growth of the Company’s health care business and its focus on participating hospital, health care professional or other facility to customer-centricity. Accordingly, Global Health Care continues to provide covered services to customers at agreed-upon rates of invest in its information technology infrastructure and capabilities reimbursement. In some instances, however, Global Health Care including innovative mobile tools and Internet-enabled technology companies contract with third parties for access to their provider that support Global Health Care’s focus on providing customers with networks and care management services. In addition, Global Health a personalized experience in making health care decisions and Care has entered into strategic alliances with several regional managed leveraging customer insights to drive the Company’s strategy and care organizations (Tufts Health Plan, HealthPartners, Inc., Health mission. Alliance Plan, and MVP Health Plan) to gain access to their provider
networks and discounts.
Cigna Medical Group. Cigna Medical Group is the multi-specialtyQuality Medical Care medical group practice division of Cigna HealthCare of Arizona, Inc.
Global Health Care’s commitment to promoting quality medical care that delivers primary care and certain specialty care services through
to its customers is reflected in a variety of activities. Most recently, 25 medical facilities and approximately 190 employed clinicians in the
Cigna has focused on collaborating with physicians and other health Phoenix, Arizona metropolitan area. Twenty-two of these multi-
care professionals and facilities with the goal of improving quality and specialty health care centers and their affiliated primary care
customer satisfaction while lowering medical costs. This focus has physicians have received the top level of accreditation (level 3) from
manifested itself through the rapid expansion of collaborative the National Committee for Quality Assurance (NCQA) a private,
accountable care organizations developed by Cigna as well as the nonprofit organization dedicated to improving health care quality.
innovative physician engagement models acquired with HealthSpring Cigna Medical Group currently holds the highest level of this
in 2012. As of December 31, 2012, almost one million medical accreditation for the greatest number of practices and physicians in
customers are serviced by physicians compensated under these types the state of Arizona.
of arrangements. Cigna Care NetworkSM. Cigna Care Network is a benefit design option
Collaborative Accountable Care Organizations (CAC). As of available for Global Health Care administered plans in 69 service areas December 31, 2012, Cigna has established over 50 CACs, and expects across the U.S. Cigna Care Network’s designated physicians are a to continue to expand these arrangements. The overall objective of subset of participating physicians in certain specialties who are so these organizations is to improve the quality of care and service designated based on specific clinical quality and cost-efficiency experience for customers while lowering their costs, resulting in selection criteria. Customers pay reduced co-payments or improved overall value. The goal is to identify health care delivery co-insurance when they receive care from a specialist designated as a organizations (medical groups and hospital organizations) that can
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Cigna Care Network provider. Participating specialists are evaluated International Health Care – focused on health care products and regularly for the Cigna Care Network designation. services to meet the needs of local and multinational companies and
organizations and their local and globally mobile employees and Provider Credentialing. Global Health Care credentials physicians, dependents. hospitals and other health care professionals in its participating
Global Health Care employs sales representatives to distribute itsprovider networks using quality criteria that meet or exceed the products and services through insurance brokers and insurancestandards of external accreditation or state regulatory agencies, or consultants or directly to employers, unions and other groups. Globalboth. Typically, most health care professionals are re-credentialed Health Care also employs representatives to sell utilization reviewevery three years. services, managed behavioral health care, pharmacy, and employee
External Validation. Cigna continues to demonstrate its assistance services directly to insurance companies, HMOs, third commitment to quality and has a broad scope of quality programs party administrators and employer groups. As of December 31, 2012, validated through nationally recognized external accreditation the field sales force for the products and services of this segment organizations. Cigna was awarded Excellent, Commendable or consisted of approximately 1,160 sales representatives in Accredited for Health Plan accreditation from NCQA in 36 of our approximately 115 field locations. With respect to the acquired markets. Additional NCQA recognitions include Full Accreditation HealthSpring business, Medicare Advantage enrollment is generally a for Managed Behavioral Healthcare Organization accreditation for decision made individually by the customer, and accordingly, sales Cigna Behavioral Health, Performance Reporting for Wellness & agents and representatives focus their efforts on in-person contacts Health Promotion accreditation for Cigna’s wellness programs and with potential enrollees as well as telephonic and group selling venues. Physician & Hospital Quality Certification for Cigna’s provider transparency program. Cigna has Full Accreditation for Health
Competition and Industry DevelopmentsUtilization Management, Case Management and Pharmacy Benefit Management from URAC, an independent, nonprofit health care Global Health Care’s business is subject to intense competition and accrediting organization dedicated to promoting health care quality continuing industry consolidation that has created an even more through accreditation, certification and commendation. competitive business environment. In certain geographic locations,
some health care companies may have significant market share HEDIS� Measures. In addition, Global Health Care participates in
positions, but no one competitor dominates the health care market the NCQA’s Health Plan Employer Data and Information Set
nationally. Global Health Care expects a continuing trend of (‘‘HEDIS�’’) Quality Compass Report, whose Effectiveness of Care
consolidation in the industry given the current economic and political measures are a standard set of metrics to evaluate the effectiveness of
environment. Global Health Care also expects continued vertical managed care clinical programs. Global Health Care’s national results
integration, with the line blurring between clinicians and hospitals, compare favorably to industry averages.
and traditional insurers.
Competition in the health care market exists both for employers andMarkets and Distribution other groups sponsoring plans and for the employees in those instances where the employer offers its employees a choice of productsGlobal Health Care offers products in the following customer from more than one health care company. Most group policies aremarkets: subject to annual review by the policyholder, who may seek
National segment – these employers have 5,000 or more U.S.-based, competitive quotations prior to renewal. As Health Care Reform is
full-time employees living in two or more states. implemented, Cigna expects competition to increase in the individual market as individual customers seek to purchase insurance forMiddle Market segment – comprised of employers with 250 to themselves or their families.4,999 U.S.-based, full-time employees located in one or more states
with a majority of their full-time employees living and working in The primary competitive factors are quality and cost-effectiveness of
the same state. This segment also includes single site employers with service and provider networks; effectiveness of medical care
more than 250 employees, Taft-Hartley plans and other third party management; products that meet the needs of clients and their
payers. employees; price; total cost management; technology; and effectiveness of marketing and sales. Financial strength of the insurer,Select segment – focused on employers with 51-249 eligible as indicated by ratings issued by nationally recognized rating agencies,employees and provides ASO and guaranteed cost funding is also a competitive factor. Cigna believes that its health advocacysolutions. Select also provides ASO funding to employers with a capabilities, holistic approach to consumer engagement, breadth ofminimum of 25 employees. product offerings, clinical care and medical management capabilities
Individual – Global Health Care actively markets health and dental and funding options are competitive advantages. These advantages insurance to individuals in ten states as of December 31, 2012, allow Cigna to respond to the diverse needs of its customer base. including Arizona, California, Colorado, Connecticut, Florida, Cigna also believes that its focus on helping to improve the health, Georgia, North Carolina, South Carolina, Tennessee and Texas. well-being and sense of security of its customers will allow it to
differentiate itself from its competitors.Seniors (Medicare) – focused on the health care needs of individuals who are pre- or post-65 retirees and employers who offer coverage to their pre- and post-65 retirees.
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Cigna’s principal competitors in its U.S.-based business are: health. This is accomplished primarily through financial incentives, access to enhanced medical quality data and other informationother large insurance companies that provide group health and life sharing. The effective use of the Company’s health advocacy, customerinsurance products; insight and physician engagement capabilities, along with decision
Blue Cross and Blue Shield organizations; support tools (some of which are web-based) and enabling technology are critical to success in the health care industry, and Cigna believes itsstand-alone HMOs and PPOs; capabilities in these areas will be competitive differentiators.
HMOs affiliated with major insurance companies and hospitals; On February 15, 2013, CMS issued its Advance Notice ofand Methodological Changes for Calendar Year (CY) 2014 for Medicare
national managed pharmacy, behavioral health and utilization Advantage (MA) Capitation Rates, Part C and Part D Payment
review services companies. Policies (the ‘‘Notice’’). CMS is accepting comments on the Notice,
The primary competitors of the international health care business and final terms are expected to be published on April 1, 2013. While include U.S.-based and European health insurance companies with management believes that a significant number of comments from global health benefits operations. For the Company’s international interested parties (including Cigna) will be provided to CMS, there health care operations in the United Kingdom and Spain, the primary can be no assurance that CMS will amend its current position. Given competitors are regional and local insurers. the uncertainty regarding the final terms of the Notice, the Company
cannot estimate the impact that it will have on its business, revenuesCompetition also arises from smaller regional or specialty companies or results of operations but recognizes that any impacts could bewith strength in a particular geographic area or product line, materially adverse. Accordingly, the Company is currently evaluatingadministrative service firms and, indirectly, self-insurers. In addition the potential implications of the Notice, including adjustments thatto these traditional competitors, a new group of competitors is the Company may make to the programs and services it offers to offsetemerging. These new competitors are focused on delivering employee any adverse impacts.benefits and services through Internet-enabled technology that allows
consumers to take a more active role in the management of their
Group Disability and Life
Cigna’s Group Disability and Life segment provides the following return to work rate. Examples of the benefits of this integrated insurance products and their related services: group long-term and approach (for which Cigna may receive fees) include: short-term disability insurance, group life insurance and accident and using information from the health care and disability databases to specialty insurance. These products and services are provided by help identify, treat and manage disabilities before they become subsidiaries of Cigna Corporation. Cigna markets products in all 50 chronic, longer in duration and more costly; and states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands
proactive outreach from Cigna Behavioral Health to assistand Canada. employees suffering from a mental health condition, either as a primary condition or as a result of another condition.
Principal Products and Services As measured by 2012 premiums and fees, disability constituted
Disability approximately 45% of this segment’s business. Approximately 12,300 insured disability policies covering approximately 6.5 million livesLong-term and short-term disability insurance products and services were outstanding as of December 31, 2012.generally provide a fixed level of income to replace a portion of wages
lost because of disability. Cigna also provides assistance to employees in returning to work and assistance to their employers in managing Life Insurance the cost of employee disability. Group disability coverage is typically
Life insurance products offered by Group Disability and Life includeemployer-paid or a combination of employer and employee-paid, but group term life and group universal life. Group term life insurancemay also include coverage paid for entirely by employees. may be employer-paid basic life insurance, employee-paid
Cigna is an industry leader in returning employees to work quickly, supplemental life insurance or a combination thereof. resulting in higher productivity and lower cost for employers and a
Group universal life insurance is a voluntary life insurance product inbetter quality of life for their employees. Cigna’s disability insurance which the owner may accumulate cash value. The cash value earnsproducts may be integrated with other disability benefit programs, interest at rates declared from time to time, subject to a minimumbehavioral programs, medical programs, social security advocacy, and guaranteed contracted rate, and may be borrowed, withdrawn, or,leave of absence administration. Cigna believes this integration within certain limits, used to fund future life insurance coverage.provides customers with increased efficiency and effectiveness in
disability claims management, enhances productivity and reduces As measured by 2012 premiums and fees, group life insurance overall costs to employers. Coordinating the administration of the constituted approximately 46% of this segment’s business. segment’s disability programs with medical programs offered by Cigna Approximately 6,200 group life insurance policies covering HealthCare provides enhanced opportunities to influence outcomes, approximately 5.6 million lives were outstanding as of December 31, reduce the cost of both medical and disability events and improve the 2012.
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interest and mortality experience. Mortality charges are subject toOther Products and Services guaranteed maximum rates stated in the policy.
Cigna offers personal accident insurance coverage, which consists The profitability of this segment’s products depends on the adequacyprimarily of accidental death and dismemberment and travel accident of premiums charged and investment returns relative to claims andinsurance to employers. Group accident insurance may be expenses. The effectiveness of return to work programs and mortalityemployer-paid or employee-paid. levels also impact the profitability of disability insurance products.
Cigna also offers specialty insurance services that consist primarily of Cigna’s previous claim experience and industry data indicate a disability and life, accident, and hospital indemnity products to correlation between disability claim incidence levels and economic professional or trade associations and financial institutions. conditions, with submitted claims rising under adverse economic
conditions, although the impact of the current adverse economicVoluntary benefits are those paid by the employee and are offered at conditions is not clear. For life insurance products, the degree tothe employer’s worksite. Cigna plans provide employers, among other which future experience deviates from mortality, morbidity andservices, flexible enrollment options, list billing, medical expense assumptions also affects profitability.underwriting, and individual record keeping. Cigna designed its
voluntary offerings to offer employers a complete and simple way to In order to reduce its exposure to large individual and catastrophic manage their benefits, including personalized enrollment losses under group life, disability and accidental death policies, Cigna communication and administration of the benefits program. purchases reinsurance from unaffiliated reinsurers.
Financial information, including premiums and fees, is presented in the Group Disability and Life section of the MD&A beginning on Markets and Distribution page 44 and in Note 23 to Cigna’s Consolidated Financial Statements.
Cigna markets the group insurance products and services described above to employers, employees, professional and other associations
Pricing and Reinsurance and groups in the following customer segments: This segment’s products and services are offered on a fully insured, National segment – these are multi-site employers generally with experience-rated and ASO basis. Under fully insured arrangements, more than 5,000 employees; policyholders pay a fixed premium and Cigna bears the risk for claims
Middle Market segment – generally defined as multi-site employersand costs. Under experience-rated funding arrangements, a premium with more than 250 but fewer than 5,000 employees, and single-sitethat typically includes a margin to partially protect against adverse employers with more than 250 employees; andclaim fluctuations is determined at the beginning of the policy period.
Cigna generally bears the risk if claims and expenses exceed this Select segment – generally includes employers with more than 50 premium. If premiums exceed claims and expenses, any surplus but fewer than 250 employees. amount is generally first used to offset prior deficits and is otherwise
In marketing these products, Cigna primarily sells through insurancegenerally returned to the policyholder if surplus exceeds minimum brokers and consultants and employs a direct sales force. As ofcontractual levels. With experience-rated insurance products, Cigna December 31, 2012, the field sales force for the products and servicesmay recover deficits from margins in future years if the policy is of this segment consisted of approximately 200 sales professionals inrenewed. Under ASO arrangements, Cigna contracts with groups 27 office locations.sponsoring self-insured plans to administer claims and perform other
plan related services in return for service fees. The self-insured plan sponsor is responsible for self funding all claims. The majority of this Competition segment’s products and services are fully insured.
The principal competitive factors that affect the Group Disability and Premiums and fees charged for disability and life insurance products Life segment are underwriting and pricing, the quality and are generally established in advance of the policy period and are effectiveness of claims management, relative operating efficiency, generally guaranteed for one to three years and selectively guaranteed investment and risk management, distribution methodologies and for up to five years, but policies are generally subject to early producer relations, the breadth and variety of products and services termination by the policyholder or by the insurance company. offered, and the quality of customer service. For certain products with Premium rates reflect assumptions about future claims, expenses, longer-term liabilities, such as group long-term disability insurance, credit risk, investment returns and profit margins. Assumptions may the financial strength of the insurer, as indicated by ratings issued by be based in whole or in part on prior experience of the account or on a nationally recognized rating agencies, is also a competitive factor. pool of accounts, depending on the group size and the statistical
The principal competitors of Cigna’s group disability, life and accidentcredibility of the experience, that varies by product. businesses are other large and regional insurance companies that
Premiums for group universal life insurance products consist of market and distribute these or similar types of products. As of mortality, administrative and surrender charges assessed against the December 31, 2012, Cigna is one of the top five providers of group policyholder’s fund balance. Interest credited and mortality charges disability, life and accident insurance in the United States, based on for group universal life, and mortality charges on group variable premiums. universal life, may be adjusted prospectively to reflect expected
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grows, Cigna believes it is well positioned to deliver integratedIndustry Developments and Strategic solutions that address these broad employer and employee needs
Initiatives through its programs that promote a healthy lifestyle, offer assistance in returning to work and integrate health care and disability programs.The group insurance market remains highly competitive as the rising Cigna also believes that its strong disability management portfolio andcost of providing medical coverage to employees has forced companies fully integrated programs provide employers and employees tools toto re-evaluate their overall employee benefit spending. Demographic improve health status. This focus on managing the employee’s totalshifts have further driven demand for products and services that are absence enables Cigna to increase the number and likelihood ofsufficiently flexible to meet the evolving needs of employers and interventions and minimize disabling events.employees who want innovative, cost-effective solutions to their
insurance needs. Employers continue to shift towards greater There is heightened review by state regulators of group disability employee participatory coverage and voluntary purchases. insurance industry business and reporting practices. Cigna is
frequently the subject of regulatory market conduct and other reviews,Employers are also expressing a growing interest in employee wellness, audits and investigations by state insurance departments.absence management and productivity and recognizing a strong link
between health, productivity and their profitability. As this interest
Global Supplemental Benefits
As explained in Item 1A ‘‘Description of Business’’, in the fourth interest in a Chinese joint venture and a 51% interest in a joint quarter of 2012, Cigna changed its external reporting segments. The venture in Turkey, through which its products and services are offered. Global Supplemental Benefits segment is comprised of the Cigna continues to work with its partner in India to establish a health international supplemental health, life and accident businesses insurance company that will operate as a joint venture upon licensing. (previously reported in the former International segment) as well as Licensing is expected to occur in 2013. the Medicare supplement business acquired in 2012.
This segment offers supplemental health, life and accident insurance Medicare Supplement Plans products in the U.S. and selected international markets. With local
Through its 2012 acquisition, Cigna also offers individual Medicarelicenses and partnerships in approximately 20 countries and Supplement plans that provide retirees with federally standardizedjurisdictions, Cigna is able to offer products and services to local Medigap-style plans. Retirees may select amongst the various planscitizens and globally mobile individuals. These products and services with specific plan options to meet their unique needs and may visitare provided by subsidiaries of Cigna Corporation, including foreign any health care professional or facility that accepts Medicareoperating entities. throughout the U.S. – with no referrals required.
Cigna continues to distinguish itself in the global supplemental Financial information, including premiums and fees, is presented inhealth, life and accident businesses through its differentiated direct to the Global Supplemental Benefits section of the MD&A beginningconsumer distribution, customer insights and marketing capabilities. on page 46 and in Note 23 to Cigna’s Consolidated FinancialCigna enters new markets when the opportunity to bring its product Statements.and health solutions is attractive. In 2012, Cigna extended its reach in
Turkey through the joint venture with Finansbank and expanded into the U.S. Medigap and supplemental lines of business through Pricing and Reinsurance acquisition. The 2011 acquisition of FirstAssist in the U.K. added a
Premium rates for Cigna’s global supplemental benefits products aretravel insurance product line and expanded the Company’s based on assumptions about mortality, morbidity, customerdistribution channels. acquisition and retention, expenses and target profit margins, as well as interest rates. The profitability of these products is primarily driven
Principal Products and Services by the adequacy of mortality and morbidity assumptions used, and customer retention.Supplemental Health, Life and Accident Insurance Fees for variable universal life insurance products consist of mortality,
These insurance products generally provide simple, affordable administrative, asset management and surrender charges assessed
coverage of risks for the health and financial security of individuals. against the contractholder’s fund balance. Mortality charges on
Supplemental health products provide specified payments for a variety variable universal life may be adjusted prospectively to reflect expected
of health risks and include personal accident, accidental death, critical mortality experience. The profitability of these products is primarily
illness, hospitalization, travel, dental, cancer and other dread disease driven by the policyholders’ fund balances on which fees are charged
coverages. Term life and individual private medical insurance as well as well as customer retention.
as variable universal life insurance and other savings products are also included in the product portfolio. Cigna’s supplemental health, life Premium rates and fees for Medicare supplement products reflect and accident insurance products are offered in South Korea, Taiwan, assumptions about future claims, customer retention, expenses, Indonesia, Hong Kong, the United States, the European Union, customer demographics, investment returns, and profit margins. China, New Zealand, Thailand and Turkey. Cigna owns a 50%
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Most contracts permit premium rate changes at least annually. The distribution channels may also impact Cigna’s business or results. See profitability of Medicare supplement products is dependent upon the the Regulation section beginning on page 14 and the Risk Factors accuracy of projections for health care inflation (unit cost and section beginning on page 19 of this Form 10-K. utilization), customer retention, customer demographics, and the adequacy of fees charged for administration. Competition The operations of Cigna’s Global Supplemental Benefits segment are
Competitive factors in Cigna’s supplemental health, life and accidentdiversified by line of business. South Korea, however, represents the and health care businesses include product and distributionsingle largest geographic market for this segment. In 2012, South innovation and differentiation, efficient management of marketingKorea generated 54% of this segment’s revenues and 90% of its processes and costs, commission levels paid to distribution partners,segment earnings. For information on the concentration of risk with and quality of claims and customer services. In most overseas markets,respect to the Global Supplemental Benefits segment’s business in perception of financial strength is also an important competitiveSouth Korea, see ‘‘Other Items Affecting Results of Global factor.Supplemental Benefits’’ in the Global Supplemental Benefits section
of the MD&A beginning on page 46 of this Form 10-K. For Cigna’s supplemental health, life and accident insurance businesses operating in foreign markets, competitors are primarilyA global approach to underwriting risk management allows for each locally based insurance companies, including insurance subsidiaries oflocal business to underwrite and accept risk within specified limits. banks primarily in Asia and Europe as well as multi-nationalRetentions are centrally managed through cost effective use of external companies. Insurance company competitors in this segment primarilyreinsurance to limit segment liability on a per life, per risk, and per focus on traditional product distribution through captive agents, withevent (catastrophe) basis. direct marketing being secondary channels. Cigna estimates that it has less than 2% market share of the total life insurance premiums in anyMarkets and Distribution given market in which it operates.
Cigna’s supplemental health, life and accident insurance products sold The principal competitive factors that affect Cigna’s Medicarein foreign countries are generally marketed through distribution supplement business are underwriting and pricing, relative operatingpartners with whom the individual insured has an affinity efficiency, broker relations, and the quality of claims and customerrelationship. These products are sold primarily through direct service.marketing channels, such as outbound telemarketing and in-branch
bancassurance (where Cigna partners with a bank and uses the bank’s The primary competitors of the Medicare supplement business sales channels to sell its insurance products). Marketing campaigns are include U.S.-based health insurance companies. conducted through these channels under a variety of arrangements
Cigna expects that the competitive environment will intensify as U.S.with affinity partners. These affinity partners primarily include banks, and Europe-based insurance and financial services providers pursuecredit card companies and other financial and non-financial global expansion opportunities.institutions. Cigna also markets directly to consumers via direct
response television and the Internet.
Industry DevelopmentsCigna’s Medicare supplement product line acquired in 2012 is primarily distributed through independent agents and telemarketing Pressure on social health care systems and increased wealth and directly to the consumer. education in emerging markets are leading to higher demand for
products providing health insurance and financial security. In theFor Cigna’s supplemental health, life and accident insurance products supplemental health, life and accident business, direct marketingsold in foreign markets, a significant portion of premiums are billed channels are growing and attracting new competitors while industryand collected through credit cards. A substantial contraction in consolidation among financial institutions and other affinity partnersconsumer credit could impact Cigna’s ability to retain existing policies continues. See ‘‘Risk Factors’’ beginning on page 19 of this Form 10-Kand sell new policies. A decline in customer retention would result in for a discussion of risks related to the Global Supplemental Benefitsboth a reduction of revenue and an acceleration of the amortization of
acquisition related costs. Changes in regulation around permitted segment.
Run-off Reinsurance
Until 2000, Cigna offered reinsurance coverage for part or all of the reinsurance businesses) into run-off as of June 1, 2000, and stopped risks written by other insurance companies (or ‘‘ceding companies’’) underwriting new reinsurance business. under life and annuity policies (both group and individual) and
As of December 31, 2012, Cigna’s remaining exposures resulted accident policies (workers’ compensation, personal accident, and
primarily from its annuity reinsurance business, including its catastrophe coverages). The products and services related to these
reinsurance of GMDB and GMIB contracts. Effective February 4, operations were offered by subsidiaries of Cigna Corporation.
2013, the Company reinsured 100% of the Company’s future In 2000, Cigna sold its U.S. individual life, group life and accidental exposures for the Run-off GMDB and GMIB businesses, net of death reinsurance businesses. Cigna placed its remaining reinsurance retrocessional arrangements in place prior to February 4, 2013 up to a businesses (including its accident, international life, and annuity specified limit. For additional information regarding this reinsurance
transaction, see Note 25 to the Consolidated Financial Statements.
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Other Operations
Cigna’s Other Operations segment includes the following businesses: mortality charges on variable universal life may be adjusted prospectively to reflect expected interest and mortality experience. Incorporate owned life insurance; order to reduce its exposure to large individual and catastrophe losses,
deferred gains recognized from the 1998 sale of the individual life Cigna purchases reinsurance from unaffiliated reinsurers. insurance and annuity business and the 2004 sale of the retirement benefits business; and
Individual Life Insurance & Annuity andrun-off settlement annuity business. Retirement Benefits BusinessesThe products and services related to these operations are offered by For more information regarding the sale of these businesses and thesubsidiaries of Cigna Corporation. arrangements which secure Cigna’s reinsurance recoverables, see Note 8 of the Consolidated Financial Statements.Corporate-owned Life Insurance (‘‘COLI’’)
The principal products of the COLI business are permanent insurance Settlement Annuity Businesscontracts sold to corporations to provide coverage on the lives of Cigna’s settlement annuity business is a closed run-off block of singlecertain employees for the purpose of funding employer-paid future premium annuity contracts. These contracts are primarily liabilitybenefit obligations. Permanent life insurance provides coverage that, settlements with approximately 28% of the liabilities associated withwhen adequately funded, does not expire after a term of years. The payments that are guaranteed and not contingent on survivorship. Incontracts are primarily non-participating universal life policies. Fees the case of the contracts that involve non-guaranteed payments, suchfor universal life insurance products consist primarily of mortality and payments are contingent on the survival of one or more partiesadministrative charges assessed against the policyholder’s fund involved in the settlement.balance. Interest credited and mortality charges for universal life and
Investments and Investment Income
cash flows to those of corresponding liabilities. Investment strategyGeneral Accounts and results are affected by the amount and timing of cash available for
Cigna’s investment operations provide investment management and investment, competition for investments, economic conditions, related services for Cigna’s corporate invested assets and the insurance- interest rates and asset allocation decisions. Cigna routinely monitors related invested assets in its General Account (‘‘General Account Invested and evaluates the status of its investments, obtaining and analyzing Assets’’). Cigna acquires or originates, directly or through intermediaries, relevant investment-specific information as well as assessing current a broad range of investments including private placements and public economic conditions, trends in capital markets and other factors. securities, commercial mortgage loans, real estate, mezzanine, private Such factors include industry sector considerations for fixed maturity equity partnerships and short-term investments. Invested assets also investments and mezzanine and private equity partnership include policy loans, that are fully collateralized by insurance policy cash investments, and geographic and property-type considerations for values. Invested Assets are managed primarily by Cigna subsidiaries and, commercial mortgage loan and real estate investments. to a lesser extent, external managers with whom Cigna’s subsidiaries contract. Net investment income and realized investment gains (losses)
Separate Accountsare included as a component of earnings for each of Cigna’s operating segments (Global Health Care, Group Disability and Life, Global Cigna subsidiaries or external managers manage Separate Account Supplemental Benefits, Run-off Reinsurance, and Other Operations) and assets on behalf of contractholders. These assets are legally segregated Corporate. For additional information about invested assets, see the from the Company’s other businesses and are not included in the ‘‘Investment Assets’’ section of the MD&A beginning on page 56 and General Account Invested Assets. Income, gains and losses generally Notes 11, 12, 13, 14 and 15 to Cigna’s Consolidated Financial accrue directly to the contractholders. Statements.
As of December 31, 2012, Cigna’s Separate Account assets consisted Cigna’s investment strategy is to maximize risk-adjusted yields for the of: portfolios. Cigna manages the investment portfolios to reflect the
$3.4 billion in separate account assets that constitute a portion of underlying characteristics of related insurance and contractholder
the assets of the Cigna Pension Plan; liabilities and capital requirements, as well as regulatory and tax
$3.4 billion in separate account assets that support Variableconsiderations pertaining to those liabilities and state investment laws. Universal Life products sold as a part of the Company’s corporate-Insurance and contractholder liabilities range from short duration owned life insurance business, as well as through the Company’shealth care products to longer term obligations associated with Global Supplemental Benefits segment; anddisability and life products, and the run-off settlement annuity
business. Assets supporting these liabilities are managed in segregated $1.0 billion in separate account assets that support primarily health investment portfolios to facilitate matching of asset durations and care and other disability and life products.
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Regulation
Cigna and its subsidiaries are subject to comprehensive state, federal reimbursement accounts and flexible spending accounts are also and international regulations. The laws and regulations governing regulated by the U.S. Department of the Treasury and the Internal Cigna’s business continue to increase each year and are subject to Revenue Service. frequent change. Cigna has established policies and procedures to Cigna’s operations, accounts and other books and records are subject comply with applicable requirements. to examination at regular intervals by regulatory agencies, including Cigna’s insurance and HMO subsidiaries must be licensed by the state insurance and health and welfare departments, state boards of jurisdictions in which they conduct business. These subsidiaries are pharmacy and the Centers for Medicare and Medicaid Services to subject to numerous state and federal regulations related to their assess compliance with applicable laws and regulations. In addition, business operations, including, but not limited to: Cigna’s current and past business practices are subject to review by,
and from time to time the Company receives subpoenas and otherthe form and content of customer contracts including benefit requests of information from, various state insurance and health caremandates (including special requirements for small groups, regulatory authorities, attorneys general, the Office of Inspectorgenerally under 50 employees); General, and other state and federal authorities, including inquiries
premium rates; by, and testimony before committees and subcommittees of the U.S. medical loss ratios; Congress regarding certain of its business practices. These
examinations, reviews, subpoenas and requests may result in changesthe content of agreements with participating providers of covered to or clarifications of Cigna’s business practices, as well as fines,services; penalties or other sanctions.
producer appointment and compensation;
claims processing and appeals; Regulatory and Legislative Developments
underwriting practices; The federal and state governments in the U.S. as well as governments
reinsurance arrangements; in other countries where Cigna does business continue to enact and unfair trade and claim practices; seriously consider many broad-based legislative and regulatory
proposals that could materially impact various aspects of Cigna’sprotecting the privacy and confidentiality of the information business.received from customers;
risk sharing arrangements with providers; Health Care Reformreimbursement or payment levels for Medicare services; In the first quarter of 2010, Health Care Reform was signed into law.advertising; and Health Care Reform mandates broad changes in the delivery of health
the operation of consumer-directed plans (including health savings care benefits that may impact the Company’s current business model, accounts, health reimbursement accounts, flexible spending including its relationship with current and future customers, accounts and debit cards). producers and health care providers, products, services, processes and
Cigna and its international subsidiaries comply with regulations in technology. Health Care Reform includes, among other requirements, international jurisdictions where foreign insurers may be faced with provisions for guaranteed coverage and renewal requirements, more onerous regulations than their domestic competitors. The prohibitions on some annual and all lifetime limits on the dollar broader regulatory environment may include anti-corruption laws, amount of benefits for essential health services, increased restrictions economic sanctions laws, various privacy, consumer protection, on rescinding coverage, minimum medical loss ratio and customer insurance, tax, tariff and trade laws and regulations, corporate rebate requirements, a requirement to cover preventive services on a governance, employment, intellectual property and investment laws first dollar basis, and greater controls on premium rate increases for and regulation, discriminatory licensing procedures, compulsory individual and small employer health insurance. It also reduces the cessions of reinsurance, required localization of records and funds, Medicare Part D coverage gap and reduces payments to private plans higher premium and income taxes, and requirements for local offering Medicare Advantage, as well as provides for state insurance participation in an insurer’s ownership. In addition, the expansion of exchanges through which qualified insurers and HMOs will be able to Cigna’s operations into foreign countries increases the Company’s offer insured plans to individuals and small employers. Certain of the exposure to certain U.S. laws, such as the Foreign Corrupt Practices law’s provisions became effective between 2010 and 2012 and other Act of 1977 (FCPA). See page 16 for further discussion of provisions will take effect from 2013 to 2018. Health Care Reform international regulations. left many of the details of the new law to be established through
regulations. While federal agencies have published interim finalThe business of administering and insuring employee benefit regulations with respect to certain requirements, many issues remainprograms, particularly health care programs, is heavily regulated by uncertain.state and federal laws and administrative agencies, such as state
departments of insurance and the federal departments of Labor, The provisions of the new law that became effective between 2010 Health and Human Services, Treasury and Justice and the Internal and 2012 included those requiring coverage of preventive services Revenue Service, as well as the courts. Health savings accounts, health with no enrollee cost-sharing, banning the use of lifetime and annual
14 CIGNA CORPORATION - 2012 Form 10-K
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limits on the dollar amount of essential health benefits, increasing Management continues to closely monitor the implementation of restrictions on rescinding coverage and extending coverage of Health Care Reform and is actively engaged with regulators and dependents to the age of 26. Minimum medical loss ratio policymakers on the conversion of legislation to regulation. In requirements as prescribed by the Department of Health and Human addition, management is implementing the necessary capabilities to Services (‘‘HHS’’) became effective in January 2011 and required ensure that the Company is compliant with the law and assessing payment of premium rebates beginning in 2012 to employers and potential opportunities arising from Health Care Reform. customers covered under the Company’s comprehensive medical insurance if certain annual minimum medical loss ratios (‘‘MLR’’) are
Dodd-Frank Act not met. HHS regulations permit adjustments to be made to the
In 2010, Congress enacted the Dodd-Frank Wall Street Reform andclaims used in the calculation for Cigna’s international health care and Consumer Protection Act (the ‘‘Dodd-Frank Act’’) that provides for alimited benefit plans subject to the MLR minimums. The adjustment number of reforms and regulations in the corporate governance,for limited benefit plans is only permitted through 2014. financial reporting and disclosure, investments, tax and enforcement
Certain other provisions of Health Care Reform will not become areas that affect Cigna. The SEC and other regulatory authorities
effective until 2013 or later, including: (1) the annual health insurer engaged in rulemaking efforts under the Dodd-Frank Act throughout
fee on health insurers and HMOs to help fund the expanded coverage 2011 and 2012, and additional rulemaking still continues. The
provided under this legislation; (2) reinsurance assessments on Dodd-Frank Act established a Federal Insurance Office that will
insurers and HMOs to help stabilize rates in the individual and small develop and coordinate federal policy on insurance matters. Cigna is
group markets beginning in 2014; (3) the guaranteed issue and closely monitoring how these regulations impact the Company,
renewal requirements and the requirement that individuals maintain however the full impact of the legislation may not be known for
coverage, and (4) an excise tax on high-cost employer-sponsored several years until regulations become fully effective.
coverage. These fees and excise taxes will generally not be tax deductible with the exception of the reinsurance assessment on insurers and HMOs. Health Care Reform also changed certain tax Regulation of Insurance Companies laws that will effectively limit the amount of certain employee
Financial Reporting and Internal Control compensation that is tax deductible by health insurers.
Regulators closely monitor the financial condition of licensed Health Care Reform also impacts Cigna’s Medicare Advantage and
insurance companies and HMOs. States regulate the form and Medicare Part D prescription drug plan businesses acquired with
content of statutory financial statements, the type and concentration HealthSpring in a variety of additional ways, including reduced
of permitted investments, and corporate governance over financial Medicare premium rates (which began with the 2011 contract year),
reporting. Cigna’s insurance and HMO subsidiaries are required to mandated minimum reductions to risk scores (beginning in 2014),
file periodic financial reports and schedules with regulators in most of transition of Medicare Advantage ‘‘benchmark’’ rates to Medicare
the jurisdictions in which they do business as well as annual financial fee-for-service parity, reduced enrollment periods and limitations on
statements audited by independent registered public accountants. disenrollment, providing ‘‘quality bonuses’’ for Medicare Advantage
Certain insurance and HMO subsidiaries are required to file an plans with a rating for four or five stars from CMS and mandated
annual report of internal control over financial reporting with most consumer discounts on brand name and generic prescription drugs for
jurisdictions in which they do business. Insurance and HMO Medicare Part D plan participants in the coverage gap. Beginning in
subsidiaries’ operations and accounts are subject to examination by 2014, Health Care Reform requires Medicare Advantage and
such agencies. Cigna expects states to expand the scope of regulations Medicare Part D plans to meet a minimum MLR of 85%. Under the
relating to corporate governance and internal control activities of its rules proposed by HHS, if the MLR for a CMS contract is less than
insurance and HMO subsidiaries as a result of the National 85%, the contractor is required to pay a penalty to CMS and could be
Association of Insurance Commissioners’ (‘‘NAIC’’) amendment to subject to additional sanctions if the MLR continues to be less than
the Annual Financial Reporting Model Regulation to adopt elements 85% for successive years. Through Health Care Reform and other
of corporate governance and internal control requirements similar to federal legislation, funding for Medicare Advantage plans has been
those under federal securities’ laws. and may continue to be altered.
Health Care Reform significantly affects states that can elect to Guaranty Associations, Indemnity Funds, Risk Poolsestablish their own state exchanges for individual and small employer and Administrative Fundsinsurance business or allow the federal government to establish and
operate the exchange for them. Cigna, therefore, expects state Most states and certain non-U.S. jurisdictions require insurance legislatures to focus on legislation to implement Health Care Reform companies to support guaranty associations or indemnity funds that and to address the impact of Health Care Reform on state budgets. are established to pay claims on behalf of insolvent insurance
companies. In the United States, these associations levy assessmentsOn June 28, 2012, the U.S. Supreme Court upheld the on member insurers licensed in a particular state to pay such claims.constitutionality of most parts of Health Care Reform, including the
obligation to purchase health care coverage (the ‘‘individual Several states also require HMOs to participate in guaranty funds, mandate’’). The Company has implemented the provisions of Health special risk pools and administrative funds. For additional Care Reform that are currently in effect (including the commercial information about guaranty fund and other assessments, see Note 24 minimum MLR requirements) and continues its implementation to Cigna’s Consolidated Financial Statements. planning for those provisions that must be adopted in the future.
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Some states also require health insurers and HMOs to participate in incorporate the concept of ‘‘enterprise risk’’ and to enact provisions assigned risk plans, joint underwriting authorities, pools or other designed to provide regulators with additional information and residual market mechanisms to cover risks not acceptable under authority to manage this new concept. To date, a few states have taken normal underwriting standards. action to adopt the amended Model Act and Regulation. Cigna
continues to follow the states’ activity in this area and will amend its processes as necessary to comply with revised state laws.
Solvency and Capital Requirements Many states have adopted some form of the NAIC model solvency-
Marketing, Advertising and Productsrelated laws and risk-based capital rules (‘‘RBC rules’’) for life and health insurance companies. The RBC rules recommend a minimum In most states, Cigna’s insurance companies and HMO subsidiaries level of capital depending on the types and quality of investments are required to certify compliance with applicable advertising held, the types of business written and the types of liabilities incurred. regulations on an annual basis. Cigna’s insurance companies and If the ratio of the insurer’s adjusted surplus to its risk-based capital falls HMO subsidiaries are also required in most states to file and secure below statutory required minimums, the insurer could be subject to regulatory approval of products prior to the marketing, advertising, regulatory actions ranging from increased scrutiny to conservatorship. and sale of such products. State and/or federal regulatory scrutiny of
life and health insurance company and HMO marketing andIn addition, various non-U.S. jurisdictions prescribe minimum advertising practices, including the adequacy of disclosure regardingsurplus requirements that are based upon solvency, liquidity and products and their administration, may result in increased regulation.reserve coverage measures. During 2012, Cigna’s HMOs and life and Products offering limited coverage, such as those Cigna issues throughhealth insurance subsidiaries, as well as non-U.S. insurance the Star HRG business, continue to attract increased regulatorysubsidiaries, were compliant with applicable RBC and non-U.S. scrutiny.surplus rules.
In September 2012, the National Association of Insurance Licensing RequirementsCommissioners adopted the Risk Management and Own Risk and
Solvency Assessment Model Act. The Act provides requirements and Pharmacy Licensure Laws principles for maintaining a group solvency assessment and a risk
Certain Cigna subsidiaries are pharmacies that dispense prescriptionmanagement framework and reflects a broader and more prospective drugs to participants of benefit plans administered or insured byapproach to U.S. insurance regulation. The Act, which includes a Cigna’s HMO and insurance company subsidiaries. These pharmacy-requirement to file an annual ORSA Summary Report in the lead subsidiaries are subject to state licensing requirements and regulationstate of domicile, now must be adopted into law by each state. Cigna’s as well as U.S. Drug Enforcement Agency registration requirements.insurance business in the U.S. will be subject to the requirements that Other laws and regulation affecting Cigna’s pharmacy-subsidiariesare expected to become effective in 2015. Cigna will be prepared to include federal and state laws concerning labeling, packaging,file an ORSA Summary Report with its lead state regulator consistent advertising and adulteration of prescription drugs and dispensing ofwith the requirements. controlled substances.
Cigna’s businesses in the European Union will be subject to the directive on insurance regulation and solvency requirements known as
International Licensure LawsSolvency II. This directive will impose economic risk-based solvency requirements and supervisory rules and is expected to become Cigna’s international subsidiaries are often required to be licensed effective in January 2014, although certain regulators are requiring when entering new markets or starting new operations in certain companies to demonstrate technical capability and comply with jurisdictions. The licensure requirements for these Cigna subsidiaries increased capital levels in advance of the effective date. Cigna’s vary by country and are subject to change. European insurance companies are capitalized at levels consistent with projected Solvency II requirements and in compliance with
Claim Administration, Utilization Review and Relatedanticipated technical capability requirements. Services Certain Cigna subsidiaries contract to provide claim administration,Holding Company Laws utilization management and other related services for the
Cigna’s domestic insurance companies and certain of its HMOs are administration of self-insured benefit plans. These Cigna subsidiaries subject to state laws regulating subsidiaries of insurance holding may be subject to state third-party administration and other licensing companies. Under such laws, certain dividends, distributions and requirements and regulation. other transactions between an insurance or HMO subsidiary and its affiliates may require notification to, or approval by, one or more state
International Regulationsinsurance commissioners. Cigna’s revenue from operations outside the United States exposes theIn December 2010, the NAIC adopted revisions to the Model Company to laws of multiple jurisdictions and the rules andInsurance Holding Company System Regulatory Act and Regulation. regulations of various governing bodies and regulators, includingThe revisions were designed to allow a better understanding of the those related to financial and other disclosures, corporate governance,risks and activities of non-insurance entities within a holding privacy, data protection, data mining, data transfer, labor andcompany system. The main focus of the revisions has been to
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employment, consumer protection and anti-corruption. The Medicare Regulations operations in countries outside the United States:
Several Cigna subsidiaries, including those acquired in the are subject to local regulations in the locations in which Cigna HealthSpring transaction, engage in businesses that are subject to subsidiaries conduct business, federal Medicare regulations such as: in some cases, are subject to regulations in the locations of those offering individual and group Medicare Advantage (HMO) customers, and coverage; in all cases are subject to FCPA. contractual arrangements with the federal government for the
processing of certain Medicare claims and other administrativeFCPA prohibits offering, promising, providing or authorizing others services; andto give anything of value to a foreign government official to obtain or
retain business or otherwise secure a business advantage. Cigna is also those offering Medicare Pharmacy (Part D) products that are subject subject to applicable anti-corruption laws in the jurisdictions in which to federal Medicare regulations. it operates. Additionally, in many countries outside of the U.S., health
In Cigna’s Medicare Advantage business, the Company contracts with care professionals are employed by the government. Therefore, Cigna’s
the Centers for Medicare and Medicaid Services (‘‘CMS’’) to provide dealings with them are subject to regulation under the FCPA.
services to Medicare beneficiaries pursuant to their Medicare Violations of the FCPA and other anti-corruption laws may result in
program. As a result, the Company’s right to obtain payment from severe criminal and civil sanctions as well as other penalties and the
CMS is subject to compliance with numerous and complex SEC and Department of Justice have increased their enforcement
regulations and requirements that are frequently modified and subject activities with respect to FCPA. The UK Bribery Act of 2010, which
to administrative discretion. The marketing and sales activities went into effect in 2011, is an anti-corruption law that applies to all
(including those of third-party brokers and agents) are also heavily companies with a nexus to the United Kingdom and whose scope is
regulated by CMS and other governmental agencies. even broader than the FCPA. It is yet to be seen how the UK Bribery
Several Cigna subsidiaries are also subject to reporting requirementsAct will be enforced, but any voluntary disclosures of FCPA violations pursuant to Section 111 of the Medicare, Medicaid and SCHIPmay be shared with the UK authorities, thus potentially exposing Extension Act of 2007.companies to liability and potential penalties in multiple jurisdictions.
Cigna has internal control policies and procedures and has implemented training and compliance programs for its employees to Federal Audits of Government Sponsored Health Care deter prohibited practices. However, if Cigna’s employees or agents fail Programs to comply with applicable laws governing its international operations,
Participation in government sponsored health care programs subjectsthe Company may face investigations, prosecutions and other legal Cigna to a variety of federal laws and regulations and risks associatedproceedings and actions that could result in civil penalties, with audits conducted under these programs. These audits may occuradministrative remedies and criminal sanctions. See the Risk Factors in years subsequent to Cigna providing the relevant services undersection beginning on page 19 for a discussion of the risks related to audit. These risks may include reimbursement claims as well asoperating globally. potential fines and penalties. For example, with respect to Cigna’s Medicare Advantage business, CMS and the Office of the Inspector
Federal Regulations General perform audits to determine a health plan’s compliance with federal regulations and contractual obligations, including complianceEmployee Retirement Income Security Act and the with proper coding practices (sometimes referred to as RiskPublic Health Service Act Adjustment Data Validation Audits or RADV audits) and compliance
Cigna subsidiaries sell most of their products and services to sponsors with fraud and abuse enforcement practices through Recovery Audit of employee benefit plans that are governed by ERISA. Many of the Contractor (RAC) audits in which third-party contractors conduct health insurance reform provisions of the Patient Protection and post-payment reviews on a contingency fee basis to detect and correct Affordable Care Act were incorporated in ERISA, Cigna subsidiaries improper payments. See ‘‘Global Health Care’’ in Section B beginning are subject to requirements imposed by ERISA affecting claim and on page 2 of this Form 10-K for additional information about Cigna’s appeals procedures for individual insurance and insured and participation in government health-related programs. self-insured group health plans and are expected to comply with these
The Federal government has made investigating and prosecutingrequirements on behalf of the dental, disability, life and accident plans health care fraud and abuse a priority. Fraud and abuse prohibitionsthey administer. These health insurance reform provisions made encompass a wide range of activities, including kickbacks for referralapplicable to group health plans under ERISA were also incorporated of customers, billing for unnecessary medical services, improperinto the Public Health Service Act and are directly applicable to health marketing, and violation of patient privacy rights. The regulationsinsurance issuers (i.e., health insurers and HMOs). and contractual requirements in this area are complex and subject to change and compliance will continue to require significant resources.
CIGNA CORPORATION - 2012 Form 10-K 17
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regulations, regulating data security and requiring security breachHealth Insurance Portability and Accountability Act notification that may apply to Cigna in certain circumstances.Regulations
The federal Health Insurance Portability and Accountability Act of Antitrust Regulations1996 and its implementing regulations (‘‘HIPAA’’) impose
requirements on health insurers, HMOs, health plans, health care Cigna subsidiaries are also engaged in activities that may be providers and clearinghouses. Health insurers and HMOs are further scrutinized under federal and state antitrust laws and regulations. subject to regulations related to guaranteed issuance (for groups with These activities include the administration of strategic alliances with 50 or fewer lives), guaranteed renewal, and portability of health competitors, information sharing with competitors and provider insurance. contracting. HIPAA also imposes minimum standards for the privacy and security of protected health information. HIPAA’s privacy and security Anti-Money Laundering Regulations requirements were expanded by the Health Information Technology
Certain Cigna products (‘‘Covered Products’’ as defined in the Bankfor Economic and Clinical Health Act (‘‘HITECH’’) that enhanced Secrecy Act) are subject to U.S. Department of the Treasurypenalties for HIPAA violations and requires regulated entities to anti-money laundering regulations. Cigna has implementedprovide notification to various parties in the event of a breach of anti-money laundering policies designed to ensure that its Coveredunsecured protected health information. Regulations pursuant to Products are underwritten and sold in compliance with theseHITECH continue to be promulgated and are monitored and regulations. Cigna may also be subject to anti-money laundering lawsimplemented as they are finalized. in non-U.S. jurisdictions where it operates.
HIPAA also established rules that standardize the format and content of certain electronic transactions, including, but not limited to,
Office of Foreign Assets Controleligibility and claims. Federal regulations were issued requiring entities subject to HIPAA to update their transaction formats for The Company is also subject to regulation put forth by the Office of electronic data interchange from HIPAA 4010 to version 5010 Foreign Assets Control of the U.S. Department of the Treasury which standards and convert from the ICD-9 diagnosis and procedure codes administers and enforces economic and trade sanctions based on U.S. to the ICD-10 diagnosis and procedure codes. The ICD-10 foreign policy and national security goals against targeted foreign conversion is required by October 1, 2013, though CMS has countries and regimes, terrorists, international narcotics traffickers, proposed a rule that would delay the implementation for one year those engaged in activities related to the proliferation of weapons of until October 1, 2014. mass destruction, and other threats to the national security, foreign
policy or economy of the United States. In addition, Cigna may be subject to similar regulations in non-U.S. jurisdictions in which itOther Confidentiality Requirements operates.
The federal Gramm-Leach-Bliley Act generally places restrictions on the disclosure of non-public information to non-affiliated third
Investment-Related Regulationsparties, and requires financial institutions, including insurers, to provide customers with notice regarding how their non-public Depending upon their nature, Cigna’s investment management personal information is used, including an opportunity to ‘‘opt out’’ of activities are subject to U.S. federal securities laws, ERISA, and other certain disclosures. State departments of insurance and certain federal federal and state laws governing investment related activities. In many agencies adopted implementing regulations as required by federal law. cases, the investment management activities and investments of Neither the HIPAA nor the Gramm-Leach-Bliley privacy regulations individual insurance companies are subject to regulation by multiple preempt more stringent state laws and regulations that apply to Cigna, jurisdictions. and a number of states have adopted data security laws and
Miscellaneous
Cigna and its principal subsidiaries are not dependent on business submitted by independent brokers and agents, and generally all such from one or a few customers. No one customer accounted for 10% or business is subject to its approval and acceptance. more of Cigna’s consolidated revenues in 2012. Cigna and its Cigna had approximately 35,800 employees as of December 31, principal subsidiaries are not dependent on business from one or a few 2012; 31,400 employees as of December 31, 2011; and 30,600 brokers or agents. In addition, Cigna’s insurance businesses are employees as of December 31, 2010. generally not committed to accept a fixed portion of the business
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PART I ITEM 1A Risk Factors
Risk Factors As a large company operating in a complex industry, Cigna risks and uncertainties that could have a material adverse effect on encounters a variety of risks and uncertainties including those Cigna’s business, liquidity, results of operations or financial condition. identified in this Risk Factor discussion and elsewhere in this report. These risks and uncertainties are not the only ones Cigna faces. Cigna has implemented and maintains enterprise-wide risk Additional risks and uncertainties not presently known to the management processes, in addition to the risk management processes Company or that it currently believes to be immaterial may also within its businesses. The factors discussed below represent significant adversely affect Cigna.
Regulatory and Litigation Risks
causing employers to drop health care coverage for their employees;Health Care Reform legislation, as well as potential additional changes in federal or state regulations, driving potential cost shifting in the health care delivery system to could have a material adverse effect on Cigna’s health insurance companies and HMOs; business, results of operations, financial condition
regulating business practices; and liquidity.
imposing new or increasing taxes and financial assessments; In 2010, Health Care Reform was signed into law, and it is resulting in
limiting the ability to increase premiums to meet costs (includingsignificant changes to the current U.S. health care system. Health denial or delays in approval and implementation of those rates); andCare Reform mandates broad changes in the delivery of health care
benefits that may impact the Company’s current business model, significantly reducing the growth of Medicare program payments. including its relationship with current and future customers,
Accordingly, Health Care Reform, other regulatory reform initiativesproducers and health care providers, products, services, processes and or additional changes in existing laws or regulations, or theirtechnology. Health Care Reform includes, among other requirements, interpretations, could have a material adverse effect on the Company’sprovisions for guaranteed coverage and renewal requirements, business, results of operations, financial condition and liquidity.prohibitions on annual and lifetime limits on the dollar amount of
benefits for essential health services, increased restrictions on The Medicare business acquired with HealthSpring presents rescinding coverage, minimum medical loss ratio and customer rebate additional risks for Cigna, as the Medicare program has been the requirements, a requirement to cover preventive services on a first subject of recent regulatory reform initiatives, including Health Care dollar basis, and greater controls on premium rate increases for Reform. Because Medicare program premiums account for individual and small employer health insurance. It also reduces the substantially all of the acquired business’s revenue, reductions or less Medicare Part D coverage gap and reduces payments to private plans than expected increases in funding for Medicare programs (including offering Medicare Advantage, as well as provides for state insurance the potential effect of sequestration) could significantly reduce the exchanges through which insurers and HMOs will, if qualified, be Company’s profitability, and non-renewal or termination of Medicare able to offer insured plans to individuals and small employers. In contracts would substantially impair the acquired business. addition, the legislation imposes an excise tax on high-cost employer-
In June 2012, the U.S. Supreme Court upheld the constitutionality ofsponsored coverage and annual fees on insurance companies and most parts of Health Care Reform, but considerable uncertaintyHMOs that will generally not be deductible for income tax purposes remains and it is difficult to predict the impact of Health Care Reformand therefore may adversely impact the Company’s effective tax rate. on the business due to the law’s complexity, continuing developmentIt also limits the amount of compensation for executives of insurers of implementing regulations and interpretive guidance. Cigna isthat is tax deductible. unable to predict how these events will develop and what impact they
Certain of the law’s provisions became effective between 2010 and will have on Health Care Reform, and in turn, on Cigna. 2012 and other provisions will take effect from 2013 to 2018. Health
For additional information on Health Care Reform, see ‘‘Business –Care Reform left many of the details of the new law to be set forth Regulation’’ in Section H beginning on page 14 of this Form 10-Kthrough regulations. While federal agencies have published interim and the ‘‘Introduction’’ section of MD&A beginning on page 32 offinal regulations with respect to certain requirements, many issues this Form 10-K. See also the description of minimum medical lossremain uncertain, thus the full impact on the Company is not yet ratio and customer rebate requirements in the ‘‘Business – B. Globalknown. This legislation could impact the Company significantly by: Health Care’’ section beginning on page 2 of this Form 10-K.
disrupting the employer-based market, which is currently the primary business model for the Company’s Global Health Care segment;
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Court decisions and legislative activity may increase Cigna’s exposureCigna’s business is subject to substantial government for any of these types of claims. In some cases, substantialregulation that, along with new regulation, could non-economic or punitive damages may be sought. Cigna currentlyincrease its costs of doing business and have a has insurance coverage for some of these potential liabilities. Other
material adverse effect on its profitability. potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be sufficient toCigna’s business is regulated at the international, federal, state and cover the entire damages awarded. In addition, certain types oflocal levels. The laws and rules governing Cigna’s business and related damages, such as punitive damages, may not be covered by insurance,interpretations are increasing in number and complexity, are subject and insurance coverage for all or certain forms of liability may becometo frequent change and can be inconsistent or even conflict with each unavailable or prohibitively expensive in the future. It is possible thatother. As a public company with global operations, Cigna is subject to the resolution of one or more of the legal matters and claims describedthe laws of multiple jurisdictions and the rules and regulations of could result in losses material to Cigna’s results of operations, financialvarious governing bodies, including those related to financial and condition and liquidity.other disclosures, corporate governance, privacy, data protection,
labor and employment, consumer protection, tax and A description of material pending legal actions and other legal matters anti-corruption. Cigna must identify, assess and respond to new in which Cigna is currently involved is included in Note 24 to Cigna’s trends in the legislative and regulatory environments as well as Consolidated Financial Statements included in this Form 10-K. The effectively comply with the various existing regulations applicable to outcome of litigation and other legal matters is always uncertain, and its business. Existing or future laws, rules, regulatory interpretations outcomes that are not justified by the evidence or existing law can or judgments could force Cigna to change how it does business, occur. Cigna believes that it has valid defenses to the legal matters restrict revenue and enrollment growth, increase health care, pending against it and is defending itself vigorously. technology and administrative costs, including pension costs and
In addition, there is heightened review by federal and state regulatorscapital requirements, require enhancements to the Company’s of health care and group disability insurance industry business andcompliance infrastructure and internal controls environment. Existing reporting practices. Cigna is frequently the subject of regulatoryor future laws and rules could also require Cigna to take other actions market conduct and other reviews, audits and investigations by statesuch as changing its business practices for disability payments thereby insurance and health and welfare departments, attorneys general, theincreasing Cigna’s liability in federal and state courts for coverage Centers for Medicare and Medicaid Services (CMS) and, the Office ofdeterminations, contract interpretation and other actions. Inspector General (OIG). With respect to Cigna’s Medicare
In addition, Cigna must obtain and maintain regulatory approvals to Advantage business, CMS and OIG perform audits to determine a market many of its products, to increase prices for certain regulated health plan’s compliance with federal regulations and contractual products and to consummate some of its acquisitions and divestitures. obligations, including compliance with proper coding practices Delays in obtaining or failure to obtain or maintain these approvals (sometimes referred to as Risk Adjustment Data Validation Audits or could reduce the Company’s revenue or increase its costs. For further RADV audits) and compliance with fraud and abuse enforcement information on regulatory matters relating to Cigna, see ‘‘Business – practices through Recovery Audit Contractor (RAC) audits in which Regulation’’ in Section H of this Form 10-K. third-party contractors conduct post-payment reviews on a
contingency fee basis to detect and correct improper payments. In 2012, Cigna significantly expanded its Medicare business with itsCigna faces risks related to litigation, regulatory acquisition of HealthSpring. This expansion of its Medicare businessaudits and investigations. may increase the risks the Company faces from lawsuits, regulatory
Cigna is routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other regulatory matters. These regulatory audits, investigations and other legal matters arising in the ordinary reviews could result in changes to or clarifications of Cigna’s business course of business, including that of administering and insuring practices or retroactive adjustments to certain premiums, and also employee benefit programs. These could include benefit claims, could result in significant fines, penalties, civil liabilities, criminal breach of contract actions, tort claims, disputes regarding reinsurance liabilities or other sanctions, that could have a material adverse effect arrangements, employment and employment discrimination-related on the Company’s business, results of operation, financial condition suits, employee benefit claims, wage and hour claims, tax, privacy, and liquidity. Additionally, the employee benefits industry remains intellectual property and real estate related disputes. In addition, under scrutiny by various state and federal government agencies and Cigna incurs and likely will continue to incur liability for claims could be subject to governmental efforts to bring criminal actions in related to its health care business, such as failure to pay for or provide circumstances that could previously have given rise only to civil or health care, poor outcomes for care delivered or arranged, provider administrative proceedings. disputes, including disputes over compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against the industry.
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Business Risks
organizational processes smoothly and communicate roles andFuture performance of Cigna’s business will depend responsibilities clearly.on the Company’s ability to execute on its strategic
and operational initiatives effectively. As a global company, Cigna faces political, legal,The future performance of Cigna’s business will depend in large part operational, regulatory, economic and other riskson Cigna’s ability to effectively implement and execute its strategic that present challenges and could negatively affect itsand operational initiatives that include: (1) driving growth in targeted
geographies, product lines, buying segments and distribution multinational operations or the Company’s long-term channels; (2) improving its strategic and financial flexibility; and growth. (3) pursuing additional opportunities in high-growth markets with
As a global company, Cigna’s business is increasingly exposed to risksparticular focus on individuals. inherent in foreign operations. These risks, which can vary
Successful execution of these strategic and operational initiatives substantially by market, include political, legal, operational, depends on a number of factors including: regulatory, economic and other risks, including government
intervention and censorship that the Company does not face in itsdifferentiating Cigna’s products and services from those of its U.S. operations. The global nature of Cigna’s business and operationscompetitors by leveraging its health advocacy capabilities and other presents challenges including, but not limited, to those arising from:strengths in targeted markets, geographies and buyer segments;
varying regional and geopolitical business conditions and demands;developing and introducing new products or programs, particularly in response to government regulation and the increased focus on discriminatory regulation, nationalization or expropriation of assets; consumer directed products;
price controls or other pricing issues and exchange controls or other identifying and introducing the proper mix or integration of restrictions that prevent it from transferring funds from these products that will be accepted by the marketplace; operations out of the countries in which it operates or converting
local currencies that our foreign operations hold into U.S. dollars orattracting and retaining sufficient numbers of qualified employees; other currencies;
attracting and engaging a sufficient number of qualified partners, foreign currency exchange rates and fluctuations that may have anincluding physicians partners in an environment with a growing impact on the future costs or on future sales and cash flows from theshortage of primary care physicians; Company’s international operations, and any measures that it may
effectively managing balance sheet exposures, including the implement to reduce the effect of volatile currencies and other risks Company’s pension funding obligation; of its international operations may not be effective;
improving medical cost competitiveness in targeted markets; and reliance on local sales forces for some of its operations in countries that may have labor problems and less flexible employeereducing Cigna HealthCare’s medical operating expenses to achieve relationships that can be difficult and expensive to terminate, orsustainable benefits. where changes in local regulation or law may disrupt the business
If these initiatives fail or are not executed effectively, it could harm the operations; Company’s consolidated financial position and results of operations.
risk associated with managing Cigna’s partner relationships inFor example, reducing operating expenses while maintaining the accordance with business objectives in countries where our foreignnecessary resources and the Company’s talent pool is important to the businesses voluntarily operate or are required to operate with localCompany and, if not managed effectively, could have long-term business partners;effects on the business such as failure to maintain or improve the
quality of its products and limiting its ability to retain or hire key challenges associated with managing more geographically diverse personnel. In addition, to succeed, the Company must align its operations and projects; organization to its strategy. Cigna must effectively integrate its
the need to provide sufficient levels of technical support in differentoperations, including its most recently acquired businesses, actively locations;work to ensure consistency throughout the organization, and promote
a global mind-set and a focus on individual customers. If the political instability or acts of war, terrorism, natural disasters, Company fails to do so, it may be unable to grow as planned, or the pandemics in locations where Cigna operates; and result of expansion may be unsatisfactory. Also, the current
general economic and political conditions.competitive, economic and regulatory environment will require Cigna’s organization to adapt rapidly and nimbly to new These factors may increase in importance as Cigna continues to opportunities and challenges. The Company will be unable to do so if expand globally, and any one of these challenges could negatively it does not make important decisions quickly, define its appetite for affect the Company’s operations or its long-term growth. Currently, risk specifically, implement new governance, managerial and South Korea is the single largest geographic market in Cigna’s Global
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Supplemental Benefits segment. South Korea generated 54% of the outsources selected services or selected functions to third parties in segment’s revenues and 90% of the segment’s earnings in 2012. Due foreign jurisdictions, the Company could be exposed to risks inherent to the concentration of business in South Korea, the Global in conducting business outside of the United States, including Supplemental Benefits segment is exposed to potential losses resulting international economic and political conditions, and the additional from economic and geopolitical developments in that country, as well costs associated with complying with foreign laws and fluctuations in as foreign currency movements affecting the South Korean currency, currency values. that could have a significant impact on the segment’s results and the
The expanding role of third party service vendors may also require Company’s consolidated financial results. Further, expansion into new
changes to Cigna’s existing operations and the adoption of new markets may require considerable management time before any
procedures and processes for retaining and managing these providers, significant revenues and earnings are generated, that could divert
as well as redistributing responsibilities as needed, in order to realize management’s attention from other strategic activities.
the potential productivity and operational efficiencies. Effective International operations also require the Company to devote management, development and implementation of its outsourcing significant management resources to implement its controls and strategies are important to Cigna’s business and strategy. If there are systems in new markets, to comply with the U.S. anti-bribery and delays or difficulties in enhancing business processes or its third party anti-corruption as well as anti-money laundering provisions and providers do not perform as anticipated, Cigna may not fully realize similar laws in local jurisdictions and to overcome logistical and other on a timely basis the anticipated economic and other benefits of the challenges based on differing languages, cultures and time zones. outsourcing projects or other relationships it enters into with key Violations of these laws and regulations could result in fines, criminal vendors, which could result in substantial costs or regulatory sanctions against the Company, its officers or employees, prohibitions compliance issues, divert management’s attention from other strategic on the conduct of its business, and reputational harm. Cigna must activities, negatively affect employee morale or create other regularly reassess the size, capability and location of its global operational or financial problems for the Company. Terminating or infrastructure and make appropriate changes, and must have effective transitioning arrangements with key vendors could result in change management processes and internal controls in place to additional costs and risks of operational delays, potential errors and address changes in its business and operations. Cigna’s success possible control issues as a result of the termination or during the depends, in part, on its ability to anticipate these risks and manage transition phase. these difficulties, and the failure to do so could have a material adverse effect on Cigna’s business, results of operations, financial condition,
Acquisitions, including HealthSpring, involve risksliquidity and long-term growth. and the Company may not realize the expected benefits because of integration difficulties,
Successful management of Cigna’s outsourcing underperformance relative to Cigna’s expectations projects and key vendors including taking steps to and other challenges. ensure that third parties that obtain access to
As part of the Company’s growth strategy, Cigna regularly considerssensitive personal information maintain its strategic transactions, including acquisitions, with the expectationconfidentiality and security, is important to its that these transactions will result in various benefits. Cigna’s ability to
business. achieve the anticipated benefits of acquisitions is subject to a number of uncertainties, including whether Cigna integrates its acquiredTo improve operating costs, productivity and efficiencies, Cigna companies in an efficient and effective manner, the performance ofoutsources selected functions to third parties. Cigna takes steps to the acquired businesses and general competitive factors in themonitor and regulate the performance of independent third parties marketplace. Failure to achieve these anticipated benefits could resultwho provide services or to whom the Company delegates selected in increased costs, decreases in expected revenues, goodwillfunctions. These third parties include information technology system impairment charges, and diversion of management’s time and energy.providers, independent practice associations, providers of medical
management services, call center and claim service providers and In January 2012, Cigna acquired HealthSpring, an operator of various types of other service providers. Medicare Advantage coordinated care plans in 13 states and the
District of Columbia. The success of the HealthSpring acquisitionArrangements with key vendors may make Cigna’s operations depends on Cigna’s ability to integrate HealthSpring with its existingvulnerable if third parties fail to satisfy their obligations to the businesses and the performance of the acquired business. TheCompany, including their obligations to maintain and protect the potential difficulties of integrating the operations of HealthSpring andsecurity and confidentiality of the Company’s information and data, achieving the performance expected of the acquired businessesas a result of their performance, changes in their own operations, include: implementing the Company’s business plan for the combinedfinancial condition, or other matters outside of Cigna’s control. The business; executing Cigna’s growth plans by leveraging its capabilitiesCompany has limited control over the actions of third-party providers and those of the businesses acquired in serving the Seniors segment;even though contracts provide certain protections. Noncompliance unanticipated issues in integrating logistics, information,with any privacy or security laws and regulations or any security communications and other systems; changes in applicable laws andbreach involving one of its third-party service providers could have a regulations or conditions imposed by regulators; retaining keymaterial adverse effect on its business, results of operations, financial employees; operating risks inherent in HealthSpring’s business andcondition, liquidity and reputation. In addition, to the extent Cigna
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Cigna’s business; retaining and growing membership; renewing or processed as quickly as clients desire, decreased levels of client service successfully rebidding for contracts with CMS, including maintaining and client satisfaction, and harm to Cigna’s reputation. Because or improving upon the CMS performance plan star ratings; leveraging Cigna’s information technology and telecommunications systems the information technology platform of the acquired businesses; and interface with and depend on third-party systems, Cigna could unanticipated issues, costs, obligations and liabilities. If Cigna is experience service denials if demand for such service exceeds capacity unable to integrate the HealthSpring business successfully, or if the or a third-party system fails or experiences an interruption. If acquired business’ performance evaluations under contracts with sustained or repeated, such a business interruption, systems failure or CMS are adverse, these factors could have a material adverse effect on service denial could result in a deterioration of Cigna’s ability to pay Cigna’s business, results of operations, financial condition and claims in a timely manner, provide customer service, write and process liquidity and could affect expectations for future revenue and earnings new and renewal business, or perform other necessary corporate growth. functions, and could have a material adverse effect on Cigna’s
business, results of operations, financial condition and liquidity. Effective internal controls are necessary for the Company to provide reliable and accurate financial reports and to mitigate the risk of fraud. Like other companies in our industry, we have been and may in the The integration of acquired businesses is likely to result in Cigna’s future be the subject of cybersecurity breaches. Computer systems systems and controls becoming increasingly complex and more may be vulnerable to physical break-ins, computer viruses, difficult to manage. Any difficulties in the assimilation of acquired programming errors, attacks by third parties or similar disruptive businesses into the Company’s control system could cause it to fail to problems. If a cybersecurity breach of Cigna’s computer systems or the meet its financial reporting obligations. Ineffective internal controls computer systems of a third-party service provider occurs, it could also could also cause investors to lose confidence in the Company’s interrupt Cigna’s operations and damage Cigna’s reputation. Cigna reported financial information, which could have a negative effect on could also be subject to liability if sensitive customer information is the trading price of Cigna’s stock and its access to capital. misappropriated. Any publicized compromise of security could result
in a loss of existing or new customers, increased operating expenses, financial losses, and additional litigation or other claims that could
Cigna’s business depends on its ability to properly have a material adverse effect on Cigna’s business, results of maintain the integrity of its data and the operations, financial condition and liquidity. uninterrupted operation of its systems and business functions, including information technology and
Effective investment in and execution ofother business systems. improvements in the Company’s information
Cigna’s business depends on effective information systems and the technology infrastructure and functionality are integrity and timeliness of the data it uses to run its business. Cigna’s important to its strategy and failure to do so may business strategy requires providing customers and health care impede its ability to deliver the services required in professionals with Internet-enabled products and information to meet
the evolving marketplace at a competitive cost.their needs. Cigna’s ability to adequately price its products and services, establish reserves, provide effective and efficient service to its Cigna’s information technology strategy and execution are critical to customers, and to timely and accurately report its financial results also the continued success of the Company. Increasing regulatory and depends significantly on the integrity of the data in its information legislative mandated changes will place additional demands on Cigna’s systems. If the information Cigna relies upon to run its businesses information technology infrastructure, which could have a direct were found to be inaccurate or unreliable due to fraud or other error, impact on available resources for projects more directly tied to or if Cigna (or the third-party service parties it utilizes) were to fail to strategic initiatives. The Company must continue to invest in maintain information systems and data integrity effectively, the long-term solutions that will enable it to anticipate customer needs Company could experience difficulties with: operational disruptions and expectations, enhance the customer experience and act as a (that may impact customers and health care professionals); differentiator in the market. Cigna’s success is dependent, in large determining medical cost estimates and establishing appropriate part, on maintaining the effectiveness of existing technology systems pricing; retaining and attracting customers; regulatory compliance and continuing to deliver and enhance technology systems that and other challenges. support the Company’s business processes in a cost-efficient and
resource-efficient manner. Cigna also must develop new systems toIn addition, Cigna’s business is highly dependent upon its ability to meet current market standards and keep pace with continuingperform, in an efficient and uninterrupted fashion, its necessary changes in information processing technology, evolving industry andbusiness functions, such as: claims processing and payment; internet regulatory standards and customer needs. Failure to do so may impedesupport and customer call centers; and the processing of new and the Company’s ability to deliver services at a competitive cost.renewal business. Failure to comply with relevant regulations, a power Furthermore, system development projects are long-term in nature,outage, pandemic, cyber-attack or other failure of one or more of may be more costly than expected to complete and may not deliver theinformation technology, telecommunications or other systems could expected benefits upon completion.cause slower system response times resulting in claims not being
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PART I ITEM 1A Risk Factors
Effective prevention, detection and control systems In operating its onsite clinics and medical facilities, are critical to maintain regulatory compliance and the Company may be subject to additional liability, prevent fraud and failure of these systems could that could result in significant time and expense and adversely affect the Company. divert management’s attention from other strategic
activities.Failure of Cigna’s prevention, detection or control systems related to regulatory compliance or the failure of employees to comply with The Company employs physicians, nurse practitioners, nurses and Cigna’s internal policies, including data systems security or unethical other health care professionals at onsite low acuity and primary care conduct by managers and employees, could adversely affect Cigna’s clinics it operates for the Company’s customers (as well as certain reputation and also expose it to litigation and other proceedings, fines clinics for Company employees). Through the HealthSpring business and penalties. Federal and state governments have made investigating acquired in 2012, Cigna also operates LivingWell health centers and and prosecuting health care and other insurance fraud and abuse a health care practices for its customers. In addition, the Company priority. Fraud and abuse prohibitions encompass a wide range of owns and operates medical facilities in the Phoenix, Arizona activities, including kickbacks for referral of members, billing for metropolitan area, including multispecialty health care centers, unnecessary medical services, improper marketing, and violations of outpatient surgery and urgent care centers, low acuity clinics, patient privacy rights. The regulations and contractual requirements laboratory, pharmacy and other operations that employ primary care applicable to the Company are complex and subject to change. In as well as specialty care physicians and other types of health care addition, ongoing vigorous law enforcement, a highly technical professionals. As a direct employer of health care professionals and as regulatory scheme and the Dodd-Frank legislation and related an operator of primary and low-acuity care clinics and other types of regulations being adopted to enhance regulators’ enforcement powers medical facilities, the Company is subject to liability for negligent and whistleblower incentives and protections, mean that Cigna’s acts, omissions, or injuries occurring at one of its clinics or caused by compliance efforts in this area will continue to require significant one of its employees. Even if any claims brought against the Company resources. were unsuccessful or without merit, it would have to defend against
such claims. The defense of any actions may be time-consuming andIn addition, provider or customer fraud that is not prevented or costly, and may distract management. As a result, Cigna may incurdetected could impact Cigna’s medical costs or those of its self-insured significant expenses that could have a material adverse effect oncustomers. Further, during an economic downturn, Cigna’s segments, Cigna’s business, results of operations, financial condition, andincluding Global Health Care, Group Disability and Life and Global liquidity.Supplemental Benefits, may see increased fraudulent claims volume
that may lead to additional costs due to an increase in disputed claims and litigation. Cigna faces competitive pressure, particularly price
competition, that could result in premiums which are insufficient to cover the cost of the health careCigna’s pharmacy benefit management business is services delivered to its members and inadequatesubject to a number of risks and uncertainties, in medical claims reserves.addition to those Cigna faces with its health care
business. While health plans compete on the basis of many factors, including service quality of clinical resources, claims administration services andCigna’s pharmacy benefit management business is subject to federal medical management programs, and quality, sufficiency and costand state regulation, including federal and state anti-remuneration effectiveness of health care professional network relationships, Cignalaws, ERISA, HIPAA and laws related to the operation of Internet and expects that price will continue to be a significant basis ofmail-service pharmacies. Noncompliance with such regulations could competition. Cigna’s customer contracts are subject to negotiation ashave a material adverse effect on Cigna’s business, results of customers seek to contain their costs, and customers may elect tooperations, financial condition, liquidity and reputation. reduce benefits in order to constrain increases in their benefit costs.
The Company’s pharmacy benefit management business would also Such an election may result in lower premiums for the Company’s be adversely affected by an inability to contract on favorable terms products, and even though it may also reduce Cigna’s costs, it could with pharmaceutical manufacturers and could suffer claims and still adversely affect Cigna’s financial results. Alternatively, the reputational harm in connection with purported errors by Cigna’s Company’s customers may purchase different types of products that mail order or retail pharmacy businesses. Disruptions at any of the are less profitable, or move to a competitor to obtain more favorable Company’s pharmacy business facilities due to failure of technology or premiums. any other failure or disruption to these systems or to the infrastructure
Factors such as business consolidations, strategic alliances, legislativedue to fire, electrical outage, natural disaster, acts of terrorism or some reform and marketing practices create pressure to contain premiumother catastrophic event could reduce Cigna’s ability to process and price increases, despite increasing medical costs. For example, thedispense prescriptions and provide products and services to customers, Gramm-Leach-Bliley Act gives banks and other financial institutionsthat could have a material adverse effect on Cigna’s business, results of the ability to be affiliated with insurance companies that may lead tooperations, financial condition and liquidity. new competitors with significant financial resources in the insurance and health benefits fields. The Company’s product margins and
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growth depend, in part, on its ability to compete effectively in its Substantially all of the Company’s investment assets are in fixed markets, set rates appropriately in highly competitive markets to keep interest-yielding debt securities of varying maturities, fixed or increase its market share, increase membership as planned, and redeemable preferred securities and commercial mortgage loans. The avoid losing accounts with favorable medical cost experience while value of these investment assets can fluctuate significantly with retaining or increasing membership in accounts with unfavorable changes in market conditions. A rise in interest rates could reduce the medical cost experience. value of the Company’s investment portfolio and increase interest
expense if Cigna were to access its available lines of credit. Cigna’s profitability depends, in part, on its ability to accurately predict and control future health care costs through underwriting The Company is also exposed to interest rate and equity risk criteria, provider contracting, utilization management and product associated with the Company’s pension and other post-retirement design. Premiums in the health care business are generally fixed for obligations. Sustained declines in interest rates could have an adverse one-year periods. Accordingly, future cost increases in excess of impact on the funded status of the Company’s pension plans and the medical cost projections reflected in pricing cannot generally be Company’s reinvestment yield on new investments. recovered in the current contract year through higher premiums. Although Cigna bases the premiums it charges on its estimate of
A downgrade in the financial strength ratings offuture health care costs over the fixed premium period, actual costs Cigna’s insurance subsidiaries could adversely affectmay exceed what was estimated and reflected in premiums. Factors new sales and retention of current business, and athat may cause actual costs to exceed premiums include: medical cost
inflation; higher than expected utilization of medical services; the downgrade in Cigna’s debt ratings would increase the introduction of new or costly treatments and technology; and cost of borrowed funds and affect the Company’s membership mix. ability to access capital. Cigna records medical claims reserves for estimated future payments. Financial strength, claims paying ability and debt ratings by The Company continually reviews estimates of future payments recognized rating organizations are an important factor in establishing relating to medical claims costs for services incurred in the current and the competitive position of insurance companies and health benefits prior periods and makes necessary adjustments to its reserves. companies. Ratings information by nationally recognized ratings However, actual health care costs may exceed what was estimated. agencies is broadly disseminated and generally used throughout the
industry. Cigna believes the claims paying ability and financial strength ratings of its principal insurance subsidiaries are an importantSignificant stock market declines could result in factor in marketing its products to certain of Cigna’s customers. Inadditional pension obligations, increased funding for addition, Cigna Corporation’s debt ratings impact both the cost and
those obligations, and increased pension plan availability of future borrowings, and accordingly, its cost of capital. expenses. Each of the rating agencies reviews Cigna’s ratings periodically and
there can be no assurance that current ratings will be maintained inCigna currently has unfunded obligations in its frozen pension plans. the future. In addition, a downgrade of these ratings could make itA significant decline in the value of the plan’s equity and fixed income more difficult to raise capital and to support business growth atinvestments or unfavorable changes in applicable laws or regulations Cigna’s insurance subsidiaries.could materially increase Cigna’s expenses and change the timing and
amount of required plan funding that could reduce the cash available Insurance ratings represent the opinions of the rating agencies on the to Cigna, including its subsidiaries. See Note 10 to Cigna’s financial strength of a company and its capacity to meet the Consolidated Financial Statements for more information on the obligations of insurance policies. The principal agencies that rate Company’s obligations under the pension plan. Cigna’s insurance subsidiaries characterize their insurance rating scales
as follows:
Significant changes in market interest rates affect the A.M. Best Company, Inc. (‘‘A.M. Best’’), A++ to S (‘‘Superior’’ to ‘‘Suspended’’);value of Cigna’s financial instruments that promise a
fixed return or benefit and the value of particular Moody’s Investors Service (‘‘Moody’s’’), Aaa to C (‘‘Exceptional’’ to assets and liabilities. ‘‘Lowest’’); As an insurer, Cigna has substantial investment assets that support Standard & Poor’s Corp. (‘‘S&P’’), AAA to R (‘‘Extremely Strong’’ insurance and contractholder deposit liabilities. Generally low levels to ‘‘Regulatory Action’’); and of interest rates on investments, such as those experienced in United
Fitch, Inc. (‘‘Fitch’’), AAA to D (‘‘Exceptionally Strong’’ to ‘‘OrderStates and foreign financial markets during recent years, have of Liquidation’’).negatively impacted the level of investment income earned by the
Company in recent periods, and such lower levels of investment income would continue if these lower interest rates were to continue.
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As of February 28, 2013, the insurance financial strength ratings were as follows for the Cigna subsidiaries, Connecticut General Life Insurance Company (‘‘CGLIC’’), Life Insurance Company of North America (‘‘LINA’’) and Cigna Health & Life Insurance Company (‘‘CHLIC’’):
CGLIC LINA CHLIC Insurance Ratings (1) Insurance Ratings (1) Insurance Ratings (1)
A.M. Best A A A (‘‘Excellent,’’ 3rd of 16) (‘‘Excellent,’’ 3rd of 16) (‘‘Excellent,’’ 3rd of 16)
Moody’s A2 A2 A2 (‘‘Good,’’ 6th of 21) (‘‘Good,’’ 6th of 21) (‘‘Good,’’ 6th of 21)
S&P A A (‘‘Strong,’’ 6th of 21) (Not Rated) (‘‘Strong,’’ 6th of 21)
Fitch A A (‘‘Strong,’’ 6th of 19) (‘‘Strong,’’ 6th of 19) (Not Rated)
(1) Includes the rating assigned, the agency’s characterization of the rating and the position of the rating in the agency’s rating scale (e.g., CGLIC’s rating by A.M. Best is the 3rd highest rating awarded in its scale of 16).
and uncertainty regarding the U.S. fiscal position, geopolitical issues,Global market, economic and geopolitical the availability and cost of credit and other capital, consumerconditions may cause fluctuations in equity market spending and other factors continue to negatively impact expectationsprices, interest rates and credit spreads, which for the U.S. and global economy. Unfavorable economic conditions
could impact the Company’s ability to raise or could cause lower enrollment in our plans and negatively impact the deploy capital as well as affect the Company’s demand for certain of our products and services as employers try to overall liquidity. reduce their operating costs. As a result, they may modify, delay or
cancel plans to purchase the Company’s products, may make changesIf the equity markets and credit market experience extreme volatility in the mix of products purchased that are unfavorable to theand disruption, there could be downward pressure on stock prices and Company, or may be forced to reduce their workforces. Specifically,credit capacity for certain issuers without regard to those issuers’ higher unemployment rates as a result of an economic downturnunderlying financial strength. Extreme disruption in the credit could lead to lower enrollment in the Company’s employer groupmarkets could adversely impact the Company’s availability and cost of plans, lower enrollment in our non-employer individual plans and acredit in the future. In addition, unpredictable or unstable market higher number of employees opting out of Cigna’s employer groupconditions or continued pressure in the global or U.S. economy, such plans. The adverse economic conditions could also cause employers toas the sovereign debt crisis in the European Union and uncertainty stop offering certain health care coverage as an employee benefit orregarding the U.S. fiscal position, including with respect to the federal elect to offer this coverage on a voluntary, employee-funded basis as adebt ceiling, could result in reduced opportunities to find suitable means to reduce their operating costs. All of these developments couldopportunities to raise capital. lead to a decrease in Cigna’s membership levels and premium and fee
In November 2011, Cigna issued $2.1 billion in aggregate principal revenues. Additionally, Cigna’s previous disability claim experience amount of senior notes to finance part of the cost for the and industry data indicate that submitted disability claims rise under HealthSpring acquisition. As of December 31, 2012, the Company’s adverse economic conditions, although the impact of the current outstanding long-term debt totaled $5.0 billion. Cigna’s increased adverse economic conditions is not clear. Further, if customers are not debt obligations could make the Company more vulnerable to general successful in generating sufficient revenue or are precluded from adverse economic and industry conditions and require the Company securing financing, they may not be able to pay, or may delay payment to dedicate increased cash flow from operations to the payment of of, accounts receivable that are owed to the Company. Further, our principal and interest on its debt, thereby reducing the funds it has customers or potential customers may force us to compete more available for other purposes, such as investments in ongoing vigorously on factors such as price and service to retain or obtain their businesses, acquisitions, dividends and stock repurchases. In these business. All of these could lead to a decrease in our membership levels circumstances, the Company’s ability to execute on its strategy may be and revenues, and could materially and adversely affect our business, limited, its flexibility in planning for or reacting to changes in its results of operations and financial condition. In addition, a prolonged business and market conditions may be reduced, or its access to capital unfavorable economic environment could adversely impact the markets may be limited such that additional capital may not be financial position of hospitals and other care providers, which could available or may only be available on unfavorable terms. increase our medical costs as hospitals and other care providers
attempt to maintain revenue levels in their efforts to adjust to their own economic challenges. The same conditions that may affect
Unfavorable developments in economic conditions Cigna’s customers and network also could adversely affect its vendors, may adversely affect our business, results of causing them to significantly and quickly increase their prices or operations and financial condition. reduce their output. Cigna’s business depends on its ability to perform
its necessary business functions in an efficient and uninterruptedThe economic conditions in the U.S. and globally continue to be fashion.challenging. Continued concerns about slow economic growth, high
unemployment rates, the sovereign debt crisis in the European Union
26 CIGNA CORPORATION - 2012 Form 10-K
PART I ITEM 1A Risk Factors
During a prolonged unfavorable economic environment, state and reinsured by Berkshire Hathaway Life Insurance Company of federal budgets could be materially and adversely affected, resulting in Nebraska on February 4, 2013. reduced reimbursements or payments in federal and state government
Under all reinsurance arrangements, reinsurers assume insured losses, coverage programs, such as Medicare and social security. In addition,
subject to certain limitations or exceptions that may include a loss the state and federal budgetary pressures could cause the government
limit. These arrangements also subject Cigna to various obligations, to impose new or a higher level of taxes or assessments on us, such as
representations and warranties with the reinsurers. Reinsurance does premium taxes on insurance companies and health maintenance
not relieve the Company of liability as the originating insurer. Cigna organizations and surcharges or fees on select fee-for-service and
remains liable to the underlying policyholders if a reinsurer defaults capitated medical claims. Although we could attempt to mitigate or
on obligations under the reinsurance arrangement. Although the cover our exposure from such increased costs through, among other
Company regularly evaluates the financial condition of reinsurers to things, increases in premiums, there can be no assurance that we will
minimize exposure to significant losses from reinsurer insolvencies, be able to mitigate or cover all of such costs which may have a material
reinsurers may become financially unsound. If a reinsurer fails to meet adverse effect on our business, results of operations, financial
its obligations under the reinsurance contract or if the liabilities condition and liquidity.
exceed any applicable loss limit, the Company will be forced to cover the claims on the reinsured policies.
Cigna is subject to the credit risk of its reinsurers. The collectability of amounts due from reinsurers is subject to uncertainty arising from a number of factors, including whether theCigna enters into reinsurance arrangements with other insurance insured losses meet the qualifying conditions of the reinsurancecompanies, primarily to limit losses from large exposures or to permit contract, whether reinsurers or their affiliates have the financialrecovery of a portion of direct losses. The Company may also enter capacity and willingness to make payments under the terms of theinto reinsurance arrangements in connection with acquisition or reinsurance contract, and the magnitude and type of collateraldivestiture transactions where the underwriting company is not being supporting the Company’s reinsurance recoverable, such as byacquired or sold. The run-off businesses that Cigna has effectively sufficient qualifying assets in trusts or letters of credit issued.exited through reinsurance include, among others: the retirement Although a portion of the Company’s reinsurance exposures arebenefit business reinsured by Prudential Retirement Insurance and secured, the inability to collect a material recovery from a reinsurerAnnuity Company; the individual life insurance and annuity business could have a material adverse effect on the Company’s results ofreinsured by Lincoln National Life Insurance Company and Lincoln operations, financial condition and liquidity.Life and Annuity of New York; and the VADBe and GMIB businesses
CIGNA CORPORATION - 2012 Form 10-K 27
PART I ITEM 1B Unresolved Staff Comments
Unresolved Staff Comments None.
Properties Cigna’s global real estate portfolio consists of approximately Services, Core Medical and Service Operations and the domestic 8.1 million square feet of owned and leased properties. Our domestic office of Cigna’s Global Supplemental Benefits business are the Wilde portfolio has approximately 6.7 million square feet in 40 states, the Building located at 900 Cottage Grove Road in Bloomfield, District of Columbia, and Puerto Rico. Our International properties Connecticut (Cigna’s corporate headquarters) and Two Liberty Place contain approximately 1.4 million square feet located throughout the located at 1601 Chestnut Street in Philadelphia, Pennsylvania. The following countries: Belgium, Canada, China, France, Germany, Wilde Building measures approximately 833,000 square feet and is Hong Kong, India, Indonesia, Ireland, Italy, Malaysia, Netherlands, owned, while Two Liberty Place measures approximately 462,000 New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland, square feet and is leased office space. Taiwan, Thailand, Turkey, United Arab Emirates, and the United
Cigna believes its properties are adequate and suitable for its business Kingdom.
as presently conducted. The foregoing does not include information Our principal, domestic office locations, including various support on investment properties. operations, along with Group Disability and Life Insurance, Health
Legal Proceedings The information contained under ‘‘Litigation and Other Legal Matters’’ in Note 24 to Cigna’s Financial Statements beginning on page 122 of this Form 10-K, is incorporated herein by reference.
Mine Safety Disclosures Not applicable.
28 CIGNA CORPORATION - 2012 Form 10-K
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
PART I EXECUTIVE OFFICERS OF THE REGISTRANT
All officers are elected to serve for a one-year term or until their NICOLE S. JONES, 42, Executive Vice President and General successors are elected. Principal occupations and employment during Counsel of Cigna beginning June 2011; Senior Vice President and the past five years are listed below. General Counsel of Lincoln Financial Group from May 2010 until
June 2011; Vice President and Deputy General Counsel of Cigna MARK L. BOXER, 53, Executive Vice President and Global Chief
from April 2008 until May 2010; Vice President and Chief Counsel Information Officer of Cigna beginning April 2011; Deputy Chief
of Domestic Health Service, Securities and Investment Law of Cigna Information Officer, Xerox Corporation; Group President,
from September 2006 until April 2008; and Corporate Secretary of Government Health Care, for Xerox Corporation/Affiliated
Cigna from September 2006 until April 2010. Computer Services from March 2009 until April 2011; Executive Vice President and President of Wellpoint’s Operations, Technology MATTHEW G. MANDERS, 51, President, Regional and and Government Services unit, as well as other senior management Operations beginning November 2011; President, U.S. Service, roles at WellPoint from November 2000 until November 2008. Clinical and Specialty from January 2010 until November 2011;
President of Cigna HealthCare, Total Health, Productivity, DAVID M. CORDANI, 47, Chief Executive Officer of Cigna
Network & Middle Market from June 2009 until January 2010; and beginning December 2009; Director since 2009; President beginning
President, of Cigna’s Customer Segments from July 2006 until June June 2008; Chief Operating Officer from June 2008 until December
2009. 2009; and President of Cigna HealthCare from July 2005 until June 2008. JOHN M. MURABITO, 54, Executive Vice President, Human
Resources and Services of Cigna beginning August 2003. HERBERT A. FRITCH, 61, President, Cigna HealthSpring beginning January 2012; Chairman of the Board and Chief Executive RALPH J. NICOLETTI, 55, Executive Vice President and Chief Officer of HealthSpring and its predecessor, NewQuest, LLC, from Financial Officer of Cigna beginning June 2011; Executive Vice commencement of operations in September 2000 until HealthSpring President and Chief Financial Officer of Alberto-Culver, Inc. from was acquired by Cigna in January 2012; also served as President of August 2009 until May 2011; and Senior Vice President and Chief HealthSpring, from September 2000 until October 2008. Financial Officer of Alberto-Culver, Inc. from February 2007 until
August 2009; DAVID D. GUILMETTE, 51, President, Global Employer Segment beginning July 2012; President, National, Pharmacy and Product JASON D. SADLER, 44, President, Global Individual Health, Life from November 2011 until July 2012; President, National Segment and Accident beginning July 2010, and Managing Director Insurance from February 2010 until November 2011; and Managing Director of Business Hong Kong, HSBC Insurance Asia Limited from January Towers Perrin Global Health & Welfare from January 2005 until 2007 until July 2010. January 2010.
CIGNA CORPORATION - 2012 Form 10-K 29
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information under the caption ‘‘Quarterly Financial Data-Stock caption ‘‘Highlights’’ on page 31 of this Form 10-K. Cigna’s common and Dividend Data’’ appears on page 127 and the number of stock is listed with, and trades on, the New York Stock Exchange shareholders of record as of December 31, 2012 appears under the under the symbol ‘‘CI’’.
Issuer Purchases of Equity Securities
The following table provides information about Cigna’s share repurchase activity for the quarter ended December 31, 2012:
Approximate dollar value of shares Total # of shares Average price paid Total # of shares purchased as part of that may yet be purchased as part
Period purchased (1) per share publicly announced program (2) of publicly announced program (3)
October 1-31, 2012 2,467,731 $ 49.55 2,464,898 $ 314,709,797 November 1-30, 2012 4,612 $ 53.07 – $ 314,709,797 December 1-31, 2012 9,501 $ 53.13 – $ 314,709,797
TOTAL 2,481,844 $ 49.57 2,464,898 N/A (1) Includes shares tendered by employees as payment of taxes withheld on the exercise of stock options and the vesting of restricted stock granted under the Company’s equity compensation plans.
Employees tendered 2,833 shares in October, 4,612 in November and 9,501 shares in December 2012. (2) Cigna has had a repurchase program for many years, and has had varying levels of repurchase authority and activity under this program. The program has no expiration date. Cigna suspends
activity under this program from time to time and also removes such suspensions, generally without public announcement. Through December 31, 2012, the Company had repurchased approximately 4.4 million shares for approximately $208 million. Remaining authorization under the program was approximately $315 million as of December 31, 2012. On February 27, 2013, the Company’s Board of Directors increased share repurchase authority by $500 million, making the remaining authorization $815 million as of February 28, 2013.
(3) Approximate dollar value of shares is as of the last date of the applicable month.
30 CIGNA CORPORATION - 2012 Form 10-K
ITEM 5
PART II ITEM 6 Selected Financial Data
Selected Financial Data The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.
Highlights
(Dollars in millions, except per share amounts) 2012 2011 2010 2009 2008
Revenues Premiums and fees and other revenues $ 26,308 $ 19,210 $ 18,528 $ 16,018 $ 16,880 Net investment income 1,144 1,146 1,105 1,014 1,063 Mail order pharmacy revenues 1,623 1,447 1,420 1,282 1,204 Realized investment gains (losses) 44 62 75 (43) (170)
TOTAL REVENUES $ 29,119 $ 21,865 $ 21,128 $ 18,271 $ 18,977
Results of Operations: Global Health Care $ 1,418 $ 1,105 $ 940 $ 775 $ 732 Group Disability and Life 279 295 305 306 282 Global Supplemental Benefits 142 97 84 107 70 Run-off Reinsurance – (183) 26 185 (646) Other Operations 82 89 85 86 87 Corporate (329) (184) (211) (142) (162) Realized investment gains (losses), net of taxes and noncontrolling interest 31 41 50 (26) (110)
Shareholders’ income from continuing operations 1,623 1,260 1,279 1,291 253 Income from continuing operations attributable to redeemable noncontrolling interest 1 – – – – Income from continuing operations attributable to other noncontrolling interest – 1 4 3 2
Income from continuing operations 1,624 1,261 1,283 1,294 255 Income from discontinued operations, net of taxes – – – 1 4
NET INCOME $ 1,624 $ 1,261 $ 1,283 $ 1,295 $ 259
Shareholders’ income per share from continuing operations:
Basic $ 5.70 $ 4.65 $ 4.69 $ 4.71 $ 0.91 Diluted $ 5.61 $ 4.59 $ 4.65 $ 4.69 $ 0.91
Shareholders’ net income per share: Basic $ 5.70 $ 4.65 $ 4.69 $ 4.71 $ 0.93 Diluted $ 5.61 $ 4.59 $ 4.65 $ 4.69 $ 0.92
Common dividends declared per share $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04 Total assets $ 53,734 $ 50,697 $ 45,393 $ 42,794 $ 41,206 Long-term debt $ 4,986 $ 4,990 $ 2,288 $ 2,436 $ 2,090 Shareholders’ equity $ 9,769 $ 7,994 $ 6,356 $ 5,198 $ 3,392
Per share $ 34.18 $ 28.00 $ 23.38 $ 18.95 $ 12.51 Common shares outstanding (in thousands) 285,829 285,533 271,880 274,257 271,036 Shareholders of record 7,885 8,178 8,568 8,888 9,014 Employees 35,800 31,400 30,600 29,300 30,300 Effective December 31, 2012, the Company changed its external reporting segments. See Note 23 to the Consolidated Financial Statements for additional information. Prior year segment information has been conformed to the new segment structure. See Note 2 to the Consolidated Financial Statements for further discussion of changes resulting from the retrospective adoption of amended accounting guidance for deferred policy acquisition costs in 2012. Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated. The effect on prior periods was not material. In 2008, the Company recorded significant charges related to the guaranteed minimum income benefits and guaranteed minimum death benefits businesses of the Run-off Reinsurance segment, as well as an after-tax litigation charge of $52 million in Corporate related to the Cigna pension plan.
CIGNA CORPORATION - 2012 Form 10-K 31
ITEM 6
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index
Introduction ..........................................................................................................................................................................32 Consolidated Results of Operations.........................................................................................................................................................35 Critical Accounting Estimates ..................................................................................................................................................................38 Segment Reporting ..................................................................................................................................................................................40
Global Health Care..........................................................................................................................................................................41 Group Disability and Life ................................................................................................................................................................44 Global Supplemental Benefits ..........................................................................................................................................................46 Run-off Reinsurance ........................................................................................................................................................................47 Other Operations.............................................................................................................................................................................50 Corporate.........................................................................................................................................................................................50
Liquidity and Capital Resources ..............................................................................................................................................................51 Investment Assets ....................................................................................................................................................................................56 Cautionary Statement ..............................................................................................................................................................................61
Introduction
As used in this document, ‘‘Cigna’’ the ‘‘Company’’, ‘‘we’’ and ‘‘our’’ 2011, and a comparison of results of operations for the years ended may refer to Cigna Corporation itself, one or more of its subsidiaries, December 31, 2012, 2011 and 2010. or Cigna Corporation and its consolidated subsidiaries. The
Unless otherwise indicated, financial information in the MD&A is Company is a global health services organization with a mission to
presented in accordance with accounting principles generally accepted help its customers improve their health, well-being and sense of
in the United States (‘‘GAAP’’). See Note 2 to the Consolidated security. Its insurance subsidiaries are major providers of medical,
Financial Statements for the effect of the January 2012 retrospective dental, disability, life and accident insurance and related products and
adoption of the amended accounting guidance for deferred policy services, the majority of which are offered through employers and
acquisition costs. Certain reclassifications have been made to prior other groups (e.g. governmental and non-governmental organizations,
period amounts to conform to the presentation of 2012 amounts. unions and associations). Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages primarily to See Note 2 to the Consolidated Financial Statements for additional individuals in the U.S. and selected international markets. In addition information. to its ongoing operations described above, Cigna also has certain
Effective December 31, 2012, Cigna changed its external reporting run-off operations, including a Run-off Reinsurance segment.
segments to reflect the Company’s realignment of its businesses to In this filing and in other marketplace communications, the better leverage distribution and service delivery capabilities for the Company makes certain forward-looking statements relating to its benefit of our global clients and customers. Management believes the financial condition and results of operations, as well as to trends and realignment of its businesses will enable the Company to more assumptions that may affect the Company. Generally, forward- effectively address global health services challenges by leveraging best looking statements can be identified through the use of predictive practices across geographies to improve the health, well being and words (e.g. ‘‘Outlook for 2013’’). Actual results may differ from the sense of security of the global customers that the Company serves. Company’s predictions. The changes in the Company’s internal financial reporting structure,
to support this realignment, took effect on December 31, 2012 and Some factors that could cause results to differ are discussed
resulted in changes to our external reporting segments. The throughout Management’s Discussion and Analysis (‘‘MD&A’’),
Company’s results are now aggregated based on the nature of the including in the Cautionary Statement. The forward-looking
Company’s products and services, rather than its geographies. statements contained in this filing represent management’s current estimate as of the date of this filing. Management does not assume any The primary segment reporting change is that the two businesses that obligation to update these estimates. comprised the former International segment (international health care
The following discussion addresses the financial condition of the Company as of December 31, 2012, compared with December 31,
32 CIGNA CORPORATION - 2012 Form 10-K
ITEM 7
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
and supplemental health, life and accident) are now reported as Medicare reimbursement rates issued by the Centers for Medicare follows: and Medicaid Services (‘‘CMS’’), including the bonus structure
based on CMS performance ratings; and substantially all of the international health care business (comprised primarily of the global health benefits business) is now reported federal, state and international regulation. with the former Health Care segment and renamed Global Health
The Company regularly monitors the trends impacting operating Care; and
results from the above mentioned key factors to appropriately respond the supplemental health, life and accident business becomes a to economic and other factors affecting its operations, both in its separate reporting segment named Global Supplemental Benefits. ongoing and run-off operations.
As a result of these changes, the financial results of Cigna’s businesses are now reported in the following segments: Run-off Operations
Global Health Care aggregates the following two operating As of December 31, 2012 the Company’s run-off reinsurance segments: operations had significant exposures, primarily from its guaranteed
minimum death benefits (‘‘GMDB’’, also known as ‘‘VADBe’’) andCommercial (including the international health care business) guaranteed minimum income benefits (‘‘GMIB’’) products. Effective
Government February 4, 2013, the Company entered into an agreement to reinsure 100% of the Company’s future exposures for these businesses, net ofGroup Disability and Life retrocessional arrangements in place prior to February 4, 2013, up to a
Global Supplemental Benefits specified limit. See Note 25 to the Consolidated Financial Statements for additional information.Run-off Reinsurance and
Other Operations, including Corporate-owned Life Insurance. Health Care Reform
Prior year segment information has been conformed to the new In the first quarter of 2010, the Patient Protection and Affordablesegment structure. Care Act and the Health Care and Education Reconciliation Act (‘‘Health Care Reform’’) were signed into law. Certain of the law’s
Significant Factors Affecting the Company provisions are already effective while others will take effect from 2013 to 2018. The Company has implemented the provisions of Health
For information on the Company’s business strategy, see the Care Reform that are currently in effect (including the commercial
‘‘Description of Business’’ section of this Form 10-K beginning on minimum medical loss ratio requirements) and continues its
page 1. The Company’s ability to increase revenue, shareholders’ net implementation planning for those provisions that must be adopted
income and operating cash flows from ongoing operations is directly in the future. Management is currently unable to estimate the full
related to progress in executing its strategy as well as other key factors, impact of Health Care Reform on the Company’s future results of
including the Company’s ability to: operations, and its financial condition and liquidity due to
profitably underwrite and price products and services at competitive uncertainties related to interpretation, implementation and timing of levels that manage risk and reflect emerging experience; its many provisions as well as the potential for the law to be amended.
It is possible, however, that certain provisions of Health Care Reform cross sell its various health and related benefit products;
could have a material impact on future results of operations. invest available cash at attractive rates of return for appropriate
Commercial minimum medical loss ratio requirements became durations; and
effective in January 2011, requiring payment of premium rebates effectively deploy capital. beginning in 2012 to employers and customers covered under the
Company’s comprehensive commercial medical insurance plans if In addition to the Company-specific factors cited above, overall results
certain annual minimum loss ratios are not met. The Company are influenced by a range of economic and other factors, especially:
recorded its rebate accrual based on estimated medical loss ratios calculated as prescribed by the U.S. Department of Health andcost trends and inflation for medical and related services; Human Services (‘‘HHS’’) using full-year premium and claim
utilization patterns of medical and other services; information by state and market segment for each legal entity that issues comprehensive medical insurance. HHS regulations permitemployment levels; adjustments to be made to the claims used in the calculation for
the tort liability system; Cigna’s international health care and limited benefits plans subject to the MLR minimums. The adjustments for limited benefit plans aredevelopments in the political environment both domestically and only allowed through 2014. In 2012, the Company accrued aninternationally, including U.S. Health Care Reform; estimated rebate of $37 million pre-tax ($24 million after-tax),
interest rates, equity market returns, foreign currency fluctuations compared with an accrual of $63 million pre-tax ($41 million and credit market volatility, including the availability and cost of after-tax) in 2011. The Company paid $77 million in 2012, slightly credit in the future; higher than the estimated rebate accrual of $63 million, primarily due
CIGNA CORPORATION - 2012 Form 10-K 33
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
to the favorable claim run-out of 2011 estimated claim reserves in On June 28, 2012, the U.S. Supreme Court upheld the 2012. The decrease in the 2012 estimated rebate accrual compared to constitutionality of most parts of Health Care Reform, including the 2011 reflects changes to the 2012 minimum loss ratio calculation in obligation to purchase health care coverage (the ‘‘individual accordance with HHS regulations that can include combined 2011 mandate’’). Management continues to closely monitor the and 2012 experience including rebates paid for the 2011 plan year, implementation of Health Care Reform and is actively engaged with lower premiums resulting from a change in business practice regarding regulators and policymakers on the conversion of legislation to the billing for broker commissions, as well as modestly higher loss regulation. In addition, management is implementing the necessary ratios due to slightly higher utilization. capabilities to ensure that the Company is compliant with the law and
assessing potential opportunities arising from Health Care Reform. Health Care Reform imposes new fees on health insurers that become
These opportunities include the continued evolution and innovation payable in 2013 and 2014. Payment of these fees will result in charges
of our broad health and wellness portfolio to improve the health and to the Company’s financial results in future periods. These fees will
productivity of our clients and customers, as well as the expansion of generally not be tax deductible with the exception of the reinsurance
our physician partnership capabilities to improve the quality of care assessments on insurers and HMOs. Accordingly, the Company’s
and service experience for our customers while lowering costs and effective tax rate is expected to be adversely impacted in future
improving overall value. periods. The amount of the fees is expected to be material, although the Company is unable to estimate the impact of these fees on For additional information regarding Health Care Reform, see the shareholders’ net income and the effective tax rate because guidance ‘‘Regulation’’ section of the Company’s 2012 Form 10-K. for these calculations has not been finalized.
Health Care Reform also impacts Cigna’s Medicare Advantage and Realignment and Efficiency Plan Medicare Part D prescription drug plan businesses acquired with
During the third quarter of 2012, the Company, in connection with HealthSpring in a variety of additional ways, including reduced
the execution of its strategy, committed to a series of actions to further Medicare premium rates (that began with the 2011 contract year),
improve its organizational alignment, operational effectiveness, and mandated minimum reductions to risk scores (beginning in 2014),
efficiency. As a result, the Company recognized charges in other transition of Medicare Advantage ‘‘benchmark’’ rates to Medicare
operating expenses of $77 million pre-tax ($50 million after-tax) in fee-for-service parity, reduced enrollment periods and limitations on
the third quarter of 2012, consisting primarily of severance costs. The disenrollment, providing ‘‘quality bonuses’’ for Medicare Advantage
Global Health Care segment reported $65 million pre-tax plans with a rating of four or five stars from CMS, and mandated
($42 million after-tax) of the charge. The remainder was reported as consumer discounts on brand name and generic prescription drugs for
follows: $9 million pre-tax ($6 million after- tax) in Global Medicare Part D plan participants in the coverage gap. Beginning in
Supplemental Benefits and $3 million pre-tax ($2 million after-tax) in 2014, Health Care Reform requires Medicare Advantage and
Group Disability and Life. The severance costs are expected to be Medicare Part D plans to meet a minimum MLR of 85%. Under the
substantially paid in 2013. The Company expects to realize rules proposed by HHS, if the MLR for a CMS contract is less than
annualized after-tax savings of approximately $60 million, the 85%, the contractor is required to pay a penalty to CMS and could be
majority of which is expected to be reinvested in the business in order subject to additional sanctions if the MLR continues to be less than
to enhance the Company’s ability to provide superior service and 85% for successive years.
affordable products to our customers. Effective in 2014, each state is required to establish a health insurance exchange for individuals and small employers with enrollment Acquisitions and Dispositions processes scheduled to commence in October of 2013. These exchanges may either be state-based, a state partnership, or federally In line with its growth strategy, the Company has strengthened its facilitated. Of the ten states where the Company currently offers market position through various acquisition transactions. See Note 3 individual coverage, most currently expect to use a federally facilitated to the Consolidated Financial Statements for additional information. exchange. Cigna will continue to evaluate its potential participation in these exchanges in each market as they develop.
34 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations – Executive Summary
The Company measures the financial results of its segments using viewed as a substitute for the most directly comparable GAAP ‘‘segment earnings (loss)’’, that is defined as shareholders’ net income measure, that is shareholders’ net income. (loss) before after-tax realized investment results. Adjusted income
The Company excludes special items because management does not (loss) from operations is defined as consolidated segment earnings
believe they are representative of the Company’s underlying results of (loss) excluding special items (described in the table below) and the
operations. The Company also excludes the results of the GMIB results of the GMIB business. Adjusted income (loss) from operations
business because the changes in the fair value of GMIB assets and is another measure of profitability used by the Company’s
liabilities are volatile and unpredictable. See the Run-off Reinsurance management because it presents the underlying results of operations
section of the MD&A for additional information on GMIB. Because of the Company’s businesses and permits analysis of trends in
of this volatility, and since the GMIB business is in run-off, underlying revenue, expenses and shareholders’ net income. This
management does not believe that its results are meaningful in measure is not determined in accordance with accounting principles
assessing underlying results of operations. generally accepted in the United States (‘‘GAAP’’) and should not be
Summarized below is a reconciliation between shareholders’ income from continuing operations and adjusted income from operations.
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 26,187 $ 18,966 $ 18,274 Net investment income 1,144 1,146 1,105 Mail order pharmacy revenues 1,623 1,447 1,420 Other revenues 121 244 254 Realized investment gains 44 62 75
Total revenues 29,119 21,865 21,128 Benefits and expenses 26,642 19,989 19,326
Income before income taxes 2,477 1,876 1,802 Income taxes 853 615 519
Net income 1,624 1,261 1,283 Less: net income attributable to redeemable noncontrolling interest 1 - - Less: net income attributable to other noncontrolling interest - 1 4
Shareholders’ net income 1,623 1,260 1,279 Less: realized investment gains, net of taxes 31 41 50
SEGMENT EARNINGS 1,592 1,219 1,229
Less: adjustments to reconcile to adjusted income from operations: Results of GMIB business (after-tax) 29 (135) (24) Special items (after-tax): Charge for realignment and efficiency plan (See Note 6 to the Consolidated Financial Statements) (50) - - Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements) (40) (31) - Resolution of a federal tax matter (See Note 20 to the Consolidated Financial Statements) - - 101 Loss on early extinguishment of debt (See Note 16 to the Consolidated Financial Statements) - - (39) Loss on reinsurance transaction (See Note 3 to the Consolidated Financial Statements) - - (20) Litigation Matters (See Note 24 to the Consolidated Financial Statements) (81) - - Completion of IRS examination (See Note 20 to the Consolidated Financial Statements) - 24 -
ADJUSTED INCOME FROM OPERATIONS $ 1,734 $ 1,361 $ 1,211
CIGNA CORPORATION - 2012 Form 10-K 35
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summarized below is adjusted income from operations by segment and other key consolidated financial data:
Adjusted Income (Loss) From Operations (In millions) 2012 2011 2010
Global Health Care $ 1,480 $ 1,104 $ 940 Group Disability and Life 281 290 305 Global Supplemental Benefits 148 100 84 Run-off Reinsurance (29) (48) (27) Other Operations 82 85 85 Corporate (228) (170) (176)
TOTAL $ 1,734 $ 1,361 $ 1,211
Other Key Consolidated Financial Data Global medical customers (in thousands) 14,045 12,680 12,473 Cash flows from operating activities $ 2,350 $ 1,491 $ 1,743 Shareholders’ equity $ 9,769 $ 7,994 $ 6,356
Shareholders’ net income decreased 1% in 2011 compared withConsolidated Results of Operations – 2012 2010, due to significantly higher GMIB losses principally reflecting
Compared to 2011 lower interest rates, substantially offset by higher adjusted income from operations.Revenues increased 33% in 2012, primarily reflecting contributions
from HealthSpring as well as higher revenues in each of the Adjusted income from operations increased 12% in 2011 Company’s ongoing businesses from continued growth in the compared with 2010 primarily due to higher earnings contributions Company’s targeted global market segments. See further detailed from the Company’s Global Health Care and Global Supplemental discussion of revenues below and segment revenues in the individual Benefits segments. These results reflect solid business growth in segment discussions of this MD&A. strategically targeted markets and continued low medical services
utilization trend.Shareholders’ net income increased 29% in 2012, primarily resulting from substantially higher adjusted income from operations Global medical customers increased 2%, reflecting growth in as discussed below and significantly improved GMIB results due to targeted markets, primarily the middle and select market segments more favorable market conditions in 2012. See the Run-off domestically as well as growth in the international health care Reinsurance section of this MD&A for additional information on business. These increases were partially offset by exits from certain GMIB results. These favorable effects were partially offset by the non-strategic markets, primarily Medicare IPFFS. 2012 special items for litigation and the realignment and efficiency plan.
Liquidity and Financial Condition Adjusted income from operations increased 27% in 2012, largely
During 2012, the following items affected the Company’s liquidityattributable to earnings contributions from HealthSpring, as well as and financial condition:overall revenue growth in the other ongoing operating segments and
lower charges related to the GMDB business. See the individual Cash flows from operating activities. For 2012, cash flows from segment sections of this MD&A for further discussion. operating activities were higher than 2011 primarily attributable to
strong earnings and business growth in the Company’s ongoingGlobal medical customers increased 11% primarily attributable to operating segments.growth in strategically targeted global markets reflecting solid
customer persistency and strong new sales as well as the acquisition Acquisitions. During 2012, the Company acquired HealthSpring, of HealthSpring. Great American Supplemental Benefits and Finans Emeklilik for a
combined purchase price of approximately $4.2 billion. See Note 3 to the Consolidated Financial Statement for additional information.Consolidated Results of Operations – 2011 Repayment of Debt. During the first quarter of 2012, theCompared to 2010 Company repaid the acquired HealthSpring debt of $326 million.
Revenues rose 3% in 2011 compared with 2010, reflecting solid See Note 16 to the Consolidated Financial Statements for additional growth in the Company’s strategically targeted domestic and information. international customer segments of its ongoing global health care,
Pension Plan Contributions. During 2012, the Companyglobal supplemental benefits, and group disability and life contributed $250 million to the Company’s domestic qualifiedbusinesses. In addition, the increase in revenue reflects the effect of pension plans; See Note 10 to the Consolidated Financialthe programs to hedge equity and growth interest rate exposures in Statements for additional information; andthe run-off reinsurance operations. See the Run-off Reinsurance
section of this MD&A beginning on page 47 for additional Share Repurchase. The Company repurchased 4.4 million shares information. These increases were partially offset by the exit from of stock for $208 million. See the Liquidity and Capital Resources certain non-strategic markets, primarily the Medicare Advantage section of this MD&A for additional information. Individual Private Fee For Service (‘‘Medicare IPFFS’’) business.
36 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Shareholders’ equity increased since 2011, reflecting strong earnings Net Investment Income in 2012 and net unrealized appreciation on investments. Cash at the
Net investment income remained flat in 2012, compared with 2011, parent company as of December 31, 2012 was approximately
primarily reflecting higher average investment assets and improved $700 million. As described in Note 25 to the Consolidated Financial
results from partnership investments offset by lower reinvestment Statements, on February 4, 2013, the Company entered into a
yields. reinsurance agreement for the Run-off GMDB and GMIB businesses.
Net investment income increased by 4% in 2011, compared withThe reinsurance premium will ultimately be funded from the sale or 2010. The key factors causing the increase were higher investmentinternal transfer of investment assets that were supporting this book of assets and improved results from real estate investments, partiallybusiness, as well as tax benefits related to the transaction, and cash. offset by lower reinvestment yields.Based on known liquidity needs at the parent company for 2013,
including the funding for the 2013 reinsurance transaction, management believes that the Company has adequate liquidity at the
Mail Order Pharmacy Revenues parent company level to satisfy its required obligations.
Mail order pharmacy revenues increased by 12% in 2012, compared with 2011, primarily reflecting higher prescription volume forOutlook for 2013 injectible medications, partially offset by price decreases related to a
The Company expects 2013 consolidated adjusted income from shift to generic oral medications from brand names. In 2011, mail operations to be higher than 2012 results. Realized investment results order pharmacy revenues increased by 2% compared with 2010 due in in 2013 are expected to include after-tax gains ranging from large part to price increases offset by a decline in volume. $50 million to $150 million for investment asset sales to fund the reinsurance premium described above. In addition, special items in
Other Revenues2013 will include an after-tax charge of approximately $500 million related to the 2013 reinsurance transaction. Except for the items Other revenues included pre-tax losses of $119 million in 2012 mentioned, information is not available for management to compared with $4 million in 2011 and $157 million in 2010 related reasonably estimate realized investment results. In addition, the to futures and swaps entered into as part of a dynamic hedge program Company is not able to identify or reasonably estimate the financial to manage equity and growth interest rate risks in the Company’s impact of special items in 2013. run-off reinsurance operations. See the Run-off Reinsurance section
of the MD&A for more information on this program.The Company’s outlook for 2013 is subject to the factors cited above and in the Cautionary Statement of this Form 10-K and the Excluding the impact of these swaps and futures contracts, other sensitivities discussed in the Critical Accounting Estimates section of revenues declined 3% in 2012, compared with 2011. The decline the MD&A. If unfavorable equity market and interest rate primarily reflects the absence of revenue in 2012 from Cigna movements occur, the Company could experience losses related to Government Services, which was sold in the second quarter of 2011, investment impairments. These losses could adversely impact the partially offset by contributions from HealthSpring. Company’s consolidated results of operations and financial condition
Other revenues, excluding the impact of these swaps and futures and liquidity by potentially reducing the capital of the Company’s
contracts, declined 40% in 2011, compared with 2010. The decline insurance subsidiaries and reducing their dividend-paying capabilities.
primarily reflects the absence of revenue in 2011 from the workers’ compensation and case management business, which was sold in 2010 as well as lower revenues in 2011 from Cigna Government Services,Revenues which was sold in the second quarter of 2011.
Total revenues increased by 33% in 2012, compared with 2011, and 3% in 2011 compared with 2010. Changes in the components of total revenue are described more fully below. Realized Investment Results
Realized investment results in 2012 were lower than in 2011, primarily due to the absence of gains on sales of real estate held inPremiums and Fees joint ventures reported in 2011and lower prepayment fees received on
Premiums and fees increased by 38% in 2012, compared with 2011, fixed maturities, partially offset by lower impairment losses and higher
including contributions from the HealthSpring acquisition, customer valuation on hybrid securities.
growth in the other targeted market segments of the Global Health Realized investment results in 2011 were lower than in 2010 primarilyCare business and continued business growth in the Global due to higher impairment losses on fixed maturities and valuationSupplemental Benefits and Group Disability and Life segments. declines on hybrid securities, partially offset by higher gains on sales of
Premiums and fees increased by 4% in 2011, compared with 2010, real estate properties held in joint ventures.
primarily reflecting business growth in the Company’s targeted See Note 15 to the Consolidated Financial Statements for additionalmarket segments, partially offset by the Company’s exit from the information.Medicare IPFFS business beginning in 2011. Excluding this business,
premiums and fees increased by 9% in 2011 compared with 2010.
CIGNA CORPORATION - 2012 Form 10-K 37
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance As explained further in Note 25 to the Consolidated Financial with GAAP requires management to make estimates and assumptions Statements, effective February 4, 2013, the Company entered into an that affect reported amounts and related disclosures in the agreement to reinsure 100% of the Company’s GMDB and GMIB consolidated financial statements. Management considers an businesses, net of retrocessional arrangements in place prior to accounting estimate to be critical if: February 4, 2013, up to a specified limit. As a result, the Company
will no longer consider liabilities associated with these contracts to be it requires assumptions to be made that were uncertain at the time
a critical accounting estimate because changes in these estimates are the estimate was made; and
not expected to have a material effect on the Company’s consolidated results of operations or financial condition.changes in the estimate or different estimates that could have been
selected could have a material effect on the Company’s consolidated Management believes the current assumptions used to estimate
results of operations or financial condition. amounts reflected in the Company’s consolidated financial statements are appropriate. However, if actual experience differs from theManagement has discussed the development and selection of its assumptions used in estimating amounts reflected in the Company’scritical accounting estimates with the Audit Committee of the consolidated financial statements, the resulting changes could have aCompany’s Board of Directors and the Audit Committee has reviewed material adverse effect on the Company’s consolidated results ofthe disclosures presented below. operations, and in certain situations, could have a material adverse
In addition to the estimates presented in the following table, there are effect on the Company’s liquidity and financial condition.
other accounting estimates used in the preparation of the Company’s See Note 2 to the Consolidated Financial Statements for furtherconsolidated financial statements, including estimates of liabilities for information on significant accounting policies that impact thefuture policy benefits, as well as estimates with respect to unpaid Company.claims and claim expenses, postemployment and postretirement
benefits other than pensions, certain compensation accruals, and income taxes.
Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Goodwill If the Company does not achieve its earnings objectives or its cost of capital rises significantly, the assumptions and estimates underlying
At the acquisition date, goodwill represents the excess of the cost of these impairment evaluations could be adversely affected and result in
businesses acquired over the fair value of their net assets. impairment charges that would negatively impact the Company’s operating results. The fair value estimates of the Company’s reportingThe Company evaluates goodwill for impairment at least annually units could decrease by 40% to 80% before an indication ofduring the third quarter at the reporting unit level, based on impairment of goodwill occurs. This potential outcome is estimateddiscounted cash flow analyses and writes it down through results of during the Company’s annual testing process, by determining theoperations if impaired. magnitude of changes to certain assumptions and estimates necessary
Discounted cash flow analyses use assumptions and estimates for the estimated fair value of a reporting unit to approach its carrying
including discount rates and projections of future earnings considering value.
operating plans, revenues, claims, operating expenses, taxes, capital levels and long-term growth rates.
Goodwill as of December 31 was as follows (in millions):
2012 – $6,001 2011 – $3,164
See Notes 2 (H) and 9 to the Consolidated Financial Statements for additional discussion of the Company’s goodwill.
38 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Accounts payable, accrued expenses and other liabilities – pension Using past experience, the Company expects that it is reasonably liabilities possible that a favorable or unfavorable change in assumptions for the
discount rate or expected return on plan assets of 50 basis points could These liabilities are estimates of the present value of the qualified and
occur. An unfavorable change is a decrease in these key assumptions nonqualified pension benefits to be paid (attributed to employee
with resulting impacts as discussed below. service to date) net of the fair value of plan assets. The accrued pension benefit liability as of December 31 was as follows (in millions): If discount rates for the qualified and nonqualified pension plans
decreased by 50 basis points: 2012 – $1,602 2011 – $1,769 annual pension costs for 2013 would decrease by approximately
$5 million, after-tax; and See Note 10 to the Consolidated Financial Statements for assumptions and methods used to estimate pension liabilities. the accrued pension benefit liability would increase by approximately
$280 million as of December 31, 2012 resulting in an after-tax decrease to shareholders’ equity of approximately $180 million as of December 31, 2012.
If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2013 would increase by approximately $11 million after-tax.
If the Company used the market value of assets to measure pension costs as opposed to the market-related value, annual pension cost for 2013 would decrease by approximately $9 million after-tax.
If the December 31, 2012 fair values of domestic qualified plan assets decreased by 10%, the accrued pension benefit liability would increase by approximately $365 million as of December 31, 2012 resulting in an after-tax decrease to shareholders’ equity of approximately $235 million.
An increase in these key assumptions would result in impacts to annual pension costs, the accrued pension liability and shareholders’ equity in an opposite direction, but similar amounts.
Global Health Care medical claims payable In 2012, actual experience differed from the Company’s key assumptions as of December 31, 2011, resulting in $200 million of
Medical claims payable for the Global Health Care segment include favorable incurred claims related to prior years’ medical claims payable
both reported claims and estimates for losses incurred but not yet or 2.2% of the current year incurred claims as reported in 2011. In
reported. 2011, actual experience differed from the Company’s key assumptions as of December 31, 2010, resulting in $140 million of favorableLiabilities for medical claims payable as of December 31 were as incurred claims related to prior years’ medical claims, or 1.5% of thefollows (in millions): current year incurred claims reported in 2010. Specifically, the
2012 – gross $1,856; net $1,614 favorable impact is due to faster than expected completion factors and
2011 – gross $1,305; net $1,056 lower than expected medical cost trends, both of which included an assumption for moderately adverse experience.These liabilities are presented above both gross and net of reinsurance
and other recoverables and generally exclude amounts for The impact of this favorable prior year development was an increase to
administrative services only business. shareholders’ net income of $66 million after-tax ($101 million pre-tax) in 2012. The change in the amount of the incurred claimsSee Notes 2 and 5 to the Consolidated Financial Statements for related to prior years in the medical claims payable liability does notadditional information regarding assumptions and methods used to directly correspond to an increase or decrease in shareholders’ netestimate this liability. income as explained in Note 5 to the Consolidated Financial Statements.
CIGNA CORPORATION - 2012 Form 10-K 39
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Valuation of fixed maturity investments Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash
Most fixed maturities are classified as available for sale and are carried flows from the instrument. Such market rates are derived by calculating
at fair value with changes in fair value recorded in accumulated other the appropriate spreads over comparable U.S. Treasury securities, based
comprehensive income (loss) within shareholders’ equity. on the credit quality, industry and structure of the asset.
Fair value is defined as the price at which an asset could be exchanged If the spreads used to calculate fair value changed by 100 basis points,
in an orderly transaction between market participants at the balance the fair value of the total fixed maturity portfolio of $17.7 billion
sheet date. would change by approximately $1.1 billion.
The determination of fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select, based on an understanding of the issuer, the structure of the security and overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. Approximately two-thirds of the Company’s fixed maturities are public securities, and one-third are private placement securities.
See Note 11 to the Consolidated Financial Statements for a discussion of the Company’s fair value measurements and the procedures performed by management to determine that the amounts represent appropriate estimates.
Assessment of ‘‘other-than-temporary’’ impairments of fixed For all fixed maturities with cost in excess of their fair value, if this maturities excess was determined to be other-than-temporary, shareholders’ net
income for the year ended December 31, 2012 would have decreased To determine whether a fixed maturity’s decline in fair value below its
by approximately $20 million after-tax. amortized cost is other than temporary, the Company must evaluate the expected recovery in value and its intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery. To make this determination, the Company considers a number of general and specific factors including the regulatory, economic and market environment, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer.
See Notes 2 (C) and 12 to the Consolidated Financial Statements for additional discussion of the Company’s review of declines in fair value, including information regarding the Company’s accounting policies for fixed maturities.
Segment Reporting
The Company measures the financial results of its segments using Company’s management because it presents the underlying results of ‘‘segment earnings (loss)’’, which is defined as shareholders’ income operations of the segment and permits analysis of trends. Each (loss) from continuing operations excluding after-tax realized segment provides a reconciliation between segment earnings and investment gains and losses. ‘‘Adjusted income from operations’’ for adjusted income from operations. each segment is defined as segment earnings excluding special items
Effective December 31, 2012, the Company changed its reporting and the results of the Company’s GMIB business. Adjusted income
segments. See the Introduction section of the MD&A and Note 23 to from operations is the primary measure of profitability used by the
the Consolidated Financial Statements for additional information.
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
U.S. Virgin Islands, Canada, Europe, the Middle East, and Asia.Global Health Care Segment Cigna services its globally mobile customers virtually everywhere in the world. These products and services are offered through a varietySegment Description of funding arrangements such as administrative services only (ASO),
As discussed in the Introduction section of this MD&A and Note 23 guaranteed cost and retrospectively experience rated.
to the Consolidated Financial Statements, effective December 31, The Government operating segment offers Medicare Advantage2012, the Company changed its reporting segments. The Global plans to seniors in 13 states and the District of Columbia, MedicareHealth Care segment now includes the Company’s international Part D plans in all 50 states and the District of Columbia andhealth care business, previously reported in the former International Medicaid plans. Results for the Government operating segmentsegment and excludes certain disability and life business that is now include HealthSpring from the date of acquisition, January 31,reported in the Group Disability and Life segment. Prior year 2012.information has been conformed to the new segment presentation.
The international health care business is included in the Commercial The Company measures the operating effectiveness of the Global
operating segment. Health Care segment using the following key factors:
Global Health Care aggregates the following two operating segments: segment earnings and adjusted income from operations;
The Commercial operating segment includes both the U.S. customer growth;
commercial and international health care businesses that offer insured and self-insured medical, dental, behavioral health, vision, sales of specialty products; and prescription drug benefit plans, health advocacy programs and
other operating expense as a percentage of segment revenues other products and services that may be integrated to provide
(operating expense ratio); and comprehensive global health care benefit programs to employers and their employees, including globally mobile individuals. Cigna, medical expense as a percentage of premiums (medical care ratio) in either directly or through its partners, offers some or all of these the guaranteed cost and Medicare businesses. products and services in all 50 states, the District of Columbia, the
Results of Operations
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 20,973 $ 14,443 $ 14,134 Net investment income 259 263 230 Mail order pharmacy revenues 1,623 1,447 1,420 Other revenues 225 236 269
Segment revenues 23,080 16,389 16,053 Mail order pharmacy cost of goods sold 1,328 1,203 1,169 Benefits and other operating expenses 19,541 13,465 13,424
Benefits and expenses 20,869 14,668 14,593
Income before taxes 2,211 1,721 1,460 Income taxes 793 616 520
SEGMENT EARNINGS 1,418 1,105 940
Less: special items (after-tax) included in segment earnings: Charge for realignment and efficiency plan (See Note 6 to the Consolidated Financial Statements) (42) - - Costs associated with the HealthSpring acquisition (See Note 3 to the Consolidated Financial Statements) (7) - - Completion of IRS examination (See Note 20 to the Consolidated Financial Statements) - 1 - Charge related to litigation matter (See Note 24 to the Consolidated Financial Statements) (13) - -
ADJUSTED INCOME FROM OPERATIONS $ 1,480 $ 1,104 $ 940
Realized investment gains, net of taxes $ 9 $ 23 $ 25
Segment earnings increased 28% in 2012 compared with 2011, due The Global Health Care segment’s adjusted income from operations to higher adjusted income from operations, partially offset by the increased 34% in 2012, as compared with 2011 reflecting: special items related to the realignment and efficiency plan charge, the
strong earnings contributions from the government segment, costs associated with the acquisition of HealthSpring and a litigation
primarily attributable to the acquired HealthSpring business matter. Segment earnings increased 18% in 2011 compared with
reflecting effective medical cost and pharmacy management 2010, due to higher adjusted income from operations.
programs;
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
revenue growth in the U.S. commercial business, primarily due to a average membership in the guaranteed cost and ASO commercial higher ASO customer base resulting in higher fees, as well as businesses, particularly in the targeted market segments: Middle, additional sales of stop loss and specialty products; Select and Individual;
growth in the international health care business; and strong revenue growth in the international health care business;
increased specialty margins including behavioral and pharmacy growth in specialty revenues, as well as rate increases on most products. products consistent with underlying trend;
These favorable impacts were partially offset by: a lower guaranteed cost medical care ratio and higher experience- rated margins in the commercial business driven by low medical
higher operating expenses, primarily attributable to investments in services utilization trend, as well as favorable prior year claim
technology and initiatives to expand business capabilities as well as development. These favorable effects were partially offset by the
to support business growth; and estimated cost of premium rebates calculated under the minimum medical loss ratio requirements of Health Care Reform; andmodestly higher medical care ratios in our commercial risk
businesses due to slightly higher utilization. higher net investment income of 14% in 2011, primarily reflecting increased average asset levels driven by membership growth, as wellThe Global Health Care segment’s adjusted income from operations as higher income from partnership investments.increased 17% in 2011, as compared with 2010 reflecting:
growth in premiums and fees of 9% in 2011 (excluding the impact of exiting the Medicare IPFFS business), primarily due to higher
Revenues
The table below shows premiums and fees for the Global Health Care segment:
(In millions) 2012 2011 2010
Medical: Guaranteed cost (1) $ 4,256 $ 4,176 $ 3,929 Experience-rated (2) 2,022 1,934 1,823 Stop loss 1,672 1,451 1,287 International health care 1,648 1,344 976 Dental 1,005 894 804 Medicare 4,969 489 1,470 Medicaid 207 - - Medicare Part D 1,421 685 615 Other 677 600 543
Total medical 17,877 11,573 11,447 Fees (3) 3,096 2,870 2,687
TOTAL PREMIUMS AND FEES 20,973 14,443 14,134 Less: Medicare IPFFS - - 827
Premiums and fees, excluding Medicare IPFFS $ 20,973 $ 14,443 $ 13,307 (1) Excludes international health care guaranteed cost premiums. (2) Includes minimum premium business that has 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 reported in fees. Also, includes certain non-participating cases for which special customer level reporting of experience is required.
(3) Includes fees related to the U.S. and international health care businesses. Fees related to Medicare Part D of $61 million in 2011 and $57 million in 2010 have been reclassified to premiums to conform to current presentation.
Premiums and fees increased 45% in 2012, compared with 2011, Premiums and fees increased 2% in 2011 compared with 2010. primarily reflecting growth in the government segment due to the Excluding the impact of exiting the Medicare IPFFS business, acquisition of HealthSpring. Revenue growth in the U.S. commercial premiums and fees rose 9% in 2011, compared with 2010, due business was driven by rate increases on most products consistent with primarily to higher revenues in the international health care and U.S. underlying cost trends and a higher ASO customer base, resulting in commercial businesses. International health care revenues increased higher fees, stop loss revenues and specialty product penetration. In due to business growth and the acquisition of Vanbreda. In the U.S. addition, revenue in the international health care business increased commercial business, the increase in revenues was attributable primarily due to the conversion of the Vanbreda business from service primarily to membership growth in the ASO business and higher to insurance contracts and, to a lesser extent, other business growth. average membership in guaranteed cost, driven by strong retention
and sales in targeted market segments. Rate increases on most products consistent with underlying cost trends and higher
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
penetration of specialty products also contributed to the increase in Other revenues for the Global Health Care segment consist primarily revenues for the U.S. commercial business. of revenues earned on direct channel sales of certain specialty
products, including behavioral health and disease management, as These increases in premiums and fees in 2012 and 2011 reflect the
well as revenues for management services provided to independent Company’s sustained success in delivering differentiated value to its
physician associations and health plans. Other revenues decreased 5% customers with a focus on providing cost-effective products and
in 2012 compared with 2011, driven primarily by the divestiture of services that expand access and provide superior clinical outcomes.
Cigna Government Services in the second quarter of 2011, partially offset by revenue contributions from HealthSpring.Net investment income decreased 2% in 2012 compared with 2011
reflecting lower yields, partially offset by the impact of the Other revenues decreased 12% in 2011 compared with 2010 mostly
HealthSpring acquisition and higher income from partnership due to the sale of the Cigna Government Services business in the
investments. Net investment income increased 14% in 2011 second quarter of 2011, as well as declines in certain stand-alone
compared with 2010 benefiting from increased average asset levels medical cost management business.
driven by membership growth and higher income from partnership investments.
Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
(In millions) 2012 2011 2010
Medical claims expense – excluding Medicare IPFFS $ 14,235 $ 9,144 $ 8,450 Medical claims expense – Medicare IPFFS (7) (19) 772
Medical claims expense 14,228 9,125 9,222 Mail order pharmacy cost of goods sold 1,328 1,203 1,169 Other operating expenses, excluding Medicare IPFFS and special items 5,217 4,340 4,120 Other operating expenses, Medicare IPFFS - - 82
Other operating expenses, excluding special items 5,217 4,340 4,202 Special items 96 - -
Total other operating expenses 5,313 4,340 4,202
TOTAL BENEFITS AND EXPENSES $ 20,869 $ 14,668 $ 14,593
Selected ratios
Guaranteed cost medical care ratio 80.2% 79.7% 80.1% Medicare Advantage medical care ratio (excluding IPFFS) 80.9% 89.6% 90.9% Medicare Part D medical care ratio 81.2% 83.4% 84.2% Operating expense ratio – including special items and Medicare IPFFS 23.0% 26.5% 26.2% Operating expense ratio – excluding special items and Medicare IPFFS 22.6% 26.5% 27.1%
Medical claims expense increased 56% in 2012 compared with 2011, quarter of 2011 and expense management actions taken in 2012. primarily reflecting growth in the government segment due to the Operating expenses increased 3% in 2011 compared with 2010. acquisition of HealthSpring, growth in the international health care Excluding the impact of the Medicare IPFFS business, operating business driven by the conversion of Vanbreda business from service expenses increased 5% primarily due to business growth, strategic to insurance contracts, and medical cost inflation. The guaranteed investments including brand strategy and Individual segment cost medical care ratio is modestly higher in 2012 compared with expansion, partially offset by the impact of exiting the Medicare 2011, due to slightly higher utilization. The Medicare Advantage and IPFFS business and divestiture of Cigna Government Services. Medicare Part D medical care ratios were lower in 2012 compared
One measure of the segment’s overall operating efficiency is the with 2011, driven by the acquisition of HealthSpring.
operating expense ratio calculated as total other operating expenses Medical claims expense decreased 1% in 2011 compared with 2010. divided by segment revenues. The table above shows the operating Excluding the impact of Medicare IPFFS business, medical claims expense ratios for the Global Health Care Segment. expenses increased 8% in 2011 compared with 2010, largely due to
The operating expense ratios decreased for 2012 compared with 2011, the acquisition of Vanbreda in the international health care business,
primarily driven by the acquisition of HealthSpring, as well as organic as well as medical cost inflation, tempered by low medical services
revenue growth and operating expense efficiencies achieved through utilization trend in commercial risk businesses.
expense management actions taken in 2012, partially offset by higher Operating expenses (including special items) increased by 22% in investments in technology and business initiatives. The HealthSpring 2012 compared with 2011. Excluding special items, operating acquired business largely reflects fully insured, premium-based expenses increased by 20% in 2012 compared with 2011, primarily products with substantially lower operating expense ratios than the due to the acquisition of HealthSpring, investments in technology, Company’s commercial businesses. The Company’s commercial business initiatives, and customer-driven volume growth, partially businesses are heavily weighted to ASO fee-based products that have offset by the divestiture of Cigna Government Services in the second relatively higher operating expense ratios.
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The operating expense ratio increased from 2010 to 2011 primarily driven by a change in business mix resulting from the Company’s decision to exit the non-strategic Medicare IPFFS business that was a fully-insured business. Excluding the impact of the Medicare IPFFS business, the operating expense ratio improved for 2011 compared with 2010 driven largely by continued focus on expense management.
Other Items Affecting Global Health Care Results Global Health Care Medical Claims Payable Medical claims payable increased 42% in 2012 compared with 2011, primarily reflecting the acquisition of HealthSpring. Medical claims payable decreased by 7% in 2011 compared with 2010, primarily reflecting the run-out of the Medicare IPFFS business that the Company exited in 2011.
Medical Customers A medical customer is defined as a person meeting any one of the following criteria:
is covered under an insurance policy or service agreement issued by the Company; has access to the Company’s provider network for covered services under their medical plan; or has medical claims that are administered by the Company.
As of December 31, estimated medical customers were as follows: (In thousands) 2012 2011 2010
Commercial Risk: U.S. Guaranteed cost (1) 1,135 1,091 1,177 U.S. Experience-rated (2) 786 798 849 International health care – Risk 744 582 480
Total commercial risk 2,665 2,471 2,506 Medicare 426 44 145 Medicaid 23 - -
Total government 449 44 145
Total risk 3,114 2,515 2,651 Service, including international health care 10,931 10,165 9,822
TOTAL MEDICAL CUSTOMERS 14,045 12,680 12,473 (1) Excludes customers from the international health care business. (2) Includes minimum premium customers, who have a risk profile similar to experience-rated members. Also, includes certain non-participating cases for which special customer level reporting
of experience is required. Excludes international health care business.
The Company’s overall medical customer base as of December 31, 2012 increased 11% when compared with December 31, 2011, primarily reflecting ASO customer growth driven by strong retention and sales in targeted market segments, increases in the government segment, primarily reflecting the impact of the acquisition of HealthSpring as well as growth in the international health care business. The increase in the international health care risk customers in 2012 also reflects the conversion of the Vanbreda business from service to insurance contracts. The Global Health Care segment’s overall medical customers as of December 31, 2011 increased 2% when compared with December 31, 2010, primarily reflecting new business sales and growth in ASO in the targeted Middle and Select market segments, growth in the Individual market segment that is sold under the guaranteed cost funding arrangement, as well as growth in the international health care business.
Medicare Advantage Reimbursement Rates for 2014 On February 15, 2013, CMS issued its Advance Notice of Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies (the ‘‘Notice’’). CMS is accepting comments on the Notice, and final terms are expected to be published on April 1, 2013. While management believes that a significant number of comments from interested parties (including Cigna) will be provided to CMS, there can be no assurance that CMS will amend its current position. Given the uncertainty regarding the final terms of the Notice, the Company cannot estimate the impact that it will have on its business, revenues or results of operations but recognizes that any impacts could be materially adverse. Accordingly, the Company is currently evaluating the potential implications of the Notice, including adjustments that the Company may make to the programs and services it offers to offset any adverse impacts.
Group Disability and Life Segment Segment Description As explained in the Introduction section of this MD&A and in Note 23 to the Consolidated Financial Statements, effective December 31, 2012, the Company changed its external reporting segments. The Group Disability and Life segment includes group disability, life, accident and specialty insurance, including certain disability and life insurance business previously reported in the former Health Care segment. Prior year information has been conformed to the new segment structure.
Key factors for this segment are: premium 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).
44 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 3,109 $ 2,857 $ 2,770 Net investment income 300 291 287 Other revenues - - 123
Segment revenues 3,409 3,148 3,180 Benefits and expenses 3,014 2,740 2,748
Income before taxes 395 408 432 Income taxes 116 113 127
SEGMENT EARNINGS 279 295 305
Less: special items (after-tax) included in segment earnings: Charge for realignment and efficiency plan (See Note 6 to the Consolidated Financial Statements) (2) - - Completion of IRS examination (See Note 20 to the Consolidated Financial Statements) - 5 -
ADJUSTED INCOME FROM OPERATIONS $ 281 $ 290 $ 305
Realized investment gains, net of taxes $ 18 $ 7 $ 13
Segment earnings for 2012 decreased 5% compared with 2011 Excluding the impact of this item, premiums and fees increased 6%. reflecting lower adjusted income from operations, a special item for a Disability premiums and fees grew by 9%. realignment and efficiency plan charge in 2012 as well as the absence
Net investment income increased 3% in 2012 compared with 2011 of the 2011 special item related to completing the 2007 and 2008 IRS
due to higher assets and higher partnership investment income, examination. Segment adjusted income from operations decreased
partially offset by lower yields. Net investment income increased 1% 3%, primarily attributable to a higher disability loss ratio and higher
in 2011 compared with 2010 due to higher average assets reflecting expense ratio, partially offset by a lower life loss ratio (see Benefits and
business growth and higher prepayment fees partially offset by lower Expenses below) and higher net investment income. Results in 2012
yields. include the $43 million after-tax favorable impact of reserve studies. Results in 2011 include the $39 million after-tax favorable impact of Other revenues. The absence of other revenues in 2012 and 2011 reserve studies offset by a $7 million after-tax litigation accrual. reflects the sale of the workers’ compensation and case management
business that was completed during the fourth quarter of 2010. Other Segment earnings decreased 3% in 2011 compared with 2010
revenues in 2010 include the $18 million pre-tax gain on the sale of reflecting 5% lower adjusted income from operations offset by a
the workers’ compensation and case management business. $5 million favorable special item related to completing the 2007 and 2008 IRS examinations. Adjusted income from operations decreased as a result of: Benefits and Expenses
the absence of the $11 million after-tax gain on the sale of the Benefits and expenses increased 10% in 2012 compared with 2011 as workers’ compensation and case management business in 2010; a result of premium growth in the disability and life business, a higher
loss ratio in the disability business and a higher operating expensea higher disability loss ratio; ratio, partially offset by a lower loss ratio in the life business. The
a higher expense ratio: and higher disability loss ratio reflects less favorable claim experience primarily as a result of higher new claims. The higher operatingan after-tax charge of $7 million for litigation matters. expense ratio is driven by higher commissions and strategic
Offsetting these factors were more favorable life and accident claims information technology and claim office investments. The lower life experience and higher net investment income driven largely by higher loss ratio primarily reflects lower new claims. Benefits and expenses invested assets and partnership income. include the favorable impact of reserve studies of $60 million in 2012
as compared with the $59 million favorable impact of reserve studies offset by a $10 million litigation accrual in 2011.
Revenues Benefits and expenses were essentially flat in 2011 as compared with
Premiums and fees increased 9% in 2012 compared with 2011 2010 reflecting disability and life business growth, less favorable
reflecting strong disability and life new sales, in-force growth and disability claims experience and a higher operating expense ratio,
continued strong persistency. largely offset by the absence of operating expenses associated with the workers’ compensation and case management business that was soldPremiums and fees increased 3% in 2011 compared with 2010 in 2010 and favorable life and accident claims experience. Thereflecting disability and life sales growth and continued solid disability claims experience reflects higher incidence rates, mitigatedpersistency partially offset by the impact of the Company’s exit from a in part by higher resolution rates reflecting the sustained stronglarge, low-margin assumed government life insurance program. performance of the Company’s disability claims management process.
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The higher operating expense ratio is driven by strategic investments. Benefits and expenses include the favorable before tax impact of reserve studies of $59 million in 2011 as compared with $55 million in 2010.
Global Supplemental Benefits Segment
Segment Description
As explained in the Introduction section of this MD&A and Note 23 to the Consolidated Financial Statements, effective December 31, 2012, the Company changed its external reporting segments. Prior year information has been conformed to the new segment structure.
The Global Supplemental segment includes supplemental health, life and accident insurance products offered in the U.S. and foreign markets, primarily in Asia as well as Medicare supplemental coverage following the 2012 acquisition of Great American Supplemental Benefits.
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);
operating expense as a percentage of earned premium (expense ratio); and
impact of foreign currency movements.
Throughout this discussion, the impact of foreign currency movements was calculated by comparing the reported results to what the results would have been had the exchange rates remained constant with the prior year’s comparable period exchange rates.
Results of Operations
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 1,984 $ 1,528 $ 1,231 Net investment income 90 83 69 Other revenues 21 15 22
Segment revenues 2,095 1,626 1,322 Benefits and expenses 1,916 1,492 1,192
Income before taxes 179 134 130 Income taxes 36 36 42 Income attributable to redeemable noncontrolling interest 1 - - Income attributable to other noncontrolling interest - 1 4
SEGMENT EARNINGS 142 97 84
Less: special items (after-tax) included in segment earnings: Charge for realignment and efficiency plan (See Note 6 to the Consolidated Financial Statements) (6) - - Costs associated with the acquisition of FirstAssist - (3) –
ADJUSTED INCOME FROM OPERATIONS $ 148 $ 100 $ 84
Impact of foreign currency movements using 2011 rates $ (2) Impact of foreign currency movements using 2010 rates $ 4 Realized investment gains, net of taxes $ 1 $ 1 $ 2
Global Supplemental Benefits segment earnings increased 46% in management of solicitation spending. Excluding the first quarter 2012 compared to 2011. Segment earnings for 2012 include an 2012 implementation effect of the capital management strategy, the after-tax charge of $6 million associated with the realignment and Global Supplemental Benefits segment’s effective tax rate for the full efficiency plan, and an $8 million favorable adjustment related to the year 2012 was 24.6%, compared with 27.3% for 2011. first quarter 2012 expansion of a capital management strategy to
Global Supplemental Benefits segment earnings increased 15% in permanently invest the earnings of its China and Indonesia operations
2011 compared with 2010. Segment earnings for 2010 include a overseas (see further discussion in the Liquidity and Capital Resources
$10 million unfavorable tax adjustment related to the first quarter section of the MD&A). Excluding these adjustments and the
2010 expansion of a capital management strategy to permanently unfavorable impact of foreign currency movements (presented in the
invest the earnings of its Hong Kong operations overseas (see further table above) adjusted income from operations increased 42% for the
discussion in the Liquidity and Capital Resources section of the 2012 compared with 2011. These increases were primarily driven by
MD&A). Excluding the impact of this tax adjustment and foreign the strong revenue growth, primarily in South Korea and, to a lesser
currency movements (presented in the table above), the Global extent, margin improvement largely attributable to disciplined
46 CIGNA CORPORATION - 2012 Form 10-K
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Supplemental Benefits segment’s adjusted income from operations activities in certain markets. Policy acquisition expenses increased in increased 2% in 2011 compared with 2010. The increases in both 2011 compared with 2010 reflecting business growth and foreign segment earnings and adjusted income from operations were currency movements. primarily due to revenue growth and higher persistency, particularly
Excluding the special items (presented in the table above), expense in South Korea, and higher net investment income, substantially
ratios increased for 2012 compared to 2011. This increase was offset by higher policy acquisition costs and expense ratios, as well as,
primarily driven by the impact of the higher expense ratios associated by a higher effective tax rate primarily due to unfavorable changes in
with FirstAssist. Excluding the special items (presented in the table foreign tax law.
above), expense ratios increased in 2011 compared with 2010, The unfavorable impacts of foreign currency movements in 2012 primarily due to strategic investments for future growth and costs to using 2011 rates, as well as the favorable impacts in 2011 using 2010 streamline operations, partially offset by higher revenues in South rates, primarily reflects the movement between the U.S. dollar and the Korea. South Korean won.
Other Items Affecting Global Supplemental Benefits Revenues Results Premiums and fees. Excluding the effect of foreign currency For the Company’s Global Supplemental Benefits segment, South movements, premiums and fees increased by 32% in 2012, compared Korea is the single largest geographic market, generating 54% of the with 2011. These increases are primarily attributable to the higher segment’s revenues and 90% of earnings in 2012. Due to the revenue associated with the acquisitions of FirstAssist and Great concentration of business in South Korea, the Global Supplemental American Supplemental Benefits (the acquisitions), strong Benefits segment is exposed to potential losses resulting from persistency, and new sales growth, particularly in South Korea. economic, regulatory and geopolitical developments in that country,
as well as foreign currency movements affecting the South KoreanExcluding the effect of foreign currency movements, premiums and currency, that could have a significant impact on the segment’s resultsfees were $1.5 billion in 2011 compared with reported premiums and and the Company’s consolidated financial results.fees of $1.2 billion in 2010, an increase of 19%. The increase is
primarily attributable to new sales growth, particularly in South Korea and Taiwan. Run-off Reinsurance Segment Net investment income increased by 8% in 2012, compared with Segment Description 2011, and 20% in 2011, compared with 2010. These increases were
The Company’s reinsurance operations were discontinued and areprimarily due to asset growth in South Korea. 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
Benefits and Expenses 2000. In 2010, the Company essentially exited from its workers’ compensation and personal accident reinsurance business byExcluding the impact of foreign currency movements, benefits and purchasing retrocessional coverage from a Bermuda subsidiary ofexpenses were $1.9 billion in 2012, compared to reported benefits and Enstar Group Limited. This segment is predominantly comprised ofexpenses of $1.5 billion in 2011, an increase of 30%. These increases guaranteed minimum death benefit (‘‘GMDB’’, also known aswere primarily due to the acquisitions and business growth. ‘‘VADBe’’) and guaranteed minimum income benefit (‘‘GMIB’’)
Excluding the impact of foreign currency movements, benefits and products. expenses were $1.4 billion in 2011, compared with reported benefits
Effective February 4, 2013, the Company reinsured 100% of theand expenses of $1.2 billion in 2010, an increase of 20%. The increase Company’s future exposures for the Run-off GMDB and GMIBwas primarily due to business growth. businesses, net of retrocessional arrangements in place prior to
Loss ratios increased slightly in 2012, reflecting the inherently higher February 4, 2013, up to a specified limit. See Note 25 to the loss ratios of the acquisitions. Loss ratios were flat in 2011 compared Consolidated Financial Statements for additional information. The with 2010. Company describes the assumptions used to develop the reserves for
GMDB in Note 7 to the Consolidated Financial Statements and forPolicy acquisition expenses increased in 2012 compared with 2011 the assets and liabilities associated with GMIB in Note 11 to thereflecting the acquisitions and business growth, partially offset by Consolidated Financial Statements.lower acquisition costs in Europe reflecting a decision to cease selling
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, that are reported in shareholders’ net income, can be volatile and unpredictable.
Results of Operations
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 21 $ 24 $ 25 Net investment income 102 103 114 Other revenues (119) (4) (158)
Segment revenues 4 123 (19) Benefits and expenses 4 405 91
Loss before income tax benefits - (282) (110) Income tax benefits - (99) (136)
SEGMENT EARNINGS (LOSS) - (183) 26
Less: special items (after-tax) included in segment earnings: Resolution of federal tax matters (See Note 20 to the Consolidated Financial Statements) - - 97 Loss on Reinsurance transaction (See Note 3 to the Consolidated Financial Statements) - - (20) Less: results of GMIB business 29 (135) (24)
ADJUSTED LOSS FROM OPERATIONS $ (29) $ (48) $ (27)
Realized investment gains, net of taxes $ 1 $ 4 $ 5
Segment results improved in 2012 compared to 2011 due to in interest rates, periods of high volatility, and less favorable equity significantly more favorable results for the GMIB business (presented market conditions during 2011. In addition, segment results in 2010 in the table above) and lower reserve strengthening for GMDB. reflect the favorable effect of resolving a federal tax matter.
Segment results in 2011 reflected higher losses for the GMIB and See the Benefits and Expenses section for further discussion around GMDB businesses compared to 2010 due to the significant declines the results of the GMIB and GMDB businesses.
Other Revenues
Other revenues consisted of gains and losses from futures and swap contracts used in the GMDB and GMIB equity and interest rate hedge programs. See Note 13 to the Consolidated Financial Statements for additional information. The components were as follows:
(In millions) 2012 2011 2010
GMDB – Equity Hedge Program $ (110) $ (45) $ (157) GMDB – Growth Interest Rate Hedge Program 5 31 - GMIB – Equity Hedge Program (16) 4 - GMIB – Growth Interest Rate Hedge Program 2 6 - Other - - (1)
TOTAL OTHER REVENUES $ (119) $ (4) $ (158)
The hedging programs generally produce losses when equity markets on shareholders’ net income (see below ‘‘Other Benefits and and interest rates are rising and gains when equity markets and interest Expenses’’). Changes in liabilities for GMIB contracts, including the rates are falling. Amounts reflecting related changes in liabilities for portion covered by the hedges, are recorded in GMIB fair value (gain) GMDB contracts were included in benefits and expenses consistent loss. These hedging programs were discontinued after February 4, with GAAP when a premium deficiency exists, resulting in no effect 2013 due to the reinsurance transaction discussed above.
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Benefits and Expenses Benefits and expenses were comprised of the following:
(In millions) 2012 2011 2010
GMIB fair value (gain) loss $ (41) $ 234 $ 55 Other benefits and expenses 45 171 36
BENEFITS AND EXPENSES $ 4 $ 405 $ 91
GMIB fair value (gain) loss. Under the GAAP guidance for fair value GMIB fair value losses of $234 million for 2011, were primarily due to a decline in both the interest rate used for projecting claim exposuremeasurements, the Company’s results of operations have been volatile (7-year Treasury rates) and the rate used for projecting market returnsbecause capital market assumptions needed to estimate the assets and and discounting (LIBOR swap curve).liabilities for the GMIB business are based largely on market
observable inputs at the close of each reporting period including GMIB fair value losses of $55 million for 2010, were primarily due to
interest rates (LIBOR swap curve) and market implied volatilities. See declining interest rates, partially offset by increases in underlying Note 11 to the Consolidated Financial Statements for additional account values resulting from favorable equity and bond fund returns. information about assumptions and asset and liability balances related
The GMIB liabilities and related assets are calculated using an internalto GMIB and Note 13 for additional information regarding the hedge model and assumptions from the viewpoint of a hypothetical marketprograms to hedge a portion of equity and interest rate risks in GMIB participant. Payments for GMIB claims are expected to occur over thecontracts. next 15 to 20 years and will be based on actual values of the
GMIB fair value gains of $41 million for 2012, were primarily due to underlying mutual funds and the 7-year Treasury rate at the dates the effect of increases in underlying account values, updates in the benefits are elected. As explained above, on February 4, 2013, the claim exposure calculation, and a reduction in annuitization rates, Company reinsured 100% of the future exposures under these GMIB partially offset by a reduction in lapse rates and general declines in contracts, net of retrocessional arrangements in place prior to interest rates. February 4, 2013.
Other Benefits and Expenses are comprised of the following:
(In millions) 2012 2011 2010
Results of GMDB equity and growth interest rate hedging programs $ (105) $ (14) $ (157) GMDB reserve strengthening 43 70 52 Other GMDB, primarily accretion of discount 79 82 85
GMDB benefit expense (income) 17 138 (20) Loss on reinsurance of workers’ compensation and personal accident business - - 31 Other, including operating expenses 28 33 25
OTHER BENEFITS AND EXPENSES $ 45 $ 171 $ 36
update to management’s consideration of the anticipated impact ofOther Benefits and Expenses the continued low level of short-term interest rates, and the adverse
Capital market movements. Benefits expense related to capital impacts of overall market declines, including an increase in the market movements as represented by the results of the hedging provision for future partial surrenders and declines in the value of programs decreased in 2012 compared with 2011 due to more contract holders’ non-equity investments such as bond funds, neither favorable equity market performance. The increase in benefits expense of which are included in the hedge program. in 2011 compared with 2010 was due to turbulent conditions in an
The 2010 reserve strengthening was driven primarily byoverall declining equity market. As explained in Other revenues above, management’s consideration of the anticipated impact of thethese changes do not affect shareholders’ net income because they are continued low level of current short-term interest rates, and to a lesseroffset by gains or losses on futures contracts used to hedge equity extent, a reduction in assumed lapse rates for policies that have takenmarket and interest rate performance. or are assumed to take significant partial withdrawals.
Reserve strengthening. The following highlights the impacts of See Note 7 to the Consolidated Financial Statements for additionalGMDB reserve strengthening: information about assumptions and reserve balances related to
The 2012 reserve strengthening was driven primarily by reductions to GMDB.
the lapse rate assumptions, an update to management’s consideration of the anticipated impact of continued low short-term interest rates, Other, including operating expenses. The decrease in 2012 and to a lesser extent, an increase to the volatility and correlation compared with 2011 was due to the favorable impact of reserve assumptions, partially offset by favorable equity market conditions. studies and lower operating expenses. The increase in 2011 compared
with 2010 was due to the reduced favorable impacts of reserve studies.The 2011 reserve strengthening was driven primarily by volatility- related impacts due to the turbulent equity market conditions, an
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other Operations Segment
Segment Description
Cigna’s Other Operations segment includes the results of the following businesses:
corporate-owned life insurance (‘‘COLI’’);
deferred gains recognized from the sale of the retirement benefits and individual life insurance and annuity businesses; and
run-off settlement annuity business.
Results of Operations
Financial Summary (In millions) 2012 2011 2010
Premiums and fees $ 100 $ 114 $ 114 Net investment income 388 400 404 Other revenues 55 55 60
Segment revenues 543 569 578 Benefits and expenses 418 451 454
Income before taxes 125 118 124 Income taxes 43 29 39
SEGMENT EARNINGS 82 89 85
Completion of IRS examination (See Note 20 to the Consolidated Financial Statements) - 4 -
ADJUSTED INCOME FROM OPERATIONS $ 82 $ 85 $ 85
Realized investment gains, net of taxes $ 2 $ 6 $ 5
Segment earnings decreased 8% in 2012 compared with 2011, Other revenues were flat in 2012 compared with 2011 and decreased primarily reflecting lower COLI interest margins and mortality gains 8% in 2011 compared with 2010 primarily due to lower deferred gain and the continued decline in deferred gain amortization associated amortization related to the sold retirement benefits and individual life with the sold businesses. insurance and annuity businesses. 2012 results were partially offset by
higher investment management fees. Segment earnings increased in 2011 compared with 2010, reflecting a $4 million increase from completing the Company’s 2007 and 2008 Benefits and expenses decreased 7% in 2012 compared with 2011 IRS examination during the first quarter of 2011. primarily due to favorable COLI claims experience and lower
policyholder death benefit coverage and the absence of a charge recorded in the first quarter of 2011 to reimburse the buyer of the
Revenues retirement benefits business with a portion of the tax benefits resulting from the completion of the 2007 and 2008 IRS examination asPremiums and fees reflect fees charged primarily on universal life required under a tax sharing agreement.insurance policies in the COLI business. Premiums and fees decreased
12% in 2012, compared with 2011 due to lower policyholder death For more information regarding the sale of these businesses see Note 8 benefit exposures. to the Consolidated Financial Statements.
Net investment income decreased 3% in 2012 compared with 2011, primarily reflecting lower average yields and decreased 1% in 2011 compared with 2010 due to lower portfolio yields partially offset by higher average invested assets.
Corporate
Description
Corporate reflects amounts not allocated to operating 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 and pension expense related to the Company’s frozen pension plans.
50 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Summary (In millions) 2012 2011 2010
Segment loss $ (329) $ (184) $ (211) Less: special items (after-tax) included in segment loss: Cost associated with HealthSpring acquisition (See Note 3 to the Consolidated Financial Statements) (33) (28) - Resolution of Federal Tax Matter (See Note 20 to the Consolidated Financial Statements) - - 4 Loss on early extinguishment of debt (See Note 16 to the Consolidated Financial Statements) - - (39) Charges related to litigation matters (See Note 24 to the Consolidated Financial Statements) (68) - - Completion of IRS examination (See Note 20 to the Consolidated Financial Statements) - 14 -
ADJUSTED LOSS FROM OPERATIONS $ (228) $ (170) $ (176)
In 2012, segment loss for Corporate was significantly higher than in Corporate’s segment loss was lower in 2011 compared with 2010 2011, primarily reflecting: primarily reflecting a tax benefit from completing the IRS
examination and absence of the 2010 loss on debt extinguishment, higher interest expense due to the $2.1 billion of long-term debt
partially offset by costs associated with the HealthSpring acquisition, issued in the fourth quarter of 2011 to fund the HealthSpring
all of which were reported as special items. acquisition;
Corporate’s adjusted loss from operations was lower in 2011 charges associated with litigation matters due primarily to recent
compared with 2010 primarily reflecting decreased pension expense developments. See Note 24 to the Consolidated Financial
and lower tax adjustments related to postretirement benefits and Statements for additional information;
compensation resulting from Health Care Reform. These factors were partially offset by increased net interest expense due to higher averagethe absence of a tax benefit; and borrowings outstanding in 2011.
estimated penalties for terminating a service contract.
Liquidity and Capital Resources
Financial Summary (In millions) 2012 2011 2010
Short-term investments $ 154 $ 225 $ 174 Cash and cash equivalents $ 2,978 $ 4,690 $ 1,605 Short-term debt $ 201 $ 104 $ 552 Long-term debt $ 4,986 $ 4,990 $ 2,288 Shareholders’ equity $ 9,769 $ 7,994 $ 6,356
matching investment durations to those estimated for the relatedLiquidity insurance and contractholder liabilities; and
The Company maintains liquidity at two levels: the subsidiary level borrowing from its parent company.and the parent company level.
Liquidity requirements at the parent level generally consist of:Liquidity requirements at the subsidiary level generally consist of:
debt service and dividend payments to shareholders;claim and benefit payments to policyholders;
pension plan funding; andoperating expense requirements, primarily for employee compensation and benefits; and federal tax payments.
dividends and federal tax payments to the parent company. The parent normally meets its liquidity requirements by:
The Company’s subsidiaries normally meet their operating maintaining appropriate levels of cash, cash equivalents and requirements by: short-term investments;
maintaining appropriate levels of cash, cash equivalents and collecting dividends and federal tax payments from its subsidiaries; short-term investments;
using proceeds from issuance of debt and equity securities; and using cash flows from operating activities;
borrowing from its subsidiaries. selling investments;
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The Company prioritizes its use of capital resources to:Capital Resources provide capital necessary to support growth and maintain orThe Company’s capital resources (primarily retained earnings and the improve the financial strength ratings of its subsidiaries;proceeds from the issuance of debt and equity securities) provide
protection for policyholders, furnish the financial strength to consider acquisitions that are strategically and economically underwrite insurance risks and facilitate continued business growth. advantageous; and
Management, guided by regulatory requirements and rating agency return capital to investors through share repurchase. capital guidelines, determines the amount of capital resources that the
The availability of capital resources will be impacted by equity andCompany maintains. Management allocates resources to new credit market conditions. Extreme volatility in credit or equity marketlong-term business commitments when returns, considering the risks, conditions may reduce the Company’s ability to issue debt or equitylook promising and when the resources available to support existing securities.business are adequate.
Cash flows for the years ended December 31, were as follows:
(In millions) 2012 2011 2010
Operating activities $ 2,350 $ 1,491 $ 1,743 Investing activities $ (3,857) $ (1,270) $ (1,342) Financing activities $ (228) $ 2,867 $ 274
Cash flows from operating activities consist of cash receipts and Investing activities disbursements for premiums and fees, mail order pharmacy and other
Cash used in investing activities was $3.9 billion in 2012, $3.6 billionrevenues, gains (losses) recognized in connection with the Company’s of which was for the acquisitions (net of cash acquired) ofGMDB and GMIB equity hedge programs, investment income, taxes, HealthSpring, Great American Supplemental Benefits, and the jointand benefits and expenses. Because certain income and expense venture in Turkey. Cash used in investing activities also included nettransactions do not generate cash, and because cash transactions purchases of investments of $132 million and net purchases ofrelated to revenues and expenses may occur in periods different from property and equipment (primarily internal-use software) ofwhen those revenues and expenses are recognized in shareholders’ net $408 million.income, cash flows from operating activities can be significantly
different from shareholders’ net income.
Financing activitiesCash flows from investing activities generally consist of net investment purchases or sales and net purchases of property and
Cash used in financing activities in 2012 primarily reflects the equipment, that includes capitalized software, as well as cash used to
repayment of debt assumed in the HealthSpring acquisition of acquire businesses.
$326 million and the repurchase of common stock for $208 million. These effects were partially offset by the change in short-term debt ofCash flows from financing activities are generally comprised of $98 million primarily from the issuance of commercial paper,issuances and re-payment of debt at the parent company level, proceeds from the issuance of common stock from employee benefitproceeds on the issuance of common stock resulting from stock plans of $121 million and net deposits to contractholder depositoption exercises, and stock repurchases. In addition, the subsidiaries funds of $73 million.report net deposits and withdrawals to or from investment contract
liabilities (that include universal life insurance liabilities) because such Share Repurchase. The Company maintains a share repurchaseliabilities are considered financing activities with policyholders. program, that was authorized by its Board of Directors. The decision to repurchase shares depends on market conditions and alternate uses of capital. The Company has, and may continue from time to time, to2012: repurchase shares on the open market through a Rule 10b5-1 plan
Operating activities that permits a company to repurchase its shares at times when it otherwise might be precluded from doing so under insider tradingCash flows from operating activities increased by $859 million in laws or because of self-imposed trading blackout periods. The2012 compared with 2011, primarily the result of strong earnings Company suspends activity under this program from time to time andgrowth in the ongoing business segments in 2012. In addition, 2011 also removes such suspensions, generally without publicoperating cash flows were adversely affected by significant claim announcement.run-out from the Medicare IPFFS business that the Company exited
in 2011. In 2012 the Company repurchased 4.4 million shares for $208 million. On February 27, 2013, the Company’s Board of Directors increased share repurchase authority by $500 million. Accordingly, the total remaining share repurchase authorization as of February 28, 2013 was $815 million. In 2011 the Company
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
repurchased 5.3 million shares for $225 million and 6.2 million shares Investing activities for $201 million during 2010.
Cash used in investing activities was $1.3 billion. This use of cash primarily consisted of net purchases of investments of $746 million,
2011: cash used to fund acquisitions (net of cash acquired) of $114 million, and net purchases of property and equipment of $422 million.
Operating activities
Cash flows from operating activities decreased by $252 million in Financing activities 2011 compared with 2010. Excluding the results of the GMDB equity hedge program (that did not affect net income), cash flows Cash provided from financing activities primarily consisted of net from operating activities decreased by $364 million. This decrease in proceeds from the issuance of long-term debt of $2.7 billion and 2011 primarily reflects higher management compensation, income proceeds on issuances of common stock of $734 million, primarily tax and pension payments in 2011 compared with 2010 and used to fund the acquisition of HealthSpring, Inc. See Notes 16 and unfavorable operating cash flows in the Medicare IPFFS business in 17 to the Consolidated Financial Statements for further information. 2011 due to significant claim run-out compared to significant Financing activities also included net deposits to contractholder favorable operating cash flows from the growth of this business in deposit funds of $145 million. These inflows were partially offset by 2010. Operating cash flows were favorably affected in 2010 because scheduled payments of debt of $451 million and common stock paid claims on this business growth lagged premium collections. repurchases of $225 million.
Interest Expense Interest expense on long-term debt, short-term debt and capital leases was as follows:
(In millions) 2012 2011 2010
Interest expense $ 268 $ 202 $ 182
The increase in interest expense in 2012 was primarily due to the The Company expects, based on its current cash position and current issuance of $2.1 billion of long-term debt in the fourth quarter of projections for subsidiary dividends, to have sufficient liquidity to 2011 to fund the acquisition of HealthSpring, partially offset by a meet the obligations discussed above. lower weighted average interest rate reflecting the more favorable rates
However, the Company’s cash projections may not be realized and the of this debt issued. The weighted average interest rate for outstanding
demand for funds could exceed available cash if: short-term debt (primarily commercial paper) was 0.47% at December 31, 2012 and 2011. ongoing businesses experience unexpected shortfalls in earnings;
regulatory restrictions or rating agency capital guidelines reduce the Liquidity and Capital Resources Outlook amount of dividends available to be distributed to the parent
company from the insurance and HMO subsidiaries (including the At December 31, 2012, there was approximately $700 million in cash
impact of equity market deterioration and volatility on subsidiary and short-term investments available at the parent company level. In
capital); 2013, the parent company’s cash obligations are expected to consist of the following: significant disruption or volatility in the capital and credit markets
reduces the Company’s ability to raise capital; or scheduled interest payments of approximately $265 million on outstanding long-term debt of $5.0 billion at December 31, 2012; a substantial increase in funding over current projections is required
for the Company’s pension plan. contributions to the domestic qualified pension plan of $250 million (most of which is voluntary); and In those cases, the Company expects to have the flexibility to satisfy
liquidity needs through a variety of measures, including intercompany repayment of $200 million of commercial paper outstanding as of
borrowings and sales of liquid investments. The parent company may December 31, 2012. The Company expects to have at least
borrow up to $750 million from its insurance subsidiaries without $200 million outstanding as of March 31, 2013.
prior state approval. As of December 31, 2012, the parent company In addition, the parent company will be required to fund a portion of had no net intercompany loan balance with its insurance subsidiaries. the $2.2 billion reinsurance premium due to Berkshire. The premium
In addition, the Company may use short-term borrowings, such as the will ultimately be paid to Berkshire in cash, that will be funded by the
commercial paper program, the committed revolving credit and letter sale or internal transfer of investment assets supporting this business,
of credit agreement of up to $1.5 billion subject to the maximum debt tax benefits related to the transaction, and parent cash of
leverage covenant in its line of credit agreement. As of December 31, $100 million.
2012, the Company had $1.4 billion of borrowing capacity under the credit agreement, reflecting $66 million of letters of credit issued out of the credit facility. Within the maximum debt leverage covenant in
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
the line of credit agreement, the Company has an additional life and health insurance companies. The RBC rules recommend a $5.3 billion of borrowing capacity in addition to the $5.2 billion of minimum level of capital depending on the types and quality of debt outstanding. investments held, the types of business written and the types of
liabilities incurred. If the ratio of the insurer’s adjusted surplus to its The Company maintains a capital management strategy to
risk-based capital falls below statutory required minimums, the permanently invest the earnings for certain of its foreign operations
insurer could be subject to regulatory actions ranging from increased overseas. During the first quarter of 2012 the Company expanded this
scrutiny to conservatorship. strategy to its China and Indonesia operations. As of December 31, 2012 the Company’s cash and cash equivalents in its foreign In addition, various non-U.S. jurisdictions prescribe minimum operations were $768 million, and permanently reinvested earnings surplus requirements that are based upon solvency, liquidity and were approximately $628 million. Repatriation of foreign cash via a reserve coverage measures. During 2012, the Company’s HMOs and dividend of these permanently reinvested earnings would result in a life and health insurance subsidiaries, as well as non-U.S. insurance charge for the incremental U.S. taxes due on the repatriation. Because subsidiaries, were compliant with applicable RBC and non-U.S. of the size, strength and diversity of earnings from domestic sources, surplus rules. management does not believe this global capital management strategy
Solvency II. Cigna’s businesses in the European Union will be subjectmaterially limits the Company’s ability to meet its liquidity and to the directive on insurance regulation and solvency requirementscapital needs in the United States. known as Solvency II. This directive will impose economic risk-based
Though the Company believes it has adequate sources of liquidity, solvency requirements and supervisory rules and is expected to continued significant disruption or volatility in the capital and credit become effective in January 2014, although certain regulators are markets could affect the Company’s ability to access those markets for requiring companies to demonstrate technical capability and comply additional borrowings or increase costs associated with borrowing with increased capital levels in advance of the effective date. Cigna’s funds. European insurance companies are capitalized at levels consistent with
projected Solvency II requirements and in compliance with Solvency regulation. Many states have adopted some form of the
anticipated technical capability requirements. National Association of Insurance Commissioners (‘‘NAIC’’) model solvency-related laws and risk-based capital rules (‘‘RBC rules’’) for
Guarantees and Contractual Obligations The Company is contingently liable for various contractual obligations entered into in the ordinary course of business. The maturities of the Company’s primary contractual cash obligations, as of December 31, 2012, are estimated to be as follows:
(In millions, on an undiscounted basis) Total Less than 1 year 1-3 years 4-5 years After 5 years
On-Balance Sheet: Insurance liabilities:
Contractholder deposit funds $ 7,104 $ 677 $ 938 $ 817 $ 4,672 Future policy benefits 11,489 486 1,153 1,083 8,767 Global Health Care medical claims payable 1,864 1,796 29 9 30 Unpaid claims and claims expenses 4,379 1,321 857 590 1,611
Short-term debt 200 200 - - - Long-term debt 8,955 269 549 1,352 6,785 Other long-term liabilities 1,037 433 166 111 327 Off-Balance Sheet: Purchase obligations 871 393 289 120 69 Operating leases 570 116 190 108 156
TOTAL $ 36,469 $ 5,691 $ 4,171 $ 4,190 $ 22,417
As discussed further in Note 25 to the Consolidated Financial On-Balance Sheet: Statements, effective February 4, 2013, the Company entered into a
Insurance liabilities. Contractual cash obligations for insurancereinsurance agreement for its GMDB and GMIB businesses. The liabilities, excluding unearned premiums and fees, representreinsurance premium due to Berkshire of $2.2 billion is not included estimated net benefit payments for health, life and disabilityin the contractual obligations table presented above. In addition, the insurance policies and annuity contracts. Recorded contractholderexpected future cash flows for GMDB and GMIB contracts included deposit funds reflect current fund balances primarily from universalin the table above do not consider this reinsurance arrangement. life customers. Contractual cash obligations for these universal life contracts are estimated by projecting future payments using assumptions for lapse, withdrawal and mortality. These projected future payments include estimated future interest crediting on
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
current fund balances based on current investment yields less the Other long-term liabilities. These items are presented in accounts estimated cost of insurance charges and mortality and payable, accrued expenses and other liabilities in the Company’s administrative fees. Actual obligations in any single year will vary Consolidated Balance Sheets. This table includes estimated based on actual morbidity, mortality, lapse, withdrawal, investment payments for GMIB contracts, pension and other postretirement and premium experience. The sum of the obligations presented and postemployment benefit obligations, supplemental and above exceeds the corresponding insurance and contractholder deferred compensation plans, interest rate and foreign currency liabilities of $18 billion recorded on the balance sheet because the swap contracts, and certain tax and reinsurance liabilities. recorded insurance liabilities reflect discounting for interest and the
Estimated payments of $75 million for deferred compensation, recorded contractholder liabilities exclude future interest crediting,
non-qualified and international pension plans and other charges and fees. The Company manages its investment portfolios
postretirement and postemployment benefit plans are expected to be to generate cash flows needed to satisfy contractual obligations. Any
paid in less than one year. The Company’s best estimate is that shortfall from expected investment yields could result in increases to
contributions to the qualified domestic pension plans during 2013 recorded reserves and adversely impact results of operations. The
will be approximately $250 million. The Company expects to make amounts associated with the sold retirement benefits and individual
payments subsequent to 2013 for these obligations, however life insurance and annuity businesses, as well as the reinsured
subsequent payments have been excluded from the table as their workers’ compensation, personal accident and supplemental
timing is based on plan assumptions which may materially differ from benefits businesses, are excluded from the table above as net cash
actual activities (see Note 10 to the Consolidated Financial Statements flows associated with them are not expected to impact the
for further information on pension and other postretirement benefit Company. The total amount of these reinsured reserves excluded is
obligations). approximately $6 billion.
The above table also does not contain $51 million of liabilities for Short-term debt represents commercial paper, current maturities of
uncertain tax positions because the Company cannot reasonably long-term debt, and current obligations under capital leases.
estimate the timing of their resolution with the respective taxing Long-term debt includes scheduled interest payments. Capital authorities. See Note 20 to the Consolidated Financial Statements for leases are included in long-term debt and represent obligations for the year ended December 31, 2012 for further information. software licenses.
Off-Balance Sheet: Purchase obligations. As of December 31, 2012, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:
(In millions)
Fixed maturities $ 58 Commercial mortgage loans 6 Real estate 7 Limited liability entities (other long-term investments) 509
Total investment commitments 580 Future service commitments 291
TOTAL PURCHASE OBLIGATIONS $ 871
The Company had commitments to invest in limited liability entities ability to terminate these agreements, but does not anticipate doing so that hold real estate, loans to real estate entities or securities. See at this time. Purchase obligations exclude contracts that are cancelable Note 12(D) to the Consolidated Financial Statements for additional without penalty and those that do not specify minimum levels of information. goods or services to be purchased.
Future service commitments include an agreement with IBM for Operating leases. For additional information, see Note 22 to the various information technology (IT) infrastructure services. The Consolidated Financial Statements. Company’s remaining commitment under this contract is approximately $15 million over the next year. The Company has the Guarantees ability to terminate this agreement with 90 days notice, subject to termination fees. The Company, through its subsidiaries, is contingently liable for
various financial and other guarantees provided in the ordinary course The Company’s remaining estimated future service commitments
of business. See Note 24 to the Consolidated Financial Statements for primarily represent contracts for certain outsourced business processes
additional information on guarantees. and IT maintenance and support. The Company generally has the
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment Assets
The Company’s investment assets do not include separate account hypothetical market participant would use to determine a current assets. Additional information regarding the Company’s investment transaction price. These valuation techniques involve some level of assets and related accounting policies is included in Notes 2, 11, 12, estimation and judgment that becomes significant with increasingly 13, 14, 15 and 18 to the Consolidated Financial Statements. complex instruments or pricing models.
The Company is responsible for determining fair value, as well as the Fixed Maturities appropriate level within the fair value hierarchy as defined in Note 11
to the Consolidated Financial Statements, based on the significance of Investments in fixed maturities include publicly traded and privately
unobservable inputs. The Company reviews methodologies and placed debt securities, mortgage and other asset-backed securities,
processes of third-party pricing services and compares prices on a test preferred stocks redeemable by the investor and hybrid and trading
basis to those obtained from other external pricing sources or internal securities. The Company estimates fair values using prices from third
estimates. The Company performs ongoing analyses of both prices parties or internal pricing methods. Fair value estimates received from
received from third-party pricing services and those developed third-party pricing services are based on reported trade activity and
internally to determine that they represent appropriate estimates of quoted market prices when available, and other market information
fair value. These analyses include reviewing to ensure that prices do that a market participant may use to estimate fair value. Internal
not become stale and whether changes from prior valuations are pricing methods are performed by the Company’s investment
reasonable or require additional review. The Company also performs professionals, and generally involve using discounted cash flow
sample testing of sales values to confirm the accuracy of prior fair analyses, incorporating current market inputs for similar financial
value estimates. Exceptions identified during these processes indicate instruments with comparable terms and credit quality, as well as other
that adjustments to prices are infrequent and do not significantly qualitative factors. In instances where there is little or no market
impact valuations. activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a
The Company’s fixed maturity portfolio continues to be diversified by issuer and industry type with the consumer sector representing the largest single industry concentration of approximately 10% of total invested assets as of December 31, 2012.
(In millions) 2012 2011
Federal government and agency $ 902 $ 958 State and local government 2,437 2,456 Foreign government 1,322 1,274 Corporate 11,896 10,513 Federal agency mortgage-backed 122 9 Other mortgage-backed 89 80 Other asset-backed 937 927
TOTAL $ 17,705 $ 16,217
As of December 31, 2012, $15.9 billion, or 90%, of the fixed on publicly-traded bonds with comparable credit risk. The Company maturities in the Company’s investment portfolio were investment performs a credit analysis of each issuer, diversifies investments by grade (Baa and above, or equivalent), and the remaining $1.8 billion industry and issuer and requires financial and other covenants that were below investment grade. The majority of the bonds that are allow the Company to monitor issuers for deteriorating financial below investment grade are rated at the higher end of the strength and pursue remedial actions, if warranted. Also included in non-investment grade spectrum. These quality characteristics have corporate fixed maturities are investments in companies that are not materially changed during the year. domiciled or have significant business interests in European countries
with the most significant political or economic concerns (Portugal, The net appreciation of the Company’s fixed maturity portfolio
Italy, Ireland, Greece and Spain). Fixed maturity investments in these increased $264 million during 2012, driven by a decrease in market
companies represent approximately $400 million at December 31, yields. Although asset values are well in excess of amortized cost, there
2012, have an average quality rating of BAA and are diversified by are specific securities with amortized cost in excess of fair value by
industry sector. Financial institutions comprised less than 2% of approximately $30 million in aggregate as of December 31, 2012. See
investments in these companies. Note 12 to the Consolidated Financial Statements for further information. The Company invests in high quality foreign government obligations,
with an average quality rating of AA as of December 31, 2012. These Corporate fixed maturities includes private placement investments of
investments are primarily concentrated in Asia consistent with the $5.4 billion, which are generally less marketable than publicly-traded
geographic distribution of the international business operations, bonds, but yields on these investments tend to be higher than yields
including government obligations of South Korea, Indonesia, Taiwan
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
and Hong Kong. Foreign government obligations also include $1 million in countries with the most significant political or economic $167 million of investments in European sovereign debt, including concerns.
The Company’s investment in state and local government securities is diversified by issuer and geography with no single exposure greater than $34 million. The Company assesses each issuer’s credit quality based on a fundamental analysis of underlying financial information and does not rely solely on statistical rating organizations or monoline insurer guarantees. As of December 31, 2012, 97% of the Company’s investments in these securities were rated A3 or better excluding guarantees by monoline bond insurers, consistent with December 31, 2011. As of December 31, 2012, approximately 63% or $1,538 million of the Company’s total investments in state and local government securities were guaranteed by monoline bond insurers, providing additional credit quality support. The quality ratings of these investments with and without this guaranteed support as of December 31, 2012 were as follows:
As of December 31, 2012
Fair Value
(In millions) Quality Rating With Guarantee Without Guarantee
State and local governments Aaa $ 131 $ 130 Aa1-Aa3 1,108 1,037
A1-A3 259 328 Baa1-Baa3 40 20
Ba1-Ba3 - 23 Not available - -
TOTAL STATE AND LOCAL GOVERNMENTS $ 1,538 $ 1,538
As of December 31, 2012, the Company’s investments in other asset rating of BAA- that are guaranteed by monoline bond insurers. and mortgage-backed securities totaling $1,148 million included Quality ratings without considering the guarantees for these other $508 million of private placement securities with an average quality asset-backed securities were not available.
As of December 31, 2012, the Company had no direct investments in monoline bond insurers. Guarantees provided by various monoline bond insurers for certain of the Company’s investments in state and local governments and other asset-backed securities as of December 31, 2012 were:
As of December 31, 2012 Guarantor (In millions) Indirect Exposure
National Public Finance Guarantee $ 1,240 Assured Guaranty Municipal Corp 583 AMBAC 185 Financial Guaranty Insurance Co. 38
TOTAL $ 2,046
Commercial Mortgage Loans
The Company’s commercial mortgage loans are fixed rate loans, inspection of the property and other pertinent factors. Based on diversified by property type, location and borrower to reduce exposure property values and cash flows estimated as part of this review and to potential losses. Loans are secured by high quality commercial subsequent portfolio activity, the overall health of the portfolio properties and are generally made at less than 75% of the property’s improved from the 2011 review, consistent with recovery in many value at origination of the loan. In addition to property value, debt commercial real estate markets. The portfolio’s average loan-to-value service coverage, building tenancy and stability of cash flows are all improved to 65% at December 31, 2012, decreasing from 70% as of important financial underwriting considerations. Property type, December 31, 2011, due primarily to increased valuations for the location, quality, and borrower are all important underwriting majority of the underlying properties. Valuation changes varied by considerations as well. The Company holds no direct residential property type as office properties and apartments demonstrated the mortgage loans and generally does not securitize or service mortgage strongest recovery, hotel and retail properties showed modest loans. improvement while industrial properties exhibited a decline,
indicative of a slower recovery for rental rates and demand. The The Company completed its annual in depth review of its commercial
portfolio’s average debt service coverage ratio was estimated to be 1.56 mortgage loan portfolio during the second quarter of 2012. This
at December 31, 2012, substantially higher than 1.40 as of review included an analysis of each property’s year-end 2011 financial
December 31, 2011, including improvement across all property types. statements, rent rolls, operating plans and budgets for 2012, a physical
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial real estate capital markets remain most active for well leased, quality commercial real estate located in strong institutional investment markets. The vast majority of properties securing the mortgages in the Company’s mortgage portfolio possess these characteristics. While commercial real estate fundamentals continued to improve, the improvement has varied across geographies and property types. A broad recovery is dependent on continued improvement in the national economy.
The following table reflects the commercial mortgage loan portfolio as of December 31, 2012, summarized by loan-to-value ratio based on the annual loan review completed during the second quarter of 2012.
LOAN-TO-VALUE DISTRIBUTION
Amortized Cost
Loan-to-Value Ratios Senior Subordinated Total % of Mortgage Loans
Below 50% $ 293 $ 62 $ 355 12% 50% to 59% 795 - 795 28% 60% to 69% 679 24 703 25% 70% to 79% 475 14 489 17% 80% to 89% 267 27 294 10% 90% to 99% 102 - 102 4% 100% or above 113 - 113 4%
TOTALS $ 2,724 $ 127 $ 2,851 100%
As summarized above, $127 million or 4% of the commercial the capital structure of these underlying entities, the Company mortgage loan portfolio is comprised of subordinated notes that were assumes a higher level of risk for higher expected returns. To mitigate fully underwritten and originated by the Company using its standard risk, investments are diversified across approximately 80 separate underwriting procedures and are secured by first mortgage loans. partnerships, and approximately 50 general partners who manage one Senior interests in these first mortgage loans were then sold to other or more of these partnerships. Also, the funds’ underlying investments institutional investors. This strategy allowed the Company to are diversified by industry sector or property type, and geographic effectively utilize its origination capabilities to underwrite high quality region. No single partnership investment exceeds 7% of the loans, limit individual loan exposures, and achieve attractive risk Company’s securities and real estate partnership portfolio. adjusted yields. In the event of a default, the Company would pursue
Although the total fair values of investments exceeded their carrying remedies up to and including foreclosure jointly with the holders of
values as of December 31, 2012, the fair value of the Company’s the senior interest, but would receive repayment only after satisfaction
ownership interest in certain funds that are carried at cost was less of the senior interest.
than carrying value by $39 million. Fund investment values continued In the table above, there are two loans in the ‘‘100% or above’’ to improve, but remained at depressed levels reflecting the impact of category with an aggregate carrying value of $47 million that exceed declines in value experienced predominantly during 2008 and 2009 the value of their underlying properties by $5 million. Both of these due to economic weakness and disruption in the capital markets, loans have current debt service coverage of 1.0 or greater, along with particularly in the commercial real estate market. The Company significant borrower commitment. expects to recover its carrying value over the average remaining life of
these investments of approximately 5 years. Given the current The commercial mortgage portfolio contains approximately 140
economic environment, future impairments are possible; however, loans. Four impaired loans with a carrying value of $125 million are
management does not expect those losses to have a material effect on classified as problem or potential problem loans, including two loans
the Company’s results of operations, financial condition or liquidity. totaling $60 million that are current based on restructured terms and two loans totaling $65 million, net of reserves, that are current but full collection of principal is not expected. All of the remaining loans Problem and Potential Problem Investments continue to perform under their contractual terms. The Company has
‘‘Problem’’ bonds and commercial mortgage loans are either $419 million of loans maturing in the next twelve months. Given the
delinquent by 60 days or more or have been restructured as to terms, quality and diversity of the underlying real estate, positive debt service
which could include concessions by the Company for modification of coverage and significant borrower cash investment averaging nearly
interest rate, principal payment or maturity date. ‘‘Potential problem’’ 30%, the Company remains confident that the vast majority of
bonds and commercial mortgage loans are considered current (no borrowers will continue to perform as expected under the contract
payment more than 59 days past due), but management believes they terms.
have certain characteristics that increase the likelihood that they may become problems. The characteristics management considers include,
Other Long-term Investments but are not limited to, the following: The Company’s other long-term investments include $1,166 million request from the borrower for restructuring; in security partnership and real estate funds as well as direct
principal or interest payments past due by more than 30 but fewer investments in real estate joint ventures. The funds typically invest in
than 60 days; mezzanine debt or equity of privately held companies (securities partnerships) and equity real estate. Given its subordinate position in downgrade in credit rating;
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
collateral losses on asset-backed securities; and
for commercial mortgages, deterioration of debt service coverage below 1.0 or value declines resulting in estimated loan-to-value ratios increasing to 100% or more.
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 2012 or 2011.
The following table shows problem and potential problem investments at amortized cost, net of valuation reserves and write-downs:
December 31, 2012 December 31, 2011
(In millions) Gross Reserve Net Gross Reserve Net
Problem bonds $ 35 $ (17) $ 18 $ 40 $ (13) $ 27 Problem commercial mortgage loans (1) 104 (16) 88 224 (19) 205 Foreclosed real estate 29 - 29 34 - 34
TOTAL PROBLEM INVESTMENTS $ 168 $ (33) $ 135 $ 298 $ (32) $ 266
Potential problem bonds $ 30 $ (9) $ 21 $ 36 $ (10) $ 26 Potential problem commercial mortgage loans 162 (7) 155 141 - 141
TOTAL POTENTIAL PROBLEM INVESTMENTS $ 192 $ (16) $ 176 $ 177 $ (10) $ 167 (1) At December 31, 2012, included $29 million and at December 31, 2011, included $10 million of restructured loans classified in Other long-term investments that were previously reported
in commercial mortgage loans.
Net problem investments represent less than 1% of total investments Commercial mortgage loans are considered impaired when it is excluding policy loans at December 31, 2012. Net problem probable that the Company will not collect all amounts due according investments decreased by $131 million during 2012, primarily due to to the terms of the original loan agreement. In the above table, a substantial paydown on a prior period problem mortgage loan and problem and potential problem commercial mortgage loans totaling the subsequent reclassification of the remaining balance of that loan to $125 million (net of valuation reserves) at December 31, 2012, are good standing based on the results of the annual loan review considered impaired. During 2012, the Company recorded a completed during the second quarter of 2012. $10 million pre-tax ($7 million after-tax) increase to valuation
reserves on impaired commercial mortgage loans. See Note 12 to the Net potential problem investments represent less than 1% of total
Consolidated Financial Statements of this Form 10-K for additional investments excluding policy loans at December 31, 2012. Net
information regarding impaired commercial mortgage loans. potential problem investments increased by $9 million in 2012, primarily due to the addition of two mortgage loans.
Included in after-tax realized investment gains (losses) were changes in valuation reserves related to commercial mortgage loans and other-than-temporary impairments on fixed maturity securities as follows:
(In millions) 2012 2011
Credit-related (1) $ (13) $ (18) Other (1) (16)
TOTAL $ (14) $ (34) (1) Credit-related losses include other-than-temporary declines in fair value of fixed maturities and equity securities and changes in valuation reserves and asset write-downs related to commercial
mortgage loans and investments in real estate entities. There were no credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income.
portion of these assets for the long term. Future credit-related lossesInvestment Outlook are not expected to have a material adverse effect on the Company’s
The financial markets continue to be impacted by economic financial condition or liquidity. uncertainty in the United States and Europe, however, asset values
While management believes the commercial mortgage loan portfolioincreased during 2012, reflecting a decrease in market yields. Future is positioned to perform well due to its solid aggregate loan-to-valuerealized and unrealized investment results will be impacted largely by ratio, strong debt service coverage and minimal underwater positions,market conditions that exist when a transaction occurs or at the broad commercial real estate market fundamentals continue to bereporting date. These future conditions are not reasonably under stress reflecting a slow economic recovery. Should thesepredictable. Management believes that the vast majority of the conditions remain for an extended period or worsen substantially, itCompany’s fixed maturity investments will continue to perform under could result in an increase in problem and potential problem loans.their contractual terms, and that declines in their fair values below Given the current economic environment, future impairments arecarrying value are temporary. Based on the strategy to match the possible; however, management does not expect those losses to have aduration of invested assets to the duration of insurance and material adverse effect on the Company’s financial condition orcontractholder liabilities, the Company expects to hold a significant liquidity.
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Market Risk
Use of derivatives. The Company generally uses derivativeFinancial Instruments financial instruments to minimize certain market risks.
The Company’s assets and liabilities include financial instruments See Notes 2(C) and 13 to the Consolidated Financial Statements forsubject to the risk of potential losses from adverse changes in market additional information about financial instruments, includingrates and prices. Subsequent to the reinsurance transaction entered derivative financial instruments.into on February 4, 2013 as further discussed in Note 25 to the
Consolidated Financial Statements, the Company’s primary market risk exposures are: Effect of Market Fluctuations on the Company
Interest-rate risk on fixed-rate, medium-term instruments. The examples that follow illustrate the adverse effect of hypothetical Changes in market interest rates affect the value of instruments that changes in market rates or prices on the fair value of certain financial promise a fixed return and the Company’s employee pension instruments including: liabilities.
a hypothetical increase in market interest rates, primarily for fixed Foreign currency exchange rate risk of the U.S. dollar primarily to maturities and commercial mortgage loans, partially offset by the South Korean won, Euro, British pound, Taiwan dollar, and liabilities for long-term debt and, in 2011, GMIB contracts; Turkish lira. An unfavorable change in exchange rates reduces the
a hypothetical strengthening of the U.S. dollar to foreign currencies,carrying value of net assets denominated in foreign currencies. primarily for the net assets of foreign subsidiaries denominated in a
Equity price risk for domestic equity securities and the plan assets foreign currency; and of the Company’s employee pension plans.
a hypothetical decrease in market prices for equity exposures, primarily for equity securities and, in 2011, GMIB contracts.
The Company’s Management of Market Risks Management believes that actual results could differ materially from
The Company predominantly relies on three techniques to manage its these examples because: exposure to market risk:
these examples were developed using estimates and assumptions; Investment/liability matching. The Company generally selects
changes in the fair values of all insurance-related assets and liabilitiesinvestment assets with characteristics (such as duration, yield, have been excluded because their primary risks are insurance rathercurrency and liquidity) that correspond to the underlying than market risk;characteristics of its related insurance and contractholder liabilities
so that the Company can match the investments to its obligations. changes in the fair values of investments recorded using the equity Shorter-term investments support generally shorter-term life and method of accounting and liabilities for pension and other health liabilities. Medium-term, fixed-rate investments support postretirement and postemployment benefit plans (and related interest-sensitive and health liabilities. Longer-term investments assets) have been excluded, consistent with the disclosure guidance; generally support products with longer pay out periods such as and annuities and long-term disability liabilities.
changes in the fair values of other significant assets and liabilities Use of local currencies for foreign operations. The Company such as goodwill, deferred policy acquisition costs, taxes, and various generally conducts its international business through foreign accrued liabilities have been excluded; because they are not financial operating entities that maintain assets and liabilities in local instruments, their primary risks are other than market risk. currencies. While this technique does not reduce the Company’s foreign currency exposure of its net assets, it substantially limits exchange rate risk to those net assets.
The effects of hypothetical changes in market rates or prices on the fair values of certain of the Company’s financial instruments, subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as of December 31(the effects of the GMIB business are presented as though the Company’s 2013 reinsurance agreement was effective as of December 31, 2012):
Loss in fair value
Market scenario for certain non-insurance financial instruments (in millions) 2012 2011
100 basis point increase in interest rates $ 685 $ 575 10% strengthening in U.S. dollar to foreign currencies $ 275 $ 220 10% decrease in market prices for equity exposures $ 10 $ 30
The effect of a hypothetical increase in interest rates was determined models, primarily duration modeling. The impact of a hypothetical by estimating the present value of future cash flows using various increase to interest rates at December 31, 2012 was greater than that
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PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
at December 31, 2011 reflecting the reinsurance of the remaining net In 2012, the primary effect of a hypothetical decrease in the market prices of equity exposures was a 10% decrease in the value of equityGMIB liability in 2013. securities reported as investment assets because the equity exposures of
The effect of a hypothetical strengthening of the U.S. dollar relative to the Company’s GMIB contracts were significantly reduced by the
the foreign currencies held by the Company was estimated to be 10% 2013 reinsurance agreement.
of the U.S. dollar equivalent fair value. The Company’s foreign In 2011, the effect of a hypothetical decrease in the market prices ofoperations hold investment assets, such as fixed maturities, cash, and equity exposures was estimated based on a 10% decrease in mutualcash equivalents, that are generally invested in the currency of the fund values underlying GMIB contracts and the equity futuresrelated liabilities. Due to the increase in the fair value of these contracts used to partially hedge these GMIB equity exposures, as wellinvestments in 2012, that are primarily denominated in the South as the value of equity securities held by the Company.Korean won, the effect of a hypothetical 10% strengthening in U.S.
dollar to foreign currencies at December 31, 2012 was greater than As noted above, the Company manages its exposures to market risk by that effect at December 31, 2011. matching investment characteristics to its obligations.
Cautionary Statement for Purposes of the ‘‘Safe Harbor’’ Provisions of the Private Securities Litigation Reform Act of 1995
Cigna Corporation and its subsidiaries (the ‘‘Company’’) and its risks associated with pending and potential state and federal class representatives may from time to time make written and oral forward- action lawsuits, disputes regarding reinsurance arrangements, looking statements, including statements contained in press releases, other litigation and regulatory actions challenging the in the Company’s filings with the Securities and Exchange Company’s businesses, including disputes related to payments to Commission, in its reports to shareholders and in meetings with health care professionals, government investigations and analysts and investors. Forward-looking statements may contain proceedings, tax audits and related litigation, and regulatory information about financial prospects, economic conditions, trends market conduct and other reviews, audits and investigations, and other uncertainties. These forward-looking statements are based including the possibility that the acquired HealthSpring business on management’s beliefs and assumptions and on information may be adversely affected by potential changes in risk adjustment available to management at the time the statements are or were made. data validation audit and payment adjustment methodology; Forward-looking statements include, but are not limited to, the
challenges and risks associated with implementing improvementinformation concerning possible or assumed future business strategies, initiatives and strategic actions in the ongoing operations of thefinancing plans, competitive position, potential growth opportunities, businesses, including those related to: (i) growth in targetedpotential operating performance improvements, trends and, in geographies, product lines, buying segments and distributionparticular, the Company’s strategic initiatives, litigation and other channels, (ii) offering products that meet emerging marketlegal matters, operational improvement initiatives in the health care needs, (iii) strengthening underwriting and pricing effectiveness,operations, and the outlook for the Company’s full year 2013 and (iv) strengthening medical cost results and a growing medicalbeyond results. Forward-looking statements include all statements customer base, (v) delivering quality service to members andthat are not historical facts and can be identified by the use of forward- health care professionals using effective technology solutions,looking terminology such as the words ‘‘believe’’, ‘‘expect’’, ‘‘plan’’, and (vi) lowering administrative costs;‘‘intend’’, ‘‘anticipate’’, ‘‘estimate’’, ‘‘predict’’, ‘‘potential’’, ‘‘may’’,
‘‘should’’ or similar expressions. the unique political, legal, operational, regulatory and other challenges associated with expanding our business globally;By their nature, forward-looking statements: (i) speak only as of the
date they are made, (ii) are not guarantees of future performance or challenges and risks associated with the successful management results and (iii) are subject to risks, uncertainties and assumptions that of the Company’s outsourcing projects or key vendors; are difficult to predict or quantify. Therefore, actual results could
the ability of the Company to execute its growth plans bydiffer materially and adversely from those forward-looking statements successfully leveraging capabilities and integrating acquiredas a result of a variety of factors. Some factors that could cause actual businesses, including the HealthSpring businesses by, amongresults to differ materially from the forward-looking statements
include: other things, operating Medicare Advantage plans and HealthSpring’s prescription drug plan, retaining and growing the
health care reform legislation, as well as additional changes in customer base, realizing revenue, expense and other synergies,
state or federal regulation, that could, among other items, affect renewing contracts on competitive terms or maintaining
the way the Company does business, increase costs, limit the performance under Medicare contracts, successfully leveraging
ability to effectively estimate, price for and manage medical the information technology platform of the acquired businesses,costs, and affect the Company’s products, services, market and retaining key personnel;segments, technology and processes; risks associated with security or interruption of informationadverse changes in state, federal and international laws and systems, that could, among other things, cause operationalregulations, including increased medical, administrative, disruption;technology or other costs resulting from new legislative and
regulatory requirements imposed on the Company’s businesses;
CIGNA CORPORATION - 2012 Form 10-K 61
3.
4.
5.
6.
7.
1.
8.2.
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
risks associated with the Company’s information technology pharmacy costs and mortality experience to rise significantly, and strategy, including that the failure to make effective investments cause operational disruption, depending on the severity of the or execute improvements may impede the Company’s ability to event and number of individuals affected. deliver services efficiently;
This list of important factors is not intended to be exhaustive. Other the failure to maintain effective prevention, detection and sections of the Form 10-K, including the ‘‘Risk Factors’’ section, and control systems for regulatory compliance and detection of fraud other documents filed with the Securities and Exchange Commission and abuse; include both expanded discussion of these factors and additional risk
factors and uncertainties that could preclude the Company from risks associated with the Company’s mail order pharmacy
realizing the forward-looking statements. The Company does not business that, among other things, includes any potential
assume any obligation to update any forward-looking statements, operational deficiencies or service issues as well as loss or
whether as a result of new information, future events or otherwise, suspension of state pharmacy licenses;
except as required by law. liability associated with the Company’s operations of onsite clinics and medical facilities, including the health care centers Management’s Annual Report on Internal operated by the HealthSpring business;
Control over Financial Reporting heightened competition, particularly price competition, that
Management of Cigna Corporation is responsible for establishing andcould reduce product margins and constrain growth in the maintaining adequate internal controls over financial reporting. TheCompany’s businesses, primarily the Global Health Care Company’s internal controls were designed to provide reasonablebusiness; assurance to the Company’s management and Board of Directors that
significant stock market declines, that could, among other the Company’s consolidated published financial statements for things, impact the Company’s pension plans in future periods as external purposes were prepared in accordance with generally accepted well as the recognition of additional pension obligations; accounting principles. The Company’s internal control over financial
reporting include those policies and procedures that:significant changes in market interest rates or sustained deterioration in the commercial real estate markets that could pertain to the maintenance of records that, in reasonable detail, reduce the value of the Company’s investment assets; accurately and fairly reflect the transactions and dispositions of
the assets and liabilities of the Company;downgrades in the financial strength ratings of the Company’s insurance subsidiaries, that could, among other things, adversely provide reasonable assurance that transactions are recorded as affect new sales and retention of current business or limit the necessary to permit preparation of financial statements in subsidiaries’ ability to dividend capital to the parent company, accordance with generally accepted accounting principles, and resulting in changes in statutory reserve or capital requirements that receipts and expenditures of the Company are being made or other financial constraints; only in accordance with authorization of management and
directors of the Company; andsignificant deterioration in global market economic conditions and market volatility, that could have an adverse effect on the provide reasonable assurance regarding prevention or timely Company’s investments, liquidity and access to capital markets; detection of unauthorized acquisitions, use or disposition of the
Company’s assets that could have a material effect on theunfavorable developments in economic conditions, that could, financial statements.among other things, have an adverse effect on the impact on the
businesses of our customers (including the amount and type of Because of its inherent limitations, internal control over financial health care services provided to their workforce, loss in workforce reporting may not prevent or detect misstatements. and ability to pay their obligations), the businesses of hospitals
Management assessed the effectiveness of the Company’s internaland other providers (including increased medical costs) or state controls over financial reporting as of December 31, 2012. In makingand federal budgets for programs, such as Medicare or social this assessment, Management used the criteria set forth by thesecurity, resulting in a negative impact to the Company’s Committee of Sponsoring Organizations of the Treadwayrevenues or results of operations; Commission (‘‘COSO’’) in Internal Control-Integrated Framework.
risks associated with the Company’s reinsurance arrangements Based on management’s assessment and the criteria set forth by for the run-off retirement benefits business, individual life COSO, it was determined that the Company’s internal controls over insurance and annuity business, variable annuity death benefits financial reporting are effective as of December 31, 2012. and guaranteed minimum income benefits businesses, including
Our evaluation of the effectiveness of internal control over financialbut not limited to, failure by reinsurers to meet their reinsurance reporting as of December 31, 2012 did not include an evaluation ofobligations or that the reinsurance arrangements do not the internal control over financial reporting of the Great Americanotherwise provide adequate protection; or Supplemental Benefits Group. We excluded the Great American
potential public health epidemics, pandemics, natural disasters Supplemental Benefits Group from our assessment of internal control and bio-terrorist activity, that could, among other things, cause over financial reporting as of December 31, 2012 because it was the Company’s covered medical and disability expenses,
62 CIGNA CORPORATION - 2012 Form 10-K
9.
10.
11.
12.
13.
14.
15.
(i)
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18.
19.
20.
PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
acquired in a purchase business combination consummated on The Company’s independent registered public accounting firm, August 31, 2012. Great American Supplemental Benefits Group’s PricewaterhouseCoopers, has audited the effectiveness of the total assets acquired represent approximately 2% of consolidated total Company’s internal control over financial reporting, as stated in their assets as of December 31, 2012; total revenues acquired represent less report located on page 126 in this Form 10-K. than 1% of consolidated total revenues for the year ended December 31, 2012.
Quantitative and Qualitative Disclosures About Market Risk
The information contained under the caption ‘‘Market Risk’’ in the MD&A section of this Form 10-K is incorporated by reference.
CIGNA CORPORATION - 2012 Form 10-K 63
ITEM 7A
PART II ITEM 8 Financial Statements and Supplementary Data
Financial Statements and Supplementary Data
Cigna Corporation Consolidated Statements of Income
For the years ended December 31, (In millions, except per share amounts) 2012 2011 2010
Revenues Premiums and fees $ 26,187 $ 18,966 $ 18,274 Net investment income 1,144 1,146 1,105 Mail order pharmacy revenues 1,623 1,447 1,420 Other revenues 121 244 254 Realized investment gains (losses):
Other-than-temporary impairments on fixed maturities, net (11) (26) (1) Other realized investment gains 55 88 76
Total realized investment gains 44 62 75
TOTAL REVENUES 29,119 21,865 21,128
Benefits and Expenses Global Health Care medical claims expense 14,228 9,125 9,222 Other benefit expenses 3,672 3,365 3,011 Mail order pharmacy cost of goods sold 1,328 1,203 1,169 GMIB fair value (gain) loss (41) 234 55 Other operating expenses 7,455 6,062 5,869
TOTAL BENEFITS AND EXPENSES 26,642 19,989 19,326
Income before Income Taxes 2,477 1,876 1,802
Income taxes: Current 719 398 331 Deferred 134 217 188
TOTAL TAXES 853 615 519
Net Income 1,624 1,261 1,283 Less: Net Income Attributable to Redeemable Noncontrolling Interest 1 – – Less: Net Income Attributable to Other Noncontrolling Interest – 1 4
SHAREHOLDERS’ NET INCOME $ 1,623 $ 1,260 $ 1,279
Shareholders’ Net Income Per Share:
Basic $ 5.70 $ 4.65 $ 4.69
Diluted $ 5.61 $ 4.59 $ 4.65
Dividends Declared Per Share $ 0.04 $ 0.04 $ 0.04 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
64 CIGNA CORPORATION - 2012 Form 10-K
ITEM 8
PART II ITEM 8 Financial Statements and Supplementary Data
Cigna Corporation Consolidated Statements of Comprehensive Income For the year ended December 31, (In millions, except per share amounts) 2012 2011 2010
Shareholders’ net income $ 1,623 $ 1,260 $ 1,279
Shareholders’ other comprehensive income (loss): Net unrealized appreciation (depreciation) on securities:
Fixed maturities 144 210 151 Equity securities 3 (2) (1)
Net unrealized appreciation (depreciation) on securities 147 208 150 Net unrealized appreciation (depreciation), derivatives (5) 1 6 Net translation of foreign currencies 66 (22) 33 Postretirement benefits liability adjustment (92) (360) (189)
Shareholders’ other comprehensive income (loss) 116 (173) -
Shareholders’ comprehensive income 1,739 1,087 1,279
Comprehensive income attributable to noncontrolling interest: Net income attributable to redeemable noncontrolling interest 1 - - Net income attributable to other noncontrolling interest - 1 4 Other comprehensive income attributable to redeemable noncontrolling interest 2 - - Other comprehensive income attributable to other noncontrolling interest - - 2
TOTAL COMPREHENSIVE INCOME $ 1,742 $ 1,088 $ 1,285 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CIGNA CORPORATION - 2012 Form 10-K 65
PART II ITEM 8 Financial Statements and Supplementary Data
Cigna Corporation Consolidated Balance Sheets
As of December 31, (In millions, except per share amounts) 2012 2011
ASSETS Investments:
Fixed maturities, at fair value (amortized cost, $15,481; $14,257) $ 17,705 $ 16,217 Equity securities, at fair value (cost, $121; $124) 111 100 Commercial mortgage loans 2,851 3,301 Policy loans 1,501 1,502 Real estate 83 87 Other long-term investments 1,255 1,058 Short-term investments 154 225
Total investments 23,660 22,490 Cash and cash equivalents 2,978 4,690 Accrued investment income 258 252 Premiums, accounts and notes receivable, net 1,777 1,358 Reinsurance recoverables 6,256 6,256 Deferred policy acquisition costs 1,198 817 Property and equipment 1,120 1,024 Deferred income taxes, net 374 803 Goodwill 6,001 3,164 Other assets, including other intangibles 2,355 1,750 Separate account assets 7,757 8,093
TOTAL ASSETS $ 53,734 $ 50,697
LIABILITIES Contractholder deposit funds $ 8,508 $ 8,553 Future policy benefits 9,265 8,593 Unpaid claims and claim expenses 4,062 3,936 Global Health Care medical claims payable 1,856 1,305 Unearned premiums and fees 549 502
Total insurance and contractholder liabilities 24,240 22,889 Accounts payable, accrued expenses and other liabilities 6,667 6,627 Short-term debt 201 104 Long-term debt 4,986 4,990 Separate account liabilities 7,757 8,093
TOTAL LIABILITIES 43,851 42,703
Contingencies — Note 24 Redeemable noncontrolling interest 114 - SHAREHOLDERS’ EQUITY Common stock (par value per share, $0.25; shares issued, 366; authorized, 600) 92 92 Additional paid-in capital 3,295 3,188 Net unrealized appreciation, fixed maturities $ 883 $ 739 Net unrealized appreciation, equity securities 4 1 Net unrealized depreciation, derivatives (28) (23) Net translation of foreign currencies 69 3 Postretirement benefits liability adjustment (1,599) (1,507)
Accumulated other comprehensive loss (671) (787) Retained earnings 12,330 10,787 Less: treasury stock, at cost (5,277) (5,286)
TOTAL SHAREHOLDERS’ EQUITY 9,769 7,994
Total liabilities and equity $ 53,734 $ 50,697
SHAREHOLDERS’ EQUITY PER SHARE $ 34.18 $ 28.00 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
66 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Cigna Corporation Statement of Changes in Total Equity
Accumulated Additional Other Redeemable
Common Paid-in Comprehensive Retained Treasury Shareholders’ Noncontrolling Total NoncontrollingFor the year ended December 31, (In millions, except per share amounts) Stock Capital Loss Earnings Stock Equity Interest Equity Interest
Balance at January 1, 2010, as previously reported $ 88 $ 2,514 $ (618) $ 8,625 $ (5,192) $ 5,417 $ 12 $ 5,429 $ - Cumulative effect of amended accounting guidance for deferred policy acquisition costs 4 (223) (219) (219)
BALANCE AT JANUARY 1, 2010, as retrospectively adjusted 88 2,514 (614) 8,402 (5,192) 5,198 12 5,210 -
2010 Activity: Effect of issuing stock for employee benefit plans 20 (80) 151 91 91 Other comprehensive income - - 2 2 Net income 1,279 1,279 4 1,283 Common dividends declared (per share: $0.04) (11) (11) (11) Repurchase of common stock (201) (201) (201)
BALANCE AT DECEMBER 31, 2010 88 2,534 (614) 9,590 (5,242) 6,356 18 6,374 -
2011 Activity: Issuance of common stock 4 625 629 629 Effect of issuing stock for employee benefit plans 27 (52) 181 156 156 Effects of acquisition of noncontrolling interest 2 2 (19) (17) Other comprehensive (loss) (173) (173) (173) Net income 1,260 1,260 1 1,261 Common dividends declared (per share: $0.04) (11) (11) (11) Repurchase of common stock (225) (225) (225)
BALANCE AT DECEMBER 31, 2011 92 3,188 (787) 10,787 (5,286) 7,994 - 7,994 -
2012 Activity: Effect of issuing stock for employee benefit plans 107 (69) 217 255 255 Effects of acquisition of joint venture - - - 111 Other comprehensive income 116 116 116 2 Net income 1,623 1,623 1,623 1 Common dividends declared (per share: $0.04) (11) (11) (11) Repurchase of common stock (208) (208) (208)
BALANCE AT DECEMBER 31, 2012 $ 92 $ 3,295 $ (671) $ 12,330 $(5,277) $ 9,769 $ - $9,769 $ 114
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CIGNA CORPORATION - 2012 Form 10-K 67
PART II ITEM 8 Financial Statements and Supplementary Data
Cigna Corporation Consolidated Statements of Cash Flows
For the years ended December 31, (In millions) 2012 2011 2010
Cash Flows from Operating Activities Net income $ 1,624 $ 1,261 $ 1,283 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 560 345 292 Realized investment gains (44) (62) (75) Deferred income taxes 134 217 188 Gains on sales of businesses (excluding discontinued operations) (18) (25) (13)
Net changes in assets and liabilities, net of non-operating effects: Premiums, accounts and notes receivable (71) (50) 62 Reinsurance recoverables 62 19 37 Deferred policy acquisition costs (159) (129) (94) Other assets 31 (307) 3 Insurance liabilities 245 154 325 Accounts payable, accrued expenses and other liabilities (132) 344 (272) Current income taxes 29 (246) 2 Proceeds from sales of mortgage loans held for sale 61 - - Other, net 28 (30) 5
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,350 1,491 1,743
Cash Flows from Investing Activities Proceeds from investments sold:
Fixed maturities 583 830 822 Equity securities 8 46 4 Commercial mortgage loans 380 253 63 Other (primarily short-term and other long-term investments) 831 1,915 1,102
Investment maturities and repayments: Fixed maturities 1,507 1,265 1,084 Commercial mortgage loans 342 385 70
Investments purchased: Fixed maturities (2,326) (2,877) (2,587) Equity securities (8) (20) (12) Commercial mortgage loans (364) (487) (239) Other (primarily short-term and other long-term investments) (821) (2,056) (810)
Property and equipment purchases (408) (422) (300) Acquisitions and dispositions, net of cash acquired (3,581) (102) (539)
NET CASH USED IN INVESTING ACTIVITIES (3,857) (1,270) (1,342)
Cash Flows from Financing Activities Deposits and interest credited to contractholder deposit funds 1,337 1,323 1,295 Withdrawals and benefit payments from contractholder deposit funds (1,264) (1,178) (1,205) Change in cash overdraft position 25 (1) 59 Net change in short-term debt 98 - - Net proceeds on issuance of long-term debt - 2,676 543 Repayment of long-term debt (326) (451) (270) Repurchase of common stock (208) (225) (201) Issuance of common stock 121 734 64 Common dividends paid (11) (11) (11)
NET CASH (USED IN) / PROVIDED BY FINANCING ACTIVITIES (228) 2,867 274
Effect of foreign currency rate changes on cash and cash equivalents 23 (3) 6
Net increase (decrease) in cash and cash equivalents (1,712) 3,085 681 Cash and cash equivalents, beginning of year 4,690 1,605 924
Cash and cash equivalents, end of year $ 2,978 $ 4,690 $ 1,605
Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 655 $ 633 $ 326 Interest paid $ 248 $ 185 $ 180
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
68 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Notes to the Consolidated Financial Statements
Description of Business
Cigna Corporation was incorporated in the State of Delaware in security. Its insurance subsidiaries are major providers of medical, 1981. Various businesses that are described in this Annual Report on dental, disability, life and accident insurance and related products and Form 10-K for the fiscal year ended December 31, 2012 services, the majority of which are offered through employers and (‘‘Form 10-K’’) are conducted by its insurance and other subsidiaries. other groups (e.g. governmental and non-governmental organizations, As used in this document, ‘‘Cigna’’, the ‘‘Company’’, ‘‘we’’ and ‘‘our’’ unions and associations). Cigna also offers Medicare and Medicaid may refer to Cigna Corporation itself, one or more of its subsidiaries, products and health, life and accident insurance coverages primarily to or Cigna Corporation and its consolidated subsidiaries. individuals in the U.S. and selected international markets. In addition
to its ongoing operations described above, Cigna also has certainThe Company is a global health services organization with a mission run-off operations, including a Run-off Reinsurance segment.to help its customers improve their health, well-being and sense of
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the accounts of Cigna Corporation and its significant subsidiaries. Intercompany
Fees Paid to the Federal Government by Health Insurers transactions and accounts have been eliminated in consolidation.
(Accounting Standards Update (‘‘ASU’’) 2011-06). In 2011, the These Consolidated Financial Statements were prepared in Financial Accounting Standards Board (‘‘FASB’’) issued accounting conformity with accounting principles generally accepted in the guidance for a health insurance industry assessment (the ‘‘fee’’) United States of America (‘‘GAAP’’). Amounts recorded in the mandated by the Patient Protection and Affordable Care Act of 2010 Consolidated Financial Statements necessarily reflect management’s (‘‘Health Care Reform’’). This fee will be levied on health insurers estimates and assumptions about medical costs, investment valuation, beginning in 2014 based on a ratio of an insurer’s net health insurance interest rates and other factors. Significant estimates are discussed premiums written for the previous calendar year compared to the U.S. throughout these Notes; however, actual results could differ from health insurance industry total. In addition, because these fees will those estimates. The impact of a change in estimate is generally generally not be tax deductible, the Company’s effective tax rate is included in earnings in the period of adjustment. expected to be adversely impacted in future periods. Under the
guidance, the liability for the fee will be estimated and recorded in fullIn preparing these Consolidated Financial Statements, the Company each year beginning in 2014 when health insurance is first provided. Ahas evaluated events that occurred between the balance sheet date and corresponding deferred cost will be recorded and amortized over theFebruary 28, 2013. calendar year. The amount of these fees is expected to be material,
Certain reclassifications have been made to prior year amounts to although the Company is unable to estimate the impact of these fees
conform to the current presentation. In particular, as a result of the on shareholders’ net income and the effective tax rate because
changes in segment reporting discussed further in Note 23, benefits guidance from the federal department of Health and Human Services
expense amounts previously reported in Other Benefits Expense for for these calculations has not been finalized.
the international health care business have been reclassified to Global Health Care Medical Claims Expense in the Consolidated Statements Deferred acquisition costs. Effective January 1, 2012, the of Income. Similarly, insurance liabilities previously classified as Company adopted the FASB’s amended guidance (ASU 2010-26) on Unpaid Claims for the international health care business have been accounting for costs to acquire or renew insurance contracts. This reclassified to Global Health Care Medical Claims Payable in the guidance requires certain sales compensation and telemarketing costs Consolidated Balance Sheets. related to unsuccessful efforts and any indirect costs to be expensed as
incurred. The Company’s deferred acquisition costs arise from sales Variable interest entities. As of December 31, 2012 and 2011 the
and renewal activities primarily in its Global Supplemental Benefits Company determined it was not a primary beneficiary in any material
segment. This amended guidance was implemented through variable interest entities.
retrospective adjustment of comparative prior periods. Summarized below are the effects of this amended guidance on previously reported amounts as of December 31, 2011 and for the years ended December 31, 2011 and 2010. Previously reported amounts presented below include certain immaterial reclassifications.
CIGNA CORPORATION - 2012 Form 10-K 69
NOTE 1
NOTE 2
A. Basis of Presentation B. Changes in Accounting Pronouncements
PART II ITEM 8 Financial Statements and Supplementary Data
Year Ended December 31
Effect of amended As previously accounting As retrospectively
reported guidance adjusted Condensed Consolidated Statement of Income (In millions) 2011 2010 2011 2010 2011 2010
Revenues, excluding other revenues $ 21,621 $ 20,874 $ - $ - $ 21,621 $ 20,874 Other revenues 254 260 (10) (6) 244 254
TOTAL REVENUES 21,875 21,134 (10) (6) 21,865 21,128
Benefits and expenses, excluding other operating expenses 13,927 13,457 - - 13,927 13,457 Other operating expenses 5,980 5,807 82 62 6,062 5,869
TOTAL BENEFITS AND EXPENSES 19,907 19,264 82 62 19,989 19,326
Income before Income Taxes 1,968 1,870 (92) (68) 1,876 1,802
Current income taxes 398 331 - - 398 331 Deferred income taxes 242 190 (25) (2) 217 188
TOTAL TAXES 640 521 (25) (2) 615 519
Discontinued Operations - - - - - - Net income 1,328 1,349 (67) (66) 1,261 1,283 Less: Net income attributable to Noncontrolling Interest 1 4 - - 1 4
SHAREHOLDERS’ NET INCOME $ 1,327 $ 1,345 $ (67) $ (66) $ 1,260 $ 1,279
Earnings per share: Basic $ 4.90 $ 4.93 $ (0.25) $ (0.24) $ 4.65 $ 4.69 Diluted $ 4.84 $ 4.89 $ (0.25) $ (0.24) $ 4.59 $ 4.65
As of December 31
Effect of amended As previously accounting As retrospectively
reported guidance adjusted Condensed Consolidated Balance Sheet (In millions) 2011 2011 2011
Deferred policy acquisition costs $ 1,312 $ (495) $ 817 Deferred income taxes, net 632 171 803 Other assets, including other intangibles 1,776 (26) 1,750 All other assets 47,327 - 47,327
TOTAL ASSETS $ 51,047 $ (350) $ 50,697
Net translation of foreign currencies $ (3) $ 6 $ 3 Retained earnings 11,143 (356) 10,787 Other shareholders’ equity (2,796) - (2,796)
TOTAL SHAREHOLDERS’ EQUITY $ 8,344 $ (350) $ 7,994
Presentation of Comprehensive Income. Effective January 1, 2012, measurement principles and expands required disclosures to include the Company adopted the FASB’s amended guidance (ASU 2011-05) quantitative and qualitative information about unobservable inputs in that requires presenting net income and other comprehensive income Level 3 measurements and leveling for financial instruments not in either a single continuous statement or in two separate, but carried at fair value in the financial statements. Upon adoption, there consecutive statements. Neither measurement of comprehensive were no effects on the Company’s fair value measurements. See income nor disclosure requirements for reclassification adjustments Note 11 for expanded fair value disclosures. between other comprehensive income and net income were affected
Troubled debt restructurings. Effective July 1, 2011, the Companyby this amended guidance. The Company has elected to present a adopted the FASB’s updated guidance (ASU 2011-02) to clarify forseparate statement of comprehensive income following the statement lenders that a troubled debt restructuring occurs when a debtof income and has retrospectively adjusted prior periods to conform to modification is a concession to the borrower and the borrower isthe new presentation, as required. experiencing financial difficulties. This guidance was required to be
Amendments to Fair Value Measurement and Disclosure. Effective applied retrospectively for restructurings occurring on or after January 1, 2012, the Company adopted the FASB’s amended January 1, 2011. The amendment also required new disclosures to be guidance on fair value measurement and disclosure (ASU 2011-04) provided beginning in the third quarter of 2011 addressing certain on a prospective basis. A key objective was to achieve common fair troubled debt restructurings. Adoption of the new guidance did not value measurement and disclosure requirements between U.S. GAAP have a material effect to the Company’s results of operations or and IFRS. The amended guidance changes certain fair value
70 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
financial condition. See Note 12 for additional information related to discounted cash flow analyses. Certain commercial mortgage loans commercial mortgage loans. without valuation reserves are considered impaired because the
Company will not collect all interest due according to the terms of the original agreements. However, the Company expects to recover theirC. Investments remaining carrying value primarily because it is less than the fair value of the underlying real estate.The Company’s accounting policies for investment assets are discussed
below: Policy loans. Policy loans are carried at unpaid principal balances plus accumulated interest. The loans are collateralized by insurance policyFixed maturities and equity securities. Most fixed maturities cash values and therefore have no exposure to credit loss.(including bonds, mortgage and other asset-backed securities and
preferred stocks redeemable by the investor) and some equity Real estate. Investment real estate can be ‘‘held and used’’ or ‘‘held forsecurities are classified as available for sale and are carried at fair value sale’’. As of December 31, 2012 and 2011, all of the Company’s realwith changes in fair value recorded in accumulated other estate is classified as ‘‘held and used’’. Such real estate is expected to becomprehensive income (loss) within shareholders’ equity. The held longer than one year and includes real estate acquired throughCompany accounts for fixed maturities with fair value below the foreclosure of commercial mortgage loans. The Company carriesamortized cost as follows: real estate held and used at depreciated cost less any write-downs to
The Company first assesses its intent to sell or whether it is more fair value due to impairment and assesses impairment when cash flows likely than not to be required to sell such fixed maturities before indicate that the carrying value may not be recoverable. The their fair values recover. Company estimates the fair value of impaired real estate using internal
valuations generally based on discounted cash flow analyses.If either of those conditions is met, an impairment loss is recognized Depreciation is generally calculated using the straight-line methodin net income for the excess of the amortized cost over fair value. based on the estimated useful life of the particular real estate asset. At
Even when there is no intent or requirement to sell the fixed the time of foreclosure, properties are reclassified from commercial maturity, if the Company determines that it does not expect to mortgage loans to real estate or other long-term investments recover the amortized cost basis of fixed maturities the credit depending on the ownership of the underlying assets. portion of the impairment loss is recognized in net income and the
Other long-term investments. Other long-term investments includenon-credit portion, if any, is recognized in accumulated other investments in unconsolidated entities. These entities include certaincomprehensive income. limited partnerships and limited liability companies holding real
The credit portion is the difference between amortized cost and the estate, securities or loans. These investments are carried at cost plus net present value of its projected future cash flows. Projected future the Company’s ownership percentage of reported income or loss in cash flows are based on qualitative and quantitative factors, cases where the Company has significant influence, otherwise the including the probability of default, and the estimated timing and investment is carried at cost. Income from certain entities is reported amount of recovery. For mortgage and asset-backed securities, on a one quarter lag depending on when their financial information is estimated future cash flows are also based on assumptions about the received. Also included in other long-term investments are loans to collateral attributes including prepayment speeds, default rates and unconsolidated real estate entities secured by the equity interests of changes in value. these real estate entities, that are carried at unpaid principal balances
(mezzanine loans). These other long-term investments are consideredFixed maturities and equity securities also include trading and certain impaired, and written down to their fair value, when cash flowshybrid securities that are carried at fair value with changes in fair value indicate that the carrying value may not be recoverable. Fair value isreported in realized investment gains and losses. The Company has generally determined based on a discounted cash flow analysis.irrevocably elected the fair value option for these securities to simplify
accounting and mitigate volatility in results of operations and Additionally, other long-term investments include interest rate and financial condition. Hybrid securities include certain preferred stock foreign currency swaps carried at fair value. See Note 13 for and debt securities with call or conversion options. information on the Company’s accounting policies for these derivative
financial instruments. Commercial mortgage loans. Mortgage loans held by the Company are made exclusively to commercial borrowers at a fixed rate of Short-term investments. Investments with maturities of greater than interest. Commercial mortgage loans are carried at unpaid principal 90 days but less than one year from time of purchase are classified as balances or, if impaired, the lower of unpaid principal or fair value of short-term, available for sale and carried at fair value, which the underlying real estate. If the fair value of the underlying real estate approximates cost. is less than unpaid principal, a valuation reserve is recorded and
Derivative financial instruments. The Company applies hedgeadjusted each period for changes in fair value. Commercial mortgage accounting when derivatives are designated, qualify and are highlyloans are considered impaired when it is probable that the Company effective as hedges. Effectiveness is formally assessed and documentedwill not collect amounts due according to the terms of the original at inception and each period throughout the life of a hedge usingloan agreement. The Company monitors credit risk and assesses the various quantitative methods appropriate for each hedge, includingimpairment of loans individually and on a consistent basis for all loans regression analysis and dollar offset. Under hedge accounting, thein the portfolio. The Company estimates the fair value of the changes in fair value of the derivative and the hedged risk are generallyunderlying real estate using internal valuations generally based on
CIGNA CORPORATION - 2012 Form 10-K 71
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PART II ITEM 8 Financial Statements and Supplementary Data
recognized together and offset each other when reported in E. Premiums, Accounts and Notes shareholders’ net income.
Receivable and Reinsurance The Company accounts for derivative instruments as follows: Recoverables
Derivatives are reported on the balance sheet at fair value with Premiums, accounts and notes receivable are reported net of an
changes in fair values reported in shareholders’ net income or allowance for doubtful accounts of $51 million as of December 31,
accumulated other comprehensive income. 2012 and $45 million as of December 31, 2011. Reinsurance
Changes in the fair value of derivatives that hedge market risk recoverables are estimates of amounts that the Company will receive related to future cash flows and that qualify for hedge accounting are from reinsurers and are recorded net of an allowance for unrecoverable reported in a separate caption in accumulated other comprehensive reinsurance of $4 million as of December 31, 2012 and $5 million as income. These hedges are referred to as cash flow hedges. of December 31, 2011. The Company estimates these allowances for
doubtful accounts for premiums, accounts and notes receivable, as A change in the fair value of a derivative instrument may not always
well as for reinsurance recoverables, using management’s best estimate equal the change in the fair value of the hedged item; this difference
of collectibility, taking into consideration the aging of these amounts, is referred to as hedge ineffectiveness. Where hedge accounting is
historical collection patterns and other economic factors. used, the Company reflects hedge ineffectiveness in shareholders’ net income (generally as part of realized investment gains and losses). F. Deferred Policy Acquisition Costs On early termination, the changes in fair value of derivatives that Acquisition costs relate to the successful acquisition of new or renewal qualified for hedge accounting are reported in shareholders’ net insurance contracts. Costs eligible for deferral include incremental, income (generally as part of realized investment gains and losses). direct costs of contract acquisition and other costs directly related to
successful contract acquisition. Examples of deferrable costs include Net investment income. When interest and principal payments on commissions, sales compensation and benefits, policy issuance and investments are current, the Company recognizes interest income underwriting costs and premium taxes. The Company records when it is earned. The Company stops recognizing interest income acquisition costs differently depending on the product line. when interest payments are delinquent based on contractual terms or Acquisition costs for: when certain terms (interest rate or maturity date) of the investment
Universal life products are deferred and amortized in proportion tohave been restructured. Net investment income on these investments the present value of total estimated gross profits over the expectedis only recognized when interest payments are actually received. lives of the contracts.Interest and dividends on trading and hybrid securities and
prepayment penalties on mortgage loans are included in net Supplemental health, life and accident insurance (primarily investment income when they are earned. individual products) and group health and accident insurance
products are deferred and amortized, generally in proportion to theInvestment gains and losses. Realized investment gains and losses are ratio of periodic revenue to the estimated total revenues over thebased on specifically identified assets and result from sales, investment contract periods.asset write-downs, changes in the fair values of trading and hybrid
securities and certain derivatives, changes in valuation reserves and Other products are expensed as incurred. prepayment penalties on fixed maturities.
Deferred acquisition costs also include an intangible asset that Unrealized gains and losses on fixed maturities and equity securities primarily represents the value of business acquired by the Company carried at fair value (excluding trading and hybrid securities) and with the purchase of the supplemental benefits business in 2012. See certain derivatives are included in accumulated other comprehensive Note 3 for additional information. There are no deferred policy income (loss), net of: acquisition costs attributable to the sold individual life insurance and
annuity and retirement businesses or the run-off reinsurance andamounts required to adjust future policy benefits for the run-off settlement annuity operations.settlement annuity business; and
For universal life and other individual products, managementdeferred income taxes. estimates the present value of future revenues less expected payments. For group health and accident insurance products, management
D. Cash and Cash Equivalents estimates the sum of unearned premiums and anticipated net investment income less future expected claims and related costs. IfCash equivalents consist of short-term investments with maturities of management’s estimates of these sums are less than the deferred costs,three months or less from the time of purchase that are classified as the Company reduces deferred policy acquisition costs and records anheld to maturity and carried at amortized cost. The Company expense. The Company recorded amortization for policy acquisitionreclassifies cash overdraft positions to accounts payable, accrued costs of $218 million in 2012, $259 million in 2011 and $251 millionexpenses and other liabilities when the legal right of offset does not in 2010 in other operating expenses.exist.
72 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 8 Financial Statements and Supplementary Data
intangibles on an accelerated or straight-line basis over periods from 1G. Property and Equipment to 30 years. Management revises amortization periods if it believes
Property and equipment is carried at cost less accumulated there has been a change in the length of time that an intangible asset depreciation. When applicable, cost includes interest, real estate taxes will continue to have value. Costs incurred to renew or extend the and other costs incurred during construction. Also included in this terms of these intangible assets are generally expensed as incurred. See category is internal-use software that is acquired, developed or Notes 9 and 11 for additional information. modified solely to meet the Company’s internal needs, with no plan to market externally. Costs directly related to acquiring, developing or
J. Separate Account Assets and Liabilitiesmodifying internal-use software are capitalized. Separate account assets and liabilities are contractholder fundsThe Company calculates depreciation and amortization principally maintained in accounts with specific investment objectives. The assetsusing the straight-line method generally based on the estimated useful of these accounts are legally segregated and are not subject to claimslife of each asset as follows: buildings and improvements, 10 to that arise out of any of the Company’s other businesses. These separate40 years; purchased software, one to five years; internally developed account assets are carried at fair value with equal amounts for relatedsoftware, three to seven years; and furniture and equipment (including separate account liabilities. The investment income, gains and lossescomputer equipment), three to 10 years. Improvements to leased of these accounts generally accrue to the contractholders and, togetherfacilities are depreciated over the remaining lease term or the with their deposits and withdrawals, are excluded from the Company’sestimated life of the improvement. The Company considers events Consolidated Statements of Income and Cash Flows. Fees and chargesand circumstances that would indicate the carrying value of property, earned for asset management or administrative services and mortalityequipment or capitalized software might not be recoverable. If the risks are reported in premiums and fees.Company determines the carrying value of a long-lived asset is not
recoverable, an impairment charge is recorded. See Note 9 for additional information. K. Contractholder Deposit Funds
Liabilities for contractholder deposit funds primarily include deposits H. Goodwill received from customers for investment-related and universal life
products and investment earnings on their fund balances. TheseGoodwill represents the excess of the cost of businesses acquired over liabilities are adjusted to reflect administrative charges and, forthe fair value of their net assets. Goodwill primarily relates to the universal life fund balances, mortality charges. In addition, thisGlobal Health Care segment ($5.7 billion) and, to a lesser extent, the caption includes premium stabilization reserves that are insuranceGlobal Supplemental Benefits segment ($350 million). The Company experience refunds for group contracts that are left with the Companyevaluates goodwill for impairment at least annually during the third to pay future premiums, deposit administration funds that are used toquarter at the reporting unit level, based on discounted cash flow fund nonpension retiree insurance programs, retained asset accountsanalyses and writes it down through results of operations if impaired. and annuities or supplementary contracts without significant lifeConsistent with prior years, the Company’s evaluations of goodwill contingencies. Interest credited on these funds is accrued ratably overassociated with these segments used the best information available at the contract period.the time, including reasonable assumptions and projections consistent
with those used in its annual planning process. The discounted cash flow analyses used a range of discount rates that correspond with the L. Future Policy Benefits reporting unit’s weighted average cost of capital, consistent with that
Future policy benefits are liabilities for the present value of estimatedused for investment decisions considering the specific and detailed future obligations under long-term life and supplemental healthoperating plans and strategies within the reporting units. The insurance policies and annuity products currently in force. Theseresulting discounted cash flow analyses indicated estimated fair values obligations are estimated using actuarial methods and primarilyfor the reporting units exceeding their carrying values, including consist of reserves for annuity contracts, life insurance benefits,goodwill and other intangibles. Finally, after reallocating goodwill in guaranteed minimum death benefit (‘‘GMDB’’) contracts (see Note 7conjunction with the resegmentation at December 31, 2012, the for additional information) and certain health, life, and accidentCompany determined that no events or circumstances have occurred insurance products in our Global Supplemental Benefits segment.that would more likely than not reduce the fair values of the reporting
units below their carrying values. See Note 9 for additional Obligations for annuities represent specified periodic benefits to be information. paid to an individual or groups of individuals over their remaining
lives. Obligations for life insurance policies represent benefits to be paid to policyholders, net of future premiums to be received.I. Other Assets, including Other Management estimates these obligations based on assumptions as to
Intangibles premiums, interest rates, mortality and surrenders, allowing for adverse deviation. Mortality, morbidity, and surrender assumptionsOther assets consist of various insurance-related assets and the gain are based on either the Company’s own experience or actuarial tables.position of certain derivatives, primarily guaranteed minimum Interest rate assumptions are based on management’s judgmentincome benefits (‘‘GMIB’’) assets. The Company’s other intangible considering the Company’s experience and future expectations, andassets include purchased customer and producer relationships, range from 1% to 10%. Obligations for the run-off settlementprovider networks, and trademarks. The Company amortizes other
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PART II ITEM 8 Financial Statements and Supplementary Data
annuity business include adjustments for investment returns statutory disability or other group disability benefit plans. For awards consistent with requirements of GAAP when a premium deficiency of such offsets that have not been finalized, the Company estimates exists. the probability and amount of the offset based on the Company’s
experience over the past three to five years. Certain reinsurance contracts contain GMDB under variable annuities issued by other insurance companies. These obligations The Company discounts certain claim liabilities related to group represent the guaranteed death benefit in excess of the contractholder’s long-term disability and workers’ compensation because benefit account values (based on underlying equity and bond mutual fund payments may be made over extended periods. Discount rate investments). These obligations are estimated based on assumptions assumptions are based on projected investment returns for the asset regarding lapse, partial surrenders, mortality, interest rates (mean portfolios that support these liabilities and range from 1.83% to investment performance and discount rate), market volatility as well 6.25%. When estimates change, the Company records the adjustment as investment returns and premiums, consistent with the in benefits and expenses in the period in which the change in estimate requirements of GAAP when a premium deficiency exists. Lapse, is identified. Discounted liabilities associated with the long-term partial surrenders, mortality, interest rates and volatility are based on disability and certain workers’ compensation businesses were management’s judgment considering the Company’s experience and $3.2 billion at December 31, 2012 and 2011. future expectations. The results of futures and swap contracts used in the GMDB equity and growth interest rate hedge programs are N. Global Health Care Medical Claims reflected in the liability calculation as a component of investment
Payablereturns. See also Note 7 for additional information. Medical claims payable for the Global Health Care segment include both reported claims and estimates for losses incurred but not yetM. Unpaid Claims and Claims Expenses reported including amounts owed for services from providers and
Liabilities for unpaid claims and claim expenses are estimates of under risk-sharing and quality management arrangements with payments to be made under insurance coverages (primarily long-term providers. The Company develops estimates for Global Health Care disability, workers’ compensation and life and health) for reported medical claims payable using actuarial principles and assumptions claims and for losses incurred but not yet reported. consistently applied each reporting period, and recognizes the
actuarial best estimate of the ultimate liability within a level ofThe Company develops these estimates for losses incurred but not yet confidence, as required by actuarial standards of practice, whichreported using actuarial principles and assumptions based on require that the liabilities be adequate under moderately adversehistorical and projected claim incidence patterns, claim size, conditions.subrogation recoveries and the length of time over which payments are
expected to be made. The Company consistently applies these The liability is primarily calculated using ‘‘completion factors’’ (a actuarial principles and assumptions each reporting period, with measure of the time to process claims), which are developed by consideration given to the variability of these factors, and recognizes comparing the date claims were incurred, generally the date services the actuarial best estimate of the ultimate liability within a level of were provided, to the date claims were paid. The Company uses confidence, as required by actuarial standards of practice, that require historical completion factors combined with an analysis of current the liabilities to be adequate under moderately adverse conditions. trends and operational factors to develop current estimates of
completion factors. The Company estimates the liability for claimsThe Company’s estimate of the liability for disability claims reported incurred in each month by applying the current estimates ofbut not yet paid is primarily calculated as the present value of expected completion factors to the current paid claims data. This approachbenefit payments to be made over the estimated time period that a implicitly assumes that historical completion rates will be a usefulpolicyholder remains disabled. The Company estimates the expected indicator for the current period. It is possible that the actualtime period that a policyholder may be disabled by analyzing the rate completion rates for the current period will develop differently fromat which an open claim is expected to close (claim resolution rate). historical patterns, which could have a material impact on theClaim resolution rates may vary based upon the length of time a Company’s medical claims payable and shareholders’ net income.policyholder is disabled, the covered benefit period, cause of disability,
benefit design and the policyholder’s age, gender and income level. Completion factors are impacted by several key items including The Company uses historical resolution rates combined with an changes in: 1) electronic (auto-adjudication) versus manual claim analysis of current trends and operational factors to develop current processing, 2) provider claims submission rates, 3) membership and estimates of resolution rates. The reserve for the gross monthly 4) the mix of products. As noted, the Company uses historical disability benefits due to a policyholder is reduced (offset) by the completion factors combined with an analysis of current trends and income that the policyholder receives under other benefit programs, operational factors to develop current estimates of completion factors. such as Social Security Disability Income, workers’ compensation,
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PART II ITEM 8 Financial Statements and Supplementary Data
In addition, for the more recent months, the Company also relies on postemployment benefits (see Note 10), the loss position of certain medical cost trend analysis, which reflects expected claim payment derivatives, primarily for GMIB contracts (see Note 13), self-insured patterns and other relevant operational considerations. Medical cost exposures, management compensation and various insurance-related trend is primarily impacted by medical service utilization and unit items, including experience rated refunds, the minimum medical loss costs, which are affected by changes in the level and mix of medical ratio rebate accrual under Health Care Reform, amounts related to benefits offered, including inpatient, outpatient and pharmacy, the reinsurance contracts and insurance-related assessments that impact of copays and deductibles, changes in provider practices and management can reasonably estimate. Accounts payable, accrued changes in consumer demographics and consumption behavior. expenses and other liabilities also include certain overdraft positions.
Legal costs to defend the Company’s litigation and arbitration mattersDespite reflecting both historical and emerging trends in setting are expensed when incurred in cases that the Company cannotreserves, it is possible that the actual medical trend for the current reasonably estimate the ultimate cost to defend. In cases that theperiod will develop differently from expectations, which could have a Company can reasonably estimate the cost to defend, these costs arematerial impact on the Company’s medical claims payable and recognized when the claim is reported.shareholders’ net income.
For each reporting period, the Company evaluates key assumptions by R. Translation of Foreign Currenciescomparing the assumptions used in establishing the medical claims
payable to actual experience. When actual experience differs from the The Company generally conducts its international business through assumptions used in establishing the liability, medical claims payable foreign operating entities that maintain assets and liabilities in local are increased or decreased through current period shareholders’ net currencies, which are generally their functional currencies. The income. Additionally, the Company evaluates expected future Company uses exchange rates as of the balance sheet date to translate developments and emerging trends which may impact key assets and liabilities into U.S. dollars. Translation gains or losses on assumptions. The estimation process involves considerable judgment, functional currencies, net of applicable taxes, are recorded in reflecting the variability inherent in forecasting future claim accumulated other comprehensive income (loss). The Company uses payments. These estimates are highly sensitive to changes in the average monthly exchange rates during the year to translate revenues Company’s key assumptions, specifically completion factors, and and expenses into U.S. dollars. medical cost trends.
S. Premiums and Fees, Revenues and O. Unearned Premiums and Fees Related Expenses Premiums for life, accident and health insurance are recognized as
Premiums for group life, accident and health insurance and managed revenue on a pro rata basis over the contract period. Fees for mortality
care coverages are recognized as revenue on a pro rata basis over the and contract administration of universal life products are recognized
contract period. Benefits and expenses are recognized when incurred. ratably over the coverage period. The unrecognized portion of these
Premiums and fees include revenue from experience-rated contracts amounts received is recorded as unearned premiums and fees.
that is based on the estimated ultimate claim, and in some cases, administrative cost experience of the contract. For these contracts, premium revenue includes an adjustment for experience-rated refundsP. Redeemable Noncontrolling Interest which is calculated according to contract terms and using the
The redeemable noncontrolling interest comprises the preferred and customer’s experience (including estimates of incurred but not
common stock interests not purchased by the Company in its reported claims). Beginning in 2011, premium revenue also includes
acquisition of Finans Emeklilik in 2012 (see Note 3A for further an adjustment to reflect the estimated effect of rebates due to
information.) This redeemable noncontrolling interest relates to the customers under the minimum medical loss ratio provisions of Health
right of the holder to require the Company to purchase the holder’s Care Reform.
49% interest at a redemption value equal to its net assets in Finans Premiums for individual life, accident and supplemental healthEmklilik and the value of its inforce business in 15 years. Cigna also insurance and annuity products, excluding universal life andhas the right to require the holder to sell its 49% interest to Cigna for investment-related products, are recognized as revenue when due.the same value in 15 years. The redeemable noncontrolling interest Benefits and expenses are matched with premiums.was recorded at fair value on the date of purchase. Subsequently, if the
estimated redemption value exceeds the recorded value for the Premiums and fees received for the Company’s Medicare Advantage redeemable noncontrolling interest, an adjustment to increase the Plans and Medicare Part D products from customers and the Centers redeemable noncontrolling interest will be recorded and impact for Medicare and Medicaid Services (CMS) are recognized as revenue income available to common shareholders. ratably over the contract period. CMS provides risk adjusted premium
payments for the Medicare Advantage Plans and Medicare Part D products, based on the demographics and health severity of enrollees.Q. Accounts Payable, Accrued Expenses The Company recognizes periodic changes to risk adjusted premiumsand Other Liabilities as revenue when the amounts are determinable and collection is
Accounts payable, accrued expenses and other liabilities consist reasonably assured. Additionally, Medicare Part D includes payments principally of liabilities for pension, other postretirement and from CMS for risk sharing adjustments. The risk sharing adjustments,
CIGNA CORPORATION - 2012 Form 10-K 75
PART II ITEM 8 Financial Statements and Supplementary Data
that are estimated quarterly based on claim experience, compare adjusted regardless of the final outcome. For strategic performance actual incurred drug benefit costs to estimated costs submitted in shares with payment dependent on performance conditions, expense original contracts and may result in more or less revenue from CMS. is initially accrued based on the most likely outcome, but evaluated for Final revenue adjustments are determined through an annual adjustment each period for updates in the expected outcome. At the settlement with CMS that occurs after the contract year. end of the performance period, expense is adjusted to the actual
outcome (number of shares awarded times the share price at the grantRevenue for investment-related products is recognized as follows: date).
Net investment income on assets supporting investment-related products is recognized as earned.
U. Participating Business Contract fees, that are based upon related administrative expenses,
The Company’s participating life insurance policies entitleare recognized in premiums and fees as they are earned ratably over policyholders to earn dividends that represent a portion of thethe contract period. earnings of the Company’s life insurance subsidiaries. Participating
Benefits and expenses for investment-related products consist insurance accounted for approximately 1% of the Company’s total life primarily of income credited to policyholders in accordance with insurance in force at the end of 2012, 2011 and 2010. contract provisions.
Revenue for universal life products is recognized as follows: V. Income Taxes Net investment income on assets supporting universal life products
The Company and its domestic subsidiaries file a consolidated United is recognized as earned.
States federal income tax return. The Company’s foreign subsidiaries Fees for mortality and surrender charges are recognized as assessed, file tax returns in accordance with foreign law. U.S. taxation of these that is as earned. foreign subsidiaries may differ in timing and amount from taxation
under foreign laws. Reportable U.S. taxable income for theseAdministration fees are recognized as services are provided. subsidiaries is reflected in the U.S. tax return of the affiliates’ domestic
Benefits and expenses for universal life products consist of benefit parent. claims in excess of policyholder account balances. Expenses are
The Company recognizes deferred income taxes when the financialrecognized when claims are submitted, and income is credited to statement and tax-based carrying values of assets and liabilities arepolicyholders in accordance with contract provisions. different. In addition, deferred income tax liabilities are recognized on
Contract fees and expenses for administrative services only programs the unremitted earnings of foreign subsidiaries that are not and pharmacy programs and services are recognized as services are permanently invested overseas. For subsidiaries whose earnings are provided net of estimated refunds under performance guarantees. In considered permanently invested overseas, income taxes are accrued at some cases, the Company provides performance guarantees associated the local foreign tax rate. The Company establishes valuation with meeting certain service standards, clinical outcomes or financial allowances against deferred tax assets if it is determined more likely metrics. If these service standards, clinical outcomes or financial than not that the deferred tax asset will not be realized. The need for a metrics are not met, the Company may be financially at risk up to a valuation allowance is determined based on the evaluation of various stated percentage of the contracted fee or a stated dollar amount. The factors, including expectations of future earnings and management’s Company establishes deferred revenues for estimated payouts judgment. Note 20 contains detailed information about the associated with these performance guarantees. Approximately 16% of Company’s income taxes. ASO fees reported for the year ended December 31, 2012 were at risk,
The Company recognizes interim period income taxes by determiningwith reimbursements estimated to be approximately 1%. an estimated annual effective tax rate and applying that rate to
Mail order pharmacy revenues and cost of goods sold are recognized as year-to-date pretax results. The estimated annual effective tax rate is each prescription is shipped. updated periodically based on revised projections of full year income.
Although the effective tax rate approach is generally used for interim periods, taxes on significant, unusual and infrequent items areT. Stock Compensation recognized at the statutory tax rate entirely in the period the amounts
The Company records compensation expense for stock awards and are realized. options over their vesting periods primarily based on the estimated fair value at the grant date. Compensation expense is recorded for stock
W. Earnings Per Shareoptions over their vesting period based on fair value at the grant date which is calculated using an option-pricing model. Compensation The Company computes basic earnings per share using the weighted- expense is recorded for restricted stock grants and units over their average number of unrestricted common and deferred shares vesting periods based on fair value, which is equal to the market price outstanding. Diluted earnings per share also includes the dilutive of the Company’s common stock on the date of grant. Compensation effect of outstanding employee stock options and unvested restricted expense for strategic performance shares is recorded over the stock granted after 2009 using the treasury stock method and the performance period. For strategic performance shares with payment effect of strategic performance shares. dependent on market condition, fair value is determined at the grant date using a Monte Carlo simulation model and not subsequently
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Acquisitions and Dispositions
The Company may from time to time acquire or dispose of assets, allocated to the tangible and intangible net assets acquired based on subsidiaries or lines of business. Significant transactions are described management’s preliminary estimates of their fair value and may below. change as additional information becomes available over the next
several months. Accordingly, approximately $117 million was allocated to identifiable intangible assets, primarily a distributionA. Joint Venture Agreement with relationship and the value of business acquired (‘‘VOBA’’) that
Finansbank represents the present value of the estimated net cash flows from the long duration contracts in force, with the remaining $113 millionOn November 9, 2012, the Company acquired 51% of the total allocated to goodwill. The identifiable intangible assets will beshares of Finans Emeklilik ve Hayat A.S. (‘‘Finans Emeklilik’’), a amortized over an estimated useful life of approximately 10 years.Turkish insurance company, from Finansbank A.S. (‘‘Finansbank’’), a Goodwill has been provisionally allocated to the Global SupplementalTurkish retail bank, for a cash purchase price of approximately Benefits segment and is not deductible for federal income tax$116 million. Finansbank continues to hold 49% of the total shares. purposes.Finans Emeklilik operates in life insurance, accident insurance and
pension product markets. The acquisition provides Cigna The redeemable noncontrolling interest is classified as temporary opportunities to reach and serve the growing middle class market in equity in the Company’s Consolidated Balance Sheet because Turkey through Finansbank’s network of retail banking branches. Finansbank has the right to require the Company to purchase its 49% In accordance with GAAP, the total purchase price, including the interest in the value of its net assets and the inforce business in redeemable noncontrolling interest of $111 million, has been 15 years.
The condensed balance sheet at the acquisition date was as follows:
(In millions)
Investments $ 23 Cash and cash equivalents 54 Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet) 28 Goodwill 113 Separate account assets 99 Other assets, including other intangibles 100
Total assets acquired 417
Insurance liabilities 58 Accounts payable, accrued expenses and other liabilities 33 Separate account liabilities 99
Total liabilities acquired 190
Redeemable noncontrolling interest 111 Net assets acquired $ 116
The results of Finans Emeklilik are included in the Company’s In accordance with GAAP, the total purchase price has been allocated Consolidated Financial Statements from the date of acquisition. The to the tangible and intangible net assets acquired based on pro forma effects on total revenues and net income assuming the management’s preliminary estimates of their fair value and may acquisition had occurred as of January 1, 2011 were not material to change as additional information becomes available over the next the Company for the years ended December 31, 2012 and 2011. several months. The Company updated its allocation of the purchase
price in the fourth quarter of 2012 with the completion of fair valuation procedures for insurance liabilities and the resolution ofB. Acquisition of Great American certain tax matters. These changes resulted in an increase in the
Supplemental Benefits Group allocation to the insurance liabilities by $73 million to $707 million On August 31, 2012, the Company acquired Great American and to the VOBA asset by $73 million to $144 million. In addition, Supplemental Benefits Group, one of the largest providers of the allocation to tax accounts was increased by $15 million to a supplemental health insurance products in the U.S. with cash from $7 million asset. Approximately $168 million was allocated to internal resources. The Company finalized the purchase price in the intangible assets, primarily the VOBA asset that will be amortized in first quarter of 2013 that resulted in an increase of $19 million to proportion to premium recognized over the life of the contracts that is $326 million. The acquisition provides the Company with an estimated to be 30 years. Amortization is expected to be higher in increased presence in the Medicare supplemental benefits market. It early years and decline as policies lapse. Goodwill has been allocated to also extends the Company’s global direct-to-consumer retail channel the Global Supplemental Benefits segment as of December 31, 2012. as well as further enhances its distribution network of agents and Substantially all of the goodwill is tax deductible and will be brokers. Subsequent to the segment reporting changes in 2012, results amortized over the next 15 years for federal income tax purposes. of this business are reported in the Global Supplemental Benefits segment.
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The condensed balance sheet at the acquisition date was as follows:
(In millions)
Investments $ 211 Cash and cash equivalents 36 Reinsurance recoverables 448 Goodwill 168 Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet) 144 Other assets, including other intangibles 35
Total assets acquired 1,042
Insurance liabilities 707 Accounts payable, accrued expenses and other liabilities 9
Total liabilities acquired 716
Net assets acquired $ 326
The results of this business have been included in the Company’s the District of Columbia, as well as a large, national stand-alone Consolidated Financial Statements from the date of acquisition. The Medicare prescription drug business. The acquisition of HealthSpring pro forma effects on total revenues and net income assuming the strengthens the Company’s ability to serve individuals across their life acquisition had occurred as of January 1, 2011 were not material to stages as well as deepens its presence in a number of geographic the Company for the years ended December 31, 2012 and 2011. markets. The addition of HealthSpring brings industry leading
physician partnership capabilities and creates the opportunity to deepen the Company’s existing client and customer relationships, asC. Acquisition of HealthSpring, Inc. well as facilitates a broader deployment of its range of health and
On January 31, 2012 the Company acquired the outstanding shares wellness capabilities and product offerings. The Company funded the of HealthSpring, Inc. (‘‘HealthSpring’’) for $55 per share in cash and acquisition with internal cash resources. Cigna stock awards, representing a cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 13 states and
Merger consideration: The estimated merger consideration of $3.8 billion was determined as follows:
(In millions, except per share amounts)
HealthSpring, Inc. common shares outstanding at January 30, 2012 67.8 Less: common shares outstanding not settled in cash (0.1)
Common shares settled in cash 67.7 Price per share $ 55
Cash consideration for outstanding shares $ 3,725 Fair value of share-based compensation awards 65 Additional cash and equity consideration 21
TOTAL MERGER CONSIDERATION $ 3,811
Fair value of share-based compensation awards. On the date of were generally consistent with those disclosed in Note 21 to the the acquisition, HealthSpring employees’ awards of options and Company’s 2012 Consolidated Financial Statements, except the restricted shares of HealthSpring stock were rolled over to Cigna stock expected life assumption of these options ranged from 1.8 to 4.8 years options and restricted stock. Each holder of a HealthSpring stock and the exercise price did not equal the market value at the grant date. option or restricted stock award received 1.24 Cigna stock options or Fair value of the new stock options approximated intrinsic value restricted stock awards. The conversion ratio of 1.24 at the date of because the exercise price at the acquisition date for substantially all of acquisition was determined by dividing the acquisition price of the options was significantly below Cigna’s stock price. HealthSpring shares of $55 per share by the price of Cigna stock on The fair value of these options and restricted stock awards was January 31, 2012 of $44.43. The Cigna stock option exercise price included in the purchase price to the extent that services had been was determined by using this same conversion ratio. Vesting periods provided prior to the acquisition based on the grant date of the and the remaining life of the options rolled over with the original original HealthSpring awards and vesting periods. The remaining fair HealthSpring awards. value not included in the purchase price will be recorded as The Company valued the share-based compensation awards as of the compensation expense in future periods over the remaining vesting acquisition date using Cigna’s stock price for restricted stock and a periods. Most of the expense is expected to be recognized in 2012 and Black-Scholes pricing model for stock options. The assumptions used 2013.
78 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
The following table summarizes the effect of these rollover awards for former HealthSpring employees.
Compensation Number of Average exercise/ Fair value Included in expense
(Awards in thousands, dollars in millions, except per share amounts) awards award price of awards purchase price post-acquisition
Vested options 589 $ 14.04 $ 18 $ 18 $ - Unvested options 1,336 $ 16.21 37 28 9 Restricted stock 786 $ 44.43 35 19 16
TOTAL 2,711 $ 90 $ 65 $ 25
Purchase price allocation. In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair values. Subsequent to the segment reporting changes in 2012, goodwill has been allocated to the Government operating segment as of December 31, 2012 and is not deductible for federal income tax purposes. The condensed balance sheet of HealthSpring at the acquisition date was as follows:
(In millions)
Investments $ 612 Cash and cash equivalents 492 Premiums, accounts and notes receivable 320 Goodwill 2,541 Intangible assets 795 Other 96
TOTAL ASSETS ACQUIRED 4,856
Insurance liabilities 505 Deferred income taxes 214 Debt 326
TOTAL LIABILITIES ACQUIRED 1,045
NET ASSETS ACQUIRED $ 3,811
In accordance with debt covenants, HealthSpring’s debt obligation reported as a financing activity in the statement of cash flows for the was paid immediately following the acquisition. This repayment is year ended December 31, 2012.
The estimated fair values and useful lives for intangible assets are as follows:
Estimated Estimated Useful Life (Dollars in millions) Fair Value (In Years)
Customer relationships $ 711 8 Other 84 3-10
TOTAL OTHER INTANGIBLE ASSETS $ 795
The fair value of the customer relationship and the amortization The results of HealthSpring have been included in the Company’s method were determined using an income approach that relies on Consolidated Financial Statements from the date of the acquisition. projected future net cash flows including key assumptions for the Revenues of HealthSpring included in the Company’s results for the customer attrition rate and discount rate. The estimated weighted year ended December 31, 2012 were approximately $5.4 billion. average useful life reflects the time period and pattern of use that During 2012, the Company recorded $53 million pre-tax Cigna expects for over 90% of the projected benefits. Accordingly, ($40 million after-tax) of acquisition-related costs in other operating amortization was recorded on an accelerated basis in 2012 and will expenses. decline in subsequent years.
Pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of HealthSpring had occurred as of January 1, 2011. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
Year Ended December 31,
(In millions, except per share amounts) 2012 2011
Total revenues $ 29,608 $ 27,461 Shareholders’ net income $ 1,633 $ 1,456 Earnings per share:
Basic $ 5.73 $ 5.11 Diluted $ 5.63 $ 5.02
CIGNA CORPORATION - 2012 Form 10-K 79
PART II ITEM 8 Financial Statements and Supplementary Data
The Company believes that the risk of loss beyond this maximumD. Acquisition of FirstAssist aggregate is remote. The reinsurance arrangement is secured by assets
In November 2011, the Company acquired FirstAssist Group held in trust. Cash consideration paid to the reinsurer was Holdings Limited (‘‘FirstAssist’’) for approximately $115 million in $190 million. The net effect of this transaction was an after-tax loss of cash. FirstAssist is based in the United Kingdom and provides travel $20 million ($31 million pre-tax), primarily reported in other and protection insurance services that the Company expects will operating expenses in the Run-off Reinsurance segment. enhance its individual business in the U.K. and around the world.
In accordance with GAAP, the total purchase price has been allocated F. Acquisition of Vanbreda International to the tangible and intangible net assets acquired based on
On August 31, 2010, the Company acquired 100% of the votingmanagement’s estimates of their fair values. During 2012, the stock of Vanbreda International NV (Vanbreda International), basedCompany updated its allocation of the purchase price based on in Antwerp, Belgium for a cash purchase price of $412 million.additional information. Accordingly, the allocation to identifiable Vanbreda International specializes in providing worldwide medicalintangible assets was decreased by $18 million to $40 million. The insurance and employee benefits to intergovernmental andallocation to goodwill was increased by $8 million to $64 million. non-governmental organizations, including internationalSubsequent to the segment reporting changes in 2012, goodwill has humanitarian operations, as well as corporate clients. Vanbredabeen reported in the Global Supplemental Benefits segment. International’s market leadership in the intergovernmental segment
The results of FirstAssist are included in the Company’s Consolidated complements the Company’s position in providing global health Financial Statements from the date of acquisition. The pro forma benefits primarily to multinational companies and organizations and effects on total revenues and net income assuming the acquisition had their globally mobile employees in North America, Europe, the occurred as of January 1, 2011 were not material to the Company for Middle East and Asia. the year ended December 31, 2011.
In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on
E. Reinsurance of Run-off Workers’ management’s estimates of their fair values. Accordingly, approximately $210 million was allocated to intangible assets,Compensation and Personal Accident primarily customer relationships. The weighted average amortizationBusiness period is 15 years.
On December 31, 2010, the Company essentially exited from its Subsequent to the segment reporting changes in 2012, goodwill has
workers’ compensation and personal accident reinsurance business by been allocated to the Commercial operating segment. For foreign tax
purchasing retrocessional coverage from a Bermuda subsidiary of purposes, the acquisition of Vanbreda International was treated as a
Enstar Group Limited and transferring administration of this business stock purchase. Accordingly, goodwill and other intangible assets will
to the reinsurer. Under the reinsurance agreement, Cigna is not be amortized for foreign tax purposes but may reduce the
indemnified for liabilities with respect to its workers’ compensation taxability of earnings repatriated to the U.S. by Vanbreda
and personal accident reinsurance business to the extent that these International.
liabilities do not exceed 190% of the December 31, 2010 net reserves.
80 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Earnings Per Share
Basic and diluted earnings per share were computed as follows:
Effect of (Dollars in millions, except per share amounts) Basic Dilution Diluted
2012 Shareholders’ net income $ 1,623 $ - $ 1,623
Shares (in thousands): Weighted average 284,819 - 284,819 Common stock equivalents 4,711 4,711
Total shares 284,819 4,711 289,530
EPS $ 5.70 $ (0.09) $ 5.61
2011 Shareholders’ net income $ 1,260 $ - $ 1,260
Shares (in thousands): Weighted average 270,691 - 270,691 Common stock equivalents 3,558 3,558
Total shares 270,691 3,558 274,249
EPS $ 4.65 $ (0.06) $ 4.59
2010 Shareholders’ net income $ 1,279 $ - $ 1,279
Shares (in thousands): Weighted average 272,866 - 272,866 Common stock equivalents 2,421 2,421
Total shares 272,866 2,421 275,287
EPS $ 4.69 $ (0.04) $ 4.65
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 Company’s common stock for the period.
(In millions) 2012 2011 2010
Antidilutive options 2.5 3.7 6.3
Global Health Care Medical Claims Payable
Medical claims payable for the Global Health Care segment reflects business (primarily the global health benefits business previously estimates of the ultimate cost of claims that have been incurred but reported in the former International segment). As a result of the not yet reported, those which have been reported but not yet paid segment reporting change, insurance liabilities of the international (reported claims in process) and other medical expense payable, which health care business previously classified as Unpaid Claims have been comprises accruals primarily for provider incentives and other reclassified to Global Health Care Medical Claims Payable in the amounts payable to providers. Consolidated Balance Sheets, and corresponding amounts in the
Statement of Income previously reported as Other Benefits Expense As discussed further in Notes 2 and 23¸ effective December 31, 2012,
have been reclassified to Global Health Care Medical Claims Expense. Cigna changed its external reporting segments. The Global Health
Prior year amounts have been conformed to this new presentation. Care segment now includes most of Cigna’s international health care
CIGNA CORPORATION - 2012 Form 10-K 81
NOTE 4
NOTE 5
PART II ITEM 8 Financial Statements and Supplementary Data
Incurred but not yet reported comprises the majority of the reserve balance as follows:
(In millions) 2012 2011
Incurred but not yet reported $ 1,541 $ 1,059 Reported claims in process 243 232 Other medical expense payable 72 14
MEDICAL CLAIMS PAYABLE $ 1,856 $ 1,305
Activity in medical claims payable was as follows:
(In millions) 2012 2011 2010
Balance at January 1, $ 1,305 $ 1,400 $ 1,045 Less: Reinsurance and other amounts recoverable 249 284 257
Balance at January 1, net 1,056 1,116 788 Acquired net: 504 - - Incurred claims related to:
Current year 14,428 9,265 9,337 Prior years (200) (140) (115)
Total incurred 14,228 9,125 9,222 Paid claims related to:
Current year 12,854 8,227 8,217 Prior years 1,320 958 677
Total paid 14,174 9,185 8,894 Balance at December 31, net 1,614 1,056 1,116 Add: Reinsurance and other amounts recoverable 242 249 284
Balance at December 31, $ 1,856 $ 1,305 $ 1,400
Reinsurance and other amounts recoverable reflect amounts due from actuarial standards of practice, that require the liabilities be adequate reinsurers and policyholders to cover incurred but not reported and under moderately adverse conditions. As the Company establishes the pending claims for minimum premium products and certain liability for each incurral year, the Company ensures that its administrative services only business where the right of offset does not assumptions appropriately consider moderately adverse conditions. exist. See Note 8 for additional information on reinsurance. For the When a portion of the development related to the prior year incurred year ended December 31, 2012, actual experience differed from the claims is offset by an increase determined appropriate to address Company’s key assumptions resulting in favorable incurred claims moderately adverse conditions for the current year incurred claims, related to prior years’ medical claims payable of $200 million, or 2.2% the Company does not consider that offset amount as having any of the current year incurred claims as reported for the year ended impact on shareholders’ net income. December 31, 2011. Actual completion factors accounted for
Second, as a result of the adoption of the commercial minimum $91 million, or 1.0% of the favorability, while actual medical cost
medical loss ratio (MLR) provisions of the Patient Protection and trend resulted in the remaining $109 million, or 1.2%.
Affordable Care Act in 2011, changes in medical claim estimates due For the year ended December 31, 2011, actual experience differed to prior year development may be partially offset by a change in the from the Company’s key assumptions, resulting in favorable incurred MLR rebate accrual. claims related to prior years’ medical claims payable of $140 million,
Third, changes in reserves for the Company’s retrospectively or 1.5% of the current year incurred claims as reported for the year
experience-rated business do not always impact shareholders’ net ended December 31, 2010. Actual completion factors resulted in
income. For the Company’s retrospectively experience-rated business $96 million, or 1.0% of the favorability, while actual medical cost
only adjustments to medical claims payable on accounts in deficit trend resulted in the remaining $44 million, or 0.5%.
affect shareholders’ net income. An increase or decrease to medical The corresponding impact of prior year development on shareholders’ claims payable on accounts in deficit, in effect, accrues to the net income was $66 million for the year ended December 31, 2012 Company and directly impacts shareholders’ net income. An account compared with $49 million for the year ended December 31, 2011. is in deficit when the accumulated medical costs and administrative The favorable effects of prior year development on net income in charges, including profit charges, exceed the accumulated premium 2012 and 2011 primarily reflect low medical services utilization trend. received. Adjustments to medical claims payable on accounts in The change in the amount of the incurred claims related to prior years surplus accrue directly to the policyholder with no impact on the in the medical claims payable liability does not directly correspond to Company’s shareholders’ net income. An account is in surplus when an increase or decrease in the Company’s shareholders’ net income the accumulated premium received exceeds the accumulated medical recognized for the following reasons. costs and administrative charges, including profit charges.
First, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by
82 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Realignment and Efficiency Plan
During the third quarter of 2012, the Company, in connection with Global Health Care segment reported $65 million pre-tax the execution of its strategy, committed to a series of actions to further ($42 million after-tax) of the charge. The remainder was reported as improve its organizational alignment, operational effectiveness, and follows: $9 million pre-tax ($6 million after-tax) in Global efficiency. As a result, the Company recognized charges in other Supplemental Benefits and $3 million pre-tax ($2 million after-tax) in operating expenses of $77 million pre-tax ($50 million after-tax) in Group Disability and Life. the third quarter of 2012 consisting primarily of severance costs. The
Summarized below is activity for 2012.
(In millions) Severance Real estate Total
Third quarter 2012 charge $ 72 $ 5 $ 77 less: Fourth quarter 2012 payments 5 1 6
Balance, December 31, 2012 $ 67 $ 4 $ 71
The severance costs are expected to be substantially paid in 2013.
Guaranteed Minimum Death Benefit Contracts
As discussed in Note 25, the Company reinsured the guaranteed (mean investment performance and discount rate) and volatility. minimum death benefit (‘‘GMDB’’) business on February 4, 2013. These assumptions are based on the Company’s experience and future
expectations over the long-term period, consistent with the long-term The Company’s reinsurance operations, that were discontinued in
nature of this product. The Company regularly evaluates these 2000 and are now an inactive business in run-off mode, reinsured a
assumptions and changes its estimates if actual experience or other GMDB, also known as variable annuity death benefits (‘‘VADBe’’),
evidence suggests that assumptions should be revised. under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds The following provides information about the Company’s reserving combined with a death benefit. The Company has equity and other methodology and assumptions for GMDB as of December 31, 2012: market exposures as a result of this product. In periods of declining
The reserves represent estimates of the present value of net amounts equity markets and in periods of flat equity markets following a
expected to be paid, less the present value of net future premiums. decline, the Company’s liabilities for these guaranteed minimum
Included in net amounts expected to be paid is the excess of the death benefits increase. Conversely, in periods of rising equity
guaranteed death benefits over the values of the contractholders’ markets, the Company’s liabilities for these guaranteed minimum
accounts (based on underlying equity and bond mutual fund death benefits decrease.
investments). In 2000, the Company determined that the GMDB reinsurance
The reserves include an estimate for partial surrenders (that allow business was premium deficient because the recorded future policy
most contractholders to withdraw substantially all of their mutual benefit reserve was less than the expected present value of future
fund investments while retaining the death benefit coverage in effect claims and expenses less the expected present value of future
at the time of the withdrawal, essentially locking in the death benefit premiums and investment income using revised assumptions based on
for a particular policy) based on annual election rates that vary from actual and expected experience. The Company tests for premium
0% to 13% depending on the net amount at risk for each policy and deficiency by reviewing its reserve each quarter using current market
whether surrender charges apply. conditions and its long-term assumptions. Under premium deficiency
The assumed mean investment performance (‘‘growth interest rate’’)accounting, if the recorded reserve is determined to be insufficient, an for the underlying equity mutual funds for the portion of theincrease to the reserve is reflected as a charge to current period income. liability that is covered by the Company’s growth interest rate hedgeConsistent with GAAP, the Company does not recognize gains on program is based on the market-observable LIBOR swap curve. Thepremium deficient long duration products. assumed mean investment performance for the remainder of the
See Note 13 for further information on the Company’s dynamic underlying equity mutual funds considers the Company’s GMDB
hedge programs. These programs were used to reduce certain equity equity hedge program using futures contracts, and is based on the
and interest rate exposures associated with this business and were Company’s view that short-term interest rates will average 4% over
discontinued after February 4, 2013. future periods, but considers that current short-term rates are less
The determination of liabilities for GMDB requires the Company to than 4%. The mean investment performance assumption for the make critical accounting estimates. The Company estimates its underlying fixed income mutual funds (bonds and money market) liabilities for GMDB exposures with an internal model using many is 5% based on a review of historical returns. The investment scenarios and based on assumptions regarding lapse, future partial performance for underlying equity and fixed income mutual funds surrenders, claim mortality (deaths that result in claims), interest rates is reduced by fund fees ranging from 1% to 3% across all funds.
CIGNA CORPORATION - 2012 Form 10-K 83
NOTE 6
NOTE 7
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PART II ITEM 8 Financial Statements and Supplementary Data
Market volatility refers to market fluctuation. The volatility Reserve Strengthening: In each of the three years presented, the assumption is based on a review of historical monthly returns for Company completed its normal review of reserves (including each key index (e.g. S&P 500) over a period of at least ten years. assumptions), and recorded additional other benefits expense to Volatility represents the dispersion of historical returns compared to strengthen GMDB reserves. The amounts and primary drivers of the the average historical return (standard deviation) for each index. reserve strengthening in each year were: The assumption is 18% to 24%, varying by equity fund type; 5% to
2012: Reserve strengthening of $43 million ($27 million after-tax)7%, varying by bond fund type; and 0% to 1% for money market was primarily due to reductions to the lapse rate assumptions, adversefunds. These volatility assumptions are used along with the mean interest rate impacts, and, to a lesser extent, an increase in theinvestment performance assumption to project future return volatility and correlation assumptions, partially offset by favorablescenarios. equity market conditions. The adverse interest rate impacts reflect
The discount rate is 5.75%, which is determined based on the management’s consideration of the anticipated impact of continued underlying and projected yield of the portfolio of assets supporting low short-term interest rates. This evaluation also led management to the GMDB liability. lower the mean investment performance for equity funds from 4.75%
to 4.00% for those funds not subject to the growth interest rate hedgeThe claim mortality assumption is 65% to 89% of the 1994 Group program.Annuity Mortality table, with 1% annual improvement beginning
January 1, 2000. The assumption reflects that for certain contracts, 2011: Reserve strengthening of $70 million ($45 million after-tax) a spousal beneficiary is allowed to elect to continue a contract by was driven primarily by volatility-related impacts due to turbulent becoming its new owner, thereby postponing the death claim rather equity market conditions, adverse interest rate impacts, and adverse than receiving the death benefit currently. For certain issuers of impacts of overall market declines in the third quarter that include an these contracts, the claim mortality assumption depends on age, increase in the provision for expected future partial surrenders and gender, and net amount at risk for the policy. declines in the value of contractholders’ non-equity investments.
The lapse rate assumption (full surrender of an annuity prior to a 2010: Reserve strengthening of $52 million pre-tax ($34 million
contractholder’s death) is 0% to 11%, depending on contract type, after-tax) was primarily due to adverse interest rate impacts, and to a
policy duration and the ratio of the net amount at risk to account lesser extent, an update to the lapse assumption for policies that have
value. already taken or may take a significant partial withdrawal.
Activity in future policy benefit reserves for these GMDB contracts was as follows:
(In millions) 2012 2011 2010
Balance at January 1, $ 1,170 $ 1,138 $ 1,285 Add: Unpaid claims 40 37 36 Less: Reinsurance and other amounts recoverable 53 51 53
Balance at January 1, net 1,157 1,124 1,268 Add: Incurred benefits 17 138 (20) Less: Paid benefits 102 105 124
Ending balance, net 1,072 1,157 1,124 Less: Unpaid claims 24 40 37 Add: Reinsurance and other amounts recoverable 42 53 51
Balance at December 31, $ 1,090 $ 1,170 $ 1,138
Benefits paid and incurred are net of ceded amounts. Incurred benefits death benefit, the Company is liable to the extent the highest reflect the favorable or unfavorable impact of a rising or falling equity historical anniversary account value exceeds the fair value of the market on the liability, and include the charges discussed above. related mutual fund investments at the time of a contractholder’s Losses or gains have been recorded in other revenues as a result of the death. Other annuity designs that the Company reinsured guarantee GMDB equity and growth interest rate hedge programs to reduce that the benefit received at death will be: equity market and certain interest rate exposures.
the contractholder’s account value as of the last anniversary date The majority of the Company’s exposure arises under annuities that (anniversary reset); or guarantee that the benefit received at death will be no less than the
no less than net deposits paid into the contract accumulated at a highest historical account value of the related mutual fund
specified rate or net deposits paid into the contract. investments on a contractholder’s anniversary date. Under this type of
The table below presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees in the event of death, by type of benefit as of December 31. The net amount at risk is the death benefit coverage in force or the amount that the Company would have to pay if all contractholders died as of the specified date, and represents the excess of the guaranteed benefit amount over the fair value
84 CIGNA CORPORATION - 2012 Form 10-K
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•
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PART II ITEM 8 Financial Statements and Supplementary Data
of the underlying mutual fund investments. This data does not reflect the impacts of reinsurance in place as of December 31, 2012 nor the reinsurance placed on February 4, 2013.
(Dollars in millions, excludes impact of reinsurance ceded) 2012 2011
Highest anniversary annuity value Account value $ 10,485 $ 10,801 Net amount at risk $ 3,303 $ 4,487 Average attained age of contractholders (weighted by exposure) 72 71
Anniversary value reset Account value $ 1,183 $ 1,184 Net amount at risk $ 22 $ 56 Average attained age of contractholders (weighted by exposure) 65 63
Other Account value $ 1,635 $ 1,768 Net amount at risk $ 693 $ 834 Average attained age of contractholders (weighted by exposure) 71 70
Total Account value $ 13,303 $ 13,753 Net amount at risk $ 4,018 $ 5,377 Average attained age of contractholders (weighted by exposure) 72 71 Number of contractholders (approx.) 435,000 480,000
The Company has also written reinsurance contracts with issuers of policies also have a GMDB benefit reinsured by the Company. See variable annuity contracts that provide annuitants with certain Note 11 for further information. guarantees related to minimum income benefits. All reinsured GMIB
Reinsurance
The Company’s insurance subsidiaries enter into agreements with December 31, 2012, the fair value of trust assets exceeded the other insurance companies to assume and cede reinsurance. reinsurance recoverable. Reinsurance is ceded primarily to limit losses from large exposures and
Individual life and annuity reinsurance. The Company hadto permit recovery of a portion of direct losses. Reinsurance is also reinsurance recoverables of $4.0 billion as of December 31, 2012 andused in acquisition and disposition transactions where the $4.2 billion as of December 31, 2011 from The Lincoln National Lifeunderwriting company is not being acquired. Reinsurance does not Insurance Company and Lincoln Life & Annuity of New Yorkrelieve the originating insurer of liability. The Company regularly resulting from the 1998 sale of the Company’s individual lifeevaluates the financial condition of its reinsurers and monitors its insurance and annuity business through indemnity reinsuranceconcentrations of credit risk. arrangements. The Lincoln National Life Insurance Company and
Supplemental benefits business. The Company had reinsurance Lincoln Life & Annuity of New York must maintain a specified recoverables of approximately $402 million as of December 31, 2012 minimum credit or claims paying rating or they will be required to from Great American Life Insurance Company. The life insurance and fully secure the outstanding recoverable balance. As of December 31, annuity lines of business written by the acquired legal entities were 2012, both companies had ratings sufficient to avoid triggering a fully reinsured by the seller prior to the acquisition of their contractual obligation. supplemental benefits business by the Company on August 31, 2012. The resulting reinsurance recoverables are secured primarily by fixed Other Ceded and Assumed Reinsurance maturities whose book value is equal to or greater than 100% of the reinsured policy liabilities. These fixed maturities are held in a trust Ceded Reinsurance: Ongoing operations. The Company’s insurance established for the benefit of the Company. subsidiaries have reinsurance recoverables from various reinsurance
arrangements in the ordinary course of business for its Global Health Retirement benefits business. The Company had reinsurance Care, Group Disability and Life, and Global Supplemental Benefits recoverables of $1.3 billion as of December 31, 2012, and $1.6 billion segments as well as the corporate-owned life insurance business. as of December 31, 2011 from Prudential Retirement Insurance and Reinsurance recoverables are $345 million as of December 31, 2012, Annuity Company resulting from the 2004 sale of the retirement with 16% of the recoverable balance protected by collateral. benefits business, that was primarily in the form of a reinsurance
The Company reviews its reinsurance arrangements and establishesarrangement. The reinsurance recoverable, that is reduced as the reserves against the recoverables in the event that recovery is notCompany’s reinsured liabilities are paid or directly assumed by the considered probable. As of December 31, 2012, the Company’sreinsurer, is secured primarily by fixed maturities equal to or greater recoverables related to these segments were net of a reserve ofthan 100% of the reinsured liabilities. These fixed maturities are held $4 million.in a trust established for the benefit of the Company. As of
CIGNA CORPORATION - 2012 Form 10-K 85
NOTE 8
PART II ITEM 8 Financial Statements and Supplementary Data
Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Company reviews its reinsurance arrangements and establishes The Company’s Run-off Reinsurance operations assumed risks related reserves against the recoverables in the event that recovery is not to GMDB contracts, GMIB contracts, workers’ compensation, and considered probable. As of December 31, 2012, the Company’s personal accident business. The Run-off Reinsurance operations also recoverables related to this segment were net of a reserve of $1 million. purchased retrocessional coverage to reduce the risk of loss on these
The Company’s payment obligations for underlying reinsurance contracts. In December 2010, the Company entered into reinsurance
exposures assumed by the Company under these contracts are based arrangements to transfer the remaining liabilities and administration
on the ceding companies’ claim payments. For GMDB, claim of the workers’ compensation and personal accident businesses to a
payments vary because of changes in equity markets and interest rates, subsidiary of Enstar Group Limited. Under this arrangement, the new
as well as mortality and contractholder behavior. Any of these claim reinsurer also assumes the future risk of collection from prior
payments can occur many years into the future, and the amount of the reinsurers. On February 4, 2013, the Company entered into a
ceding companies’ ultimate claims, and therefore, the amount of the reinsurance arrangement related to its GMDB and GMIB contracts.
Company’s ultimate payment obligations and corresponding ultimate See Note 25 for further details regarding these arrangements.
collection from retrocessionaires, may not be known with certainty for Liabilities related to GMDB, workers’ compensation and personal some time. accident are included in future policy benefits and unpaid claims.
Summary. The Company’s reserves for underlying reinsuranceBecause the GMIB contracts are treated as derivatives under GAAP, exposures assumed by the Company, as well as for amountsthe asset related to GMIB is recorded in the Other assets, including recoverable from reinsurers/retrocessionaires for both ongoingother intangibles caption and the liability related to GMIB is recorded operations and the run-off reinsurance operation, are consideredin Accounts payable, accrued expenses, and other liabilities on the appropriate as of December 31, 2012, based on current information.Company’s Consolidated Balance Sheets (see Notes 11 and 24 for The Company bears the risk of loss if its retrocessionaires do not meetadditional discussion of the GMIB assets and liabilities). or are unable to meet their reinsurance obligations to the Company.
The reinsurance recoverables for GMDB, workers’ compensation, and personal accident total $170 million as of December 31, 2012. Of this amount, approximately 97% are secured by assets in trust or letters of credit.
In the Company’s Consolidated Income Statements, Premiums and fees were presented net of ceded premiums, and Total benefits and expenses were presented net of reinsurance recoveries, in the following amounts:
(In millions) 2012 2011 2010
Premiums and Fees Short-duration contracts:
Direct $ 23,954 $ 17,300 $ 16,492 Assumed 382 158 496 Ceded (217) (185) (187)
24,119 17,273 16,801
Long-duration contracts: Direct 2,234 1,919 1,687 Assumed 86 36 36
Ceded: Individual life insurance and annuity business sold (186) (203) (195) Other (66) (59) (55)
2,068 1,693 1,473
TOTAL $ 26,187 $ 18,966 $ 18,274
Reinsurance recoveries Individual life insurance and annuity business sold $ 316 $ 310 $ 321 Other 201 213 156
TOTAL $ 517 $ 523 $ 477
The increase in direct premiums in 2012 as compared to 2011 as compared to 2010 primarily reflects the effect of the Company’s primarily reflects the Company’s acquisitions of HealthSpring and exit from a large, low-margin assumed government life insurance Great American Supplemental Benefits as well as the conversion of program. The effects of reinsurance on written premiums and fees for Vanbreda business from service to insurance contracts in 2012. The short-duration contracts were not materially different from the increase in assumed premiums in 2012 largely results from the recognized premium and fee amounts shown in the table above. acquisition of FirstAssist. The decrease in assumed premiums in 2011
86 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Goodwill, Other Intangibles, and Property and Equipment
Effective December 31, 2012, the Company changed its external reporting segments. See Note 23 for further information. Goodwill primarily relates to the Global Health Care segment ($5.7 billion) and, to a lesser extent, the Global Supplemental Benefits segment ($350 million) and increased during 2012 primarily as a result of the acquisitions of HealthSpring ($2.5 billion) and, to a lesser extent, Great American Supplemental Benefits and Finans Emeklilik ($300 million).
Activity in Goodwill during 2012 and 2011 was as follows:
(In millions) 2012 2011
Balance at January 1, $ 3,164 $ 3,119 Goodwill acquired:
FirstAssist 7 57 HealthSpring 2,541 - Great American Supplement Benefits 168 - Finans Emeklilik 113 -
Goodwill sold: Cigna Government Services - (6)
Impact of foreign currency translation 8 (6)
Balance at December 31, $ 6,001 $ 3,164
Other intangible assets were comprised of the following at December 31:
Weighted Average Accumulated Net Carrying Amortization
(Dollars in millions) Cost Amortization Value Period (Years)
2012 Customer relationships $ 1,278 $ 466 $ 812 10 Other 328 80 248 11
Total reported in other assets, including other intangibles 1,606 546 1,060 Value of business acquired (reported in deferred policy acquisition
costs) 172 2 170 26 Internal-use software (reported in property and equipment) 1,738 1,191 547 5
TOTAL OTHER INTANGIBLE ASSETS $ 3,516 $ 1,739 $ 1,777
2011 Customer relationships $ 583 $ 313 $ 270 13 Other 127 27 100 12
Total reported in other assets, including other intangibles 710 340 370 Internal-use software (reported in property and equipment) 1,600 1,054 546 5
TOTAL OTHER INTANGIBLE ASSETS $ 2,310 $ 1,394 $ 916
The increase in intangible assets in 2012 relates primarily to the acquisitions of HealthSpring and, to a lesser extent, Great American Supplemental Benefits and Finans Emeklilik.
Property and equipment was comprised of the following as of December 31:
Accumulated Net Carrying (Dollars in millions) Cost Amortization Value
2012 Internal-use software $ 1,738 $ 1,191 $ 547 Other property and equipment 1,415 842 573
TOTAL PROPERTY AND EQUIPMENT $ 3,153 $ 2,033 $ 1,120
2011 Internal-use software $ 1,600 $ 1,054 $ 546 Other property and equipment 1,285 807 478
TOTAL PROPERTY AND EQUIPMENT $ 2,885 $ 1,861 $ 1,024
CIGNA CORPORATION - 2012 Form 10-K 87
NOTE 9
PART II ITEM 8 Financial Statements and Supplementary Data
Depreciation and amortization was comprised of the following for the years ended December 31:
(Dollars in millions) 2012 2011 2010
Internal-use software $ 209 $ 187 $ 161 Other property and equipment 144 117 99 Value of business acquired (reported in deferred policy acquisition costs) 2 - - Other intangibles 205 41 32
TOTAL DEPRECIATION AND AMORTIZATION $ 560 $ 345 $ 292
The increase in amortization of other intangibles in 2012 relates years to be as follows: $415 million in 2013, $368 million in 2014, primarily to the acquisitions of HealthSpring and, to a lesser extent, $312 million in 2015, $262 million in 2016, and $213 million in Great American Supplemental Benefits and Finans Emeklilik. 2017.
The Company estimates annual pre-tax amortization for intangible assets, including internal-use software, over the next five calendar
Pension and Other Postretirement Benefit Plans
The Company and certain of its subsidiaries provide pension, health postretirement benefit plans is immaterial to the Company’s results of care and life insurance defined benefits to eligible retired employees, operations, liquidity and financial position. Effective July 1, 2009, the spouses and other eligible dependents through various domestic and Company froze its primary domestic defined benefit pension plans. foreign plans. The effect of its foreign pension and other
The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. The following table summarizes the projected benefit obligations and assets related to the Company’s domestic and international pension and other postretirement benefit plans as of, and for the year ended, December 31:
Other Postretirement Pension Benefits Benefits
(In millions) 2012 2011 2012 2011
Change in benefit obligation Benefit obligation, January 1 $ 5,067 $ 4,691 $ 452 $ 444 Service cost 3 2 2 2 Interest cost 198 228 16 20 (Gain) loss from past experience 283 453 (2) 16 Benefits paid from plan assets (256) (273) (3) (2) Benefits paid – other (28) (34) (23) (28)
Benefit obligation, December 31 5,267 5,067 442 452
Change in plan assets Fair value of plan assets, January 1 3,298 3,163 22 23 Actual return on plan assets 370 156 1 1 Benefits paid (256) (273) (3) (2) Contributions 253 252 - -
Fair value of plan assets, December 31 3,665 3,298 20 22
Funded Status $ (1,602) $ (1,769) $ (422) $ (430)
The postretirement benefits liability adjustment included in accumulated other comprehensive loss consisted of the following as of December 31:
Other Postretirement Pension Benefits Benefits
(In millions) 2012 2011 2012 2011
Unrecognized net loss $ (2,450) $ (2,331) $ (28) $ (30) Unrecognized prior service cost (5) (5) 23 35
POSTRETIREMENT BENEFITS LIABILITY ADJUSTMENT $ (2,455) $ (2,336) $ (5) $ 5
88 CIGNA CORPORATION - 2012 Form 10-K
NOTE 10
A. Pension and Other Postretirement Benefit Plans
PART II ITEM 8 Financial Statements and Supplementary Data
During 2012, the Company’s postretirement benefits liability The Company funds its qualified pension plans at least at the adjustment increased by $129 million pre-tax ($92 million after-tax) minimum amount required by the Employee Retirement Income resulting in a decrease to shareholders’ equity. The increase in the Security Act of 1974 and the Pension Protection Act of 2006. For liability was primarily due to a decrease in the discount rate, partially 2013, the Company expects to make minimum required and offset by actual investment returns greater than expected in 2012. voluntary contributions totaling approximately $250 million. Future
years’ contributions will ultimately be based on a wide range of factors Pension benefits. The Company’s pension plans were underfunded including but not limited to asset returns, discount rates, and funding by $1.6 billion in 2012 and $1.8 billion in 2011 and had related targets. accumulated benefit obligations of $5.3 billion as of December 31, 2012 and $5.1 billion as of December 31, 2011.
Components of net pension cost for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Service cost $ 3 $ 2 $ 2 Interest cost 198 228 240 Expected long-term return on plan assets (270) (267) (253) Amortization of:
Net loss from past experience 58 38 28 Settlement loss 6 - -
NET PENSION COST $ (5) $ 1 $ 17
The Company expects to recognize pre-tax losses of $75 million in Other postretirement benefits. Unfunded retiree health benefit plans 2013 from amortization of past experience. This estimate is based on a had accumulated benefit obligations of $294 million at December 31, weighted average amortization period for the frozen and inactive plans 2012, and $302 million at December 31, 2011. Retiree life insurance of approximately 28 years, that is based on the average expected plans had accumulated benefit obligations of $148 million as of remaining life of plan participants. December 31, 2012 and $150 million as of December 31, 2011.
Components of net other postretirement benefit cost for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Service cost $ 2 $ 2 $ 1 Interest cost 16 20 22 Expected long-term return on plan assets (1) (1) (1) Amortization of:
Prior service cost (12) (16) (18)
NET OTHER POSTRETIREMENT BENEFIT COST $ 5 $ 5 $ 4
The Company expects to recognize in 2013 pre-tax gains of employees associated with the other postretirement benefit plans of $9 million related to amortization of prior service cost and no pre-tax approximately 11 years. The weighted average remaining losses from amortization of past experience. The original amortization amortization period for prior service cost is approximately 2.5 years. period is based on an average remaining service period of active
The estimated rate of future increases in the per capita cost of health care benefits is 7.5% in 2013, decreasing by 0.5% per year to 5% in 2018 and beyond. This estimate reflects the Company’s current claim experience and management’s estimate that rates of growth will decline in the future. A 1% increase or decrease in the estimated rate would have changed 2012 reported amounts as follows:
(In millions) Increase Decrease
Effect on postretirement benefit obligation $ 12 $ 10
Plan assets. The Company’s current target investment allocation would expect to gradually reduce the allocation to equity securities percentages (37% equity securities, 30% fixed income, 15% securities and move into fixed income to mitigate the volatility in returns, while partnerships, 10% hedge funds and 8% real estate) are developed by also providing adequate liquidity to fund benefit distributions. The management as guidelines, although the fair values of each asset timing of any updates in allocation is not certain. category are expected to vary as a result of changes in market
As of December 31, 2012, pension plan assets included $3.4 billion conditions. The pension plan asset portfolio has continued to include
invested in the separate accounts of Connecticut General Life a significant allocation of equity securities, consisting of domestic and
Insurance Company (‘‘CGLIC’’) and Life Insurance Company of international investments, in an effort to earn a higher rate of return
North America, that are subsidiaries of the Company, as well as an on pension plan investments over the long-term payout period of the
additional $300 million invested directly in funds offered by the buyer pension benefit obligations. As funding levels improve, the Company
of the retirement benefits business.
CIGNA CORPORATION - 2012 Form 10-K 89
PART II ITEM 8 Financial Statements and Supplementary Data
The fair values of plan assets by category and by the fair value hierarchy as defined by GAAP are as follows. See Note 11 for a description of how fair value is determined, including the level within the fair value hierarchy and the procedures the Company uses to validate fair value measurements.
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs InputsDecember 31, 2012 (In millions) (Level 1) (Level 2) (Level 3) Total
Plan assets at fair value: Fixed maturities:
Federal government and agency $ - $ 4 $ - $ 4 Corporate - 416 27 443 Mortgage and other asset-backed - 8 5 13 Fund investments and pooled separate accounts (1) - 519 3 522
TOTAL FIXED MATURITIES - 947 35 982
Equity securities: Domestic 1,202 4 10 1,216 International, including funds and pooled separate accounts (1) 158 149 - 307
TOTAL EQUITY SECURITIES 1,360 153 10 1,523
Real estate and mortgage loans, including pooled separate accounts (1) - - 351 351 Securities partnerships - - 328 328 Hedge funds - - 327 327 Guaranteed deposit account contract - - 47 47 Cash equivalents - 107 - 107
TOTAL PLAN ASSETS AT FAIR VALUE $ 1,360 $ 1,207 $ 1,098 $ 3,665 (1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs InputsDecember 31, 2011 (In millions) (Level 1) (Level 2) (Level 3) Total
Plan assets at fair value: Fixed maturities:
Federal government and agency $ - $ 5 $ - $ 5 Corporate - 332 7 339 Mortgage and other asset-backed - 8 2 10 Fund investments and pooled separate accounts (1) - 546 3 549
TOTAL FIXED MATURITIES - 891 12 903
Equity securities: Domestic 1,153 1 14 1,168 International, including funds and pooled separate accounts (1) 141 137 - 278
TOTAL EQUITY SECURITIES 1,294 138 14 1,446
Real estate and mortgage loans, including pooled separate accounts (1) - - 303 303 Securities partnerships - - 314 314 Hedge Fund - - 148 148 Guaranteed deposit account contract - - 39 39 Cash equivalents - 145 - 145
TOTAL PLAN ASSETS AT FAIR VALUE $ 1,294 $ 1,174 $ 830 $ 3,298 (1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.
Plan assets in Level 1 include exchange-listed equity securities. Level 2 Because many fixed maturities do not trade daily, fair values are often assets primarily include: derived using recent trades of securities with similar features and
characteristics. When recent trades are not available, pricing models fixed income and international equity funds priced using their daily
are used to determine these prices. These models calculate fair values net asset value that is the exit price; and
by discounting future cash flows at estimated market interest rates. fixed maturities valued using recent trades of similar securities or Such market rates are derived by calculating the appropriate spreads pricing models as described below.
90 CIGNA CORPORATION - 2012 Form 10-K
•
•
PART II ITEM 8 Financial Statements and Supplementary Data
over comparable U.S. Treasury securities, based on the credit quality, plan’s ownership share of the equity of the investee including changes industry and structure of the asset. in the fair values of its underlying investments.
Plan assets classified in Level 3 include securities partnerships, equity real estate and hedge funds generally valued based on the pension
The following table summarizes the changes in pension plan assets classified in Level 3 for the years ended December 31, 2012 and December 31, 2011. Actual return on plan assets in this table may include changes in fair value that are attributable to both observable and unobservable inputs.
Fixed Guaranteed Maturities Real Estate Deposit & Equity & Mortgage Securities Account
(In millions) Securities Loans Partnerships Hedge Funds Contract Total
Balance at January 1, 2012 $ 26 $ 303 $ 314 $ 148 $ 39 $ 830
Actual return on plan assets: Assets still held at the reporting date - 38 18 10 3 69 Assets sold during the period - - - - - -
TOTAL ACTUAL RETURN ON PLAN ASSETS - 38 18 10 3 69
Purchases, sales, settlements, net 5 11 (4) 169 5 186 Transfers into/out of Level 3 13 - - - - 13
Balance at December 31, 2012 $ 44 $ 352 $ 328 $ 327 $ 47 $ 1,098
Fixed Guaranteed Maturities Real Estate Deposit & Equity & Mortgage Securities Account
(In millions) Securities Loans Partnerships Hedge Fund Contract Total
Balance at January 1, 2011 $ 46 $ 240 $ 347 $ - $ 24 $ 657
Actual return on plan assets: Assets still held at the reporting date 1 44 66 (2) 3 112 Assets sold during the period 18 - - - - 18
TOTAL ACTUAL RETURN ON PLAN ASSETS 19 44 66 (2) 3 130
Purchases, sales, settlements, net (33) 21 (99) 150 12 51 Transfers into/out of Level 3 (6) (2) - - - (8)
Balance at December 31, 2011 $ 26 $ 303 $ 314 $ 148 $ 39 $ 830
The assets related to other postretirement benefit plans are invested in they are classified as Level 3. During 2012, these assets earned a return deposit funds with interest credited based on fixed income of $1 million, offset by a net withdrawal from the fund of $3 million, investments in the general account of CGLIC. As there are significant while during 2011, they earned a return of $1 million, offset by a net unobservable inputs used in determining the fair value of these assets, withdrawal of $2 million.
Assumptions for pension and other postretirement benefit plans. Management determined the present value of the projected benefit obligation and the accumulated other postretirement benefit obligation and related benefit costs based on the following weighted average assumptions as of and for the years ended December 31:
2012 2011
Discount rate: Pension benefit obligation 3.50% 4.00% Other postretirement benefit obligation 3.25% 3.75% Pension benefit cost 4.00% 5.00% Other postretirement benefit cost 3.75% 4.75%
Expected long-term return on plan assets: Pension benefit cost 8.00% 8.00% Other postretirement benefit cost 5.00% 5.00%
In measuring the 2012 benefit obligations, the Company set discount Company believes that the Citigroup Above-Median Pension Liability rates by applying actual annualized yields at various durations from curve is more representative of the yields that the Company is able to the Citigroup Above-Median Pension Liability curve to the expected achieve in its plan asset investment strategy. The curve uses an array of cash flows of the postretirement benefits liabilities. Prior to 2012, the bonds in various industries throughout the domestic market for high Company used the broader Cititgroup Pension Liability curve. The quality bonds, but only selects those for the curve that have an above
CIGNA CORPORATION - 2012 Form 10-K 91
PART II ITEM 8 Financial Statements and Supplementary Data
median return at each duration. As with the broader curve, Citigroup domestic and foreign GDP growth, employment levels and inflation. monitors the bond portfolio to ensure that only high quality issues are Based on the Company’s current outlook, the expected return included. In setting its discount rate for 2012, the Company reviewed assumption is considered reasonable. alternative indices and determined that they were not materially
To measure pension costs, the Company uses a market-related asset different than the result produced by the Citigroup Above-Median
valuation for domestic pension plan assets invested in non-fixed curve.
income investments. The market-related value of these pension assets Expected long-term rates of return on plan assets were developed recognizes the difference between actual and expected long-term considering actual long-term historical returns, expected long-term returns in the portfolio over 5 years, a method that reduces the market conditions, plan asset mix and management’s investment short-term impact of market fluctuations on pension cost. At strategy, that continues a significant allocation to domestic and December 31, 2012, the market-related asset value was approximately foreign equity securities as well as real estate, securities partnerships $3.5 billion compared with a market value of approximately and hedge funds. Expected long-term market conditions take into $3.6 billion. consideration certain key macroeconomic trends including expected
Benefit payments. The following benefit payments, including expected future services, are expected to be paid in:
Other Postretirement
(In millions) Pension Benefits Benefits
2013 $ 396 $ 35 2014 $ 342 $ 36 2015 $ 333 $ 36 2016 $ 331 $ 35 2017 $ 332 $ 34 2018-2022 $ 1,630 $ 149
the Company increased its matching contributions to 401(k) planB. 401(k) Plans participants.
The Company sponsors a 401(k) plan in which the Company The Company may elect to increase its matching contributions if thematches a portion of employees’ pre-tax contributions. Another Company’s annual performance meets certain targets. A substantial401(k) plan with an employer match was frozen in 1999. Participants amount of the Company’s matching contributions are invested in thein the active plan may invest in various funds that invest in the Company’s common stock. The Company’s expense for these plansCompany’s common stock, several diversified stock funds, a bond was $78 million for 2012, $72 million for 2011 and $69 million forfund or a fixed-income fund. In conjunction with the action to freeze 2010.the domestic defined benefit pension plans, effective January 1, 2010,
Fair Value Measurements
The Company carries certain financial instruments at fair value in the unobservable inputs were significant to the instrument’s fair value, financial statements including fixed maturities, equity securities, even though the measurement may be derived using inputs that are short-term investments and derivatives. Other financial instruments both observable (Levels 1 and 2) and unobservable (Level 3). are measured at fair value under certain conditions, such as when
The Company estimates fair values using prices from third parties or impaired.
internal pricing methods. Fair value estimates received from third- Fair value is defined as the price at which an asset could be exchanged party pricing services are based on reported trade activity and quoted in an orderly transaction between market participants at the balance market prices when available, and other market information that a sheet date. A liability’s fair value is defined as the amount that would market participant may use to estimate fair value. The internal pricing be paid to transfer the liability to a market participant, not the methods are performed by the Company’s investment professionals, amount that would be paid to settle the liability with the creditor. and generally involve using discounted cash flow analyses,
incorporating current market inputs for similar financial instruments The Company’s financial assets and liabilities carried at fair value have
with comparable terms and credit quality, as well as other qualitative been classified based upon a hierarchy defined by GAAP. The
factors. In instances where there is little or no market activity for the hierarchy gives the highest ranking to fair values determined using
same or similar instruments, fair value is estimated using methods, unadjusted quoted prices in active markets for identical assets and
models and assumptions that the Company believes a hypothetical liabilities (Level 1) and the lowest ranking to fair values determined
market participant would use to determine a current transaction price. using methodologies and models with unobservable inputs (Level 3).
These valuation techniques involve some level of estimation and An asset’s or a liability’s classification is based on the lowest level of
judgment that becomes significant with increasingly complex input that is significant to its measurement. For example, a financial
instruments or pricing models. asset or liability carried at fair value would be classified in Level 3 if
92 CIGNA CORPORATION - 2012 Form 10-K
NOTE 11
PART II ITEM 8 Financial Statements and Supplementary Data
The Company is responsible for determining fair value, as well as the appropriate estimates of fair value. These analyses include reviewing appropriate level within the fair value hierarchy, based on the to ensure that prices do not become stale and whether changes from significance of unobservable inputs. The Company reviews prior valuations are reasonable or require additional review. The methodologies and processes of third-party pricing services and Company also performs sample testing of sales values to confirm the compares prices on a test basis to those obtained from other external accuracy of prior fair value estimates. Exceptions identified during pricing sources or internal estimates. The Company performs ongoing these processes indicate that adjustments to prices are infrequent and analyses of both prices received from third-party pricing services and do not significantly impact valuations. those developed internally to determine that they represent
Financial Assets and Financial Liabilities Carried at Fair Value The following tables provide information as of December 31, 2012 and December 31, 2011 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, that are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders. In addition, Note 10 contains similar disclosures for the Company’s pension plan assets.
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs InputsDecember 31, 2012 (In millions) (Level 1) (Level 2) (Level 3) Total
Financial assets at fair value: Fixed maturities:
Federal government and agency $ 156 $ 746 $ - $ 902 State and local government - 2,437 - 2,437 Foreign government - 1,298 24 1,322 Corporate - 11,201 695 11,896 Federal agency mortgage-backed - 122 - 122 Other mortgage-backed - 88 1 89 Other asset-backed - 340 597 937
Total fixed maturities (1) 156 16,232 1,317 17,705 Equity securities 4 73 34 111
Subtotal 160 16,305 1,351 17,816 Short-term investments - 154 - 154 GMIB assets (2) - - 622 622 Other derivative assets (3) - 41 - 41
TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS $ 160 $ 16,500 $ 1,973 $ 18,633
Financial liabilities at fair value: GMIB liabilities $ - $ - $ 1,170 $ 1,170 Other derivative liabilities (3) - 31 - 31
TOTAL FINANCIAL LIABILITIES AT FAIR VALUE $ - $ 31 $ 1,170 $ 1,201 (1) Fixed maturities included $875 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $108 million of appreciation for
securities classified in Level 3.
(2) The GMIB assets represent retrocessional contracts in place from two external reinsurers that cover 55% of the exposures on these contracts. Effective February 4, 2013, the Company reinsured the remaining 45% of the exposures on these contracts.
(3) Other derivative assets included $5 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $36 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 13 for additional information.
CIGNA CORPORATION - 2012 Form 10-K 93
PART II ITEM 8 Financial Statements and Supplementary Data
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs InputsDecember 31, 2011 (In millions) (Level 1) (Level 2) (Level 3) Total
Financial assets at fair value: Fixed maturities:
Federal government and agency $ 217 $ 738 $ 3 $ 958 State and local government - 2,456 - 2,456 Foreign government - 1,251 23 1,274 Corporate - 10,132 381 10,513 Federal agency mortgage-backed - 9 - 9 Other mortgage-backed - 79 1 80 Other asset-backed - 363 564 927
Total fixed maturities (1) 217 15,028 972 16,217 Equity securities 3 67 30 100
Subtotal 220 15,095 1,002 16,317 Short-term investments - 225 - 225 GMIB assets (2) - - 712 712 Other derivative assets (3) - 45 - 45
TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS $ 220 $ 15,365 $ 1,714 $ 17,299
Financial liabilities at fair value: GMIB liabilities $ - $ - $ 1,333 $ 1,333 Other derivative liabilities (3) - 30 - 30
TOTAL FINANCIAL LIABILITIES AT FAIR VALUE $ - $ 30 $ 1,333 $ 1,363 (1) Fixed maturities included $826 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $115 million of appreciation for
securities classified in Level 3.
(2) The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts.
(3) Other derivative assets included $10 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $35 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 13 for additional information.
Because many fixed maturities do not trade daily, third-party pricingLevel 1 Financial Assets services and internal methods often use recent trades of securities with
Inputs for instruments classified in Level 1 include unadjusted quoted similar features and characteristics. When recent trades are not prices for identical assets in active markets accessible at the available, pricing models are used to determine these prices. These measurement date. Active markets provide pricing data for trades models calculate fair values by discounting future cash flows at occurring at least weekly and include exchanges and dealer markets. estimated market interest rates. Such market rates are derived by
calculating the appropriate spreads over comparable U.S. TreasuryAssets in Level 1 include actively-traded U.S. government bonds and securities, based on the credit quality, industry and structure of theexchange-listed equity securities. Given the narrow definition of asset. Typical inputs and assumptions to pricing models include, butLevel 1 and the Company’s investment asset strategy to maximize are not limited to, a combination of benchmark yields, reportedinvestment returns, a relatively small portion of the Company’s trades, issuer spreads, liquidity, benchmark securities, bids, offers,investment assets are classified in this category. reference data, and industry and economic events. For mortgage- backed securities, inputs and assumptions may also include
Level 2 Financial Assets and Financial Liabilities characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.
Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those Nearly all of these instruments are valued using recent trades or willing to trade in markets that are not active, or other inputs that are pricing models. Less than 1% of the fair value of investments classified market observable or can be corroborated by market data for the term in Level 2 represents foreign bonds that are valued, consistent with of the instrument. Such other inputs include market interest rates and local market practice, using a single unadjusted market-observable volatilities, spreads and yield curves. An instrument is classified in input derived by averaging multiple broker-dealer quotes. Level 2 if the Company determines that unobservable inputs are
Short-term investments are carried at fair value, that approximates insignificant.
cost. On a regular basis the Company compares market prices for these securities to recorded amounts to validate that current carryingFixed maturities and equity securities. Approximately 91% of the amounts approximate exit prices. The short-term nature of theCompany’s investments in fixed maturities and equity securities are investments and corroboration of the reported amounts over theclassified in Level 2 including most public and private corporate debt holding period support their classification in Level 2.and equity securities, federal agency and municipal bonds,
non-government mortgage-backed securities and preferred stocks.
94 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Other derivatives classified in Level 2 represent over-the-counter Level 3 Financial Assets and Financial Liabilities instruments such as interest rate and foreign currency swap contracts.
Certain inputs for instruments classified in Level 3 are unobservableFair values for these instruments are determined using market (supported by little or no market activity) and are significant to theirobservable inputs including forward currency and interest rate curves resulting fair value measurement. Unobservable inputs reflect theand widely published market observable indices. Credit risk related to Company’s best estimate of what hypothetical market participantsthe counterparty and the Company is considered when estimating the would use to determine a transaction price for the asset or liability atfair values of these derivatives. However, the Company is largely the reporting date.protected by collateral arrangements with counterparties, and
determined that no adjustment for credit risk was required as of The Company classifies certain newly-issued, privately-placed, December 31, 2012 or December 31, 2011. The nature and use of complex or illiquid securities, as well as assets and liabilities relating to these other derivatives are described in Note 13. GMIB, in Level 3.
Fixed maturities and equity securities. Approximately 8% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:
December 31, December 31, (In millions) 2012 2011
Other asset and mortgage-backed securities – valued using pricing models $ 598 $ 565 Corporate and government fixed maturities – valued using pricing models 596 335 Corporate fixed maturities – valued at transaction price 123 72 Equity securities – valued at transaction price 34 30
TOTAL $ 1,351 $ 1,002
Fair values of other asset and mortgage-backed securities, corporate developed directly by the Company as of December 31, 2012. The and government fixed maturities are primarily determined using range and weighted average basis point amounts reflect the pricing models that incorporate the specific characteristics of each Company’s best estimates of the unobservable adjustments a market asset and related assumptions including the investment type and participant would make to the market observable spreads (adjustment structure, credit quality, industry and maturity date in comparison to to discount rates) used to calculate the fair values in a discounted cash current market indices, spreads and liquidity of assets with similar flow analysis. characteristics. For other asset and mortgage-backed securities, inputs
Other asset and mortgage-backed securities. The significantand assumptions to pricing may also include collateral attributes and unobservable inputs used to value the following other asset andprepayment speeds. Recent trades in the subject security or similar mortgage-backed securities are liquidity and weighting of creditsecurities are assessed when available, and the Company may also spreads. An adjustment for liquidity is made as of the measurementreview published research, as well as the issuer’s financial statements, date when there is limited trading activity for the security thatin its evaluation. Approximately 10% of fixed maturities classified in considers current market conditions, issuer circumstances andlevel 3 represent single, unadjusted, non-binding broker quotes that complexity of the security structure. An adjustment to weight creditare not considered market observable. Certain subordinated corporate spreads is needed to value a more complex bond structure withfixed maturities and private equity investments, representing multiple underlying collateral with no standard market valuationapproximately 10% of securities included in level 3, are valued at technique. The weighting of credit spreads is primarily based on thetransaction price in the absence of market data indicating a change in underlying collateral’s characteristics and their proportional cash flowsthe estimated fair values. supporting the bond obligations. The resulting wide range of unobservable adjustments in the table below is due to the varying
Quantitative Information about Unobservable Inputs liquidity and quality of the underlying collateral, ranging from high credit quality to below investment grade.The following table summarizes the fair value and significant
unobservable inputs used in pricing Level 3 securities that were
Corporate and government fixed maturities. The significant unobservable input used to value the following corporate and government fixed maturities is an adjustment for liquidity. When there is limited trading activity for the security, an adjustment is needed to reflect current market conditions and issuer circumstances.
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PART II ITEM 8 Financial Statements and Supplementary Data
Unobservable Adjustment to Discount Rates Range
Unobservable (Weighted Average) inAs of December 31, 2012 (In millions except basis points) Fair Value Input Basis Points
Other asset and mortgage-backed securities $ 584 Liquidity 60 - 410 (140) Weighting of credit spreads 50 - 4,540 (410)
Corporate and government fixed maturities $ 439 Liquidity 20 - 640 (190)
Significant increases in any of these inputs would result in a lower fair Assumptions based on observable inputs: value measurement while decreases in these inputs would result in a
The market return and discount rate assumptions are based on thehigher fair value measurement. Generally, the unobservable inputs are market-observable LIBOR swap curve.not interrelated and a change in the assumption used for one
unobservable input is not accompanied by a change in the other The projected interest rate used to calculate the reinsured income unobservable input. The table does not include all of the Level 3 benefits is indexed to the 7-year Treasury Rate at the time of securities because information about specific unobservable inputs annuitization (claim interest rate) based on contractual terms. That used in pricing all of these securities was not reasonably available to rate was 1.18% at December 31, 2012 and must be projected for the Company. See preceding discussion regarding the Company’s future time periods. These projected rates vary by economic valuation processes and controls. scenario and are determined by an interest rate model using current
interest rate curves and the prices of instruments available in the Guaranteed minimum income benefit contracts. The Company
market including various interest rate caps and zero-coupon bonds. reports liabilities and assets as derivatives at fair value because the cash
For a subset of the business, there is a contractually guaranteed floor flows of these contracts are affected by equity markets and interest
of 3% for the claim interest rate. rates but are without significant life insurance risk and are settled in lump sum payments. The Company estimates the fair value of the The market volatility assumptions for annuitants’ underlying assets and liabilities for GMIB contracts using assumptions regarding mutual fund investments that are modeled based on the S&P 500, capital markets (including market returns, interest rates and market Russell 2000 and NASDAQ Composite are based on the market- volatilities of the underlying equity and bond mutual fund implied volatility for these indices for three to seven years grading to investments), future annuitant behavior (including mortality, lapse, historical volatility levels thereafter. For the remaining 50% of and annuity election rates), and non-performance risk, as well as risk underlying mutual fund investments modeled using other indices and profit charges. As certain assumptions used to estimate fair values (with insufficient market-observable data), volatility is based on the for these contracts are largely unobservable, the Company classifies average historical level for each index over the past 10 years. Using GMIB assets and liabilities in Level 3. The Company considered the this approach, volatility ranges from 18% to 28% for equity funds, following in determining the view of a hypothetical market 6% to 8% for bond funds, and 0% to 1% for money market funds. participant:
that the most likely transfer of these assets and liabilities would be Assumptions based on unobservable inputs: through a reinsurance transaction with an independent insurer; and
The mortality assumption is 70% of the 1994 Group Annuity that because this block of contracts is in run-off mode, an insurer Mortality table, with 1% annual improvement beginning January 1, looking to acquire these contracts would have similar existing 2000. contracts with related administrative and risk management
The annual lapse rate assumption reflects experience that differs bycapabilities the company issuing the underlying variable annuity contracts,
These GMIB assets and liabilities are calculated with a complex ranges from 0% to 12% at December 31, 2012, and depends on the internal model using many scenarios to determine the fair value of net time since contract issue and the relative value of the guarantee. The amounts estimated to be paid, less the fair value of net future weighted average annual lapse rate is 1.8%. premiums estimated to be received, adjusted for risk and profit
The annual annuity election rate assumption reflects experience thatcharges that the Company anticipates a hypothetical market differs by the company issuing the underlying variable annuityparticipant would require to assume this business. Net amounts contracts and depends on the annuitant’s age, the relative value ofestimated to be paid represent the excess of the anticipated value of the the guarantee and whether a contractholder has had a previousincome benefits over the values of the annuitants’ accounts at the time opportunity to elect the benefit. Immediately after the expiration ofof annuitization. Assumptions related to future annuitant behavior the waiting period, the assumed probability that an individual willreflect the Company’s belief that a hypothetical market participant annuitize their variable annuity contract is up to 80%. For thewould consider the actual and expected experience of the Company as second and subsequent annual opportunities to elect the benefit, thewell as other relevant and available industry resources in setting assumed probability of election is up to 20%. The weighted averagepolicyholder behavior assumptions. The significant assumptions used annual annuity election rate is 9%.to value the GMIB assets and liabilities as of December 31, 2012 were
as follows:
96 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 8 Financial Statements and Supplementary Data
The nonperformance risk adjustment is incorporated by adding The Company regularly evaluates each of the assumptions used in spread to the discount rate in the calculation of both (1) the GMIB establishing these assets and liabilities by considering how a liability to reflect a hypothetical market participant’s view of the risk hypothetical market participant would set assumptions at each of the Company not fulfilling its GMIB obligations, and (2) the valuation date. Capital markets assumptions are expected to change at GMIB asset to reflect a hypothetical market participant’s view of the each valuation date reflecting currently observable market conditions. reinsurers’ credit risk, after considering collateral. The estimated Other assumptions may also change based on a hypothetical market market-implied spread is company-specific for each party involved participant’s view of actual experience as it emerges over time or other to the extent that company-specific market data is available and is factors that impact the net liability. The significant unobservable based on industry averages for similarly-rated companies when inputs used in the fair value measurement of the GMIB assets and company-specific data is not available. The spread is impacted by liabilities are lapse rates, annuity election rates, and spreads used to the credit default swap spreads of the specific parent companies, calculate nonperformance risk. Significant decreases in assumed lapse adjusted to reflect subsidiaries’ credit ratings relative to their parent rates or spreads used to calculate nonperformance risk, or increases in company and any available collateral. The additional spread over assumed annuity election rates would result in higher fair value LIBOR incorporated into the discount rate ranged from 5 to 140 measurements. Generally, a change in one of these assumptions is not basis points for the GMIB liability with a weighted average of 55 necessarily accompanied by a change in another assumption. basis points and ranged from 15 to 100 basis points for the GMIB
GMIB liabilities are reported in the Company’s Consolidated Balance reinsurance asset with a weighted average of 65 basis points for that
Sheets in Accounts payable, accrued expenses and other liabilities. portion of the interest rate curve most relevant to these policies.
GMIB assets associated with these contracts represent net receivables The risk and profit charge assumption is based on the Company’s in connection with reinsurance that the Company has purchased from estimate of the capital and return on capital that would be required two external reinsurers and are reported in the Company’s by a hypothetical market participant. The assumed return on capital Consolidated Balance Sheets in Other assets, including other is 10% after-tax. intangibles.
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 years ended December 31, 2012 and 2011. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in this table may include net changes in fair value that are attributable to both observable and unobservable inputs.
Fixed Maturities &
(In millions) Equity Securities GMIB Assets GMIB Liabilities GMIB Net
Balance at January 1, 2012 $ 1,002 $ 712 $ (1,333) $ (621)
Gains (losses) included in shareholders’ net income: GMIB fair value gain/(loss) - (55) 96 41 Other 13 - - -
Total gains (losses) included in shareholders’ net income 13 (55) 96 41
Gains included in other comprehensive income 8 - - - Losses required to adjust future policy benefits for settlement annuities (1) (10) - - - Purchases, issuances, settlements:
Purchases 188 - - - Sales (1) - - - Settlements (88) (35) 67 32
Total purchases, sales and settlements 99 (35) 67 32
Transfers into/(out of ) Level 3: Transfers into Level 3 283 - - - Transfers out of Level 3 (44) - - -
Total transfers into/(out of ) Level 3 239 - - -
Balance at December 31, 2012 $ 1,351 $ 622 $ (1,170) $ (548)
Total gains (losses) included in shareholders’ net income attributable to instruments held at the reporting date $ (1) $ (55) $ 96 $ 41 (1) Amounts do not accrue to shareholders.
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PART II ITEM 8 Financial Statements and Supplementary Data
Fixed Maturities &
(In millions) Equity Securities GMIB Assets GMIB Liabilities GMIB Net
Balance at January 1, 2011 $ 933 $ 480 $ (903) $ (423)
Gains (losses) included in shareholders’ net income: GMIB fair value gain/(loss) - 270 (504) (234) Other 10 - - -
Total gains (losses) included in shareholders’ net income 10 270 (504) (234)
Gains included in other comprehensive income 7 - - - Gains required to adjust future policy benefits for settlement annuities (1) 41 - - - Purchases, issuances, settlements:
Purchases 129 - - - Sales (20) - - - Settlements (61) (38) 74 36
Total purchases, sales, and settlements 48 (38) 74 36
Transfers into/(out of ) Level 3: Transfers into Level 3 81 - - - Transfers out of Level 3 (118) - - -
Total transfers into/(out of ) Level 3 (37) - - -
Balance at December 31, 2011 $ 1,002 $ 712 $ (1,333) $ (621)
Total gains (losses) included in shareholders’ net income attributable to instruments held at the reporting date $ 6 $ 270 $ (504) $ (234) (1) Amounts do not accrue to shareholders.
As noted in the tables above, total gains and losses included in reinsurance arrangements when annuitants lapse, die, elect their shareholders’ net income are reflected in the following captions in the benefit, or reach the age after which the right to elect their benefit Consolidated Statements of Income: expires.
Realized investment gains (losses) and net investment income for Under FASB’s guidance for fair value measurements, the Company’s amounts related to fixed maturities and equity securities; and GMIB assets and liabilities are expected to be volatile in future periods
because the underlying capital markets assumptions will be based GMIB fair value (gain) loss for amounts related to GMIB assets and
largely on market observable inputs at the close of each reporting liabilities.
period including interest rates and market implied volatilities. In the tables above, gains and losses included in other comprehensive
Beginning in February 2011, the Company implemented a dynamic income are reflected in Net unrealized appreciation (depreciation) on
equity hedge program to reduce a portion of the equity market securities in the Consolidated Statements of Other Comprehensive
exposures related to GMIB contracts (‘‘GMIB equity hedge Income.
program’’) by entering into exchange-traded futures contracts. The Company also entered into a dynamic interest rate hedge programReclassifications impacting Level 3 financial instruments are reported that reduces a portion of the interest rate exposure related to GMIBas transfers into or out of the Level 3 category as of the beginning of contracts (‘‘GMIB growth interest rate hedge program’’) using LIBORthe quarter in which the transfer occurs. Therefore gains and losses in swap contracts and exchange-traded treasury futures contracts. Inincome only reflect activity for the quarters the instrument was June 2012, the GMIB equity hedge program was expanded. Theseclassified in Level 3. hedges were terminated after February 4, 2013 as a result of the
Transfers into or out of the Level 3 category occur when unobservable reinsurance agreement for the remaining 45% of the risk. See
inputs, such as the Company’s best estimate of what a market Notes 25 and 13 for further information.
participant would use to determine a current transaction price, GMIB fair value gains of $41 million for 2012 were primarily due tobecome more or less significant to the fair value measurement. For the the effect of increases in underlying account values due to favorableyears ended December 31, 2012 and 2011, transfer activity between equity markets, updates in the claim exposure calculation based on aLevel 3 and Level 2 primarily reflects changes in the level of review of actual claim amounts compared to projected values in theunobservable inputs used to value certain public and private corporate fair value model and a reduction in the annuitization rates. Thesebonds, principally related to liquidity of the securities and credit risk favorable effects were partially offset by a reduction in lapse rates andof the issuers. general declines in interest rates.
Because GMIB reinsurance arrangements remain in effect at the GMIB fair value losses of $234 million for 2011 were primarily due toreporting date, the Company has reflected the total gain or loss for the a decline in both the interest rate used for projecting claim exposureperiod as the total gain or loss included in income attributable to (7-year Treasury rates) and the rate used for projecting market returnsinstruments still held at the reporting date. However, the Company and discounting (LIBOR swap curve).reduces the GMIB assets and liabilities resulting from these
98 CIGNA CORPORATION - 2012 Form 10-K
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PART II ITEM 8 Financial Statements and Supplementary Data
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 Company’s revenues and expenses. At December 31, separate account assets were as follows:
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs2012 (In millions) (Level 1) (Level 2) (Level 3) Total
Guaranteed separate accounts (See Note 24) $ 245 $ 324 $ - $ 569 Non-guaranteed separate accounts (1) 1,925 4,258 1,005 7,188
TOTAL SEPARATE ACCOUNT ASSETS $ 2,170 $ 4,582 $ 1,005 $ 7,757 (1) As of December 31, 2012, non-guaranteed separate accounts included $3.4 billion in assets supporting the Company’s pension plans, including $956 million classified in Level 3.
Quoted Prices in Significant Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs2011 (In millions) (Level 1) (Level 2) (Level 3) Total
Guaranteed separate accounts (See Note 24) $ 249 $ 1,439 $ - $ 1,688 Non-guaranteed separate accounts (1) 1,804 3,851 750 6,405
TOTAL SEPARATE ACCOUNT ASSETS $ 2,053 $ 5,290 $ 750 $ 8,093 (1) As of December 31, 2011, non-guaranteed separate accounts included $3.0 billion in assets supporting the Company’s pension plans, including $702 million classified in Level 3.
Separate account assets in Level 1 include exchange-listed equity actively-traded institutional and retail mutual fund investments and securities. Level 2 assets primarily include: separate accounts priced using the daily net asset value that is the
exit price. corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at Separate account assets classified in Level 3 include investments estimated market interest rates as described above; and primarily in securities partnerships, real estate and hedge funds
generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments.
The following tables summarize the change in separate account assets reported in Level 3 for the years ended December 31, 2012 and 2011.
(In millions)
Balance at January 1, 2012 $ 750 Policyholder gains (1) 55 Purchases, issuances, settlements:
Purchases 283 Sales (6) Settlements (90)
Total purchases, sales and settlements 187
Transfers into/(out of ) Level 3: Transfers into Level 3 17 Transfers out of Level 3 (4)
Total transfers into/(out of ) Level 3: 13
Balance at December 31, 2012 $ 1,005 (1) Included in this amount are gains of $49 million attributable to instruments still held at the reporting date.
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PART II ITEM 8 Financial Statements and Supplementary Data
(In millions)
Balance at January 1, 2011 $ 594 Policyholder gains (1) 114 Purchases, issuances, settlements:
Purchases 257 Sales (51) Settlements (152)
Total purchases, sales and settlements 54
Transfers into/(out of ) Level 3: Transfers into Level 3 4 Transfers out of Level 3 (16)
Total transfers into/(out of ) Level 3: (12)
Balance at December 31, 2011 $ 750 (1) Included in this amount are gains of $96 million attributable to instruments still held at the reporting date.
down to their fair values, resulting in realized investment losses ofAssets and Liabilities Measured at Fair Value under $15 million after-tax.Certain Conditions
Some financial assets and liabilities are not carried at fair value each Fair Value Disclosures for Financial Instruments Notreporting period, but may be measured using fair value only under
certain conditions, such as investments in real estate entities and Carried at Fair Value commercial mortgage loans when they become impaired. During
Most financial instruments that are subject to fair value disclosure 2012, impaired commercial mortgage loans representing less than 1%
requirements are carried in the Company’s Consolidated Financial of total investments were written down to their fair values, resulting in
Statements at amounts that approximate fair value. The following realized investment losses of $7 million after-tax.
table provides the fair values and carrying values of the Company’s During 2011, impaired commercial mortgage loans and real estate financial instruments not recorded at fair value that are subject to fair entities representing less than 1% of total investments were written value disclosure requirements at December 31, 2012 and
December 31, 2011.
December 31, 2012 December 31, 2011Classification in Fair Value Fair Carrying Fair Carrying
(In millions) Hierarchy Value Value Value Value
Commercial mortgage loans Level 3 $ 2,999 $ 2,851 $ 3,380 $ 3,301 Contractholder deposit funds, excluding universal life products Level 3 $ 1,082 $ 1,056 $ 1,056 $ 1,035 Long-term debt, including current maturities, excluding capital leases Level 2 $ 5,821 $ 4,986 $ 5,319 $ 4,984
The fair values presented in the table above have been estimated using amount estimated to be payable to the customer as of the reporting market information when available. The following is a description of date, which is generally the carrying value. Most of the remaining the valuation methodologies and inputs used by the Company to contractholder deposit funds are reinsured by the buyers of the determine fair value. individual life and annuity and retirement benefits businesses. The
fair value for these contracts is determined using the fair value of these Commercial mortgage loans. The Company estimates the fair value buyers’ assets supporting these reinsured contracts. The Company had of commercial mortgage loans generally by discounting the a reinsurance recoverable equal to the carrying value of these reinsured contractual cash flows at estimated market interest rates that reflect contracts. These instruments were classified in Level 3 because certain the Company’s assessment of the credit quality of the loans. Market inputs are unobservable (supported by little or no market activity) and interest rates are derived by calculating the appropriate spread over significant to their resulting fair value measurement. comparable U.S. Treasury rates, based on the property type, quality rating and average life of the loan. The quality ratings reflect the Long-term debt, including current maturities, excluding capital relative risk of the loan, considering debt service coverage, the leases. The fair value of long-term debt is based on quoted market loan-to-value ratio and other factors. Fair values of impaired mortgage prices for recent trades. When quoted market prices are not available, loans are based on the estimated fair value of the underlying collateral fair value is estimated using a discounted cash flow analysis and the generally determined using an internal discounted cash flow model. Company’s estimated current borrowing rate for debt of similar terms The fair value measurements were classified in Level 3 because the and remaining maturities. These measurements were classified in cash flow models incorporate significant unobservable inputs. Level 2 because the fair values are based on quoted market prices or
other inputs that are market observable or can be corroborated by Contractholder deposit funds, excluding universal life products. market data. Generally, these funds do not have stated maturities. Approximately
Fair values of off-balance-sheet financial instruments were not55% of these balances can be withdrawn by the customer at any time material.without prior notice or penalty. The fair value for these contracts is the
100 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Investments
Securities in the following table are included in fixed maturities and equity securities on the Company’s Consolidated Balance Sheets. The Company’s hybrid investments include certain preferred stock or debt securities with call or conversion features.
(In millions) 2012 2011
Included in fixed maturities: Trading securities (amortized cost: $1; $2) $ 1 $ 2 Hybrid securities (amortized cost: $15; $26) 15 28
TOTAL $ 16 $ 30
Included in equity securities: Hybrid securities (amortized cost: $84; $90) $ 70 $ 65
Fixed maturities included federal government securities of $54 million at December 31, 2012 and $79 million at December 31, 2011, that were pledged as collateral to brokers as required under certain futures contracts.
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 December 31, 2012:
Amortized Fair (In millions) Cost Value
Due in one year or less $ 1,121 $ 1,141 Due after one year through five years 5,211 5,633 Due after five years through ten years 5,283 5,973 Due after ten years 2,850 3,796 Mortgage and other asset-backed securities 1,000 1,146
TOTAL $ 15,465 $ 17,689
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.
Gross unrealized appreciation (depreciation) on fixed maturities by type of issuer is shown below (excluding trading securities and hybrid securities with a fair value of $16 million at December 31, 2012 and $30 million at December 31, 2011).
December 31, 2012
Amortized Unrealized Unrealized Fair (In millions) Cost Appreciation Depreciation Value
Federal government and agency $ 509 $ 393 $ - $ 902 State and local government 2,169 270 (2) 2,437 Foreign government 1,197 126 (1) 1,322 Corporate 10,590 1,308 (17) 11,881 Federal agency mortgage-backed 121 1 - 122 Other mortgage-backed 82 11 (4) 89 Other asset-backed 797 145 (6) 936
TOTAL $ 15,465 $ 2,254 $ (30) $ 17,689
CIGNA CORPORATION - 2012 Form 10-K 101
NOTE 12
A. Fixed Maturities and Equity Securities
PART II ITEM 8 Financial Statements and Supplementary Data
December 31, 2011
Amortized Unrealized Unrealized Fair (In millions) Cost Appreciation Depreciation Value
Federal government and agency $ 552 $ 406 $ - $ 958 State and local government 2,185 274 (3) 2,456 Foreign government 1,173 103 (2) 1,274 Corporate 9,460 1,070 (45) 10,485 Federal agency mortgage-backed 9 - - 9 Other mortgage-backed 73 10 (4) 79 Other asset-backed 777 160 (11) 926
TOTAL $ 14,229 $ 2,023 $ (65) $ 16,187
The above table includes investments with a fair value of $3.1 billion Review of declines in fair value. Management reviews fixed supporting the Company’s run-off settlement annuity business, with maturities with a decline in fair value from cost for impairment based gross unrealized appreciation of $883 million and gross unrealized on criteria that include: depreciation of $8 million at December 31, 2012. Such unrealized
length of time and severity of decline; amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other financial health and specific near term prospects of the issuer; comprehensive income. At December 31, 2011, investments
changes in the regulatory, economic or general market environment supporting this business had a fair value of $3 billion, gross unrealized
of the issuer’s industry or geographic region; and appreciation of $851 million and gross unrealized depreciation of $25 million. the Company’s intent to sell or the likelihood of a required sale prior
to recovery. As of December 31, 2012, the Company had commitments to purchase $58 million of fixed maturities, most of which bear interest at a fixed market rate.
Excluding trading and hybrid securities, as of December 31, 2012, fixed maturities with a decline in fair value from amortized cost (primarily corporate, and other asset and mortgage-backed securities) were as follows, including the length of time of such decline:
December 31, 2012
Fair Amortized Unrealized Number (Dollars in millions) Value Cost Depreciation of Issues
Fixed maturities: One year or less:
Investment grade $ 488 $ 494 $ (6) 200 Below investment grade $ 123 $ 125 $ (2) 67
More than one year: Investment grade $ 195 $ 207 $ (12) 39 Below investment grade $ 26 $ 36 $ (10) 14
As of December 31, 2012, the unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Excluding trading and hybrid securities, equity securities with a fair value lower than cost were not material at December 31, 2012.
B. Commercial Mortgage Loans Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are secured by high quality, primarily completed and substantially leased operating properties.
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PART II ITEM 8 Financial Statements and Supplementary Data
At December 31, commercial mortgage loans were distributed among the following property types and geographic regions:
(In millions) 2012 2011
Property type Office buildings $ 866 $ 1,014 Apartment buildings 571 705 Industrial 532 670 Hotels 463 542 Retail facilities 346 297 Other 73 73
TOTAL $ 2,851 $ 3,301
Geographic region Pacific $ 966 $ 893 South Atlantic 730 870 New England 387 450 Central 352 511 Middle Atlantic 300 391 Mountain 116 186
TOTAL $ 2,851 $ 3,301
At December 31, 2012, scheduled commercial mortgage loan the annual portfolio loan review. The Company monitors credit maturities were as follows (in millions): $419 in 2013, $290 in 2014, quality on an ongoing basis, classifying each loan as a loan in good $318 in 2015, $791 in 2016 and $1,033 thereafter. Actual maturities standing, potential problem loan or problem loan. could differ from contractual maturities for several reasons: borrowers
Quality ratings are based on internal evaluations of each loan’s specific may have the right to prepay obligations, with or without prepayment
characteristics considering a number of key inputs, including real penalties; the maturity date may be extended; and loans may be
estate market-related factors such as rental rates and vacancies, and refinanced.
property-specific inputs such as growth rate assumptions and lease As of December 31, 2012, the Company had commitments to extend rollover statistics. However, the two most significant contributors to credit under commercial mortgage loan agreements of $6 million. the credit quality rating are the debt service coverage and
loan-to-value ratios. The debt service coverage ratio measures the Credit quality. The Company applies a consistent and disciplined amount of property cash flow available to meet annual interest and approach to evaluating and monitoring credit risk, beginning with the principal payments on debt. A debt service coverage ratio below 1.0 initial underwriting of a mortgage loan and continuing throughout indicates that there is not enough cash flow to cover the loan the investment holding period. Mortgage origination professionals payments. The loan-to-value ratio, commonly expressed as a employ an internal rating system developed from the Company’s percentage, compares the amount of the loan to the fair value of the experience in real estate investing and mortgage lending. A quality underlying property collateralizing the loan. rating, designed to evaluate the relative risk of the transaction, is assigned at each loan’s origination and is updated each year as part of
The following tables summarize the credit risk profile of the Company’s commercial mortgage loan portfolio using carrying values classified based on loan-to-value and debt service coverage ratios, as of December 31, 2012 and 2011:
December 31, 2012
Debt Service Coverage Ratio Loan-to-Value Ratios (In millions) 1.30x or Greater 1.20x to 1.29x 1.10x to 1.19x 1.00x to 1.09x Less than 1.00x Total
Below 50% $ 297 $ 8 $ - $ 50 $ - $ 355 50% to 59% 614 104 25 52 - 795 60% to 69% 562 75 - 66 - 703 70% to 79% 194 143 132 4 16 489 80% to 89% 45 42 131 18 58 294 90% to 99% 14 30 - - 58 102 100% or above - - 30 17 66 113
TOTAL $ 1,726 $ 402 $ 318 $ 207 $ 198 $ 2,851
CIGNA CORPORATION - 2012 Form 10-K 103
PART II ITEM 8 Financial Statements and Supplementary Data
December 31, 2011
Debt Service Coverage Ratio Loan-to-Value Ratios (In millions) 1.30x or Greater 1.20x to 1.29x 1.10x to 1.19x 1.00x to 1.09x Less than 1.00x Total
Below 50% $ 225 $ 55 $ 3 $ 50 $ 9 $ 342 50% to 59% 444 47 26 - 53 570 60% to 69% 646 140 42 - 77 905 70% to 79% 117 132 120 159 33 561 80% to 89% 99 81 79 72 71 402 90% to 99% 36 35 30 58 116 275 100% or above - 10 50 51 135 246
TOTAL $ 1,567 $ 500 $ 350 $ 390 $ 494 $ 3,301
The Company’s annual in-depth review of its commercial mortgage During 2011, the Company restructured a $65 million potential loan investments is the primary mechanism for identifying emerging problem loan into two notes carried at $55 million and $10 million. risks in the portfolio. The most recent review was completed by the This modification was considered a troubled debt restructuring Company’s investment professionals in the second quarter of 2012 because the borrower was experiencing financial difficulties and an and included an analysis of each underlying property’s most recent interest rate concession was granted. No valuation reserve was annual financial statements, rent rolls, operating plans, budgets, a required because the fair value of the underlying property exceeded physical inspection of the property and other pertinent factors. Based the carrying value of the outstanding loan. As a part of this on historical results, current leases, lease expirations and rental restructuring, the borrowers and the Company have committed to conditions in each market, the Company estimates the current year fund additional capital for leasing and capital requirements. and future stabilized property income and fair value, and categorizes
Other loans were modified during 2012 and 2011, but were not the investments as loans in good standing, potential problem loans or
considered troubled debt restructures. The impact of modifications to problem loans. Based on property valuations and cash flows estimated
these loans was not material to the Company’s results of operations, as part of this review, and considering updates for loans where material
financial condition or liquidity. changes were subsequently identified, the portfolio’s average loan-to-value ratio improved to 65% at December 31, 2012, Potential problem mortgage loans are considered current (no payment decreasing from 70% as of December 31, 2011. The portfolio’s more than 59 days past due), but exhibit certain characteristics that average debt service coverage ratio was estimated to be 1.56 at increase the likelihood of future default. The characteristics December 31, 2012, a significant improvement from 1.40 at management considers include, but are not limited to, the December 31, 2011. deterioration of debt service coverage below 1.0, estimated
loan-to-value ratios increasing to 100% or more, downgrade in Quality ratings are adjusted between annual reviews if new property
quality rating and request from the borrower for restructuring. In information is received or events such as delinquency or a borrower’s
addition, loans are considered potential problems if principal or request for restructure cause management to believe that the
interest payments are past due by more than 30 but less than 60 days. Company’s estimate of financial performance, fair value or the risk
Problem mortgage loans are either in default by 60 days or more or profile of the underlying property has been impacted.
have been restructured as to terms, which could include concessions During 2012, the Company restructured a $119 million problem on interest rate, principal payment or maturity date. The Company mortgage loan, net of a valuation reserve, into two notes carried at monitors each problem and potential problem mortgage loan on an $100 million and $19 million. The $100 million note was reclassified ongoing basis, and updates the loan categorization and quality rating to impaired commercial mortgage loans with no valuation reserves when warranted. and the $19 million note was classified as another long-term
Problem and potential problem mortgage loans, net of valuation investment. This modification was considered a troubled debt
reserves, totaled $215 million at December 31, 2012 and restructuring because the borrower was experiencing financial
$336 million at December 31, 2011. At December 31, 2012, difficulties and an interest rate concession was granted. No valuation
mortgage loans located in the South Atlantic region represented the reserve was required because the fair value of the underlying property
most significant component of problem and potential problem equaled the carrying value of the outstanding loan. Following the
mortgage loans, with no significant concentration by property type. restructuring, the $100 million note was paid down by $46 million
At December 31, 2011, mortgage loans collateralized by industrial with the remaining $54 million note reclassified to good standing due
properties represent the most significant component of problem and to an improved quality rating based on significant improvements in its
potential problem mortgage loans, with no significant concentration loan-to-value and debt service coverage ratios resulting from the
by geographic region. annual loan review.
104 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Impaired commercial mortgage loans. The carrying value of the Company’s impaired commercial mortgage loans and related valuation reserves were as follows:
2012 2011
(In millions) Gross Reserves Net Gross Reserves Net
Impaired commercial mortgage loans with valuation reserves $ 72 $ (7) $ 65 $ 154 $ (19) $ 135 Impaired commercial mortgage loans with no valuation reserves 60 - 60 60 - 60
TOTAL $ 132 $ (7) $ 125 $ 214 $ (19) $ 195
During 2012, the Company recorded a $10 million pre-tax underlying investment. Additional interest income that would have ($7 million after-tax) increase in valuation reserves on three impaired been reflected in net income if interest on non-accrual commercial commercial mortgage loans collateralized by industrial properties and mortgage loans had been received in accordance with the original one impaired commercial mortgage loan collateralized by a retail terms was not significant for 2012 or 2011. Interest income on property. The average recorded investment in impaired loans was impaired commercial mortgage loans was not significant for 2012 or $167 million during 2012 and $176 million during 2011. The 2011. See Note 2 for further information on impaired commercial Company recognizes interest income on problem mortgage loans only mortgage loans. when payment is actually received because of the risk profile of the
The following table summarizes the changes in valuation reserves for commercial mortgage loans:
(In millions) 2012 2011
Reserve balance, January 1, $ 19 $ 12 Increase in valuation reserves 10 16 Charge-offs upon sales and repayments, net of recoveries (3) (1) Transfers to other long-term investments (16) - Transfers to foreclosed real estate (3) (8)
RESERVE BALANCE, DECEMBER 31, $ 7 $ 19
C. Real Estate As of December 31, 2012 and 2011, real estate investments consisted primarily of office and industrial buildings in California. Investments with a carrying value of $49 million as of December 31, 2012 and 2011 were non-income producing during the preceding twelve months. As of December 31, 2012, the Company had commitments to contribute additional equity of $7 million to real estate investments.
D. Other Long-Term Investments As of December 31, other long-term investments consisted of the following:
(In millions) 2012 2011
Real estate entities $ 823 $ 665 Securities partnerships 343 298 Interest rate and foreign currency swaps 6 12 Mezzanine loans 31 31 Other 52 52
TOTAL $ 1,255 $ 1,058
Investments in real estate entities and securities partnerships with a $312 million to entities that hold securities diversified by issuer and carrying value of $199 million at December 31, 2012 and maturity date. $171 million at December 31, 2011 were non-income producing
The Company expects to disburse approximately 50% of the during the preceding twelve months.
committed amounts in 2013. As of December 31, 2012, the Company had commitments to contribute:
$197 million to limited liability entities that hold either real estate or loans to real estate entities that are diversified by property type and geographic region; and
CIGNA CORPORATION - 2012 Form 10-K 105
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PART II ITEM 8 Financial Statements and Supplementary Data
market funds of $40 million. The decrease during 2012 is primarilyE. Short-Term Investments and Cash due to funds used to acquire HealthSpring. See Note 3 for further
Equivalents information. Short-term investments and cash equivalents included corporate securities of $1.1 billion, federal government securities of F. Concentration of Risk $167 million and money market funds of $217 million as of
As of December 31, 2012 and 2011, the Company did not have aDecember 31, 2012. The Company’s short-term investments and cash concentration of investments in a single issuer or borrower exceedingequivalents as of December 31, 2011 included corporate securities of 10% of shareholders’ equity.$4.1 billion, federal government securities of $164 million and money
Derivative Financial Instruments
The Company has written and purchased reinsurance contracts under variable annuity account values compared with a contractually its Run-off Reinsurance segment that are accounted for as free guaranteed amount (‘‘GMIB liabilities’’). According to the contractual standing derivatives. The Company also uses derivative financial terms of the written reinsurance contracts, payment by the Company instruments to manage the equity, foreign currency, and certain depends on the actual account value in the underlying mutual funds interest rate risk exposures of its Run-off Reinsurance segment. In and the level of interest rates when the contractholders elect to receive addition, the Company uses derivative financial instruments to minimum income payments. The Company has purchased manage the characteristics of investment assets to meet the varying retrocessional coverage for 55% of these contracts to reduce a portion demands of the related insurance and contractholder liabilities. See of the risks assumed (‘‘GMIB assets’’). Effective February 4, 2013, the Note 2 for information on the Company’s accounting policy for Company reinsured the remainder of the exposures on these derivative financial instruments. Derivatives in the Company’s contracts. See Note 25 for additional information. separate accounts are excluded from the following discussion because
Accounting policy. The Company accounts for these GMIB liabilities associated gains and losses generally accrue directly to separate
and assets as written and purchased options at fair value because cash account policyholders.
flows are affected by equity markets and interest rates, but are without Collateral and termination features. The Company routinely significant life insurance risk and are settled in lump sum payments. monitors exposure to credit risk associated with derivatives and These derivatives are not designated as hedges and their fair values are diversifies the portfolio among approved dealers of high credit quality reported in other liabilities (GMIB liability) and other assets (GMIB to minimize this risk. Certain of the Company’s over-the-counter asset), with changes in fair value reported in GMIB fair value (gain) derivative instruments contain provisions requiring either the loss. Company or the counterparty to post collateral or demand immediate
Cash flows. Under the terms of these written and purchased contracts, payment depending on the amount of the net liability position and
the Company periodically receives and pays fees based on either predefined financial strength or credit rating thresholds. Collateral
contractholders’ account values or their deposits increased at a posting requirements vary by counterparty. The net liability positions
contractual rate. The Company will also pay and receive cash of these derivatives were not material as of December 31, 2012 or
depending on changes in account values and interest rates when 2011.
contractholders first elect to receive minimum income payments. These cash flows are reported in operating activities.
Derivative instruments associated with the Company’s Volume of activity. The potential undiscounted future payments for
Run-off Reinsurance segment. the written options (GMIB liability, as defined in Note 24) was $1,065 million as of December 31, 2012 and $1,244 million as of December 31, 2011. The potential undiscounted future receipts for
Purpose. The Company has written reinsurance contracts with issuers the purchased options (GMIB asset) was $586 million as of
of variable annuity contracts that provide annuitants with certain December 31, 2012 and $684 million as of December 31, 2011.
guarantees of minimum income benefits resulting from the level of
The following table provides the effect of these derivative instruments on the financial statements for the indicated periods:
Fair Value Effect on the Financial Statements (In millions)
Other Assets, Accounts Payable, Accrued Expenses including other intangibles and Other Liabilities GMIB Fair Value (Gain) Loss
As of December 31, As of December 31, For the years ended December 31,
Instrument 2012 2011 2012 2011 2012 2011
Written options (GMIB liability) $ 1,170 $ 1,333 $ (96) $ 504 Purchased options (GMIB asset) $ 622 $ 712 55 (270)
TOTAL $ 622 $ 712 $ 1,170 $ 1,333 $ (41) $ 234
106 CIGNA CORPORATION - 2012 Form 10-K
NOTE 13
Guaranteed Minimum Income Benefits (GMIB)
PART II ITEM 8 Financial Statements and Supplementary Data
interest rate swap contracts. These contracts are generally expected toGMDB and GMIB Hedge Programs rise in value as equity markets and interest rates decline, and decline in
Purpose. The Company uses derivative financial instruments under a value as equity markets and interest rates rise. dynamic hedge program designed to substantially reduce domestic
Accounting policy. These hedge programs are not designated asand international equity market exposures resulting from changes in accounting hedges. Although these hedge programs effectively reducevariable annuity account values based on underlying mutual funds for equity market, foreign currency, and interest rate exposures, changescertain reinsurance contracts that guarantee minimum death benefits in the fair values of these futures and swap contracts may not exactly(‘‘GMDB’’). During the second quarter of 2012, the Company offset changes in the portions of the GMDB and GMIB liabilitiesexpanded this hedge program to cover approximately one-half of the covered by these hedges, in part because the market does not offerequity market exposures associated with its GMIB business, increasing contracts that exactly match the targeted exposure profile. Changes inthe covered exposure from approximately one-quarter. The Company fair value of these futures contracts, as well as interest income andalso operates a dynamic hedge program to reduce the exposure to interest expense relating to the swap contracts are reported in otherchanges in interest rate levels on the growth rate for approximately revenues. The fair values of the interest rate swaps are reported inone-third of its GMDB and one-quarter of its GMIB businesses other assets and other liabilities. Amounts reflecting corresponding(‘‘GMDB and GMIB growth interest rate hedge program’’). These changes in liabilities for GMDB contracts are included in benefits andhedge programs are dynamic because the Company will regularly expenses.rebalance the hedging instruments within established parameters as
equity and interest rate exposures of these businesses change. These Cash flows. The Company receives or pays cash daily in the amount of hedge programs were terminated after February 4, 2013 as a result of the change in fair value of the futures contracts. The Company the Company’s agreement to reinsure the remainder of GMDB and periodically exchanges cash flows between variable and fixed interest GMIB businesses. See Notes 7 and 11 for further details regarding rates under the interest rate swap contracts. Cash flows relating to these businesses. these contracts are included in operating activities. The Company manages these hedge programs using exchange-traded equity, foreign currency, and interest rate futures contracts, as well as
Volume of activity. The notional values of futures and swap contracts used in the GMDB and GMIB equity and growth interest rate hedge programs are included in the following table. Equity futures consist primarily of S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX (Japanese), EUROSTOXX and FTSE (British) equity indices. Currency futures consist of Euros, Japanese yen and British pounds.
Notional Amount (In millions)
Instrument As of December 31, 2012 As of December 31, 2011
Equity and currency futures – equity hedge $ 777 $ 994 Interest rate swaps – growth interest rate hedge 240 240 U.S. Treasury futures – growth interest rate hedge 16 29 Eurodollar futures – growth interest rate hedge 482 598
TOTAL $ 1,515 $ 1,861
The following tables provide the effect of these derivative instruments on the financial statements for the indicated periods:
Fair Value Effect on the Financial Statements (In millions)
Other Revenues
For the years ended December 31,
2012 2011
Equity and currency futures for GMDB exposures $ (110) $ (45) Equity and currency futures for GMIB exposures (16) 4
TOTAL EQUITY AND CURRENCY FUTURES (1) $ (126) $ (41)
Other Assets, including other intangibles Other Revenues
As of December 31, For the years ended December 31,
2012 2011 2012 2011
Interest rate swaps $ 35 $ 33 $ 8 $ 39 Interest rate futures (1) - - (1) (2)
TOTAL INTEREST RATE SWAPS AND FUTURES $ 35 $ 33 $ 7 $ 37
Interest rate derivatives for GMDB exposures $ 5 $ 31 Interest rate derivatives for GMIB exposures 2 6
TOTAL INTEREST RATE SWAPS AND FUTURES $ 7 $ 37 (1) Balance sheet presentation of amounts receivable or payable relating to futures daily variation margin are excluded from this table.
CIGNA CORPORATION - 2012 Form 10-K 107
PART II ITEM 8 Financial Statements and Supplementary Data
Accounting policy. Using cash flow hedge accounting, fair values areDerivative instruments used in the Company’s reported in other long-term investments or other liabilities andinvestment risk management. accumulated other comprehensive income and amortized into net
Derivative financial instruments are also used by the Company as a investment income or reported in other realized investment gains and part of its investment strategy to manage the characteristics of losses as interest or principal payments are received. investment assets (such as duration, yield, currency and liquidity) to
Cash flows. Under the terms of these various contracts, the Companymeet the varying demands of the related insurance and contractholder periodically exchanges cash flows between variable and fixed interestliabilities (such as paying claims, investment returns and withdrawals). rates and/or between two currencies for both principal and interest.Derivatives are typically used in this strategy to reduce interest rate Foreign currency swaps are primarily Euros, Australian dollars,and foreign currency risks. Canadian dollars, Japanese yen, and British pounds, and have terms for periods of up to 9 years. Net interest cash flows are reported in
Investment Cash Flow Hedges operating activities. Purpose. The Company uses interest rate, foreign currency, and combination (interest rate and foreign currency) swap contracts to hedge the interest and foreign currency cash flows of its fixed maturity bonds to match associated insurance liabilities.
Volume of activity. The following table provides the notional values of these derivative instruments for the indicated periods:
Notional Amount (In millions)
As of December 31,
Instrument 2012 2011
Interest rate swaps $ 58 $ 134 Foreign currency swaps 133 134 Combination interest rate and foreign currency swaps 64 64
TOTAL $ 255 $ 332
The following table provides the effect of these derivative instruments on the financial statements for the indicated periods:
Fair Value Effect on the Financial Statements (In millions)
Accounts Payable, Accrued Gain (Loss) Recognized in Other Long-Term Expenses Other
Investments and Other Liabilities Comprehensive Income (1)
For the years ended As of December 31, As of December 31, December 31,
Instrument 2012 2011 2012 2011 2012 2011
Interest rate swaps $ 4 $ 7 $ - $ - $ (3) $ (3) Foreign currency swaps 1 3 18 19 (3) (1) Combination interest rate and foreign currency swaps - - 13 11 (2) 1
TOTAL $ 5 $ 10 $ 31 $ 30 $ (8) $ (3) (1) Other comprehensive income for foreign currency swaps excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
For the years ended December 31, 2012 and 2011, the amount of recognized due to ineffectiveness was not material and there were no gains (losses) reclassified from accumulated other comprehensive amounts excluded from the assessment of hedge effectiveness. income into income was not material. The amount of gains (losses)
108 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Variable Interest Entities
When the Company becomes involved with a variable interest entity provide health care services to the Medicare Advantage customers and and when the nature of the Company’s involvement with the entity the Company provides medical management and administrative changes, in order to determine if the Company is the primary services to the IPAs. beneficiary and must consolidate the entity, it evaluates: The Company is not the primary beneficiary and does not consolidate
the structure and purpose of the entity; these entities because either:
the risks and rewards created by and shared through the entity; and it had no power to direct the activities that most significantly impact the entities’ economic performance; orthe entity’s participants’ ability to direct its activities, receive its
benefits and absorb its losses. Participants include the entity’s it had neither the right to receive benefits nor the obligation to sponsors, equity holders, guarantors, creditors and servicers. absorb losses that could be significant to these variable interest
entities.In the normal course of its investing activities, the Company makes passive investments in securities that are issued by variable interest The Company has not provided, and does not intend to provide, entities for which the Company is not the sponsor or manager. These financial support to these entities that it is not contractually required investments are predominantly asset-backed securities primarily to provide. The Company performs ongoing qualitative analyses of its collateralized by foreign bank obligations or mortgage-backed involvement with these variable interest entities to determine if securities. The asset-backed securities largely represent fixed-rate debt consolidation is required. The Company’s maximum potential securities issued by trusts that hold perpetual floating-rate exposure to loss related to the investment entities is limited to the subordinated notes issued by foreign banks. The mortgage-backed carrying amount of its investment reported in fixed maturities and securities represent senior interests in pools of commercial or equity securities, and its aggregate ownership interest is insignificant residential mortgages created and held by special-purpose entities to relative to the total principal amount issued by these entities. The provide investors with diversified exposure to these assets. The Company’s maximum exposure to loss related to the IPA Company owns senior securities issued by several entities and receives arrangements is limited to the liability for incurred but not reported fixed-rate cash flows from the underlying assets in the pools. claims for the Company’s Medicare Advantage customers. These
liabilities are not material and are generally secured by depositsIn order to provide certain services to its Medicare Advantage maintained by the IPAs.customers, the Company contracts with independent physician
associations (IPAs) that are variable interest entities. Physicians
Investment Income and Gains and Losses
The components of pre-tax net investment income for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Fixed maturities $ 843 $ 817 $ 788 Equity securities 4 6 6 Commercial mortgage loans 192 218 221 Policy loans 74 86 90 Real estate (2) (2) (2) Other long-term investments 59 48 29 Short-term investments and cash 14 10 11
1,184 1,183 1,143 Less investment expenses 40 37 38
NET INVESTMENT INCOME $ 1,144 $ 1,146 $ 1,105
CIGNA CORPORATION - 2012 Form 10-K 109
NOTE 14
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NOTE 15
A. Net Investment Income
PART II ITEM 8 Financial Statements and Supplementary Data
Net investment income for separate accounts (that is not reflected in the Company’s revenues) was $181 million for 2012, $207 million for 2011, and $163 million for 2010.
B. Realized Investment Gains and Losses The following realized gains and losses on investments for the years ended December 31 exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.
(In millions) 2012 2011 2010
Fixed maturities $ 48 $ 50 $ 87 Equity securities 4 (1) 5 Commercial mortgage loans (9) (16) (23) Real estate (1) (6) 3 Other investments, including derivatives 2 35 3
Realized investment gains (losses), before income taxes 44 62 75 Less income taxes (benefits) 13 21 25
NET REALIZED INVESTMENT GAINS (LOSSES) $ 31 $ 41 $ 50
Included in pre-tax realized investment gains (losses) above were asset write-downs and changes in valuation reserves as follows:
(In millions) 2012 2011 2010
Credit related (1) $ (20) $ (28) $ (38) Other (2) (25) (1)
TOTAL $ (22) $ (53) $ (39) (1) Credit-related losses include other-than-temporary declines in fair value of fixed maturities and equity securities and changes in valuation reserves and asset write-downs related to
commercial mortgage loans and investments in real estate entities. There were no credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income.
The Company recognized pre-tax gains of $5 million in 2012, compared with pre-tax losses of $7 million in 2011 and pre-tax gains of $7 million in 2010 on hybrid securities.
Realized investment gains in 2011 in other investments, including derivatives, represent primarily gains on sale of real estate properties held in joint ventures.
Realized investment gains that are not reflected in the Company’s revenues for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Separate accounts $ 206 $ 210 $ 191 Investment gains required to adjust future policy benefits for the run-off settlement annuity business $ 21 $ 8 $ 18
Sales information for available-for-sale fixed maturities and equity securities, for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Proceeds from sales $ 591 $ 876 $ 826 Gross gains on sales $ 37 $ 53 $ 46 Gross losses on sales $ (2) $ (7) $ (3)
110 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Debt
(In millions) 2012 2011
Short-term: Commercial paper $ 200 $ 100 Current maturities of long-term debt 1 4
TOTAL SHORT-TERM DEBT $ 201 $ 104
Long-term: Uncollateralized debt: 2.75% Notes due 2016 $ 600 $ 600 5.375% Notes due 2017 250 250 6.35% Notes due 2018 131 131 8.5% Notes due 2019 251 251 4.375% Notes due 2020 249 249 5.125% Notes due 2020 299 299 6.37% Notes due 2021 78 78 4.5% Notes due 2021 299 298 4% Notes due 2022 743 743 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 5.875% Notes due 2041 298 298 5.375% Notes due 2042 750 750 Other 38 43
TOTAL LONG-TERM DEBT $ 4,986 $ 4,990
As described in Note 3, the Company acquired HealthSpring on interest rate of 4% ($743 million, net of discount, with an effective January 31, 2012. At the acquisition date, HealthSpring had interest rate of 4.346% per year) and $750 million of 30-Year Notes $326 million of debt outstanding. In accordance with debt covenants, due February 15, 2042 at a stated interest rate of 5.375% HealthSpring’s debt obligation was paid immediately following the ($750 million, net of discount, with an effective interest rate of acquisition. This repayment is reported as a financing activity in the 5.542% per year). Interest is payable on May 15 and November 15 of statement of cash flows for the year ended December 31, 2012. each year beginning May 15, 2012 for the 5-Year Notes and
February 15 and August 15 of each year beginning February 15, 2012 In December 2012, the Company extended the life of its June 2011
for the 10-Year and 30-Year Notes. The proceeds of this debt were five-year revolving credit and letter of credit agreement for
used to fund the HealthSpring acquisition in January 2012. $1.5 billion, that permits up to $500 million to be used for letters of credit. This agreement is diversified among 16 banks, with 3 banks The Company may redeem these Notes, at any time, in whole or in each having 12% of the commitment and the remainder spread part, at a redemption price equal to the greater of: among 13 banks. The credit agreement includes options that are
100% of the principal amount of the Notes to be redeemed; or subject to consent by the administrative agent and the committing banks, to increase the commitment amount to $2 billion and to the present value of the remaining principal and interest payments extend the term past December 2017. The credit agreement is on the Notes being redeemed discounted at the applicable Treasury available for general corporate purposes, including as a commercial rate plus 30 basis points (5-Year 2.75% Notes due 2016), 35 basis paper backstop and for the issuance of letters of credit. This agreement points (10-Year 4% Notes due 2022), or 40 basis points (30-Year has certain covenants, including a financial covenant requiring the 5.375% Notes due 2042). Company to maintain a total debt-to-adjusted capital ratio at or
In March 2011, the Company issued $300 million of 10-Year Notes below 0.50 to 1.00. As of December 31, 2012, the Company had
due March 15, 2021 at a stated interest rate of 4.5% ($298 million, $5.3 billion of borrowing capacity within the maximum debt coverage
net of discount, with an effective interest rate of 4.683% per year) and covenant in the agreement in addition to the $5.2 billion of debt
$300 million of 30-Year Notes due March 15, 2041 at a stated interest outstanding. There were letters of credit of $66 million issued as of
rate of 5.875% ($298 million, net of discount, with an effective December 31, 2012.
interest rate of 6.008% per year). Interest is payable on March 15 and On November 10, 2011, the Company issued $2.1 billion of September 15 of each year beginning September 15, 2011. The long-term debt as follows: $600 million of 5-Year Notes due proceeds of this debt were used for general corporate purposes, November 15, 2016 at a stated interest rate of 2.75% ($600 million, including the repayment of debt maturing in 2011. net of discount, with an effective interest rate of 2.936% per year), $750 million of 10-Year Notes due February 15, 2022 at a stated
CIGNA CORPORATION - 2012 Form 10-K 111
NOTE 16
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PART II ITEM 8 Financial Statements and Supplementary Data
The Company may redeem these Notes, at any time, in whole or in $198 million, including accrued interest and expenses, to settle the part, at a redemption price equal to the greater of: Notes, resulting in an after-tax loss on early debt extinguishment of
$18 million.100% of the principal amount of the Notes to be redeemed; or In December 2010, the Company issued $250 million of 4.375%the present value of the remaining principal and interest payments Notes ($249 million net of debt discount, with an effective intereston the Notes being redeemed discounted at the applicable Treasury rate of 5.1%). Interest is payable on June 15 and December 15 ofrate plus 20 basis points (10-Year 4.5% Notes due 2021) or 25 basis each year beginning December 15, 2010. These Notes will maturepoints (30-Year 5.875% Notes due 2041). on December 15, 2020. The proceeds of this debt were used to fund
During 2011, the Company repaid $449 million in maturing the tender offer for the 8.5% Senior Notes due 2019 and the 6.35% long-term debt. Senior Notes due 2018 described above. In the fourth quarter of 2010, the Company entered into the In May 2010, the Company issued $300 million of 5.125% Notes following transactions related to its long-term debt: ($299 million, net of debt discount, with an effective interest rate of
5.36% per year). Interest is payable on June 15 and December 15 ofIn December 2010 the Company offered to settle its 8.5% Notes each year beginning December 15, 2010. These Notes will mature ondue 2019, including accrued interest from November 1 through the June 15, 2020. The proceeds of this debt were used for generalsettlement date. The tender price equaled the present value of the corporate purposes.remaining principal and interest payments on the Notes being
redeemed, discounted at a rate equal to the 10-year Treasury rate The Company may redeem the Notes issued in 2010 at any time, in
plus a fixed spread of 100 basis points. The tender offer priced at a whole or in part, at a redemption price equal to the greater of:
yield of 4.128% and principal of $99 million was tendered, with 100% of the principal amount of the Notes to be redeemed; or$251 million remaining outstanding. The Company paid
$130 million, including accrued interest and expenses, to settle the the present value of the remaining principal and interest payments Notes, resulting in an after-tax loss on early debt extinguishment of on the Notes being redeemed discounted at the applicable Treasury $21 million. rate plus 25 basis points. In December 2010 the Company offered to settle its 6.35% Notes
Maturities of debt and capital leases are as follows (in millions): $1 in due 2018, including accrued interest from September 16 through
2013, $23 in 2014, none in 2015, $600 in 2016, $250 in 2017 and the settlement date. The tender price equaled the present value of
the remainder in years after 2017. Interest expense on long-term debt, the remaining principal and interest payments on the Notes being
short-term debt and capital leases was $268 million in 2012, redeemed, discounted at a rate equal to the 10-year Treasury rate
$202 million in 2011, and $182 million in 2010. plus a fixed spread of 45 basis points. The tender offer priced at a
The Company was in compliance with its debt covenants as ofyield of 3.923% and principal of $169 million was tendered, with $131 million remaining outstanding. The Company paid December 31, 2012.
Common and Preferred Stock
As of December 31, the Company had issued the following shares:
(Shares in thousands) 2012 2011
Common: Par value $0.25 600,000 shares authorized Outstanding – January 1 285,533 271,880 Issuance of common stock - 15,200 Issued for stock option and other benefit plans 4,695 3,735 Repurchase of common stock (4,399) (5,282)
Outstanding – December 31 285,829 285,533 Treasury stock 80,316 80,612
ISSUED – DECEMBER 31 366,145 366,145
On November 16, 2011, the Company issued 15.2 million shares of During 2012, and through February 28, 2013, the Company its common stock at $42.75 per share. Proceeds of $650 million repurchased 4.4 million shares for $208 million. On February 27, ($629 million net of underwriting discount and fees) were used to 2013, the Company’s Board of Directors increased share repurchase partially fund the HealthSpring acquisition in January 2012. authority by $500 million. Accordingly, the total remaining share
repurchase authorization as of February 28, 2013 was $815 million.The Company maintains a share repurchase program, which was The Company repurchased 5.3 million shares for $225 million duringauthorized by its Board of Directors. The decision to repurchase 2011.shares depends on market conditions and alternative uses of capital.
The Company has, and may continue from time to time, to The Company has authorized a total of 25 million shares of $1 par repurchase shares on the open market through a Rule 10b5-1 plan value preferred stock. No shares of preferred stock were outstanding at that permits a company to repurchase its shares at times when it
December 31, 2012 or 2011. otherwise might be precluded from doing so under insider trading laws or because of self-imposed trading blackout periods.
112 CIGNA CORPORATION - 2012 Form 10-K
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NOTE 17
PART II ITEM 8 Financial Statements and Supplementary Data
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
Changes in accumulated other comprehensive income (loss) were as follows:
Tax 2012 (Expense) After- (In millions) Pre-Tax Benefit Tax
Net unrealized appreciation, securities: Net unrealized appreciation on securities arising during the year $ 271 $ (90) $ 181 Reclassification adjustment for losses (gains) included in shareholders’ net income (52) 18 (34)
Net unrealized appreciation, securities $ 219 $ (72) $ 147
Net unrealized depreciation, derivatives $ (7) $ 2 $ (5)
Net translation of foreign currencies $ 78 $ (12) $ 66
Postretirement benefits liability adjustment: Reclassification adjustment for amortization of net losses from past experience and prior service costs, and settlement charges $ 52 $ (18) $ 34 Net change arising from assumption and plan changes and experience (181) 55 (126)
Net postretirement benefits liability adjustment $ (129) $ 37 $ (92)
Tax 2011 (Expense) After- (In millions) Pre-Tax Benefit Tax
Net unrealized appreciation, securities: Net unrealized appreciation on securities arising during the year $ 366 $ (127) $ 239 Reclassification adjustment for (gains) included in net income (49) 18 (31)
Net unrealized appreciation, securities $ 317 $ (109) $ 208
Net unrealized appreciation, derivatives $ 1 $ – $ 1
Net translation of foreign currencies $ (21) $ (1) $ (22)
Postretirement benefits liability adjustment: Reclassification adjustment for amortization of net losses from past experience and prior service costs $ 22 $ (7) $ 15 Net change arising from assumption and plan changes and experience (580) 205 (375)
Net postretirement benefits liability adjustment $ (558) $ 198 $ (360)
Tax 2010 (Expense) After- (In millions) Pre-Tax Benefit Tax
Net unrealized appreciation, securities: Net unrealized appreciation on securities arising during the year $ 319 $ (109) $ 210 Reclassification adjustment for (gains) included in net income (92) 32 (60)
Net unrealized appreciation, securities $ 227 $ (77) $ 150
Net unrealized appreciation, derivatives $ 8 $ (2) $ 6
Net translation of foreign currencies $ 40 $ (7) $ 33
Postretirement benefits liability adjustment: Reclassification adjustment for amortization of net losses from past experience and prior service costs $ 10 $ (4) $ 6 Net change arising from assumption and plan changes and experience (311) 116 (195)
Net postretirement benefits liability adjustment $ (301) $ 112 $ (189)
Shareholders’ Equity and Dividend Restrictions
State insurance departments and foreign jurisdictions that regulate certain of the Company’s subsidiaries prescribe accounting practices (which differ in some respects from GAAP) to determine statutory net income and surplus. The Company’s life insurance and HMO company
CIGNA CORPORATION - 2012 Form 10-K 113
NOTE 18
NOTE 19
PART II ITEM 8 Financial Statements and Supplementary Data
subsidiaries are regulated by such statutory requirements. The statutory net income for the years ended, and statutory surplus as of, December 31 of the Company’s life insurance and HMO subsidiaries were as follows:
(In millions) 2012 2011 2010
Net income $ 1,520 $ 953 $ 1,697 Surplus $ 6,109 $ 5,286 $ 5,107
The minimum statutory surplus required by regulators for the annual dividends or other distributions (such as loans or cash Company’s life insurance and HMO company subsidiaries was advances) insurance companies may extend to the parent company approximately $1.7 billion as of December 31, 2012. As of without prior approval of regulatory authorities. The maximum December 31, 2012, statutory surplus for each of the Company’s life dividend distribution that the Company’s life insurance and HMO insurance and HMO subsidiaries is sufficient to meet the minimum subsidiaries may make during 2013 without prior approval is required by regulators. As of December 31, 2012, the Company’s life approximately $1.1 billion. Restricted net assets of the Company as of insurance and HMO subsidiaries had investments on deposit with December 31, 2012, were approximately $8.7 billion. Certain life state departments of insurance with statutory carrying values of insurance subsidiaries of the Company are permitted to loan up to $337 million. The Company’s life insurance and HMO subsidiaries $750 million to the parent company without prior approval. are also subject to regulatory restrictions that limit the amount of
Income Taxes
The components of income taxes for the years ended December 31 were as follows:
(In millions) 2012 2011 2010
Current taxes U.S. income $ 604 $ 320 $ 267 Foreign income 72 58 45 State income 43 20 19
719 398 331
Deferred taxes (benefits) U.S. income 131 193 187 Foreign income 4 23 8 State income (1) 1 (7)
134 217 188
TOTAL INCOME TAXES $ 853 $ 615 $ 519
Total income taxes for the years ended December 31 were different from the amount computed using the nominal federal income tax rate of 35% for the following reasons:
(In millions) 2012 2011 2010
Tax expense at nominal rate $ 867 $ 657 $ 631 Tax-exempt interest income (28) (29) (31) Effect of permanently invested foreign earnings (37) (17) (11) Dividends received deduction (3) (4) (3) Resolution of federal tax matters – (30) – State income tax (net of federal income tax benefit) 28 14 9 Change in valuation allowance 6 5 (93) Other 20 19 17
TOTAL INCOME TAXES $ 853 $ 615 $ 519
Commencing in the first quarter of 2012, the Company began usingEffect of Permanently Invested Foreign Earnings this approach to compute income taxes attributable to its China and
The Company provides for income taxes on the undistributed Indonesia operations, based upon a determination that the related earnings of certain foreign operations using the foreign jurisdictions’ earnings would be permanently invested overseas. The Company tax rate, as compared to the higher U.S. statutory tax rate.
114 CIGNA CORPORATION - 2012 Form 10-K
NOTE 20
A. Income Tax Expense
PART II ITEM 8 Financial Statements and Supplementary Data
continues to evaluate the permanent investment of foreign earnings liability includes an increase of $10 million associated with for additional jurisdictions. unrecorded deferred tax liabilities reported through other
comprehensive income. Shareholders’ net income for the year ended December 31, 2012 increased by $37 million related to this method of providing for income taxes including $13 million attributable to the first quarter Change in Valuation Allowance implementation of this method for the Company’s China and
The significant decline in the 2010 valuation allowance primarilyIndonesia operations. Permanent investment of foreign operation reflects the resolution of a disputed federal income tax matter specificearnings has resulted in cumulative unrecognized deferred tax to the run-off reinsurance operations.liabilities of $116 million through December 31, 2012. The
year-to-date change in the cumulative unrecognized deferred tax
B. Deferred Income Taxes Deferred income tax assets and liabilities as of December 31 are shown below.
(In millions) 2012 2011
Deferred tax assets Employee and retiree benefit plans $ 765 $ 829 Investments, net 95 108 Other insurance and contractholder liabilities 486 443 Deferred gain on sale of businesses 28 46 Policy acquisition expenses 147 151 Loss carryforwards 9 8 Other accrued liabilities 164 109 Bad debt expense 21 17 Other 33 37
Deferred tax assets before valuation allowance 1,748 1,748 Valuation allowance for deferred tax assets (42) (45)
Deferred tax assets, net of valuation allowance 1,706 1,703
Deferred tax liabilities Depreciation and amortization 704 377 Foreign operations, net 147 128 Unrealized appreciation on investments and foreign currency translation 481 395
Total deferred tax liabilities 1,332 900
NET DEFERRED INCOME TAX ASSETS $ 374 $ 803
Management believes consolidated taxable income expected to be The Company’s deferred tax asset is net of federal, state, and foreign generated in the future will be sufficient to support realization of the valuation allowances. The foreign valuation allowance was initially Company’s net deferred tax assets. This determination is based upon recorded in connection with the Company’s 2011 acquisition of the Company’s consistent overall earnings history and future earnings FirstAssist, for which there was a year over year decline of $7 million. expectations. Other than deferred tax benefits attributable to This reduction did not impact shareholder’s net income. The operating loss carryforwards, there are no time constraints within valuation allowance reflects management’s assessment that certain which the Company’s deferred tax assets must be realized. deferred tax assets may not be realizable.
C. Uncertain Tax Positions
A reconciliation of unrecognized tax benefits for the years ended December 31 is as follows:
(In millions) 2012 2011 2010
Balance at January 1, $ 52 $ 177 $ 214 Decrease due to prior year positions (5) (113) (55) Increase due to current year positions 7 7 34 Reduction related to settlements with taxing authorities – (17) (13) Reduction related to lapse of applicable statute of limitations (3) (2) (3)
BALANCE AT DECEMBER 31, $ 51 $ 52 $ 177
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PART II ITEM 8 Financial Statements and Supplementary Data
There was minimal change in the level of unrecognized tax benefits for certain reinsurance contracts. Trial was held before the United during 2012. States Tax Court for the 2004 tax year in September 2011. Prior to
trial, the IRS conceded the underlying adjustments but continued to The December 31, 2012 unrecognized tax benefit balance included
challenge the Company’s reserve methodology as a matter of law. The $29 million that would increase shareholders’ net income if
United States Tax Court issued its opinion for the 2004 year on recognized. The Company has determined it is at least reasonably
September 13, 2012. While declining to rule on the broader legal possible that within the next twelve months there could be a
issue, the opinion confirmed the Company’s tax reserve calculation significant change in the level of unrecognized tax benefits specific to
and referenced an IRS representation that it would not challenge the development in ongoing IRS examinations. These changes are not
Company’s reserving methodology in future tax years, thereby expected to have a material impact on shareholders’ net income.
providing certainty that the Company may continue to use its current reserve methodology prospectively. Tax computations for the 2004 taxThe Company classifies net interest expense on uncertain tax year have been reviewed by the staff of the Joint Committee ofpositions and any applicable penalties as a component of income tax Taxation and the parties are currently awaiting entry of the Taxexpense, but excludes these amounts from the liability for uncertain Court’s decision, that is expected shortly. On January 9, 2013 the Taxtax positions. The Company’s liability for net interest and penalties Court entered its decision on this issue for the 2005 and 2006 taxwas $3 million at December 31, 2012, $2 million at December 31, years, ordering and deciding that the Company has no tax deficiency.2011 and $14 million at December 31, 2010. The 2011 decline
included $11 million associated with the completion of the 2007 and The IRS continues to be engaged in its examination of the Company’s
2008 IRS examinations. 2009 and 2010 consolidated federal income tax returns. This review is expected to be competed in 2013, and is not expected to have aDuring the first quarter of 2011, the IRS completed its examination material impact on shareholder’s net income. The Company conductsof the Company’s 2007 and 2008 consolidated federal income tax business in numerous state and foreign jurisdictions, and may bereturns, resulting in an increase to shareholders’ net income of engaged in multiple audit proceedings at any given time. Generally,$24 million ($33 million reported in income tax expense, partially no further state audit activity is expected for tax years prior to 2008,offset by a $9 million pre-tax charge). The increase in shareholders’ and prior to 2001 for foreign audit activity.net income included a reduction in net unrecognized tax benefits of
$11 million and a reduction of interest expense of $11 million The American Taxpayer Act of 2012 was signed into law on January 2,
(reported in income tax expense). 2013. This legislation retroactively extended for 2012, as well as for 2013, several otherwise expired corporate tax provisions from which the Company benefits. Tax benefits specific to extension of theseD. Federal Income Tax Examinations, provisions for 2012 will be recorded in the first quarter of 2013, andLitigation and Other Matters are not expected to have a material impact on shareholder’s net income.
The Company has had a continuing dispute with the IRS for tax years 2004 through 2006 regarding the appropriate reserve methodology
Employee Incentive Plans
The People Resources Committee (‘‘the Committee’’) of the Board of As explained further in Note 3, in connection with the HealthSpring Directors awards stock options, restricted stock, deferred stock and, acquisition on January 31, 2012, HealthSpring employees’ awards of beginning in 2010, strategic performance shares to certain employees. options and restricted shares of HealthSpring stock were rolled over to To a very limited extent, the Committee has issued common stock Cigna stock options and restricted stock. Unless otherwise indicated, instead of cash compensation and dividend equivalent rights as part of information in this footnote includes the effect of the HealthSpring restricted and deferred stock units. The Company issues shares from rollover awards. Treasury stock for option exercises, awards of restricted stock and payment of deferred and restricted stock units.
Compensation cost and related tax benefits for these awards were as follows:
(In millions) 2012 2011 2010
Compensation cost $ 98 $ 61 $ 49 Tax benefits $ 26 $ 14 $ 12
The Company had the following number of shares of common stock grant date. Options vest over periods ranging from one to five years available for award at December 31: 8.4 million in 2012, 11.7 million and expire no later than 10 years from grant date. in 2011 and 7.5 million in 2010.
Stock options. The Company awards options to purchase the Company’s common stock at the market price of the stock on the
116 CIGNA CORPORATION - 2012 Form 10-K
NOTE 21
PART II ITEM 8 Financial Statements and Supplementary Data
The table below shows the status of, and changes in, common stock options during the last three years:
2012 2011 2010
Weighted Average Weighted Average Weighted Average (Options in thousands) Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding – January 1 9,581 $ 33.92 12,093 $ 31.10 13,751 $ 29.34 Granted 3,446 $ 28.29 1,546 $ 42.36 1,846 $ 34.64 Exercised (3,740) $ 22.72 (3,480) $ 27.93 (2,565) $ 24.31 Expired or canceled (336) $ 37.85 (578) $ 33.61 (939) $ 30.86
OUTSTANDING – DECEMBER 31 8,951 $ 36.29 9,581 $ 33.92 12,093 $ 31.10
Options exercisable at year-end 5,731 $ 34.93 6,147 $ 34.94 7,656 $ 34.42
Compensation expense of $20 million related to unvested stock options at December 31, 2012 will be recognized over the next two years (weighted average period).
The table below summarizes information for stock options exercised during the last three years:
(In millions) 2012 2011 2010
Intrinsic value of options exercised $ 95 $ 53 $ 30 Cash received for options exercised $ 85 $ 97 $ 62 Excess tax benefits realized from options exercised $ 15 $ 10 $ 5
The following table summarizes information for outstanding common stock options at December 31, 2012:
Options Options (Dollars in millions, except per share amounts) Outstanding Exercisable
Number (in thousands) 8,951 5,731 Total intrinsic value $ 154 $ 106 Weighted average exercise price $ 36.29 $ 34.93 Weighted average remaining contractual life 6.3 yrs 5.1 yrs
Excluding the HealthSpring rollover options, the weighted average fair value of options granted under employee incentive plans was $14.99 for 2012, $13.96 for 2011 and $11.56 for 2010, using the Black-Scholes option-pricing model and the assumptions presented in the following table. See Note 3 for additional information regarding the valuation of the HealthSpring rollover awards.
2012 2011 2010
Dividend yield 0.1% 0.1% 0.1% Expected volatility 40.0% 40.0% 40.0% Risk-free interest rate 0.8% 1.7% 1.9% Expected option life 4.5 years 4 years 4 years
The expected volatility reflects the Company’s past daily stock price widely used form of restricted stock awards and are used for volatility. The Company does not consider volatility implied in the substantially all U.S.-based employees receiving such awards. market prices of traded options to be a good indicator of future Recipients of restricted stock grants are entitled to earn dividends and volatility because remaining maturities of traded options are less than to vote during the vesting period, but forfeit their awards if their one year. The risk-free interest rate is derived using the four-year U.S. employment terminates before the vesting date. Awards of restricted Treasury bond yield rate as of the award date for the primary grant. stock units are generally limited to international employees. A Expected option life reflects the Company’s historical experience. restricted stock unit represents a right to receive a common share of
stock when the unit vests. Recipients of restricted stock units are Restricted stock. The Company awards restricted stock to its entitled to receive hypothetical dividends, but cannot vote during the employees or directors with vesting periods ranging from two to five vesting period. They forfeit their units if their employment terminates years. These awards are generally in one of two forms: restricted stock before the vesting date. grants or restricted stock units. Restricted stock grants are the most
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PART II ITEM 8 Financial Statements and Supplementary Data
The table below shows the status of, and changes in, restricted stock grants and units during the last three years:
2012 2011 2010
Weighted Average Weighted Average Weighted Average Fair Value at Fair Value at Fair Value at
(Awards in thousands) Grants/Units Award Date Grants/Units Award Date Grants/Units Award Date
Outstanding – January 1 4,246 $ 28.88 4,306 $ 27.70 4,113 $ 27.65 Awarded 1,563 $ 44.37 945 $ 42.62 1,155 $ 34.63 Vested (1,485) $ 27.60 (564) $ 42.79 (541) $ 40.87 Forfeited (260) $ 33.61 (441) $ 28.99 (421) $ 29.28
OUTSTANDING – DECEMBER 31 4,064 $ 35.00 4,246 $ 28.88 4,306 $ 27.70
The fair value of vested restricted stock was: $66 million in 2012, generally with a performance period of three years. Strategic $24 million in 2011 and $18 million in 2010. performance shares are divided into two broad groups: 50% are
subject to a market condition (total shareholder return relative to At the end of 2012, approximately 3,200 employees held 4.1 million
industry peer companies) and 50% are subject to performance restricted stock grants and units with $69 million of related
conditions (revenue growth and cumulative adjusted net income). compensation expense to be recognized over the next three years
These targets are set by the Committee. At the end of the performance (weighted average period).
period, holders of strategic performance shares will be awarded anywhere from 0 to 200% of the original grant of strategicStrategic Performance Shares. The Company awards strategic performance shares in Cigna common stock.performance shares to executives and certain other key employees
The table below shows the status of, and changes in, strategic performance shares during the last three years:
2012 2011 2010
Weighted Average Weighted Average Weighted Average Fair Value at Fair Value at Fair Value at
(Awards in thousands) Grants/Units Award Date Grants/Units Award Date Grants/Units Award Date
Outstanding – January 1 834 $ 39.45 430 $ 34.73 $ Awarded 842 $ 44.49 529 $ 42.92 480 $ 34.73 Forfeited (76) $ 43.39 (125) $ 37.92 (50) $ 34.65
OUTSTANDING – DECEMBER 31 1,600 $ 41.92 834 $ 39.45 430 $ 34.73
At the end of 2012, approximately 955 employees held 1.6 million strategic performance shares subject to a performance condition, the strategic performance shares and $26 million of related compensation amount of expense may vary based on actual performance in 2013 expense was expected to be recognized over the next two years. For and 2014.
Leases, Rentals and Outsourced Service Arrangements
The Company has several operating leases, primarily for office space, The Company also has several outsourced service arrangements with with a weighted average term of approximately 9 years. Some of these third parties, primarily for human resource and information leases include renewal options and other incentives that are amortized technology support services. The initial service periods under these over the life of the lease. Rental expenses for operating leases arrangements range from seven to eight years and their related costs amounted to $130 million in 2012, $115 million in 2011 and are reported consistent with operating leases over the service period $127 million in 2010. As of December 31, 2012, future net based on the pattern of use. The Company recorded in other minimum rental payments under non-cancelable operating leases operating expenses $86 million in 2012, $116 million in 2011 and were approximately $570 million, payable as follows (in millions): $114 million in 2010 for these arrangements. $116 in 2013, $108 in 2014, $82 in 2015, $65 in 2016, $43 in 2017 and $156 thereafter.
118 CIGNA CORPORATION - 2012 Form 10-K
NOTE 22
PART II ITEM 8 Financial Statements and Supplementary Data
Segment Information
Effective December 31, 2012, Cigna changed its external reporting markets, primarily in Asia as well as Medicare supplemental coverage segments to reflect the Company’s realignment of its businesses to following the 2012 acquisition of Great American Supplemental better leverage distribution and service delivery capabilities for the Benefits. benefit of our global clients and customers. Management believes the
Group Disability and Life represents group disability, life and realignment of its businesses will enable the Company to more
accident insurance products, including certain disability and life effectively address global health services challenges by leveraging best
insurance business previously reported in the former Health Care practices across geographies to improve the health, well being and
segment. sense of security of the global customers that the Company serves. The changes in the Company’s internal financial reporting structure, Run-off Reinsurance is predominantly comprised of GMDB and to support this realignment, took effect on December 31, 2012 and GMIB business. On December 31, 2010, the Company essentially resulted in changes to our external reporting segments. The exited from its workers’ compensation and personal accident Company’s results are now aggregated based on the nature of the reinsurance business by purchasing retrocessional coverage from a Company’s products and services, rather than its geographies. Bermuda subsidiary of Enstar Group Limited and transferring the
ongoing administration of this business to the reinsurer. The primary segment reporting change is that the two businesses that comprised the former International segment (international health care The Company also reports results in two other categories. and supplemental health, life and accident) are now reported as
Other Operations consist of: follows:
corporate-owned life insurance (‘‘COLI’’); substantially all of the international health care business (comprised primarily of the global health benefits business) is now reported deferred gains recognized from the 1998 sale of the individual life with the former Health Care segment and renamed Global Health insurance and annuity business and the 2004 sale of the retirement Care; and benefits business; and
the supplemental health, life and accident business becomes a run-off settlement annuity business. separate reporting segment named Global Supplemental Benefits.
Corporate reflects amounts not allocated to other segments, such as As a result of these changes, the financial results of Cigna’s businesses net interest expense (defined as interest on corporate debt less net are now reported in the following segments: investment income on investments not supporting segment
operations), interest on uncertain tax positions, certain litigation Global Health Care aggregates the following two operating
matters, intersegment eliminations, compensation cost for stock segments:
options and certain corporate overhead expenses such as directors’ The Commercial operating segment includes both the U.S. expenses. commercial and international health care businesses that offer
In 2010, the Company began reporting the expense associated with its insured and self-insured medical, dental, behavioral health, vision,
frozen pension plans in Corporate. Prior periods were not restated as and prescription drug benefit plans, health advocacy programs and
the effect on prior periods was not material. other products and services that may be integrated to provide comprehensive global health care benefit programs to employers The Company measures the financial results of its segments using and their employees, including globally mobile individuals. Cigna, ‘‘segment earnings (loss)’’, which is defined as shareholders’ income either directly or through its partners, offers some or all of these (loss) from continuing operations before after-tax realized investment products and services in all 50 states, the District of Columbia, the results. The Company determines segment earnings (loss) consistent U.S. Virgin Islands, Canada, Europe, the Middle East, and Asia. with accounting policies used in preparing the consolidated financial Cigna services its globally mobile customers virtually everywhere in statements, except that amounts included in Corporate are not the world. These products and services are offered through a variety allocated to segments. The Company allocates certain other operating of funding arrangements such as administrative services only (ASO), expenses, such as systems and other key corporate overhead expenses, guaranteed cost and retrospectively experience rated. on systematic bases. Income taxes are generally computed as if each
segment were filing a separate income tax return. The Company does The Government operating segment offers Medicare Advantage
not report total assets by segment since this is not a metric used to plans to seniors in 13 states and the District of Columbia, Medicare
allocate resources or evaluate segment performance. Part D plans in all 50 states and the District of Columbia and Medicaid plans.
Global Supplemental Benefits includes supplemental health, life and accident insurance products offered in the U.S. and foreign
CIGNA CORPORATION - 2012 Form 10-K 119
NOTE 23
• •
•
• •
•
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PART II ITEM 8 Financial Statements and Supplementary Data
Summarized segment financial information for the years ended December 31 was as follows:
(In millions) 2012 2011 2010
Global Health Care Premiums and fees: Medical:
Guaranteed cost (1) $ 4,256 $ 4,176 $ 3,929 Experience-rated (2) 2,022 1,934 1,823 Stop loss 1,672 1,451 1,287 International health care 1,648 1,344 976 Dental 1,005 894 804 Medicare 4,969 489 1,470 Medicaid 207 - - Medicare Part D 1,421 685 615 Other 677 600 543
Total medical 17,877 11,573 11,447 Fees (3) 3,096 2,870 2,687
Total premiums and fees 20,973 14,443 14,134 Mail order pharmacy revenues 1,623 1,447 1,420 Other revenues 225 236 269 Net investment income 259 263 230
Segment revenues $ 23,080 $ 16,389 $ 16,053 Depreciation and amortization $ 500 $ 297 $ 255 Income taxes $ 793 $ 616 $ 520 Segment earnings $ 1,418 $ 1,105 $ 940 (1) Excludes the international health care business.
(2) Includes minimum premium business that has 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 reported in fees. Also includes certain non-participating cases for which special customer level reporting of experience is required.
(3) Includes fees related to the international health care business. Fees related to Medicare Part D of $61 million in 2011 and $57 million in 2010 have been reclassified to premiums to conform to current presentation.
120 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
(In millions) 2012 2011 2010
Group Disability and Life Premiums and fees:
Life $ 1,426 $ 1,333 $ 1,341 Disability 1,413 1,268 1,167 Other 270 256 262
Total 3,109 2,857 2,770 Other revenues - - 123 Net investment income 300 291 287
Segment revenues $ 3,409 $ 3,148 $ 3,180 Depreciation and amortization $ 10 $ 10 $ 8 Income taxes $ 116 $ 113 $ 127 Segment earnings $ 279 $ 295 $ 305
Global Supplemental Benefits Premiums and fees $ 1,984 $ 1,528 $ 1,231 Other revenues 21 15 22 Net investment income 90 83 69
Segment revenues $ 2,095 $ 1,626 $ 1,322 Depreciation and amortization $ 28 $ 13 $ 8 Income taxes $ 36 $ 36 $ 42 Equity in income of investees $ 10 $ 15 $ 18 Segment earnings $ 142 $ 97 $ 84
Run-off Reinsurance Premiums and fees and other revenues $ (98) $ 20 $ (133) Net investment income 102 103 114
Segment revenues $ 4 $ 123 $ (19) Income tax benefits $ - $ (99) $ (136) Segment earnings (loss) $ - $ (183) $ 26
Other Operations Premiums and fees and other revenues $ 155 $ 169 $ 174 Net investment income 388 400 404
Segment revenues $ 543 $ 569 $ 578 Depreciation and amortization $ 22 $ 25 $ 21 Income taxes $ 43 $ 29 $ 39 Segment earnings $ 82 $ 89 $ 85
Corporate Other revenues and eliminations $ (61) $ (58) $ (62) Net investment income 5 6 1
Segment revenues $ (56) $ (52) $ (61) Income tax benefits $ (148) $ (101) $ (98) Segment loss $ (329) $ (184) $ (211)
Realized investment gains Realized investment gains $ 44 $ 62 $ 75 Income taxes 13 21 25
Realized investment gains net of taxes and noncontrolling interest $ 31 $ 41 $ 50
Total Premiums and fees and other revenues $ 26,308 $ 19,210 $ 18,528 Mail order pharmacy revenues 1,623 1,447 1,420 Net investment income 1,144 1,146 1,105 Realized investment gains 44 62 75
Total revenues $ 29,119 $ 21,865 $ 21,128 Depreciation and amortization $ 560 $ 345 $ 292 Income taxes $ 853 $ 615 $ 519 Segment earnings $ 1,592 $ 1,219 $ 1,229 Realized investment gains, net of taxes and noncontrolling interest $ 31 $ 41 $ 50
Shareholders’ net income $ 1,623 $ 1,260 $ 1,279
CIGNA CORPORATION - 2012 Form 10-K 121
PART II ITEM 8 Financial Statements and Supplementary Data
Premiums and fees, mail order pharmacy revenues and other revenues by product type were as follows for the years ended December 31:
(In millions) 2012 2011 2010
Medical $ 20,973 $ 14,443 $ 14,134 Disability 1,413 1,268 1,167 Supplemental Health, Life, and Accident 3,680 3,117 2,834 Mail order pharmacy 1,623 1,447 1,420 Other 242 382 393
TOTAL $ 27,931 $ 20,657 $ 19,948
Premiums and fees, mail order pharmacy revenues and other revenues by geographic location were as follows for the years ended December 31:
(In millions) 2012 2011 2010
U.S. $ 25,217 $ 18,522 $ 18,326 South Korea 1,076 909 717 All other foreign 1,638 1,226 905
TOTAL $ 27,931 $ 20,657 $ 19,948
Consolidated pre-tax income from continuing operations is primarily segment’s earnings in 2012. Due to the concentration of business in attributable to domestic operations. Consolidated pre-tax income South Korea, the Global Supplemental Benefits segment is exposed to from continuing operations generated by the Company’s foreign potential losses resulting from economic and geopolitical operations was approximately 8% in 2012, 10% in 2011 and 9% in developments in that country, as well as foreign currency movements 2010. affecting the South Korean currency, that could have a significant
impact on the segment’s results and the Company’s consolidated Concentration of risk. For the Company’s Global Supplemental financial results. Benefits segment, South Korea is the single largest geographic market. South Korea generated 54% of the segment’s revenues and 90% of the
Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for varies depending on the asset class within a sponsoring employer’s various guarantees provided in the ordinary course of business. 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 ofA. Financial Guarantees Primarily separate account assets, the Company or an affiliate of the buyer has
Associated with the Sold Retirement the right to redirect the management of the related assets to provide for benefit payments. As of December 31, 2012, employersBenefits Business maintained assets that exceeded the benefit obligations. Benefit
Separate account assets are contractholder funds maintained in obligations under these arrangements were $559 million as of accounts with specific investment objectives. The Company records December 31, 2012. As of December 31, 2012, approximately 21% separate account liabilities equal to separate account assets. In certain of these guarantees are reinsured by an affiliate of the buyer of the cases, primarily associated with the sold retirement benefits business retirement benefits business. The remaining guarantees are provided (that was sold in April 2004), the Company guarantees a minimum by the Company with minimal reinsurance from third parties. There level of benefits for retirement and insurance contracts written in were no additional liabilities required for these guarantees as of separate accounts. The Company establishes an additional liability if December 31, 2012. Separate account assets supporting these management believes that the Company will be required to make a guarantees are classified in Levels 1 and 2 of the GAAP fair value payment under these guarantees. hierarchy. See Note 11 for further information on the fair value
hierarchy.The Company guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring The Company does not expect that these financial guarantees will employers are primarily responsible for ensuring that assets are have a material effect on the Company’s consolidated results of sufficient to pay these benefits and are required to maintain assets that operations, liquidity or financial condition. exceed a certain percentage of benefit obligations. This percentage
122 CIGNA CORPORATION - 2012 Form 10-K
NOTE 24
PART II ITEM 8 Financial Statements and Supplementary Data
representations or covenants provided by the Company, such asB. Guaranteed Minimum Income Benefit representations for the presentation of financial statements, the filing
Contracts of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject toSee Notes 11 (fair value) and 13 (derivatives) for further information various time limitations, defined by the contract or by operation ofon GMIB contracts. Under these guarantees, the future payment law, such as statutes of limitation. In some cases, the maximumamounts are dependent on equity and bond fund market and interest potential amount due is subject to contractual limitations based on arate levels prior to and at the date of annuitization election, that must percentage of the transaction purchase price, while in other casesoccur within 30 days of a policy anniversary, after the appropriate limitations are not specified or applicable. The Company does notwaiting period. Therefore, the future payments are not fixed and believe that it is possible to determine the maximum potential amountdeterminable under the terms of the contract. Accordingly, the due under these obligations, since not all amounts due under theseCompany’s maximum potential undiscounted future payment of indemnification obligations are subject to limitation. There were no$1.1 billion was determined using the following hypothetical liabilities for these indemnification obligations as of December 31,assumptions: 2012.no annuitants surrendered their accounts; The Company does not expect that these guarantees will have aall annuitants lived to elect their benefit; material adverse effect on the Company’s consolidated results of
all annuitants elected to receive their benefit on the next available operations, financial condition or liquidity. date (2013 through 2018); and
all underlying mutual fund investment values remained at the D. Regulatory and Industry Developments December 31, 2012 value of $1.1 billion with no future returns.
Employee benefits regulation. The business of administering andThe Company has retrocessional coverage in place from two external insuring employee benefit programs, particularly health carereinsurers that covers 55% of the exposures on these contracts. The programs, is heavily regulated by federal and state laws andCompany reinsured the remainder of the exposures on these contracts administrative agencies, such as state departments of insurance andeffective February 4, 2013. The Company bears the risk of loss if its the Federal Departments of Labor and Justice, as well as the courts.retrocessionaires do not meet or are unable to meet their reinsurance Regulation, legislation and judicial decisions have resulted in changesobligations to the Company. to industry and the Company’s business practices and will continue to do so in the future. In addition, the Company’s subsidiaries areC. Certain Other Guarantees routinely involved with various claims, lawsuits and regulatory and
The Company had indemnification obligations to lenders of up to IRS audits and investigations that could result in financial liability, $331 million as of December 31, 2012, related to borrowings by changes in business practices, or both. certain real estate joint ventures that the Company either records as an
Health care regulation and legislation in its various forms, including investment or consolidates. These borrowings, that are nonrecourse to
the implementation of the Patient Protection and Affordable Care Act the Company, are secured by the joint ventures’ real estate properties
(including the Reconciliation Act) that was signed into law during the with fair values in excess of the loan amounts and mature at various
first quarter of 2010 and found to be constitutional by the U.S. dates beginning in 2013 through 2042. The Company’s
Supreme Court in June of 2012, could have a material adverse effect indemnification obligations would require payment to lenders for any
on the Company’s health care operations if it inhibits the Company’s actual damages resulting from certain acts such as unauthorized
ability to respond to market demands, adversely affects the way the ownership transfers, misappropriation of rental payments by others or
Company does business, or results in increased medical or environmental damages. Based on initial and ongoing reviews of
administrative costs without improving the quality of care or services. property management and operations, the Company does not expect
Other possible regulatory and legislative changes or judicial decisionsthat payments will be required under these indemnification that could have an adverse effect on the Company’s employee benefitsobligations. Any payments that might be required could be recovered businesses include:through a refinancing or sale of the assets. In some cases, the
Company also has recourse to partners for their proportionate share of additional mandated benefits or services that increase costs; amounts paid. There were no liabilities required for these
legislation that would grant plan participants broader rights to sue indemnification obligations as of December 31, 2012.
their health plans; As of December 31, 2012, the Company guaranteed that it would
changes in public policy and in the political environment, that compensate the lessors for a shortfall of up to $41 million in the
could affect state and federal law, including legislative and market value of certain leased equipment at the end of the lease.
regulatory proposals related to health care issues, that could increase Guarantees of $16 million expire in 2016 and $25 million expire in
cost and affect the market for the Company’s health care products 2025. The Company had liabilities for these guarantees of $2 million
and services; as of December 31, 2012.
changes in Employee Retirement Income Security Act of 1974 The Company had indemnification obligations as of December 31,
(‘‘ERISA’’) regulations resulting in increased administrative burdens 2012 in connection with acquisition and disposition transactions.
and costs; These indemnification obligations are triggered by the breach of
CIGNA CORPORATION - 2012 Form 10-K 123
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PART II ITEM 8 Financial Statements and Supplementary Data
additional restrictions on the use of prescription drug formularies services business, including payments to providers and benefit level and rulings from pending purported class action litigation, that disputes. Such legal matters include benefit claims, breach of contract could result in adjustments to or the elimination of the average claims, tort claims, disputes regarding reinsurance arrangements, wholesale price of pharmaceutical products as a benchmark in employment related suits, employee benefit claims, wage and hour establishing certain rates, charges, discounts, guarantees and fees for claims, and intellectual property and real estate related disputes. various prescription drugs; Litigation of income tax matters is accounted for under FASB’s
accounting guidance for uncertainty in income taxes. Furtheradditional privacy legislation and regulations that interfere with the information can be found in Note 20. The outcome of litigation andproper use of medical information for research, coordination of other legal matters is always uncertain, and unfavorable outcomes thatmedical care and disease and disability management; are not justified by the evidence can occur. The Company believes
additional variations among state laws mandating the time periods that it has valid defenses to the legal matters pending against it and is and administrative processes for payment of health care provider defending itself vigorously. claims;
When the Company (in the course of its regular review of pending legislation that would exempt independent physicians from litigation and legal matters) has determined that a material loss is antitrust laws; and reasonably possible, the matter is disclosed including an estimate or
range of loss or a statement that such an estimate cannot be made. Inchanges in federal tax laws, such as amendments that could affect many proceedings, however, it is inherently difficult to determinethe taxation of employer provided benefits. whether any loss is probable or even possible or to estimate theThe employee benefits industry remains under scrutiny by various amount or range of any loss. In accordance with applicable accountingstate and federal government agencies and could be subject to guidance, when litigation and regulatory matters present lossgovernment efforts to bring criminal actions in circumstances that contingencies that are both probable and estimable, the Companycould previously have given rise only to civil or administrative accrues the estimated loss by a charge to income. The amount accruedproceedings. represents the Company’s best estimate of the probable loss. If only a
Guaranty fund assessments. The Company operates in a regulatory range of estimated losses can be determined, the Company accrues an environment that may require the Company to participate in amount within the range that, in the Company’s judgment, reflects assessments under state insurance guaranty association laws. The the most likely outcome; if none of the estimates within that range is a Company’s exposure for certain obligations of insolvent insurance better estimate than any other amount, the Company accrues at the companies to policyholders and claimants to assessments is based on low end of the range. In cases that the Company has accrued an its share of business it writes in the relevant jurisdictions. For the years estimated loss, the accrued amount may differ materially from the ended December 31, 2012, 2011, and 2010, charges related to ultimate amount of the relevant costs. guaranty fund assessments were not material to the Company’s results
The Company increased its reserves by $124 million pre-tax of operations.
($81 million after-tax) during 2012, primarily relating to The Company is aware of an insurer that is in rehabilitation, an developments in the Amara matter as discussed below, resulting in intermediate action before insolvency. On May 3, 2012, the state pre-tax reserves for these matters of $189 million ($123 million court denied the regulator’s amended petitions for liquidation and set after-tax) as of December 31, 2012. Due to numerous uncertain forth specific requirements and a deadline for the regulator to develop factors presented in these cases, it is not possible to estimate an a plan of rehabilitation without liquidating the insurer. On May 14, aggregate range of loss (if any) for these matters at this time. 2012 the regulator filed a post-trial motion requesting the court to
Except as otherwise noted, the Company believes that the legal reconsider its decision. On September 28, 2012, an Order of
actions, proceedings and investigations currently pending against it Judgment was entered finalizing the court’s opinion that the insurer is
should not have a material adverse effect on the Company’s results of not insolvent and remains in rehabilitation. The regulator has
operations, financial condition or liquidity based upon current appealed the court’s decision. If the state court’s decision is reversed
knowledge and taking into consideration current accruals. However, and the insurer is declared insolvent and placed in liquidation, the
in light of the uncertainties involved in these matters, there is no Company and other insurers may be required to pay a portion of
assurance that their ultimate resolution will not exceed the amounts policyholder claims through guaranty fund assessments from various
currently accrued by the Company and that an adverse outcome in states in which the Company’s insurance subsidiaries write premiums.
one or more of these matters could be material to the Company’s Based on current information available, in the event of a reversal of the
results of operation, financial condition or liquidity for any particular state court decision and liquidation of the insurer, the Company has
period. estimated that potential future assessments could result in future
Amara cash balance pension plan litigation. On December 18,charges totaling approximately $60 million after-tax. The Company 2001, Janice Amara filed a class action lawsuit, captioned Janice C.will continue to monitor the outcome of the court’s deliberations. Amara, Gisela R. Broderick, Annette S. Glanz, individually and on behalf of all others similarly situated v. Cigna Corporation and CignaE. Litigation and Other Legal Matters Pension Plan, in the United States District Court for the District of
The Company is routinely involved in numerous claims, lawsuits, Connecticut against Cigna Corporation and the Cigna Pension Plan regulatory and IRS audits, investigations and other legal matters on behalf of herself and other similarly situated participants in the arising, for the most part, in the ordinary course of managing a health Cigna Pension Plan affected by the 1998 conversion to a cash balance
124 CIGNA CORPORATION - 2012 Form 10-K
•
•
•
•
•
PART II ITEM 8 Financial Statements and Supplementary Data
formula. The plaintiffs allege various ERISA violations including, 2012. The Company will continue to vigorously defend its position in among other things, that the Plan’s cash balance formula discriminates this case. against older employees; the conversion resulted in a wear away period
Ingenix. On February 13, 2008, State of New York Attorney General (when the pre-conversion accrued benefit exceeded the
Andrew M. Cuomo announced an industry-wide investigation into post-conversion benefit); and these conditions are not adequately
the use of data provided by Ingenix, Inc., a subsidiary of disclosed in the Plan.
UnitedHealthcare, used to calculate payments for services provided by In 2008, the court issued a decision finding in favor of Cigna out-of-network providers. The Company received four subpoenas Corporation and the Cigna Pension Plan on the age discrimination from the New York Attorney General’s office in connection with this and wear away claims. However, the court found in favor of the investigation and responded appropriately. On February 17, 2009, the plaintiffs on many aspects of the disclosure claims and ordered an Company entered into an Assurance of Discontinuance resolving the enhanced level of benefits from the existing cash balance formula for investigation. In connection with the industry-wide resolution, the the majority of the class, requiring class members to receive their Company contributed $10 million to the establishment of a new frozen benefits under the pre-conversion Cigna Pension Plan and their non-profit company that now compiles and provides the data post-1997 accrued benefits under the post-conversion Cigna Pension formerly provided by Ingenix. Plan. The court also ordered, among other things, pre-judgment and
The Company was named as a defendant in a number of putative post-judgment interest.
nationwide class actions asserting that due to the use of data from Both parties appealed the court’s decisions to the United States Court Ingenix, Inc., the Company improperly underpaid claims, an of Appeals for the Second Circuit that issued a decision on October 6, industry-wide issue. All of the class actions were consolidated into 2009 affirming the District Court’s judgment and order on all issues. Franco v. Connecticut General Life Insurance Company et al., that is On January 4, 2010, both parties filed separate petitions for a writ of pending in the United States District Court for the District of New certiorari to the United States Supreme Court. Cigna’s petition was Jersey. The consolidated amended complaint, filed on August 7, 2009, granted, and on May 16, 2011, the Supreme Court issued its Opinion asserts claims under ERISA, the RICO statute, the Sherman Antitrust in which it reversed the lower courts’ decisions and remanded the case Act and New Jersey state law on behalf of subscribers, health care to the trial judge for reconsideration of the remedy. The Court providers and various medical associations. unanimously agreed with the Company’s position that the lower
On September 23, 2011, the court granted in part and denied in part courts erred in granting a remedy for an inaccurate plan description
the Company’s motion to dismiss the consolidated amended under an ERISA provision that allows only recovery of plan benefits.
complaint. The court dismissed all claims by the health care provider However, the decision identified possible avenues of ‘‘appropriate
and medical association plaintiffs for lack of standing to sue, and as a equitable relief ’’ that plaintiffs may pursue as an alternative remedy.
result the case will proceed only on behalf of subscribers. In addition, The case was returned to the trial court and hearings took place on
the court dismissed all of the antitrust claims, the ERISA claims based December 9, 2011 and March 29-30, 2012. Over the summer, the
on disclosure and the New Jersey state law claims. The court did not trial judge passed away after a long illness and the case was re-assigned.
dismiss the ERISA claims for benefits and claims under the RICO On December 20, 2012, the new trial judge issued a decision statute. awarding equitable relief to the class. The court’s order requires the
Plaintiffs filed a motion to certify a nationwide class of subscriber Company to reform the pension plan to provide a substantially
plaintiffs on December 19, 2011, which was denied on January 16, identical remedy to that ordered by the first trial judge in 2008. Both
2013. Plaintiffs petitioned for an immediate appeal of the order parties appealed the order and the judge stayed implementation of the
denying class certification, that the Company opposed. order pending resolution of the appeals. In light of the re-affirmed
It is reasonably possible that others could initiate additional litigationremedy ordered by the District Court, the Company was required to or additional regulatory action against the Company with respect tore-evaluate its reserve for this case. Due to the current economic use of data provided by Ingenix, Inc. The Company denies theenvironment of low interest rates that have a significant impact on the allegations asserted in the investigations and litigation and willvaluation of potential future pension benefits, the Company was vigorously defend itself in these matters.required to increase its reserve for this matter in the fourth quarter of
Subsequent Event – Reinsurance of GMDB and GMIB Business
Effective February 4, 2013, the Company entered into an agreement future claims of approximately $4 billion to be covered by the with Berkshire Hathaway Life Insurance Company of Nebraska agreement. (Berkshire) to reinsure the GMDB and GMIB businesses. Berkshire This reinsurance premium will be recorded in the first quarter of 2013 will reinsure 100% of the Company’s future claim payments, net of resulting in an after-tax impact to shareholders’ net income of retrocessional arrangements in place prior to February 4, 2013, for a approximately $500 million. Premium of $725 million was paid on reinsurance premium of $2.2 billion. The reinsurance agreement is February 4, 2013 with the remainder to be paid by April 30, 2013. subject to an overall limit of approximately $3.8 billion plus future This premium will ultimately be funded from the sale or internal premiums collected under the contracts being reinsured that will be transfer of investment assets that were supporting this book of paid to Berkshire. The Company estimates that these future premium business, as well as tax benefits related to the transaction, and cash. amounts will be from $0.1 to $0.3 billion and, accordingly, expects
CIGNA CORPORATION - 2012 Form 10-K 125
NOTE 25
5MAY201113444704
PART II ITEM 8 Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm insurance companies that can be capitalized in connection withTo the Board of Directors acquiring or renewing insurance contracts.and Shareholders of Cigna Corporation A company’s internal control over financial reporting is a processIn our opinion, the accompanying consolidated balance sheets and designed to provide reasonable assurance regarding the reliability ofthe related consolidated statements of income, comprehensive income financial reporting and the preparation of financial statements forand changes in total equity and cash flows present fairly, in all material external purposes in accordance with generally accepted accountingrespects, the financial position of Cigna Corporation and its principles. A company’s internal control over financial reportingsubsidiaries (‘‘the Company’’) at December 31, 2012 and includes those policies and procedures that (i) pertain to theDecember 31, 2011, and the results of their operations and their cash maintenance of records that, in reasonable detail, accurately and fairlyflows for each of the three years in the period ended December 31, reflect the transactions and dispositions of the assets of the company;2012 in conformity with accounting principles generally accepted in (ii) provide reasonable assurance that transactions are recorded asthe United States of America. Also in our opinion, the Company necessary to permit preparation of financial statements in accordancemaintained, in all material respects, effective internal control over with generally accepted accounting principles, and that receipts andfinancial reporting as of December 31, 2012, based on criteria expenditures of the company are being made only in accordance withestablished in Internal Control—Integrated Framework issued by the authorizations of management and directors of the company; andCommittee of Sponsoring Organizations of the Treadway (iii) provide reasonable assurance regarding prevention or timelyCommission (COSO). The Company’s management is responsible detection of unauthorized acquisition, use, or disposition of thefor these financial statements, for maintaining effective internal company’s assets that could have a material effect on the financialcontrol over financial reporting and for its assessment of the statements.effectiveness of internal control over financial reporting, included in
Management’s Annual Report on Internal Control over Financial Because of its inherent limitations, internal control over financial Reporting. Our responsibility is to express opinions on these financial reporting may not prevent or detect misstatements. Also, projections statements and on the Company’s internal control over financial of any evaluation of effectiveness to future periods are subject to the reporting based on our integrated audits. We conducted our audits in risk that controls may become inadequate because of changes in accordance with the standards of the Public Company Accounting conditions, or that the degree of compliance with the policies or Oversight Board (United States). Those standards require that we plan procedures may deteriorate. and perform the audits to obtain reasonable assurance about whether
As described in Management’s Annual Report on Internal Controlthe financial statements are free of material misstatement and whether over Financial Reporting, management has excluded Great Americaneffective internal control over financial reporting was maintained in all Supplemental Benefits Group from its assessment of internal controlmaterial respects. Our audits of the financial statements included over financial reporting as of December 31, 2012 because it wasexamining, on a test basis, evidence supporting the amounts and acquired by the Company in a purchase business combination duringdisclosures in the financial statements, assessing the accounting the year ended December 31, 2012. We have also excluded Greatprinciples used and significant estimates made by management, and American Supplemental Benefits Group from our audit of internalevaluating the overall financial statement presentation. Our audit of control over financial reporting. Great American Supplementalinternal control over financial reporting included obtaining an Benefits Group’s total assets acquired represent approximately 2% ofunderstanding of internal control over financial reporting, assessing consolidated total assets as of December 31, 2012; total revenuesthe risk that a material weakness exists, and testing and evaluating the acquired represent less than 1% of consolidated total revenues for thedesign and operating effectiveness of internal control based on the year ended December 31, 2012.assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We /s/ PricewaterhouseCoopers LLPbelieve that our audits provide a reasonable basis for our opinions. Philadelphia, Pennsylvania
As discussed in Note 2 to the consolidated financial statements, as of February 28, 2013
January 1, 2012, the Company retrospectively adopted a new accounting standard that amends the accounting for costs incurred by
126 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 8 Financial Statements and Supplementary Data
Quarterly Financial Data (unaudited) The following unaudited quarterly financial data is presented on a consolidated basis for each of the years ended December 31, 2012 and December 31, 2011. Quarterly financial results necessarily rely heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business, suggest the need to exercise caution in drawing specific conclusions from quarterly consolidated results. Certain reclassifications have been made to previously reported quarterly amounts to conform to the current presentation. See Note 2 to the Consolidated Financial Statements for additional information.
Three Months Ended
(In millions, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
Consolidated Results 2012 Total revenues $ 6,754 $ 7,422 $ 7,323 $ 7,620 Income from continuing operations before income taxes 552 588 718 619 Shareholders’ net income 371 (1) 380 (2) 466 (3) 406 (4)
Shareholders’ net income per share: 1 Basic 1.30 1.33 1.64 1.43 Diluted 1.28 1.31 1.61 1.41
2011 Total revenues $ 5,387 $ 5,479 $ 5,574 $ 5,425 Income from continuing operations before income taxes 579 592 273 432 Shareholders’ net income 413 (5) 391 (6) 183 (7) 273 (8)
Shareholders’ net income per share: Basic 1.53 1.46 0.68 0.99 Diluted 1.51 1.43 0.67 0.98
Stock and Dividend Data 2012 Price range of common stock – high $ 49.89 $ 49.63 $ 47.92 $ 54.53
– low $ 41.27 $ 42.21 $ 39.34 $ 47.31 Dividends declared per common share $ 0.04 $ - $ - $ - 2011 Price range of common stock – high $ 44.29 $ 51.81 $ 52.95 $ 47.61
– low $ 36.76 $ 42.80 $ 40.24 $ 38.82 Dividends declared per common share $ 0.04 $ - $ - $ - (1) The first quarter of 2012 includes an after-tax gain of $41 million for the GMIB business, an after-tax charge of $28 million for costs associated with acquisitions, and an after-tax charge of
$13 million for costs associated a litigation matter in Global Health Care. (2) The second quarter of 2012 includes an after-tax loss of $51 million for the GMIB business. (3) The third quarter of 2012 includes an after-tax gain of $32 million for the GMIB business, an after-tax charge of $12 million for costs associated with acquisitions, and an after-tax charge
of $50 million for costs associated with a realignment and efficiency plan. (4) The fourth quarter of 2012 includes an after-tax gain of $7 million for the GMIB business and an after-tax charge of $68 million for litigation matters. (5) The first quarter of 2011 includes an after-tax gain of $13 million for the GMIB business and a net tax benefit of $24 million related to the resolution of a Federal tax matter. (6) The second quarter of 2011 includes an after-tax loss of $21 million for the GMIB business. (7) The third quarter of 2011 includes an after-tax loss of $134 million for the GMIB business. (8) The fourth quarter of 2011 includes an after-tax gain of $7 million for the GMIB business and, an after-tax charge of $31 million for costs associated with acquisitions.
CIGNA CORPORATION - 2012 Form 10-K 127
21FEB201301140543
PART II ITEM 8 Financial Statements and Supplementary Data
Five Year Cumulative Total Shareholder Return* December 31, 2007 – December 31, 2012
$50
$100
$150
$0
S&P 500 Index
S&P Managed Health Care, Life & Health Ins. Indexes**
Cigna
12/31/0812/31/07 12/31/09 12/31/10 12/30/11 12/31/12
12/31/07 12/31/08 12/31/09 12/31/10 12/30/11 12/31/12
Cigna $ 100 $ 31 $ 66 $ 69 $ 79 $ 100
S&P 500 Index $ 100 $ 63 $ 80 $ 92 $ 94 $ 109
S&P Mgd. Health Care, Life & Health Ins. Indexes** $ 100 $ 47 $ 58 $ 66 $ 78 $ 84 * Assumes that the value of the investment in Cigna common stock and each index was $100 on December 31, 2007 and that all dividends were reinvested. ** Weighted average of S&P Managed Health Care (75%) and Life & Health Insurance (25%) Indexes.
128 CIGNA CORPORATION - 2012 Form 10-K
PART II ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Controls and Procedures Disclosure Controls and Procedures
Based on an evaluation of the effectiveness of Cigna’s disclosure procedures are effective to ensure that information required to be controls and procedures conducted under the supervision and with disclosed by Cigna in the reports that it files or submits under the the participation of Cigna’s management, Cigna’s Chief Executive Exchange Act is recorded, processed, summarized and reported, Officer and Chief Financial Officer concluded that, as of the end of within the time periods specified in the SEC’s rules and forms. the period covered by this report, Cigna’s disclosure controls and
Internal Control Over Financial Reporting
The Company’s management report on internal control over financial During the period covered by this report, other than the changes reporting under the caption ‘‘Management’s Annual Report on resulting from the HealthSpring, Inc. acquisition discussed below, Internal Control over Financial Reporting’’ on page 62 in this there have been no changes in Cigna’s internal control over financial Form 10-K. reporting that have materially affected, or are reasonably likely to
materially affect, Cigna’s internal control over financial reporting.
On January 31, 2012, the Company acquired HealthSpring, Inc. The Company is in the process of integrating HealthSpring, Inc. operations, processes and internal controls. See Note 3 to the
The attestation report of Cigna’s independent registered public Consolidated Financial Statements for additional information related accounting firm, on the effectiveness of Cigna’s internal control over to the HealthSpring, Inc. acquisition. financial reporting appears under the caption ‘‘Report of Independent Registered Public Accounting Firm’’ on page 126 of this Form 10-K.
Other Information None.
CIGNA CORPORATION - 2012 Form 10-K 129
ITEM 9
ITEM 9A A.
B.
Management’s Annual Report on Internal Changes in Internal Control Over Financial Control over Financial Reporting Reporting
Attestation Report of the Registered Public Accounting Firm
ITEM 9B
PART III
Directors and Executive Officers of the Registrant
Directors of the Registrant
The information under the captions ‘‘The Board of Directors’ Nominees for Terms to Expire in April 2016,’’ ‘‘Directors Who Will Continue in Office,’’ ‘‘Board of Directors and Committee Meetings, Membership, Attendance and Independence’’ (as it relates to Audit Committee disclosure), and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in Cigna’s proxy statement to be dated on or about March 15, 2013 is incorporated by reference.
Executive Officers of the Registrant
See PART I – ‘‘Executive Officers of the Registrant on page 29 in this Form 10-K.’’
Code of Ethics and Other Corporate Governance Disclosures
Cigna’s Code of Ethics is the Company’s code of business conduct and In addition, the Company’s corporate governance guidelines (Board ethics, and applies to Cigna’s directors, officers (including the chief Practices) and the charters of its board committees (audit, corporate executive officer, chief financial officer and chief accounting officer) governance, executive, finance and people resources) are available on and employees. The Code of Ethics is posted on the Corporate the Corporate Governance section of the Company’s website. These Governance section found on the ‘‘About Cigna’’ page of the corporate governance documents, as well as the Code of Ethics, are Company’s website, www.cigna.com. In the event the Company available in print to any shareholder who requests them. substantively amends its Code of Ethics or waives a provision of the Code, Cigna intends to disclose the amendment or waiver on the Corporate Governance section of the Company’s website.
Executive Compensation The information under the captions ‘‘Director Compensation,’’ ‘‘Report of the People Resources Committee,’’ ‘‘Compensation Discussion and Analysis’’ and ‘‘Executive Compensation’’ in Cigna’s proxy statement to be dated on or about March 15, 2013 is incorporated by reference.
130 CIGNA CORPORATION - 2012 Form 10-K
ITEM 10
A.
B.
C.
ITEM 11
PART III ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table presents information regarding Cigna’s equity compensation plans as of December 31, 2012:
(c) (3)
Securities Remaining(b) (2)
Weighted Average Available For Future(a) (1)
Securities To Be Issued Exercise Price Per Issuance Under Equity Upon Exercise Of Share Of Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities Plan Category Warrants And Rights Warrants And Rights Reflected In Column (a))
Equity Compensation Plans Approved by Security Holders 12,393,377 $ 36.29 8,845,753 Equity Compensation Plans Not Approved by Security Holders - - -
TOTAL 12,393,377 $ 36.29 8,845,753 (1) Includes, in addition to outstanding stock options, 129,951 restricted stock units, 99,177 deferred shares, 12,739 director deferred share units that settle in shares, and 3,200,998 strategic
performance shares, which are reported at the maximum 200% payout rate. Also includes 919,158 shares of common stock underlying stock option awards granted under the HealthSpring, Inc. Amended and Restated 2006 Equity Incentive Plan and 26,304 shares of common stock underlying stock option awards granted under the NewQuest Holdings, Inc. 2005 Stock Option Plan, each of which was approved by the applicable company’s shareholders before Cigna’s acquisition of HealthSpring in January 2012.
(2) The weighted-average exercise price is based only on outstanding stock options. The outstanding stock options assumed due to Cigna’s acquisition of HealthSpring, Inc. have a weighted- average exercise price of $16.79. Excluding these assumed options results in a weighted-average exercise price of $38.59.
(3) Includes 399,038 shares of common stock available as of the close of business December 31, 2012 for future issuance under the Cigna Directors Equity Plan and 8,446,715 shares of common stock available as of the close of business on December 31, 2012 for future issuance under the Cigna Long-Term Incentive Plan as shares of restricted stock, strategic performance shares, shares in payment of dividend equivalent rights, shares in lieu of cash payable under the Company’s other short- and long-term incentive compensation plans and non-tax qualified supplemental retirement benefit plans, or shares in payment of SPSs or SPUs.
The information under the captions ‘‘Stock held by Directors, Nominees and Executive Officers’’ and ‘‘Largest Security Holders’’ in Cigna’s proxy statement to be dated on or about March 15, 2013 is incorporated by reference.
Certain Relationships and Related Transactions The information under the caption ‘‘Certain Transactions’’ in Cigna’s proxy statement to be dated on or about March 15, 2013 is incorporated by reference.
Principal Accounting Fees and Services The information under the captions ‘‘Policy for the Pre-Approval of Audit and Non-Audit Services’’ and ‘‘Fees to Independent Registered Public Accounting Firm’’ in Cigna’s proxy statement to be dated on or about March 15, 2013 is incorporated by reference.
CIGNA CORPORATION - 2012 Form 10-K 131
ITEM 12
ITEM 13
ITEM 14
PART IV
Exhibits and Financial Statement Schedules (1) The following Financial Statements appear on pages 64 Consolidated Statements of Changes in Total Equity for the through 126: years ended December 31, 2012, 2011 and 2010.
Consolidated Statements of Income for the years ended Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010. December 31, 2012, 2011 and 2010.
Consolidated Statements of Comprehensive Income for the Notes to the Consolidated Financial Statements. years ended December 31, 2012, 2011 and 2010.
Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets as of December 31, 2012 and
(2) The financial statement schedules are listed in the Index to 2011.
Financial Statement Schedules on page FS-1.
132 CIGNA CORPORATION - 2012 Form 10-K
ITEM 15 (a)
PART IV ITEM 15 Signatures
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CIGNA CORPORATION
Date: February 28, 2013 By: /s/ Ralph J. Nicoletti
Ralph J. Nicoletti Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 28, 2013.
Signature Title
/s/ David M. Cordani Chief Executive Officer and Director (Principal Executive Officer)
David M. Cordani /s/ Ralph J. Nicoletti Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Ralph J. Nicoletti /s/ Mary T. Hoeltzel Vice President and Chief Accounting Officer (Principal Accounting Officer)
Mary T. Hoeltzel /s/ Eric J. Foss Director
Eric J. Foss /s/ Isaiah Harris, Jr. Chairman of the Board
Isaiah Harris, Jr. /s/ Jane E. Henney, M.D. Director
Jane E. Henney, M.D. /s/ Roman Martinez IV Director
Roman Martinez IV /s/ John M. Partridge Director
John M. Partridge /s/ James E. Rogers Director
James E. Rogers /s/ Joseph P. Sullivan Director
Joseph P. Sullivan /s/ Eric C. Wiseman Director
Eric C. Wiseman /s/ Donna F. Zarcone Director
Donna F. Zarcone /s/ William D. Zollars Director
William D. Zollars
CIGNA CORPORATION - 2012 Form 10-K 133
INDEX TO FINANCIAL STATEMENT SCHEDULES ITEM 15 Exhibits and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules ............................................ FS-2
Schedules
I – Summary of Investments – Other Than Investments in Related Parties as of December 31, 2012 ................................ FS-3 II – Condensed Financial Information of Cigna Corporation (Registrant)............................................................................ FS-4 III – Supplementary Insurance Information ........................................................................................................................... FS-9 IV – Reinsurance.................................................................................................................................................................... FS-11 V – Valuation and Qualifying Accounts and Reserves .......................................................................................................... FS-12
Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.
CIGNA CORPORATION - 2012 Form 10-K FS-1
PART IV ITEM 15 Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
To the Board of Directors and Shareholders of Cigna Corporation
Our audits of the consolidated financial statements and of the As described in Management’s Annual Report on Internal Control effectiveness of internal control over financial reporting referred to in over Financial Reporting, management has excluded Great American our report dated February 28, 2013 (which report and consolidated Supplemental Benefits Group from its assessment of internal control financial statements are included under Item 8 in this Annual Report over financial reporting as of December 31, 2012 because it was on Form 10-K) also included an audit of the financial statement acquired by the Company in a purchase business combination during schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, the year ended December 31, 2012. We have also excluded Great these financial statement schedules present fairly, in all material American Supplemental Benefits Group from our audit of internal respects, the information set forth therein when read in conjunction control over financial reporting. Great American Supplemental with the related consolidated financial statements. Benefits Group’s total assets acquired represent approximately 2% of
consolidated total assets as of December 31, 2012; total revenues As discussed in Note 2 to the consolidated financial statements, as of
acquired represent less than 1% of consolidated total revenues for the January 1, 2012, the Company retrospectively adopted a new
year ended December 31, 2012. accounting standard that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania February 28, 2013
FS-2 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule I – Summary of Investments – Other Than Investments in Related Parties December 31, 2012
Amount at which shown in
Fair the ConsolidatedType of Investment (In millions) Cost Value Balance Sheet
Fixed maturities: Bonds:
United States government and government agencies and authorities $ 509 $ 902 $ 902 States, municipalities and political subdivisions 2,169 2,437 2,437 Foreign governments 1,197 1,322 1,322 Public utilities 102 106 106 All other corporate bonds 10,466 11,752 11,752
Asset backed securities: United States government agencies mortgage-backed 121 122 122 Other mortgage-backed 82 89 89 Other asset-backed 798 937 937
Redeemable preferred stocks 37 38 38
TOTAL FIXED MATURITIES 15,481 17,705 17,705
Equity securities: Common stocks:
Industrial, miscellaneous and all other 28 33 33 Non redeemable preferred stocks 93 78 78
TOTAL EQUITY SECURITIES 121 111 111
Commercial mortgage loans on real estate 2,851 2,851 Policy loans 1,501 1,501 Real estate investments 83 83 Other long-term investments 1,213 1,255 Short-term investments 154 154
TOTAL INVESTMENTS $ 21,404 $ 23,660
CIGNA CORPORATION - 2012 Form 10-K FS-3
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule II – Condensed Financial Information of Cigna Corporation – (Registrant)
For the year ended December 31,
(in millions) 2012 2011 2010
Operating expenses: Interest $ 262 $ 195 $ 176 Intercompany interest - 19 26 Other 190 92 129
TOTAL OPERATING EXPENSES 452 306 331
Loss before income taxes (452) (306) (331) Income tax benefit (143) (107) (106)
Loss of parent company (309) (199) (225) Equity in income of subsidiaries 1,932 1,459 1,504
SHAREHOLDERS’ NET INCOME 1,623 1,260 1,279
Shareholders’ other comprehensive income (loss): Net unrealized appreciation (depreciation) on securities:
Fixed maturities 144 210 151 Equity securities 3 (2) (1)
Net unrealized appreciation on securities 147 208 150 Net unrealized appreciation (depreciation), derivatives (5) 1 6 Net translation of foreign currencies 66 (22) 33 Postretirement benefits liability adjustment (92) (360) (189)
Shareholders’ other comprehensive income (loss) 116 (173) -
SHAREHOLDERS’ COMPREHENSIVE INCOME $ 1,739 $ 1,087 $ 1,279 See Notes to Financial Statements on the following pages.
FS-4 CIGNA CORPORATION - 2012 Form 10-K
Statements of Income
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule II – Condensed Financial Information of Cigna Corporation (Registrant)
As of December 31,
(In millions) 2012 2011
ASSETS: Cash and cash equivalents $ 115 $ – Investments in subsidiaries 16,125 14,606 Intercompany 37 29 Other assets 729 793
TOTAL ASSETS $ 17,006 $ 15,428
LIABILITIES: Intercompany $ 289 $ 489 Short-term debt 200 100 Long-term debt 4,870 4,869 Other liabilities 1,878 1,976
TOTAL LIABILITIES 7,237 7,434
SHAREHOLDERS’ EQUITY: Common stock (shares issued, 366; authorized, 600) 92 92 Additional paid-in capital 3,295 3,188 Net unrealized appreciation – fixed maturities $ 883 $ 739 Net unrealized appreciation – equity securities 4 1 Net unrealized depreciation – derivatives (28) (23) Net translation of foreign currencies 69 3 Postretirement benefits liability adjustment (1,599) (1,507)
Accumulated other comprehensive loss (671) (787) Retained earnings 12,330 10,787 Less treasury stock, at cost (5,277) (5,286)
TOTAL SHAREHOLDERS’ EQUITY 9,769 7,994
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 17,006 $ 15,428 See Notes to Financial Statements on the following pages.
CIGNA CORPORATION - 2012 Form 10-K FS-5
Balance Sheets
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule II – Condensed Financial Information of Cigna Corporation (Registrant)
For the year ended December 31,
(in millions) 2012 2011 2010
Cash Flows from Operating Activities: Shareholders’ Net Income $ 1,623 $ 1,260 $ 1,279
Adjustments to reconcile shareholders’ net income to net cash provided by operating activities: Equity in income of subsidiaries (1,932) (1,459) (1,504) Dividends received from subsidiaries 671 1,135 1,050 Other liabilities (213) (296) (294) Other, net 191 (92) 158
Net cash provided by operating activities 340 548 689
Cash Flows from Investing Activities: Other, net (19) - -
Net cash used in investing activities (19) - - Cash Flows from Financing Activities: Net change in intercompany debt (208) (3,258) (816) Net change in short-term debt 100 - - Net proceeds on issuance of long-term debt - 2,661 543 Repayment of long-term debt - (449) (268) Issuance of common stock 121 734 64 Common dividends paid (11) (11) (11) Repurchase of common stock (208) (225) (201)
Net cash used in financing activities (206) (548) (689) Net increase in cash and cash equivalents 115 - -
Cash and cash equivalents, end of year $ 115 $ - $ - See Notes to Financial Statements on the following pages.
FS-6 CIGNA CORPORATION - 2012 Form 10-K
Statements of Cash Flows
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule II – Condensed Financial Information of Cigna Corporation (Registrant)
The accompanying condensed financial statements’ prior periods have Note 1 – For purposes of these condensed financial statements, Cigna been updated to reflect the changes resulting from the retrospective Corporation’s (the Company) wholly owned and majority owned adoption of amended accounting guidance for deferred policy subsidiaries are recorded using the equity basis of accounting. Certain acquisition costs effective January 1, 2012. See Note 2 to the reclassifications have been made to prior years’ amounts to conform to Consolidated Financial Statements within this Form 10-K for the 2012 presentation. additional information. These statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto contained in this Form 10-K.
Note 2 – Short-term and long-term debt consisted of the following at December 31:
(In millions) December 31, 2012 December 31, 2011
Short-term: Commercial Paper $ 200 $ 100
TOTAL SHORT-TERM DEBT $ 200 $ 100
Long-term: Uncollateralized debt: 2.75% Notes due 2016 $ 600 $ 600 5.375% Notes due 2017 250 250 6.35% Notes due 2018 131 131 8.5% Notes due 2019 251 251 4.375% Notes due 2020 249 249 5.125% Notes due 2020 299 299 4.5% Notes due 2021 299 298 4% Notes due 2022 743 743 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 5.875% Notes due 2041 298 298 5.375% Notes due 2042 750 750
TOTAL LONG-TERM DEBT $ 4,870 $ 4,869
In December 2012, the Company extended the life of its June 2011 outstanding. There were letters of credit of $66 million issued as of five-year revolving credit and letter of credit agreement for December 31, 2012. $1.5 billion, that permits up to $500 million to be used for letters of
On November 10, 2011, the Company issued $2.1 billion of credit. This agreement is diversified among 16 banks, with 3 banks
long-term debt as follows: $600 million of 5-Year Notes due each having 12% of the commitment and the remainder spread
November 15, 2016 at a stated interest rate of 2.75% ($600 million, among 13 banks. The credit agreement includes options that are
net of discount, with an effective interest rate of 2.936% per year), subject to consent by the administrative agent and the committing
$750 million of 10-Year Notes due February 15, 2022 at a stated banks, to increase the commitment amount to $2 billion and to
interest rate of 4% ($743 million, net of discount, with an effective extend the term past December 2017. The credit agreement is
interest rate of 4.346% per year) and $750 million of 30-Year Notes available for general corporate purposes, including as a commercial
due February 15, 2042 at a stated interest rate of 5.375% paper backstop and for the issuance of letters of credit. This agreement
($750 million, net of discount, with an effective interest rate of includes certain covenants, including a financial covenant requiring
5.542% per year). Interest is payable on May 15 and November 15 of the Company to maintain a total debt-to-adjusted capital ratio at or
each year beginning May 15, 2012 for the 5-Year Notes and below 0.50 to 1.00. As of December 31, 2012, the Company had
February 15 and August 15 of each year beginning February 15, 2012 $5.3 billion of borrowing capacity within the maximum debt coverage
for the 10-Year and 30-Year Notes. The proceeds of this debt were covenant in the agreement in addition to the $5.2 billion of debt
used to reduce the intercompany payable balance with Cigna
CIGNA CORPORATION - 2012 Form 10-K FS-7
Notes to Condensed Financial Statements
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Holdings and ultimately used to fund the HealthSpring acquisition in was accrued at an average monthly rate of 0.71% for 2012 and 0.63% 2012. for 2011.
The Company may redeem these Notes, at any time, in whole or in Note 4 – As of December 31, 2012, the Company had guarantees and part, at a redemption price equal to the greater of: similar agreements in place to secure payment obligations or solvency
requirements of certain wholly owned subsidiaries as follows: 100% of the principal amount of the Notes to be redeemed; or
The Company has arranged for bank letters of credit in the amount the present value of the remaining principal and interest payments
of $3 million to provide collateral in support of its indirect wholly on the Notes being redeemed discounted at the applicable Treasury
owned subsidiaries. Rate plus 30 basis points (5-Year 2.75% Notes due 2016), 35 basis points (10-Year 4% Notes due 2022), or 40 basis points (30-Year Various indirect, wholly-owned subsidiaries have obtained surety 5.375% Notes due 2042). bonds in the normal course of business. If there is a claim on a surety
bond and the subsidiary is unable to pay, the Company guarantees In March 2011, the Company issued $300 million of 10-Year Notes
payment to the company issuing the surety bond. The aggregate due March 15, 2021 at a stated interest rate of 4.5% ($298 million,
amount of such surety bonds as of December 31, 2012 was net of discount, with an effective interest rate of 4.683% per year) and
$28 million. $300 million of 30-Year Notes due March 15, 2041 at a stated interest rate of 5.875% ($298 million, net of discount, with an effective The Company is obligated under a $12 million letter of credit interest rate of 6.008% per year). Interest is payable on March 15 and required by the insurer of its high-deductible self-insurance September 15 of each year beginning September 15, 2011. The programs to indemnify the insurer for claim liabilities that fall proceeds of this debt were used for general corporate purposes, within deductible amounts for policy years dating back to 1994. including the repayment of debt maturing in 2011.
The Company also provides solvency guarantees aggregating The Company may redeem these Notes, at any time, in whole or in $34 million under state and federal regulations in support of its part, at a redemption price equal to the greater of: indirect wholly-owned medical HMOs in several states.
100% of the principal amount of the Notes to be redeemed; or The Company has arranged a $50 million letter of credit in support of Cigna Europe Insurance Company, an indirect wholly-owned
the present value of the remaining principal and interest payments subsidiary. The Company has agreed to indemnify the banks
on the Notes being redeemed discounted at the applicable Treasury providing the letters of credit in the event of any draw. Cigna
Rate plus 20 basis points (10-Year 4.5% Notes due 2021) or 25 basis Europe Insurance Company is the holder of the letters of credit.
points (30-Year 5.875% Notes due 2041). The Company has agreed to indemnify payment of losses included
Maturities of debt are as follows (in millions): none in 2013, 2014, in Cigna Europe Insurance Company’s reserves on the assumed
2015, $600 in 2016, $250 in 2017 and the remainder in years after reinsurance business transferred from ACE. As of December 31,
2017. Interest expense on long-term and short-term debt was 2012, the reserve was $43 million.
$262 million in 2012, $195 million in 2011, and $176 million in 2010. Interest paid on long-term and short-term debt was In 2012, no payments have been made on these guarantees and none $242 million in 2012, $179 million in 2011, and $175 million in are pending. The Company provided other guarantees to subsidiaries 2010. that, in the aggregate, do not represent a material risk to the
Company’s results of operations, liquidity or financial condition. Note 3 – Intercompany liabilities consist primarily of loans payable to Cigna Holdings, Inc. of $ 289 million as of December 31, 2012 and Note 5 – On November 16, 2011, the Company issued 15.2 million $489 million as of December 31, 2011. The proceeds of the debt shares of its common stock at $42.75 per share. Proceeds were issuance in November 2011 of $2.1 billion (see Note 2) and the equity $650 million ($629 million net of underwriting discount and fees) issuance of $629 million (see Note 5) were used to reduce the and used to reduce the intercompany loan payable balance with Cigna intercompany loan payable balance with Cigna Holdings and Holdings and ultimately used to fund the HealthSpring acquisition in ultimately used to fund the HealthSpring acquisition in 2012. Interest January 2012.
FS-8 CIGNA CORPORATION - 2012 Form 10-K
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PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule III – Supplementary Insurance Information
Future policy Deferred benefits and Medical claims
policy contractholder payable and Unearned acquisition deposit unpaid premiumsSegment
(In millions) costs funds claims and fees
Year Ended December 31, 2012: Global Health Care $ 19 $ 175 $ 1,856 $ 111 Group Disability and Life 1 1,599 3,482 26 Global Supplemental Benefits 1,113 2,227 306 388 Run-off Reinsurance - 1,094 153 - Other Operations 65 12,678 142 24 Corporate - - (21) -
TOTAL $ 1,198 $ 17,773 $ 5,918 $ 549
Year Ended December 31, 2011: Global Health Care $ 19 $ 170 $ 1,443 $ 103 Group Disability and Life 1 1,572 3,228 26 Global Supplemental Benefits 729 1,255 177 346 Run-off Reinsurance - 1,172 240 - Other Operations 68 12,977 160 27 Corporate - - (7) -
TOTAL $ 817 $ 17,146 $ 5,241 $ 502
Year Ended December 31, 2010: Global Health Care $ 22 $ 178 $ 1,555 $ 87 Group Disability and Life 2 1,464 3,201 27 Global Supplemental Benefits 609 1,085 112 271 Run-off Reinsurance - 1,139 244 - Other Operations 68 12,790 159 31 Corporate - - (8) -
TOTAL $ 701 $ 16,656 $ 5,263 $ 416
CIGNA CORPORATION - 2012 Form 10-K FS-9
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Amortization of deferred
Net policy Other Premiums investment Benefit acquisition operating and fees (1) income (2) expenses (1)(3) expenses expenses (4)
Year Ended December 31, 2012: Global Health Care $ 20,973 $ 259 $ 14,228 $ 68 $ 6,573 Group Disability and Life 3,109 300 2,290 3 721 Global Supplemental Benefits 1,984 90 1,005 141 770 Run-off Reinsurance 21 102 16 - (12) Other Operations 100 388 361 6 51 Corporate - 5 - - 421
TOTAL $ 26,187 $ 1,144 $ 17,900 $ 218 $ 8,524
Year Ended December 31, 2011: Global Health Care $ 14,443 $ 263 $ 9,125 $ 139 $ 5,404 Group Disability and Life 2,857 291 2,086 4 650 Global Supplemental Benefits 1,528 83 754 110 628 Run-off Reinsurance 24 103 140 - 265 Other Operations 114 400 385 6 60 Corporate - 6 - - 233
TOTAL $ 18,966 $ 1,146 $ 12,490 $ 259 $ 7,240
Year Ended December 31, 2010: Global Health Care $ 14,134 $ 230 $ 9,222 $ 155 $ 5,216 Group Disability and Life 2,770 287 2,035 6 707 Global Supplemental Benefits 1,231 69 603 84 505 Run-off Reinsurance 25 114 (22) - 113 Other Operations 114 404 395 6 53 Corporate - 1 - - 248
TOTAL $ 18,274 $ 1,105 $ 12,233 $ 251 $ 6,842 Effective December 31, 2012, Cigna changed its reporting segments. Prior period information has been conformed to the current reporting segments. Prior periods for certain information in this Schedule III (Deferred policy acquisition costs, Amortization of deferred policy acquisition costs, and Other operating expenses) have been updated to reflect changes resulting from the retrospective adoption of amended accounting guidance for deferred policy acquisition costs effective January 1, 2012. See Note 2 to the Consolidated Financial Statements included in this Form 10-K for additional information.
(1) Amounts presented are shown net of the effects of reinsurance. See Note 8 to the Consolidated Financial Statements included in this Form 10-K.
(2) The allocation of net investment income is based upon the investment year method, the identification of certain portfolios with specific segments, or a combination of both.
(3) Benefit expenses include Global Health Care medical claims expense and other benefit expenses.
(4) Other operating expenses include mail order pharmacy cost of goods sold, GMIB fair value (gain) loss and other operating expenses, and excludes amortization of deferred policy acquisition expenses.
FS-10 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule IV – Reinsurance
Percentage Ceded to other Assumed from of amount
(In millions) Gross amount companies other companies Net amount assumed to net
Year Ended December 31, 2012: Life insurance in force $ 710,140 $ 52,435 $ 8,168 $ 665,873 1.2%
Premiums and fees: Life insurance and annuities $ 2,025 $ 268 $ 29 $ 1,786 1.6% Accident and health insurance 24,163 201 439 24,401 1.8%
TOTAL $ 26,188 $ 469 $ 468 $ 26,187 1.8%
Year Ended December 31, 2011: Life insurance in force $ 606,587 $ 53,088 $ 9,163 $ 562,662 1.6%
Premiums and fees: Life insurance and annuities $ 1,990 $ 280 $ 40 $ 1,750 2.3% Accident and health insurance 17,229 167 154 17,216 0.9%
TOTAL $ 19,219 $ 447 $ 194 $ 18,966 1.0%
Year Ended December 31, 2010: Life insurance in force $ 566,841 $ 44,335 $ 9,734 $ 532,240 1.8%
Premiums and fees: Life insurance and annuities $ 2,026 $ 264 $ 107 $ 1,869 5.7% Accident and health insurance 16,153 173 425 16,405 2.6%
TOTAL $ 18,179 $ 437 $ 532 $ 18,274 2.9%
CIGNA CORPORATION - 2012 Form 10-K FS-11
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Cigna Corporation and Subsidiaries Schedule V – Valuation and Qualifying Accounts and Reserves
Charged Charged Balance at (Credited) (Credited) Other
Description beginning of to costs and to other deductions Balance at (in millions) period(4) expenses(1) accounts(2) -describe(3) end of period
2012: Investment asset valuation reserves: Commercial mortgage loans $ 19 $ 10 $ $ (22) $ 7 Allowance for doubtful accounts: Premiums, accounts and notes receivable $ 45 $ 4 $ 1 $ 1 $ 51 Deferred tax asset valuation allowance $ 45 $ 4 $ (7) $ - $ 42 Reinsurance recoverables $ 5 $ (1) $ - $ - $ 4 2011: Investment asset valuation reserves: Commercial mortgage loans $ 12 $ 16 $ - $ (9) $ 19 Allowance for doubtful accounts: Premiums, accounts and notes receivable $ 49 $ 4 $ (1) $ (7) $ 45 Deferred tax asset valuation allowance $ 26 $ 4 $ 15 $ - $ 45 Reinsurance recoverables $ 10 $ (5) $ - $ - $ 5 2010: Investment asset valuation reserves: Commercial mortgage loans $ 17 $ 24 $ - $ (29) $ 12 Allowance for doubtful accounts: Premiums, accounts and notes receivable $ 43 $ 11 $ - $ (5) $ 49 Deferred tax asset valuation allowance $ 117 $ (91) $ - $ - $ 26 Reinsurance recoverables $ 15 $ (5) $ - $ - $ 10 Prior periods for the deferred tax valuation allowance were updated to reflect changes resulting from the retrospective adoption of amended accounting guidance for deferred policy acquisition costs effective January 1, 2012. See Note 2 to the Consolidated Financial Statements in the Form 10-K for additional information.
(1) 2010 amount for deferred tax asset valuation allowance primarily reflects the resolution of a federal tax matter. See Note 20 to the Consolidated Financial Statements.
(2) 2011 increase to deferred tax asset valuation allowance reflects effects of the acquisition of First Assist in November 2011.
(3) Amounts for commercial mortgage loans primarily reflects charge-offs upon sales and repayments, as well as transfers to foreclosed real estate. 2012 amount also includes restructures reclassified to Other Long-term Investments.
FS-12 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Index to Exhibits
Number Description Method of Filing
2.1 Agreement and Plan of Merger dated as of October 24, 2011 by Filed as Exhibit 2.1 to the registrant’s Form 8-K on October 27, and among Cigna Corporation, Cigna Magnolia Corp. and 2011 and incorporated herein by reference. HealthSpring, Inc.*
2.2 Voting Agreement dated as of October 24, 2011 among Cigna Filed as Exhibit 2.3 to the registrant’s Form 8-K on October 27, Corporation and Herbert A. Fritch 2011 and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the registrant as last Filed as Exhibit 3.1 to the registrant’s Form 10-Q for the quarterly amended October 28, 2011 period ended September 30, 2011and incorporated herein by
reference. 3.2 By-Laws of the registrant as last amended and restated December 6, Filed herewith.
2012 4.1 (a) Indenture dated August 16, 2006 between Cigna Corporation and Filed herewith.
U.S. Bank National Association (b) Supplemental Indenture No. 1 dated November 11, 2006 between Filed herewith.
Cigna Corporation and U.S. Bank National Association (c) Supplemental Indenture No. 2 dated March 15, 2007 between Filed as Exhibit 4.1(c) to the registrant’s Form 10-Q for the
Cigna Corporation and U.S. Bank National Association quarterly period ended March 31, 2011 and incorporated herein by reference
(d) Supplemental Indenture No. 3 dated March 7, 2008 between Cigna Filed as Exhibit 4.1 to the registrant’s Form 8-K on March 10, Corporation and U.S. Bank National Association 2008 and incorporated herein by reference.
(e) Supplemental Indenture No. 4 dated May 7, 2009 between Cigna Filed as Exhibit 99.2 to the registrant’s Form 8-K on May 12, 2009 Corporation and U.S. Bank National Association and incorporated herein by reference.
(f ) Supplemental Indenture No. 5 dated May 17, 2010 between Cigna Filed as Exhibit 99.2 to the registrant’s Form 8-K on May 28, 2010 Corporation and U.S. Bank National Association and incorporated herein by reference.
(g) Supplemental Indenture No. 6 dated December 8, 2010 between Filed as Exhibit 99.2 to the registrant’s Form 8-K on December 9, Cigna Corporation and U.S. Bank National Association 2010 and incorporated herein by reference.
(h) Supplemental Indenture No. 7 dated March 7, 2011 between Cigna Filed as Exhibit 4.1 to the registrant’s Form 8-K on March 8, 2011 Corporation and U.S. Bank National Association and incorporated herein by reference.
(i) Supplemental Indenture No. 8 dated November 10, 2011 between Filed as Exhibit 4.1 to the registrant’s Form 8-K on November 14, Cigna Corporation and U.S. Bank National Associated 2011 and incorporated herein by reference.
4.2 Indenture dated January 1, 1994 between Cigna Corporation and Filed as Exhibit 4.2 to the registrant’s Form 10-K for the year ended Marine Midland Bank December 31, 2009 and incorporated herein by reference.
4.3 Indenture dated June 30, 1988 between Cigna Corporation and Filed as Exhibit 4.3 to the registrant’s Form 10-K for the year ended Bankers Trust December 31, 2009 and incorporated herein by reference.
Exhibits 10.1 through 10.28 are identified as compensatory plans, management contracts or arrangements pursuant to Item 15 of Form 10-K. 10.1 Deferred Compensation Plan for Directors of Cigna Corporation, as Filed as Exhibit 10.1 to the registrant’s Form 10-K for the year
amended and restated January 1, 1997 ended December 31, 2011 and incorporated herein by reference. 10.2 Deferred Compensation Plan of 2005 for Directors of Cigna Filed as Exhibit 10.2 to the registrant’s Form 10-K for the year
Corporation, Amended and Restated effective April 28, 2010 ended December 31, 2010 and incorporated herein by reference. 10.3 Cigna Corporation Non-Employee Director Compensation Program Filed as Exhibit 10.3 to the registrant’s Form 10-K for the year
amended and restated effective January 1, 2012 ended December 31, 2011 and incorporated herein by reference. 10.4 Cigna Restricted Share Equivalent Plan for Non-Employee Directors Filed herewith.
as amended and restated effective January 1, 2008 10.5 Cigna Corporation Directors Equity Plan Filed as Exhibit 10.3 to the registrant’s Form 10-Q for the quarterly
period ended March 31, 2010 and incorporated herein by reference. 10.6 Cigna Corporation Compensation Program for Independent Vice Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly
Chairman/Chairman of the Board of Directors period ended September 30, 2009 and incorporated herein by reference.
10.7 Cigna Corporation Stock Plan, as amended and restated through Filed as Exhibit 10.7 to the registrant’s Form 10-K for the year July 2000 ended December 31, 2009 and incorporated herein by reference.
10.8 (a) Cigna Stock Unit Plan, as amended and restated effective July 22, Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly 2008 period ended September 30, 2008 and incorporated herein by
reference. (b) Amendment No. 1 to the Cigna Stock Unit Plan, as amended and Filed as Exhibit 10.3 to the registrant’s Form 10-Q for the quarterly
restated effective July 22, 2008 period ended June 30, 2010 and incorporated herein by reference.
CIGNA CORPORATION - 2012 Form 10-K E-1
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Number Description Method of Filing 10.9 Cigna Executive Severance Benefits Plan as amended and restated Filed as Exhibit 10.2 to the registrant’s Form 10-Q for the quarterly
effective April 27, 2010 period ended June 30, 2010 and incorporated herein by reference. 10.10 Description of Severance Benefits for Executives in Non-Change of Filed as Exhibit 10.10 to the registrant’s Form 10-K for the year
Control Circumstances ended December 31, 2009 and incorporated herein by reference. 10.11 Description of Cigna Corporation Strategic Performance Share Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly
Program period ended June 30, 2012 and incorporated herein by reference. 10.12 Cigna Executive Incentive Plan amended and restated as of Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the year
January 12, 2012 ended March 31, 2012 and incorporated herein by reference. 10.13 (a) Cigna Long-Term Incentive Plan as amended and restated effective Filed as Exhibit 10.2 to the registrant’s Form 10-Q for the quarterly
as of April 28, 2010 period ended March 31, 2010 and incorporated herein by reference. (b) Amendment No. 1 to the Cigna Long-Term Incentive Plan as Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly
amended and restated effective as of April 28, 2010 period ended June 30, 2010 and incorporated herein by reference. (c) Amendment No. 2 to the Cigna Long-Term Incentive Plan as Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly
amended and restated effective as of April 28, 2010 period ended March 31, 2011 and incorporated herein by reference. 10.14 Cigna Deferred Compensation Plan, as amended and restated Filed as Exhibit 10.14 to the registrant’s Form 10-K for the year
October 24, 2001 ended December 31, 2011 and incorporated herein by reference. 10.15 Cigna Deferred Compensation Plan of 2005 effective as of Filed herewith.
January 1, 2005 10.16 (a) Cigna Supplemental Pension Plan as amended and restated effective Filed as Exhibit 10.15(a) to the registrant’s Form 10-K for the year
August 1, 1998 ended December 31, 2009 and incorporated herein by reference. (b) Amendment No. 1 to the Cigna Supplemental Pension Plan, Filed as Exhibit 10.15(b) to the registrant’s Form 10-K for the year
amended and restated effective as of September 1, 1999 ended December 31, 2009 and incorporated herein by reference. (c) Amendment No. 2 dated December 6, 2000 to the Cigna Filed as Exhibit 10.16(c) to the registrant’s Form 10-K for the year
Supplemental Pension ended December 31, 2011 and incorporated herein by reference. 10.17 (a) Cigna Supplemental Pension Plan of 2005 effective as of January 1, Filed as Exhibit 10.15 to the registrant’s Form 10-K for the year
2005 ended December 31, 2007 and incorporated herein by reference. (b) Amendment No. 1 to the Cigna Supplemental Pension Plan of Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly
2005 period ended June 30, 2009 and incorporated herein by reference. 10.18 Cigna Supplemental 401(k) Plan effective January 1, 2010 Filed as Exhibit 10.17 to the registrant’s Form 10-K for the year
ended December 31, 2009 and incorporated herein by reference. 10.19 Description of Cigna Corporation Financial Services Program Filed as Exhibit 10.18 to the registrant’s Form 10-K for the year
ended December 31, 2009 and incorporated herein by reference. 10.20 Schedule regarding Amended Deferred Stock Unit Agreements Filed as Exhibit 10.20 to the registrant’s Form 10-K for the year
effective December 31, 2008 with Mr. Murabito and Form of ended December 31, 2008 and incorporated herein by reference. Amended Deferred Stock Unit Agreement
10.21 Form of Cigna Long-Term Incentive Plan: Nonqualified Stock Filed as Exhibit 10.21 to the registrant’s Form 10-K for the year Option and Grant Letter ended December 31, 2011 and incorporated herein by reference.
10.22 Form of Cigna Long-Term Incentive Plan: Restricted Stock Grant Filed as Exhibit 10.22 to the registrant’s Form 10-K for the year and Grant Letter ended December 31, 2011 and incorporated herein by reference.
10.23 Form of Cigna Long-Term Incentive Plan: Restricted Stock Unit Filed as Exhibit 10.27 to the registrant’s Form 10-K for the year Grant and Grant Letter ended December 31, 2010 and incorporated herein by reference.
10.24 Agreement and Release dated April 27, 2011 with Carol Ann Petren Filed as Exhibit 99.1 to the registrant’s Form 8-K filed on May 3, 2011 and incorporated herein by reference.
10.25 Ralph Nicoletti’s Offer of Employment dated April 27, 2011 Filed as Exhibit 10.1 to the registrant’s Form 8-K filed on May 31, 2011 and incorporated herein by reference.
10.26 Nicole Jones’ Offer of Employment dated April 27, 2011 Filed as Exhibit 10.2 to the registrant’s Form 10-Q for the period ended March 31, 2012 and incorporated herein by reference.
10.27 Agreement and Release executed December 9, 2011 with Bertram Filed as Exhibit 10.1 to the registrant’s Form 8-K filed on L. Scott December 13, 2011 and incorporated herein by reference.
10.28 Matthew Manders’ Promotion Letter dated November 18, 2011 Filed herewith. 10.29 Master Transaction Agreement, dated February 4, 2013, among Filed herewith.
Connecticut General Life Insurance Company, Berkshire Hathaway Life Insurance Company of Nebraska and, solely for purposes of Sections 3.10, 6.1, 6.4, 6.6 and 6.9 and Articles II, V, VII and VIII thereof, National Indemnity Company (including the Forms of Retrocession Agreement, the Collateral Trust Agreement, the Security and Control Agreement, the Surety Policy and the ALC Model Purchase Option Agreement, as exhibits).
12 Computation of Ratios of Earnings to Fixed Charges Filed herewith. 21 Subsidiaries of the Registrant Filed herewith. 23 Consent of Independent Registered Public Accounting Firm Filed herewith. 31.1 Certification of Chief Executive Officer of Cigna Corporation Filed herewith.
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer of Cigna Corporation Filed herewith. pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
E-2 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
Number Description Method of Filing
32.1 Certification of Chief Executive Officer of Cigna Corporation Furnished herewith. pursuant to 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer of Cigna Corporation Furnished herewith. pursuant to 18 U.S.C. Section 1350
* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request.
The registrant will furnish to the Commission upon request of any other instruments defining the rights of holders of long-term debt.
Shareholders may obtain copies of exhibits by writing to Cigna Corporation, Shareholder Services Department, 1601 Chestnut Street, Philadelphia, PA 19192.
CIGNA CORPORATION - 2012 Form 10-K E-3
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 12 Cigna Corporation – Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, (Dollars in millions) 2012 2011 2010 2009 2008
Income before income taxes $ 2,477 $ 1,876 $ 1,802 $ 1,853 $ 329 Adjustments:
Income from equity investee (10) (15) (18) (19) (11) Income attributable to redeemable noncontrolling interest (1) - - - - Income attributable to other noncontrolling interest - (1) (4) (3) (2)
Income before income taxes, as adjusted $ 2,466 $ 1,860 $ 1,780 $ 1,831 $ 316
Fixed charges included in income: Interest expense $ 268 $ 202 $ 182 $ 166 $ 146 Interest portion of rental expense 43 38 42 46 43 Interest credited to contractholders 4 5 5 3 6
$ 315 $ 245 $ 229 $ 215 $ 195
Income available for fixed charges $ 2,781 $ 2,105 $ 2,009 $ 2,046 $ 511
RATIO OF EARNINGS TO FIXED CHARGES: 8.8 8.6 8.8 9.5 2.6
This Exhibit 12 has been updated from the Company’s 2011 Form 10-K to reflect changes resulting from the retrospective adoption of amended accounting guidance for deferred policy acquisition costs, effective January 1, 2012. See Note 2 to the Consolidated Financial Statements within this Form 10-K for additional information.
E-4 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 21 Subsidiaries of the Registrant
Listed below are subsidiaries of Cigna Corporation as of December 31, 2012 with their jurisdictions of organization shown in parentheses. Those subsidiaries not listed would not, in the aggregate, constitute a ‘‘significant subsidiary’’ of Cigna Corporation, as that term is defined in Rule 1-02(w) of Regulation S-X.
Cigna Holdings, Inc. (Delaware)
I. Connecticut General Corporation (Connecticut) A. Benefits Management Corp. (Montana)
i. Allegiance Life & Health Insurance Company, Inc. (Montana) ii. Allegiance Re, Inc. (Montana)
B. Cigna Arbor Life Insurance Company (Connecticut) C. Cigna Behavioral Health, Inc. (Minnesota)
i. Cigna Behavioral Health of California, Inc. (California) ii. Cigna Behavioral Health of Texas, Inc. (Texas) iii. MCC Independent Practice Association of New York, Inc. (New York)
D. Cigna Dental Health, Inc. (Florida) i. Cigna Dental Health of California, Inc. (California) ii. Cigna Dental Health of Colorado, Inc. (Colorado) iii. Cigna Dental Health of Delaware, Inc. (Delaware) iv. Cigna Dental Health of Florida, Inc. (Florida) v. Cigna Dental Health of Illinois, Inc. (Illinois) vi. Cigna Dental Health of Kansas, Inc. (Kansas) vii. Cigna Dental Health of Kentucky, Inc. (Kentucky) viii. Cigna Dental Health of Maryland, Inc. (Maryland) ix. Cigna Dental Health of Missouri, Inc. (Missouri) x. Cigna Dental Health of New Jersey, Inc. (New Jersey) xi. Cigna Dental Health of North Carolina, Inc. (North Carolina) xii. Cigna Dental Health of Ohio, Inc. (Ohio) xiii. Cigna Dental Health of Pennsylvania, Inc. (Pennsylvania) xiv. Cigna Dental Health of Texas, Inc. (Texas) xv. Cigna Dental Health of Virginia, Inc. (Virginia) xvi. Cigna Dental Health Plan of Arizona, Inc. (Arizona)
E. Cigna Health Corporation (Delaware) i. Healthsource, Inc. (New Hampshire)
a. Cigna Healthcare of Arizona, Inc. (Arizona) b. Cigna Healthcare of California, Inc. (California) c. Cigna Healthcare of Colorado, Inc. (Colorado) d. Cigna Healthcare of Connecticut, Inc. (Connecticut) e. Cigna Healthcare of Florida, Inc. (Florida) f. Cigna Healthcare of Georgia, Inc. (Georgia) g. Cigna Healthcare of Illinois, Inc. (Illinois) h. Cigna Healthcare of Indiana, Inc. (Indiana) i. Cigna Healthcare of Maine, Inc. (Maine) j. Cigna Healthcare of Massachusetts, Inc. (Massachusetts) k. Cigna Healthcare Mid-Atlantic, Inc. (Maryland) l. Cigna Healthcare of New Hampshire, Inc. (New Hampshire) m. Cigna Healthcare of New Jersey, Inc. (New Jersey) n. Cigna Healthcare of New York, Inc. (New York) o. Cigna Healthcare of North Carolina, Inc. (North Carolina) p. Cigna Healthcare of Pennsylvania, Inc. (Pennsylvania) q. Cigna Healthcare of South Carolina, Inc. (South Carolina) r. Cigna Healthcare of St. Louis, Inc. (Missouri) s. Cigna Healthcare of Tennessee, Inc. (Tennessee) t. Cigna Healthcare of Texas, Inc. (Texas) u. Cigna Healthcare of Utah, Inc. (Utah)
CIGNA CORPORATION - 2012 Form 10-K E-5
PART IV ITEM 15 Exhibits and Financial Statement Schedules
v. Cigna Insurance Services Company (South Carolina) w. Temple Insurance Company Limited (Bermuda)
F. Cigna Healthcare Holdings, Inc. (Colorado) i. Great-West Healthcare – Illinois (Illinois)
G. Cigna Health Management, Inc. (Delaware) H. Cigna Life Insurance Company of Canada (Canada) I. Cigna Life Insurance Company of New York (New York) J. Connecticut General Life Insurance Company (Connecticut)
i. Cigna Health and Life Insurance Company (Connecticut) a. Cigna Corporate Services, LLC (Delaware) b. Loyal American Life Insurance Company (Ohio)
i. American Retirement Life Insurance Company (Ohio) c. Ceres Sales of Ohio, LLC (Ohio) d. Central Reserve Life Insurance Company (Ohio)
i. Provident American Life and Health Insurance Company (Ohio) ii. United Benefit Life Insurance Company (Ohio)
ii. Tel Drug of Pennsylvania, LLC (Pennsylvania) K. HealthSpring, Inc. (Delaware)
i. NewQuest, LLC (Texas) a. Bravo Health, LLC (Delaware)
i. Bravo Health of Pennsylvania, Inc. (Pennsylvania) ii. Bravo Health Mid-Atlantic, Inc. (Maryland)
b. HealthSpring Management, Inc. (Tennessee) i. HealthSpring of Tennessee, Inc. (Tennessee)
c. HealthSpring of Alabama, Inc. (Alabama) d. HealthSpring of Florida, Inc. (Florida) e. HealthSpring Life & Health Insurance Company, Inc. (Texas) f. HealthSpring Management of America, LLC (Delaware) g. HealthSpring USA, LLC (Tennessee) h. NewQuest Management of Alabama, LLC (Alabama) i. NewQuest Management of Florida, LLC (Florida)
ii. HouQuest, LLC (Delaware) a. GulfQuest, LP (Texas)
L. Life Insurance Company of North America (Pennsylvania) i. Cigna & CMC Life Insurance Company Limited (China) ii. LINA Life Insurance Company of Korea (Korea)
M. Tel Drug, Inc. (South Dakota) N. Vielife Holdings Limited (United Kingdom)
i. Vielife Limited (United Kingdom) II. Cigna Investment Group, Inc. (Delaware)
A. Cigna Investments, Inc. (Delaware) i. Cigna Benefits Financing, Inc. (Delaware)
III. Cigna Global Holdings, Inc. (Delaware) A. Cigna International Corporation, Inc. (Delaware) B. Cigna Global Reinsurance Company, Ltd. (Bermuda)
i. Cigna Holdings Overseas, Inc. (Delaware) a. Cigna Apac Holdings Limited (New Zealand)
i. Cigna Hong Kong Holdings Company Limited (Hong Kong) a. Cigna Data Services (Shanghai) Company Limited (China) b. Cigna HLA Technology Services Company Limited (Hong Kong) c. Cigna Worldwide General Insurance Company Limited (Hong Kong) d. Cigna Worldwide Life Insurance Company Limited (Hong Kong)
ii. Cigna Life Insurance New Zealand Limited (New Zealand) iii. Cigna Taiwan Life Assurance Company Limited (Taiwan)
b. Cigna Europe Insurance Company S.A.-N.V. (Belgium) c. Cigna European Services (UK) Limited (United Kingdom) d. Cigna Global Insurance Company Limited (Guernsey, C.I.) e. Cigna Hayat Sigorta A.S. (Turkey) f. Cigna Health Solutions India Pvt. Ltd. (India) g. Cigna International Services Australia Pty. Ltd. (Australia) h. Cigna Life Insurance Company of Europe S.A.- N.V. (Belgium) i. Cigna Nederland Alpha Cooperatief U.A. (Netherlands)
i. Cigna Nederland Beta N.V. (Netherlands)
E-6 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
a. Cigna Nederland Gamma N.V. (Netherlands) i. Finans Emeklilik ve Hayat A.S. (Turkey)
j. FirstAssist Group Holdings Limited (United Kingdom) i. FirstAssist Group Limited (United Kingdom)
a. FirstAssist Legal Protection Limited (United Kingdom) ii. FirstAssist Insurance Services Limited (United Kingdom)
k. RHP ThailandLimited (Thailand) i. Cigna Brokerage Services (Thailand) Limited (Thailand) ii. Cigna Non-Life Insurance Brokerage (Thailand) iii. KDM Thailand Limited (Thailand)
a. Cigna Insurance Public Company Limited (Thailand) l. Vanbreda International N.V. (Belgium)
i. Vanbreda International SDN.BHD (Malaysia) ii. Vanbreda International LLC (Flordia)
ii. Cigna Worldwide Insurance Company (Delaware) a. PT. Asuransi Cigna (Indonesia)
CIGNA CORPORATION - 2012 Form 10-K E-7
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 23 Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the No. 033-60053 and No. 033-51791) of Cigna Corporation of our Registration Statement on Form S-3 (No. 333-183238) and Form S-8 reports dated February 28, 2013 relating to the financial statements, (No. 333-179307, No. 333-166583, No. 333-163899, the financial statement schedules and the effectiveness of internal No. 333-147994, No. 333-64207, No. 333-129395, control over financial reporting, which appear in this Form 10-K. No. 333-107839, No. 333-90785, No. 333-31903, No. 333-22391,
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania February 28, 2013
E-8 CIGNA CORPORATION - 2012 Form 10-K
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 31.1 Certification
I, DAVID M. CORDANI, certify that:
I have reviewed this Annual Report on Form 10-K of Cigna the preparation of financial statements for external Corporation; purposes in accordance with generally accepted accounting
principles; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact evaluated the effectiveness of the registrant’s disclosure necessary to make the statements made, in light of the controls and procedures and presented in this report our circumstances under which such statements were made, not conclusions about the effectiveness of the disclosure misleading with respect to the period covered by this report; controls and procedures, as of the end of the period covered
by this report based on such evaluation; and Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all disclosed in this report any change in the registrant’s material respects the financial condition, results of operations internal control over financial reporting that occurred and cash flows of the registrant as of, and for, the periods during the registrant’s most recent fiscal quarter (the presented in this report; registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to The registrant’s other certifying officer(s) and I are responsible
materially affect, the registrant’s internal control over for establishing and maintaining disclosure controls and
financial reporting; and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as The registrant’s other certifying officer(s) and I have disclosed, defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the based on our most recent evaluation of internal control over registrant and have: financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons designed such disclosure controls and procedures, or caused
performing the equivalent functions): such disclosure controls and procedures to be designed under our supervision, to ensure that material information all significant deficiencies and material weaknesses in the relating to the registrant, including its consolidated design or operation of internal control over financial subsidiaries, is made known to us by others within those reporting which are reasonably likely to adversely affect the entities, particularly during the period in which this report registrant’s ability to record, process, summarize and report is being prepared; financial information; and
designed such internal control over financial reporting, or any fraud, whether or not material, that involves caused such internal control over financial reporting to be management or other employees who have a significant role designed under our supervision, to provide reasonable in the registrant’s internal control over financial reporting. assurance regarding the reliability of financial reporting and
/s/ David M. Cordani
Chief Executive Officer Date: February 28, 2013
CIGNA CORPORATION - 2012 Form 10-K E-9
1.
2. c)
3. d)
4.
5.
a)
a)
b) b)
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 31.2 Certification
I, RALPH J. NICOLETTI, certify that:
I have reviewed this Annual Report on Form 10-K of Cigna the preparation of financial statements for external Corporation; purposes in accordance with generally accepted accounting
principles; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact evaluated the effectiveness of the registrant’s disclosure necessary to make the statements made, in light of the controls and procedures and presented in this report our circumstances under which such statements were made, not conclusions about the effectiveness of the disclosure misleading with respect to the period covered by this report; controls and procedures, as of the end of the period covered
by this report based on such evaluation; and Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all disclosed in this report any change in the registrant’s material respects the financial condition, results of operations internal control over financial reporting that occurred and cash flows of the registrant as of, and for, the periods during the registrant’s most recent fiscal quarter (the presented in this report; registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to The registrant’s other certifying officer(s) and I are responsible
materially affect, the registrant’s internal control over for establishing and maintaining disclosure controls and
financial reporting; and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as The registrant’s other certifying officer(s) and I have disclosed, defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the based on our most recent evaluation of internal control over registrant and have: financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons designed such disclosure controls and procedures, or caused
performing the equivalent functions): such disclosure controls and procedures to be designed under our supervision, to ensure that material information all significant deficiencies and material weaknesses in the relating to the registrant, including its consolidated design or operation of internal control over financial subsidiaries, is made known to us by others within those reporting which are reasonably likely to adversely affect the entities, particularly during the period in which this report registrant’s ability to record, process, summarize and report is being prepared; financial information; and
designed such internal control over financial reporting, or any fraud, whether or not material, that involves caused such internal control over financial reporting to be management or other employees who have a significant role designed under our supervision, to provide reasonable in the registrant’s internal control over financial reporting. assurance regarding the reliability of financial reporting and
/s/ Ralph J. Nicoletti
Chief Financial Officer Date: February 28, 2013
E-10 CIGNA CORPORATION - 2012 Form 10-K
1.
2. c)
3. d)
4.
5.
a)
a)
b) b)
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 32.1 Certification of Chief Executive Officer of Cigna Corporation pursuant to 18 U.S.C. Section 1350
I certify that, to the best of my knowledge and belief, the Annual Report on Form 10-K of Cigna Corporation for the fiscal period ending December 31, 2012 (the ‘‘Report’’):
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cigna Corporation.
/s/ David M. Cordani
David M. Cordani Chief Executive Officer February 28, 2013
CIGNA CORPORATION - 2012 Form 10-K E-11
(1)
(2)
PART IV ITEM 15 Exhibits and Financial Statement Schedules
EXHIBIT 32.2 Certification of Chief Financial Officer of Cigna Corporation pursuant to 18 U.S.C. Section 1350
I certify that, to the best of my knowledge and belief, the Annual Report on Form 10-K of Cigna Corporation for the fiscal period ending December 31, 2012 (the ‘‘Report’’):
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cigna Corporation.
/s/ Ralph J. Nicoletti
Ralph J. Nicoletti Chief Financial Officer February 28, 2013
E-12 CIGNA CORPORATION - 2012 Form 10-K
(1)
(2)
