Cigna Earnings 2018-09-30

CI 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 a18-19010_110q.htm 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

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

for the transition period from to

Commission file number 1-08323

Cigna Corporation

(Exact name of registrant as specified in its charter)

Delaware		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 or (215) 761-5511
Registrant’s facsimile number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark				YES	NO
· whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.				R	o
· whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).				R	o
· whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company o	Emerging growth company o
· If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
· whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).				o	R

As of October 19, 2018, 243,534,265 shares of the issuer’s common stock were outstanding.

Table of Contents

Cigna Corporation

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income	1
	Consolidated Statements of Comprehensive Income	2
	Consolidated Balance Sheets	3
	Consolidated Statements of Changes in Total Equity	4
	Consolidated Statements of Cash Flows	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	66


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	67
Item 1. A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6.	Exhibits	72
SIGNATURE		73

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

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Cigna Corporation

Consolidated Statements of Income

	Unaudited				Unaudited
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions, except per share amounts)	2018		2017		2018		2017
Revenues
Premiums	$	8,994	$	8,075	$	27,005	$	24,283
Fees and other revenues	1,361		1,266		4,087		3,782
Net investment income	355		298		1,036		909
Mail order pharmacy revenues	747		733		2,222		2,200
Realized investment gains (losses)
Other-than-temporary impairments on fixed maturities	(1)		(6)		(19)		(15)
Other realized investment gains (losses), net	1		123		(17)		229
Net realized investment gains (losses)	-		117		(36)		214
TOTAL REVENUES	11,457		10,489		34,314		31,388
Benefits and expenses
Global Health Care medical costs	5,360		4,845		16,098		14,684
Other benefit expenses	1,443		1,342		4,322		4,044
Mail order pharmacy costs	602		612		1,776		1,819
Other operating expenses	2,971		2,838		8,666		7,905
Amortization of other acquired intangible assets	48		28		99		88
TOTAL BENEFITS AND EXPENSES	10,424		9,665		30,961		28,540
Income before income taxes	1,033		824		3,353		2,848
Income taxes
Current	248		231		837		821
Deferred	11		31		17		62
TOTAL INCOME TAXES	259		262		854		883
Net income	774		562		2,499		1,965
Less: Net income (loss) attributable to noncontrolling interests	2		2		6		(6)
SHAREHOLDERS’ NET INCOME	$	772	$	560	$	2,493	$	1,971
Shareholders’ net income per share
Basic	$	3.18	$	2.25	$	10.28	$	7.79
Diluted	$	3.14	$	2.21	$	10.14	$	7.67
Dividends declared per share	$	-	$	-	$	0.04	$	0.04

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

Table of Contents

Cigna Corporation

Consolidated Statements of Comprehensive Income

	Unaudited				Unaudited
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2018		2017		2018		2017
Shareholders’ net income	$	772	$	560	$	2,493	$	1,971
Shareholders’ other comprehensive income, net of tax
Net unrealized (depreciation) appreciation, securities	-		(22)		(420)		52
Net unrealized appreciation (depreciation), derivatives	2		-		(11)		(3)
Net translation of foreign currencies	(29)		34		(136)		173
Postretirement benefits liability adjustment	13		10		31		36
Shareholders’ other comprehensive (loss) income, net of tax	(14)		22		(536)		258
Shareholders’ comprehensive income	758		582		1,957		2,229
Comprehensive income (loss) attributable to noncontrolling interests
Net income (loss) attributable to redeemable noncontrolling interests	2		2		6		(1)
Net (loss) attributable to other noncontrolling interests	-		-		-		(5)
Other comprehensive (loss) attributable to redeemable noncontrolling interests	(9)		-		(19)		-
Total comprehensive (loss) income attributable to noncontrolling interests	(7)		2		(13)		(6)
TOTAL COMPREHENSIVE INCOME	$	751	$	584	$	1,944	$	2,223

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

Table of Contents

Cigna Corporation

Consolidated Balance Sheets

	Unaudited
	As of		As of
	September 30,		December 31,
(In millions, except per share amounts)	2018		2017
Assets
Investments
Fixed maturities, at fair value (amortized cost, $22,869; $21,867)	$	23,268	$	23,138
Equity securities	579		588
Commercial mortgage loans	1,867		1,761
Policy loans	1,421		1,415
Other long-term investments	1,739		1,518
Short-term investments	102		199
Total investments	28,976		28,619
Cash and cash equivalents	24,032		2,972
Premiums, accounts and notes receivable, net	3,609		3,380
Reinsurance recoverables	5,780		6,046
Deferred policy acquisition costs	2,350		2,237
Property and equipment	1,559		1,563
Deferred tax assets, net	132		39
Goodwill	6,129		6,164
Other assets, including other intangibles	2,227		2,316
Separate account assets	8,162		8,423
TOTAL ASSETS	$	82,956	$	61,759
Liabilities
Contractholder deposit funds	$	8,069	$	8,196
Future policy benefits	9,652		10,040
Unpaid claims and claim expenses	5,259		5,168
Global Health Care medical costs payable	2,955		2,719
Unearned premiums	683		724
Total insurance and contractholder liabilities	26,618		26,847
Accounts payable, accrued expenses and other liabilities	7,541		7,290
Short-term debt	9		240
Long-term debt	25,041		5,199
Separate account liabilities	8,162		8,423
TOTAL LIABILITIES	67,371		47,999
Contingencies — Note 16
Redeemable noncontrolling interests	30		49
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 296; authorized, 600)	74		74
Additional paid-in capital	2,985		2,940
Accumulated other comprehensive (loss)	(1,857)		(1,082)
Retained earnings	18,474		15,800
Less treasury stock, at cost	(4,121)		(4,021)
TOTAL SHAREHOLDERS’ EQUITY	15,555		13,711
Total liabilities and shareholders’ equity	$	82,956	$	61,759
SHAREHOLDERS’ EQUITY PER SHARE	$	63.88	$	56.20

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

Table of Contents

Cigna Corporation

Consolidated Statements of Changes in Total Equity

Unaudited For the three months ended September 30, 2018 (In millions)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive (Loss)		Retained Earnings		Treasury Stock		Shareholders’ Equity		Other Non- controlling Interests		Total Equity		Redeemable Non- controlling Interests

Balance at June 30, 2018	$	74	$	2,974	$	(1,843)	$	17,722	$	(4,184)	$	14,743	$	-	$	14,743	$	39
Effect of issuing stock for employee benefit plans			11				(20)		63		54				54
Other comprehensive (loss)					(14)						(14)				(14)		(9)
Net income							772				772				772		2
Other transactions impacting noncontrolling interests											-				-		(2)
BALANCE AT SEPTEMBER 30, 2018	$	74	$	2,985	$	(1,857)	$	18,474	$	(4,121)	$	15,555	$	-	$	15,555	$	30

			Additional		Accumulated Other								Other Non-				Redeemable Non-
For the three months ended September 30, 2017	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		controlling		Total		controlling
(In millions)	Stock		Capital		(Loss)		Earnings		Stock		Equity		Interests		Equity		Interests

Balance at June 30, 2017 as reported	$	74	$	2,922	$	(1,146)	$	15,102	$	(2,406)	$	14,546	$	1	$	14,547	$	58
Cumulative effect of accounting for revenue recognition (1)							(24)				(24)				(24)
Balance at June 30, 2017 as retrospectively adjusted	74		2,922		(1,146)		15,078		(2,406)		14,522		1		14,523		58
Effect of issuing stock for employee benefit plans			7				(72)		128		63				63
Other comprehensive income					22						22				22
Net income							560				560				560		2
Repurchase of common stock									(1,046)		(1,046)				(1,046)
Other transactions impacting noncontrolling interests											-		(1)		(1)		(8)
BALANCE AT SEPTEMBER 30, 2017	$	74	$	2,929	$	(1,124)	$	15,566	$	(3,324)	$	14,121	$	-	$	14,121	$	52

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

(1) See Note 2 for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2018.

Table of Contents

Cigna Corporation

Consolidated Statements of Changes in Total Equity

					Accumulated												Redeemable
Unaudited			Additional		Other								Other Non-				Non-
For the nine months ended September 30, 2018	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		controlling		Total		controlling
(In millions)	Stock		Capital		(Loss)		Earnings		Stock		Equity		Interests		Equity		Interests

Balance at December 31, 2017 as retrospectively adjusted	$	74	$	2,940	$	(1,082)	$	15,800	$	(4,021)	$	13,711	$	-	$	13,711	$	49
Cumulative effect of accounting for financial instruments and hedging (1)					(10)		68				58				58
Reclassification adjustment related to U.S. tax reform legislation (1)					(229)		229				-				-
Effect of issuing stock for employee benefit plans			45				(106)		175		114				114
Other comprehensive (loss)					(536)						(536)				(536)		(19)
Net income							2,493				2,493				2,493		6
Common dividends declared (per share: $0.04)							(10)				(10)				(10)
Repurchase of common stock									(275)		(275)				(275)
Other transactions impacting noncontrolling interests											-				-		(6)
BALANCE AT SEPTEMBER 30, 2018	$	74	$	2,985	$	(1,857)	$	18,474	$	(4,121)	$	15,555	$	-	$	15,555	$	30








					Accumulated												Redeemable
			Additional		Other								Other non-				Non-
For the nine months ended September 30, 2017	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		controlling		Total		controlling
(In millions)	Stock		Capital		(Loss)		Earnings		Stock		Equity		Interests		Equity		Interests

Balance at December 31, 2016 as reported	$	74	$	2,892	$	(1,382)	$	13,855	$	(1,716)	$	13,723	$	4	$	13,727	$	58
Cumulative effect of accounting for revenue recognition (1)							(24)				(24)				(24)
Balance at December 31, 2016 as retrospectively adjusted	74		2,892		(1,382)		13,831		(1,716)		13,699		4		13,703		58
Effect of issuing stock for employee benefit plans			40				(226)		380		194				194
Other comprehensive income					258						258				258		-
Net income (loss)							1,971				1,971		(5)		1,966		(1)
Common dividends declared (per share: $0.04)							(10)				(10)				(10)
Repurchase of common stock									(1,988)		(1,988)				(1,988)
Other transactions impacting noncontrolling interests			(3)								(3)		1		(2)		(5)
BALANCE AT SEPTEMBER 30, 2017	$	74	$	2,929	$	(1,124)	$	15,566	$	(3,324)	$	14,121	$	-	$	14,121	$	52

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

(1) See Note 2 for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2018.

Table of Contents

Cigna Corporation

Consolidated Statements of Cash Flows

	Unaudited
	Nine Months Ended September 30,
(In millions)	2018		2017
Cash Flows from Operating Activities
Net income	$	2,499	$	1,965
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	438		425
Realized investment losses (gains)	36		(214)
Deferred income taxes	17		62
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable	(243)		(190)
Reinsurance recoverables	100		144
Deferred policy acquisition costs	(195)		(209)
Other assets	339		(156)
Insurance liabilities	408		988
Accounts payable, accrued expenses and other liabilities	113		221
Current income taxes	73		7
Debt extinguishment costs	-		321
Distributions from partnership investments	128		114
Other, net	(69)		33
NET CASH PROVIDED BY OPERATING ACTIVITIES	3,644		3,511
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities and equity securities	1,930		1,376
Investment maturities and repayments:
Fixed maturities and equity securities	1,394		1,444
Commercial mortgage loans	181		253
Other sales, maturities and repayments (primarily short-term and other long-term investments)	588		1,486
Investments purchased or originated:
Fixed maturities and equity securities	(4,461)		(4,292)
Commercial mortgage loans	(288)		(272)
Other (primarily short-term and other long-term investments)	(660)		(722)
Property and equipment purchases	(346)		(340)
Acquisitions, net of cash acquired	-		(33)
Other	(12)		-
NET CASH (USED IN) INVESTING ACTIVITIES	(1,674)		(1,100)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds	816		965
Withdrawals and benefit payments from contractholder deposit funds	(872)		(1,079)
Net change in short-term debt	(109)		(16)
Payments for debt extinguishment	-		(313)
Repayment of long-term debt	(131)		(1,250)
Net proceeds on issuance of long-term debt	19,884		1,584
Repurchase of common stock	(310)		(1,961)
Issuance of common stock	41		111
Other, net	(204)		(9)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	19,115		(1,968)
Effect of foreign currency rate changes on cash and cash equivalents	(25)		28
Net increase in cash and cash equivalents	21,060		471
Cash and cash equivalents, January 1,	2,972		3,185
Cash and cash equivalents, September 30,	$	24,032	$	3,656
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	767	$	812
Interest paid	$	167	$	197

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

Table of Contents

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TABLE OF CONTENTS

Note Number	Footnote	Page

BUSINESS AND CAPITAL STRUCTURE
1	Description of Business	8
2	Significant Accounting Policies	8
3	Mergers and Acquisitions	14
4	Earnings Per Share	15
5	Debt	16
INSURANCE INFORMATION
6	Global Health Care Medical Costs Payable	18
7	Liabilities for Unpaid Claims and Claim Expenses	19
8	Reinsurance	20
INVESTMENTS
9	Fair Value Measurements	23
10	Investments	30
11	Derivative Financial Instruments	33
12	Variable Interest Entities	36
13	Accumulated Other Comprehensive Income (Loss)	36
WORKFORCE MANAGEMENT AND COMPENSATION
14	Pension and Other Postretirement Benefit Plans	38
COMPLIANCE, REGULATION AND CONTINGENCIES
15	Income Taxes	39
16	Contingencies and Other Matters	39
RESULTS DETAILS
17	Segment Information	42

Table of Contents

Note 1 — Description of Business

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”) is a global health services organization dedicated to a mission of helping individuals improve their health, well-being and sense of security. To execute on our mission, Cigna’s evolved strategy is to “Go Deeper”, “Go Local” and “Go Beyond” with a differentiated set of medical, dental, disability, life and accident insurance and related products and services offered by our insurance and other subsidiaries. The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations. Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the United States and selected international markets. In addition to its ongoing operations described above, Cigna also has certain run-off operations.

The financial results of the Company’s businesses are reported in the following segments:

Global Health Care aggregates the Commercial and Government operating segments due to their similar economic characteristics, products and services and regulatory environment:

·	The Commercial operating segment (“Commercial segment”) encompasses both the U.S. commercial and certain international health care businesses serving employers and their employees, other groups and individuals. Products and services include medical, dental, behavioral health, vision, prescription drug benefit plans, health advocacy programs and other products and services to insured and self-insured customers.

·	The Government operating segment (“Government segment”) offers Medicare Advantage and Medicare Part D plans to seniors. This segment also offers Medicaid plans in selected markets.

Global Supplemental Benefits includes supplemental health, life and accident insurance products offered primarily in selected international markets and in the United States.

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

Other Operations consist of:

·	corporate-owned life insurance (“COLI”);

·	run-off reinsurance business that is predominantly comprised of guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) in 2013;

·	deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and

·	run-off settlement annuity business.

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, intersegment eliminations, compensation cost for stock options and related excess tax benefits, expense associated with frozen pension plans and certain litigation matters and costs for corporate projects, including overhead.

Note 2 — Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of Cigna Corporation and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Amounts recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment valuation, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment. Certain reclassifications have been made to prior year amounts to conform to the current presentation.

Table of Contents

These interim Consolidated Financial Statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s 2017 Annual Report on Form 10-K (“2017 Form 10-K”). The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates. This and certain other factors, including the seasonal nature of portions of the health care and related benefits business, as well as competitive and other market conditions, call for caution in estimating full-year results based on interim results of operations.

Recent Accounting Pronouncements

The Company’s 2017 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.

The following tables provide information about recently adopted and recently issued or changed accounting guidance (applicable to Cigna) that have occurred since the Company filed its 2017 Form 10-K.

Recently Adopted Accounting Guidance

Accounting Standard and
Adoption Date

Requirements and Effects of Adopting New Guidance

Revenue from Contracts with Customers (Accounting Standards Update (“ASU”) 2014-09 and related amendments)

Adopted as of January 1, 2018

Requires:

· Revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services

· Additional revenue-related disclosures

Effects of adoption:

· Applies to the Company’s service and mail order pharmacy contracts with customers

· Adopted through full retrospective restatement

· Cumulative effect adjustment of $24 million after-tax was recorded, reducing the December 31, 2016 balance of retained earnings. Adjustment established a contract liability for service fee revenue billed that must be deferred and allocated to services performed after a customer contract terminates. Subsequent changes in the contract liability and the related impact to net income and per share amounts since adoption were immaterial.

· Immaterial reclassifications were made to prior periods in the Consolidated Statements of Income to conform to the current presentation. The ASU and related interpretive guidance provide clarification on topics including whether all or a part of a contract is within its scope, and the definition of a customer. Companies are required to identify and evaluate distinct performance obligations within their contracts. These clarifications resulted in reclassifications within the Global Health Care segment affecting premiums, fees and other revenues, Global Health Care medical costs, and other operating expenses and had no impact on recognition patterns or net income.

· Prior period balances in the Company’s footnote disclosures have been updated to reflect adjustments resulting from the adoption of this ASU.

Table of Contents

Accounting Standard and
Adoption Date

Requirements and Effects of Adopting New Guidance

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01 and related amendments)

Adopted as of January 1, 2018

Requires entities to measure equity investments at fair value in net income if they are neither consolidated nor accounted for under the equity method

Effects of adoption:

· Certain limited partnership interests previously carried at cost of approximately $200 million were increased to fair value of approximately $275 million on January 1, 2018. Subsequent changes in fair value are reported in net investment income.

· Changes in fair value for equity securities that have a readily determinable fair value that were previously reported in accumulated other comprehensive income are now reported in net realized investment gains.

· Cumulative effect adjustment of $62 million after-tax was recorded, increasing the opening balance of retained earnings in 2018.

· See Notes 9 and 10 for updated disclosures about equity securities.

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

Early adopted as of January 1, 2018

Guidance:

· Relaxes requirements for financial and nonfinancial hedging strategies to be eligible for hedge accounting and changes how companies assess effectiveness

· Amends presentation and disclosure requirements to improve transparency about the uses and results of hedging programs

Effects of adoption:

· An immaterial amount of retained earnings was reclassified to accumulated other comprehensive income, decreasing the opening balance in 2018, for a portion of the hedging instruments that was previously excluded from the assessment of hedge effectiveness for fair value hedges.

· See Note 11 for the Company’s disclosures about derivatives.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)

Early adopted as of January 1, 2018

Guidance:

· Allows companies to reclassify the tax effects stranded in accumulated other comprehensive income to retained earnings as a result of H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (referred to throughout this Form 10-Q as “U.S. tax reform” or “U.S. tax reform legislation”)

· Requires additional disclosures of the Company’s accounting policy for releasing income tax effects from accumulated other comprehensive income

· Allows companies to apply the guidance retrospectively or in the period of adoption

Effects of adoption: Accumulated other comprehensive income of $229 million was reclassified to retained earnings, increasing the opening balance in 2018. See Note 13 for additional information including accounting policy disclosures.

In addition to the standards listed above, the Company adopted the following guidance in first quarter 2018 with no material impact to our financial statements: Intra-Entity Transfers of Assets Other than Inventory (ASU 2016-16), Clarifying the Definition of a Business (ASU 2017-01), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), Statement of Cash Flows: Restricted Cash (ASU 2016-18), Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05) and Stock Compensation Scope of Modification Accounting (ASU 2017-09).

Table of Contents

Accounting Guidance Not Yet Adopted

Accounting Standard and
Effective Date Applicable
for Cigna

Requirements and Expected Effects of Guidance Not Yet Adopted

Leases (ASU 2016-02 and related amendments)

Required as of January 1, 2019

Requires:

· Balance sheet recognition of assets and liabilities arising from leases, including leases embedded in other contracts

· Additional disclosures of the amount, timing and uncertainty of cash flows from leases

· Modified retrospective approach for leases in effect as of and after the date of adoption with a cumulative-effect adjustment recorded in retained earnings

Expected effects:

· The Company is continuing to evaluate the impact this standard will have on its financial statements.

· While we continue to refine the estimated impact of this standard, the Company currently expects an increase to assets and liabilities of approximately $500 million. The actual increase in assets and liabilities will depend on the volume, terms and discount rates of leases in place at the time of adoption.

· The Company plans to elect the optional practical expedient to retain the current classification of leases, and therefore, does not anticipate a material impact to the Consolidated Statements of Income or Cash Flows.

· The Company is implementing a new lease system and also expects that adoption of the new standard will require changes to internal control over financial reporting.

· The Company intends to adopt this new guidance as of the adoption date and will not present comparative periods in the financial statements, as recently allowed.

Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12)

Required as of January 1, 2021

Requires (for insurance entities that issue long-duration contracts):

· Cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-pay contract to be reconsidered at least annually with any changes reflected in net income.

· Discount rate assumptions to be reviewed quarterly (based on an upper-medium grade (low-credit-risk) fixed-income instrument yield that maximizes the use of observable market inputs) with any changes reflected in other comprehensive income.

· Deferred policy acquisition costs to be amortized on a constant-level basis over the expected term of the related contract.

· Fair value measurement of all market risk benefits.

· Additional disclosures, including liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement.

· Transition methods at adoption vary.

- Changes to the liability for future policy benefits will use a modified retrospective approach (applied to all contracts on the basis of their carrying amounts as of the beginning of the earliest period presented), with an option to elect a full retrospective transition under certain criteria.

- Deferred policy acquisition costs are to be transitioned consistent with the method applied to the liability for future policyholder benefits.

- Market risk benefits are required to transition using retrospective application.

Expected effects:

· The Company is evaluating the impact of this newly-issued guidance, but it is expected to have a significant impact on our processes, controls, systems and financial results. The new guidance will apply to insurance products predominantly sold in the Company’s businesses other than the Global Health Care segment.

Table of Contents

Updates to Significant Accounting Policies

The Company’s 2017 Form 10-K includes discussion of significant accounting policies in Note 2 or the applicable Notes to the Consolidated Financial Statements. Significant updates to these policies resulting from the adoption of new accounting guidance in 2018 are provided as follows:

·	ASU 2016-01 (Recognition and Measurement of Financial Assets and Liabilities): see Notes 9 and 10

·	ASU 2017-12 (Targeted Improvements to Accounting for Hedging Activities): see Note 11

·	ASU 2014-09 (Revenue from Contracts with Customers), also referred to as Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers and related guidance (“ASC 606”): see below

The majority of the Company’s revenues are not subject to the guidance in ASC 606, including premiums from insurance contracts and fees for investment-related products accounted for under insurance guidance (ASC 944). ASC 606 applies to the Company’s service and mail order pharmacy contracts with clients. See Note 17 for disaggregated revenue from external customers by segment and by major product or service identified with applicable accounting guidance (ASC 944 or ASC 606).

Accounting for Contracts with Customers – Service and Mail Order Pharmacy Arrangements

Service Fees and Expenses

The majority of the Company’s service fees are derived from administrative services only (“ASO”) arrangements that allow corporate clients to self-fund claims and assume the risk of medical or other benefit costs. Most of the Company’s ASO arrangements are for Global Health Care medical and specialty services, including pharmacy benefits and, to a lesser extent, ASO services in its Group Disability and Life and Global Supplemental Benefits segments. Generally, the Company’s ASO arrangements are short-term. Contract modifications typically occur on renewal and are prospective in nature.

In return for fees from these clients, the Company provides or makes available various services supporting benefit management and claims administration. In addition, Global Health Care’s services include access to the Company’s participating provider networks, disease management, utilization management, and cost containment services.

In general, the Company considers these services to be a combined performance obligation to provide cost effective administration of plan benefits over the contract period. Fees are billed, due and recognized monthly at contracted rates based on current membership or utilization. This recognition pattern aligns with the benefits from services provided to clients. These revenues are reported in fees and other revenues in the Consolidated Statements of Income.

For most ASO arrangements, the Company is required to perform services for a limited period after a client cancels. If these services will not be separately billed to the client as they are performed, the Company estimates and defers a portion of compensation attributable to this service obligation received in advance. Deferred revenue is recorded as a contract liability in accounts payable, accrued expenses and other liabilities and recognized when the related services are performed.

The Company may also provide performance guarantees that result in refunds to clients only if certain service standards, clinical outcomes or financial metrics are not met. If these standards, outcomes and metrics are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company defers revenue by recording a liability for estimated payouts associated with these guarantees within accounts payable, accrued expenses and other liabilities. The amount of revenue deferred is estimated for each type of guarantee, using either a most likely amount or expected value method depending upon the nature of the guarantee and the information available to estimate refunds. Estimates are refined each reporting period as additional information on the Company’s performance becomes available, and upon final reconciliation and settlement at the end of the guarantee period. Amounts accrued and paid for performance guarantees during the reporting periods were not material.

Service fees are recognized net of estimated pharmaceutical manufacturer rebates payable to ASO clients using our network of retail pharmacies. Net rebates retained by the Company from pharmaceutical manufacturers resulting from ASO client utilization at retail pharmacies represent compensation for pharmacy services and are reflected as fee revenue. Rebates generally represent a per script amount from the manufacturer and are determined based on scripts filled during the reporting period.

Expenses associated with administrative programs and services are recognized in other operating expenses as incurred.

Table of Contents

Mail Order Pharmacy Revenues and Costs

Mail order pharmacy revenues are due and recognized as each prescription is shipped. Mail order pharmacy revenues are presented net of estimated pharmaceutical manufacturer rebates payable to ASO clients that use our mail order business. Rebates are generally determined based on actual prescriptions filled during the reporting period.

Mail order pharmacy costs are recognized as each prescription is shipped and include the cost of prescriptions sold and other costs to operate this business (including supplies, shipping and handling), net of estimated pharmaceutical rebates from manufacturers for prescriptions filled through our mail order business.

Contract Balances

The following table provides information about receivables and contract liabilities from service and mail order pharmacy contracts with clients. The allowance for doubtful accounts for receivables and the Company’s contract assets were not material as of the dates presented.

(In millions)	September 30, 2018		December 31, 2017
Receivables, net	$	898	$	885
Contract liabilities	$	50	$	54

Revenue recognized that was included in the contract liability balance at the beginning of the reporting period was not material for the three months and nine months ended September 30, 2018 and 2017.

The amount of revenue recognized from performance obligations satisfied in prior periods was not material for the three months and nine months ended September 30, 2018 and 2017.

The incremental costs of obtaining ASO and mail order pharmacy contracts (such as sales commissions) are expensed as incurred and the Company does not disclose information about remaining performance obligations for these contracts in accordance with elections made by the Company as they are generally short-term with original expected durations of one year or less.

Table of Contents

Note 3 — Mergers and Acquisitions

Proposed Acquisition of Express Scripts

On March 8, 2018, the Company entered into an Agreement and Plan of Merger, as amended by Amendment No. 1, dated as of June 27, 2018 (as amended, the “Merger Agreement”) with Express Scripts Holding Company (“Express Scripts”), Halfmoon Parent, Inc., a direct wholly owned subsidiary of the Company (“New Cigna”), Halfmoon I, Inc., a direct wholly owned subsidiary of New Cigna (“Cigna Merger Sub”), and Halfmoon II, Inc., a direct wholly owned subsidiary of New Cigna (“Express Scripts Merger Sub”). Subject to the terms and conditions of the Merger Agreement, the Company will acquire Express Scripts in a cash and stock transaction through (1) the merger of Cigna Merger Sub with and into the Company, with the Company surviving as a direct wholly owned subsidiary of New Cigna and (2) the merger of Express Scripts Merger Sub with and into Express Scripts, with Express Scripts surviving as a direct wholly owned subsidiary of New Cigna (collectively, the “Merger”). New Cigna will be renamed “Cigna Corporation” immediately after the Merger.

Upon completion of the Merger, Cigna stockholders will receive one share of New Cigna common stock in exchange for each share of Cigna common stock held immediately prior to the Merger, and Express Scripts stockholders will receive (1) 0.2434 of a share of New Cigna common stock and (2) the right to receive $48.75 in cash, without interest, subject to applicable withholding taxes (the “Merger Consideration”), in exchange for each share of Express Scripts common stock held immediately prior to the Merger. Upon completion of the Merger, shares of New Cigna common stock are expected to be listed for trading on the New York Stock Exchange.

In August 2018, the stockholders of each of Cigna and Express Scripts gave the requisite stockholder approvals for the Merger. In September 2018, the Antitrust Division of the U.S. Department of Justice (“DOJ”) cleared the Merger, terminating the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Completion of the Merger remains subject to certain state regulatory approvals and filings required in connection with the transaction, including clearances from certain departments of insurance, and the satisfaction or valid waiver of all closing conditions. The Merger is not subject to a financing condition. The Company intends to fund the cash portion of the Merger Consideration through a combination of cash on hand, assumed Express Scripts debt and new debt issuance. See Note 5 for additional information about the financing of the Merger. The Merger is expected to be completed by December 31, 2018.

The Merger Agreement provides for certain termination rights and fees for both the Company and Express Scripts. If the Merger Agreement is terminated under certain circumstances and within 12 months after the date of such termination the Company enters into an agreement regarding a sale of a majority of the Company’s assets or equity or consummates such a sale, then the Company will be required to pay a $1.6 billion termination fee to Express Scripts prior to or contemporaneously with such a transaction. Express Scripts has reciprocal obligations under specified circumstances to pay a $1.6 billion termination fee to the Company.

Additionally, in the event that the Merger Agreement is terminated by either the Company or Express Scripts due to (1) a legal restraint relating to a regulatory law prohibiting consummation of the Merger having become final and non-appealable or (2) the Merger not having been consummated on or prior to December 8, 2018 (subject to an extension to June 8, 2019 if extended by the Company or Express Scripts under certain circumstances); and, in the case of clause (2), at the time of such termination, all of the conditions to the Company’s obligation to consummate the Merger have been satisfied or waived other than those that relate to the absence of a legal restraint relating to a regulatory law or the receipt of a regulatory approval, the Company may be required to pay Express Scripts a reverse termination fee of $2.1 billion.

Other transactions

In May 2018, the Company announced an agreement to acquire OnePath Life NZ Limited from ANZ Bank New Zealand Limited, a part of Australia and New Zealand Banking Group Limited, for NZ$700 million (approximately $460 million as of September 30, 2018). The Company expects that the transaction will be completed no later than the first quarter of 2019, subject to final regulatory approval.

Table of Contents

Transaction-related costs

The Company has incurred costs detailed in the table below in connection with the proposed acquisition of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”) and other transactions. These costs consisted primarily of fees for legal, advisory and other professional services, amortization of the Bridge Facility fees in 2018 and interest expense on the debt issued to fund the Express Scripts merger net of investment income earned on the proceeds of the debt issuance.

	Three Months Ended
	September 30, 2018				September 30, 2017
(In millions)	Before-tax		After-tax		Before-tax		After-tax
Interest expense on newly issued debt	$	33	$	26	$	-	$	-
Net investment income on debt proceeds	(13)		(10)		-		-
All other transaction-related costs	108		92		9		6
Transaction-related costs, net	$	128	$	108	$	9	$	6

	Nine Months Ended
	September 30, 2018				September 30, 2017
(In millions)	Before-tax		After-tax		Before-tax		After-tax
Interest expense on newly issued debt	$	33	$	26	$	-	$	-
Net investment income on debt proceeds	(13)		(10)		-		-
All other transaction-related costs	298		251		88		67
Tax (benefit) - previously non-deductible costs	-		-		-		(59)
Transaction-related costs, net	$	318	$	267	$	88	$	8

In the second quarter of 2017, the Company recognized an incremental tax benefit of $59 million for costs that became deductible upon the termination of its merger agreement with Anthem. When the Express Scripts acquisition is consummated, a portion of the costs related to that acquisition will not be deductible for federal income tax purposes, as is currently reflected in the Company’s financial results.

Note 4 — Earnings Per Share

Basic and diluted earnings per share (“EPS”) were computed as follows:

	Three Months Ended
	September 30, 2018						September 30, 2017
(Shares in thousands, dollars in millions, except per share amounts)	Basic		Effect of Dilution		Diluted		Basic		Effect of Dilution		Diluted
Shareholders’ net income	$	772			$	772	$	560			$	560
Shares
Weighted average	242,577				242,577		249,242				249,242
Common stock equivalents			3,535		3,535				4,168		4,168
Total shares	242,577		3,535		246,112		249,242		4,168		253,410
EPS	$	3.18	$	(0.04)	$	3.14	$	2.25	$	(0.04)	$	2.21

	Nine Months Ended
	September 30, 2018						September 30, 2017
(Shares in thousands, dollars in millions, except per share amounts)	Basic		Effect of Dilution		Diluted		Basic		Effect of Dilution		Diluted
Shareholders’ net income	$	2,493			$	2,493	$	1,971			$	1,971
Shares
Weighted average	242,404				242,404		252,980				252,980
Common stock equivalents			3,343		3,343				4,078		4,078
Total shares	242,404		3,343		245,747		252,980		4,078		257,058
EPS	$	10.28	$	(0.14)	$	10.14	$	7.79	$	(0.12)	$	7.67

Table of Contents

The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three months and nine months ended September 30, 2018 and 2017 because their effect was anti-dilutive.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In millions)	2018	2017	2018	2017
Anti-dilutive options	0.9	-	0.9	1.2

The Company held approximately 52.6 million shares of common stock in Treasury as of September 30, 2018, and 48.6 million shares as of September 30, 2017.

Note 5 — Debt

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

	September 30,		December 31,
(In millions)	2018		2017
Short-term
Commercial paper	$	-	$	100
Current maturities of long-term debt	-		131
Other, including capital leases	9		9
Total short-term debt	$	9	$	240
Long-term
$250 million, 4.375% Notes due 2020	$	247	$	249
$300 million, 5.125% Notes due 2020	298		299
$1,000 million, Floating Rate Notes due 2020	996		-
$1,750 million, 3.2% Notes due 2020	1,741		-
$78 million, 6.37% Notes due 2021	78		78
$300 million, 4.5% Notes due 2021	296		299
$1,000 million, Floating Rate Notes due 2021	995		-
$1,250 million, 3.4% Notes due 2021	1,244		-
$750 million, 4% Notes due 2022	746		745
$100 million, 7.65% Notes due 2023	100		100
$17 million, 8.3% Notes due 2023	17		17
$700 million, Floating Rate Notes due 2023	696		-
$3,100 million, 3.75% Notes due 2023	3,082		-
$900 million, 3.25% Notes due 2025	895		894
$2,200 million, 4.125% Notes due 2025	2,185		-
$600 million, 3.05% Notes due 2027	594		594
$259 million, 7.875% Debentures due 2027	259		258
$3,800 million, 4.375% Notes due 2028	3,771		-
$45 million, 8.3% Step Down Notes due 2033	45		45
$191 million, 6.15% Notes due 2036	190		190
$2,200 million, 4.8% Notes due 2038	2,176		-
$121 million, 5.875% Notes due 2041	119		119
$317 million, 5.375% Notes due 2042	315		315
$1,000 million, 3.875% Notes due 2047	988		988
$3,000 million, 4.9% Notes due 2048	2,961		-
Other, including capital leases	7		9
Total long-term debt	$	25,041	$	5,199

Table of Contents

Notes. In September 2018, New Cigna issued $20.0 billion of senior unsecured notes at maturities ranging from 18 months to 30 years (the “Notes”). The various tranches of the Notes are included in the table above and can be identified as those having no balance at December 31, 2017. Of the Notes issued, the Company would be required to redeem $17 billion at a redemption price equal to 101% of the principal amount plus accrued interest if the Merger does not close. The proceeds of these mandatory redeemable notes and a portion of the proceeds of the notes due 2048, both of which reported in cash and cash equivalents, are restricted in order to redeem the debt if necessary. The proceeds of all the notes are intended to be used to pay a portion of the cash consideration for the Merger, to repay certain indebtedness of Express Scripts and its subsidiaries and/or to pay related fees and expenses. Proceeds not required for these purposes may be used by New Cigna for general corporate purposes. Interest is payable semi-annually in the case of the fixed rate notes and quarterly in the case of the floating rate notes. Following closing of the Merger, the notes will be guaranteed by the Company and Express Scripts Holding Company (collectively “the Guarantors”), and guarantees will terminate when certain conditions are met, primarily when the debt issued by the Guarantors is collectively less than 20% of the debt issued by New Cigna and its subsidiaries in the aggregate.

Bridge Facility. In March 2018, in connection with the proposed Merger, the Company and New Cigna entered into a commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd and 21 additional banks, to provide a $26.7 billion 364-day senior unsecured bridge facility (the “Bridge Facility”). The Bridge Facility commitment has been reduced to $3.9 billion as of September 30, 2018 after issuing the Notes in the third quarter of 2018 (described above) and entering into the Term Loan Credit Agreement (described below). The Bridge Facility commitment may be used to finance the Merger, repay certain existing Express Scripts debt or pay related fees and expenses.

The Bridge Facility contains customary covenants and restrictions, including a financial covenant that the Company or New Cigna m

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$155.86	379	$59,140

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2018-12-20	M&A, Off-BS Arrangement, Shareholder Rights, Control, Officers, Amend Bylaw, Other Events, Exhibits
8-K	2018-12-18	Regulation FD
8-K	2018-12-13	Regulation FD
8-K	2018-11-21	Regulation FD
8-K	2018-11-21	Enter Agreement, Regulation FD, Exhibits
8-K	2018-11-01	Earnings, Exhibits
8-K	2018-09-23	Officers, Other Events, Exhibits
8-K	2018-09-17	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2018-09-17	Other Events, Exhibits
8-K	2018-09-11	Regulation FD
8-K	2018-09-04	Regulation FD, Exhibits
8-K	2018-08-29	Regulation FD
8-K	2018-08-24	Shareholder Vote, Other Events, Exhibits
8-K	2018-08-21	Regulation FD
8-K	2018-08-13	Other Events, Exhibits
8-K	2018-08-10	Other Events, Exhibits
8-K	2018-08-09	Other Events, Exhibits
8-K	2018-08-08	Other Events
8-K	2018-08-07	Other Events, Exhibits
8-K	2018-08-02	Earnings, Exhibits
8-K	2018-06-27	Enter Agreement, Officers
8-K	2018-05-31	Regulation FD
8-K	2018-04-25	Amend Bylaw, Shareholder Vote
8-K	2018-04-23	Other Events
8-K	2018-04-06	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2018-03-12	Officers
8-K	2018-03-08	Other Events, Exhibits
8-K	2018-02-27	Regulation FD
8-K	2018-02-01	Earnings, Exhibits
8-K	2018-01-09	Earnings, Regulation FD

UHS	Universal Health Services	11,080
RVI	Retail Value	621
SMMF	Summit Financial Group	331
LIQT	Liqtech International	143
REED	Reed's	124
BBGI	Beasley Broadcast Group	99
TRIB	Trinity Biotech	59
CMTV	Community Bancorp	0
HEYU	Heyu Biological Technology	0
RVRA	Riviera Resources	0

EX-10.1	a18-19010_1ex10d1.htm
EX-12	a18-19010_1ex12.htm
EX-31.1	a18-19010_1ex31d1.htm
EX-31.2	a18-19010_1ex31d2.htm
EX-32.1	a18-19010_1ex32d1.htm
EX-32.2	a18-19010_1ex32d2.htm