Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-8323
CIGNA Corporation
(Exact name of registrant as specified in its charter)
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| Delaware
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06-1059331 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
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| Two Liberty Place, Philadelphia, Pennsylvania
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19192 |
| (Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code (215) 761-1000
Securities registered pursuant to section 12(b) of the Act:
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Name of each exchange on |
| Title of each class
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which registered |
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| Common Stock, Par Value $0.25
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New York Stock Exchange, Inc. |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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| Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as
of June 30, 2009 was approximately $6.6 billion.
As of January 30, 2010, 274,968,520 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 19, 2010.
PART I
A. Description of Business
CIGNA Corporation and its subsidiaries constitute one of the largest investor-owned health
service organizations in the United States. Its subsidiaries are major providers of health care
and related benefits, the majority of which are offered through the workplace, including: health
care products and services; group disability, life and accident insurance; and workers’
compensation case management and related services. In addition, the Company has an international
operation that offers life, accident and supplemental health insurance products as well as
international health care products and services to businesses and individuals in selected markets.
The Company also has certain inactive businesses, including a run-off reinsurance operation. CIGNA
Corporation had consolidated shareholders’ equity of $5.4 billion and assets of $43.0 billion as of
December 31, 2009, and revenues of $18.4 billion for the year then ended. CIGNA’s major insurance
subsidiary, Connecticut General Life Insurance Company (“CGLIC”), traces its origins to 1865.
CIGNA Corporation was incorporated in the State of Delaware in 1981.
As used in this document, “CIGNA” and the “Company” may refer to CIGNA Corporation itself, one
or more of its subsidiaries, or CIGNA Corporation and its consolidated subsidiaries. CIGNA
Corporation is a holding company and is not an insurance company. Its subsidiaries conduct various
businesses, which are described in this Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 (“Form 10-K”).
CIGNA’s revenues are derived principally from premiums, fees, mail order pharmacy, other
revenues and investment income. The financial results of CIGNA’s businesses are reported in the
following segments:
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Run-off Reinsurance; and |
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Other Operations, including Corporate-owned Life Insurance. |
Available Information
CIGNA’s annual, quarterly and current reports, proxy statements and other filings, and any
amendments to these filings, are made available free of charge on its website
(http://www.cigna.com, under the “Investors—SEC Filings” captions) as soon as reasonably
practicable after the Company electronically files these materials with, or furnish them to, the
Securities and Exchange Commission (the “SEC”). The Company uses its website as a channel of
distribution for material company information. Important information, including news releases,
analyst presentations and financial information regarding CIGNA is routinely posted on and
accessible at www.cigna.com. See “Code of Ethics and Other Corporate Governance Disclosures” in
Part III, Item 10 beginning on page 171 of this Form 10-K for additional available information.
B. Financial Information about Business Segments
The financial information included herein is in conformity with accounting principles
generally accepted in the United States of America (“GAAP”), unless otherwise indicated. Certain
reclassifications have been made to prior years’ financial information to conform to the 2009
presentation. Industry rankings and percentages set forth herein are for the year ended December
31, 2009, unless otherwise indicated. Unless otherwise noted, statements set forth in this
document concerning CIGNA’s rank or position in an industry or particular line of business have
been developed internally, based on publicly available information.
Financial data for each of CIGNA’s business segments is set forth in Note 22 to the
Consolidated Financial Statements beginning on page 160 of this Form 10-K.
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C. Strategy
As a global health service organization, CIGNA’s mission remains focused on helping the people
it serves improve their health, well-being and sense of security. CIGNA’s long-term growth
strategy is based on: (1) growth in targeted geographies, product lines, buying segments and
distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing
additional opportunities in high-growth markets with particular focus on individuals.
CIGNA expects to focus on the following areas it believes represent the markets or areas with
the most potential for profitable growth:
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In the Health Care segment, the Company is concentrating on: (1) further
enhancing its geographic focus in the middle market in order to create geographic density; (2)
growing the “Select” market, which generally includes employers with more than 50 but fewer
than 250 employees, by leveraging the Company’s customer knowledge, differentiated service
model, product portfolio and distribution model; and (3) engaging those national account
employers who share and will benefit from the Company’s value proposition of using health
advocacy and employee engagement to increase productivity, performance and the health outcomes
of their employees. |
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In the Disability and Life segment, CIGNA’s strategy is to grow its Disability
business by fully leveraging the key components of its industry-leading disability management
model to reduce medical costs for its clients and return their employees to work sooner
through: (1) early claim notification and outreach, (2) a full suite of clinical and
return-to-work resources, and (3) specialized case management
services. |
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In the International segment, the Company is targeting growth through: (1)
product and channel expansion in its life, accident and health business in key Asian
geographies, (2) the introduction of new expatriate benefits products, and (3) further
geographic expansion. |
The Company plans to improve its strategic and financial flexibility by driving further
reductions in its Health Care operating expenses, improving its medical cost competitiveness in
targeted markets and effectively managing balance sheet exposures.
Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to
health advocacy as a means of creating sustainable solutions for employers, improving the health of
the individuals that the Company serves, and lowering the costs of health care for all
constituencies.
Details on the Company’s operational strategies are discussed further in the Health Care
segment discussion of Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) section on page 62 of this Form 10-K.
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D. Health Care
CIGNA’s Health Care segment (“CIGNA HealthCare”) offers insured and self-funded medical,
dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs
and other products and services that may be integrated to provide individuals with comprehensive
health care benefit programs. CIGNA HealthCare also provides disability and life insurance
products that were historically sold in connection with certain experience-rated medical products.
These products and services are provided and administered by subsidiaries of CIGNA Corporation.
CIGNA HealthCare companies offer these products and services in all 50 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands.
CIGNA HealthCare is focused on helping to improve the health, well-being and sense of security
of the individuals it serves. CIGNA HealthCare believes the most sustainable approach to enhancing
quality and managing health care costs is to fully engage individuals in the decisions that affect
their health and the health care services they receive. To assist individuals in making informed
choices about health care for themselves and their families, CIGNA HealthCare makes available to
its members actionable information about health and advocacy programs as well as about the cost and
quality of health care services and supplies provided to them.
Underlying CIGNA HealthCare’s operations is a foundation of clinical expertise and an ability
to provide quality service. CIGNA HealthCare’s strengths include its ability to: (1) integrate
medical and specialty product offerings to achieve a more holistic and integrated approach to
individuals’ health that promotes consistent care management; and (2) provide predictive modeling
and other analytical tools (for example, through the Company’s exclusive access to analytical tools
and algorithms developed by the University of Michigan), to assist in providing targeted outreach
and health advocacy by CIGNA’s clinical professionals to CIGNA HealthCare members.
Principal Products and Services and Funding Arrangements
With the exception of Health Maintenance Organization (“HMO”) as well as Medicare Part D and
Private Fee for Service products, each of CIGNA HealthCare’s products (as described below) is
offered with multiple funding options (also described below). CIGNA may sell multiple products
under the same funding arrangement to the same employer. Accordingly, the revenue table included
in the Health Care section of the MD&A beginning on page 62 of this Form 10-K reflects both the
product type and funding arrangement.
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Medical
CIGNA HealthCare provides a wide array of products and services to meet the needs of
employers, other sponsors of health benefit plans and their plan participants (i.e.,
employees/members and their eligible dependents), and individuals, including:
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Network and Open Access Plus Plans. CIGNA HealthCare offers a product line of
indemnity managed care benefit plans. Indemnity benefit plans in the managed care product
line generally use meaningful coinsurance differences for “in-network” versus “out-of-network”
care, give members the option of selecting a primary care physician, and use a national
provider network, which is somewhat smaller than the national network used with the preferred
provider (“PPO”) plan product line. The Network, Network Open Access, and Open Access Plus
In-Network products cover only those services provided by CIGNA HealthCare participating
(“in-network”) providers and emergency services provided by non-participating
(“out-of-network”) providers. The Network point of service (“POS”), Network POS Open Access
and Open Access Plus plans (“OAP”) cover health care services provided by participating, and
non-participating health care providers, but the members’ coinsurance obligation is greater
for out-of-network care. |
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Preferred Provider Plans. CIGNA HealthCare also offers a PPO product line that
features a broader national network with generally less favorable provider discounts than the
managed care products described above, no option to select a primary care physician, and
in-network and out-of-network coverage with greater member coinsurance liability for
out-of-network services. |
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Health Maintenance Organizations. HMOs are required by law in most states to
provide coverage for all basic health services. They use various tools to facilitate the
appropriate use of health care services through employed and/or contracted health care
providers. HMOs control unit costs by negotiating rates of reimbursement with providers and
by requiring that certain treatments be authorized for coverage in advance. CIGNA HealthCare
offers HMO plans that require members to obtain all non-emergency services from participating
providers as well as POS HMO plans that also provide a lesser level of insurance coverage for
out-of-network care from non-participating providers. The out-of-network coverage is
generally provided through separate insurance coverage that is sold with the HMO benefits. |
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Voluntary Plans . CIGNA HealthCare’s voluntary medical products are offered to
employers with 51 or more eligible employees and are designed to meet the insurance needs of
uninsured hourly and part-time employees by offering more limited, (i.e., leaner benefits) and
more affordable coverage than traditional medical plans. |
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CIGNA Choice Fund®, Health Reimbursement Arrangements (“HRAs”), Health
Savings Accounts (“HSAs”) and Flexible Spending Accounts (“FSAs”). In connection with
many of the products described above, CIGNA HealthCare offers the CIGNA Choice Fund suite of consumer-directed products, including HRA, HSA and FSA options. An HRA allows
plan sponsors to choose from a variety of benefit plan designs and for employees to fund
un-reimbursed health care expenses with reimbursement account funds that can be rolled over
from year to year. HSA plans allow plan sponsors to choose from a variety of benefit plan
designs and funding options and combine a high deductible payment feature for a health plan
with a tax-preferred savings account offering mutual fund investment options. Funds in an HSA
can be used to pay the deductible and other eligible tax-deductible medical expenses and can
be rolled over from year to year. In connection with its consumer-directed products, CIGNA
HealthCare offers Custom Benefit BuilderSM, a tool that allows members to customize
plan options including co-payments and deductible levels, to create a personalized benefit
design that meets their individual needs. The HRA and HSA products for employers with
generally more than 50 but fewer than 250 employees are now available in 49 states. An FSA
pays for certain health care-related expenses, that are either not covered or only partially
covered by health care plans, with pretax contributions by employees. Unused FSA account
funds cannot be rolled over from year to year; they are forfeited by the employee. |
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Stop-Loss Coverage. CIGNA HealthCare offers stop-loss insurance coverage for
self-insured plans. This stop-loss coverage reimburses the plan for claims in excess of a
predetermined amount, either for individuals (“specific”) or the entire group (“aggregate”),
or both. CIGNA HealthCare also offers stop-loss features in its experience-rated policies
(discussed below). |
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Shared Administration Services. CIGNA HealthCare provides Taft-Hartley trusts and
other self-insured groups access to its national provider network and provides claim
re-pricing and other services (e.g., utilization management). |
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Specialty
Health Advocacy. CIGNA HealthCare offers medical management, disease management, and
other health advocacy services to employers and other plan sponsors. Services are not only offered
to members covered under CIGNA HealthCare administered plans but also to those individuals who have
elected coverage under a plan offered through their employer by competing insurers/third party
administrators. CIGNA offers a seamless integration of services to address the clinical and
administrative challenges that are inherent in coordinating multiple vendors. Through its health
advocacy programs, CIGNA HealthCare works to help: (1) healthy people stay healthy; (2) people
change behaviors that are putting their health at risk; (3) people with existing health care issues
access quality care and practice healthy self-care; and (4) people with a disabling illness or
injury return to productive work quickly and safely.
CIGNA HealthCare offers a wide array of health advocacy programs and services to help
individuals improve the health of the mind and body, including:
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early intervention by CIGNA’s network of approximately 2,350 clinical professionals; |
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CIGNA’s online health assessment, powered by analytics from the University of Michigan
Health Management Research Center, which helps members identify potential health risks and
learn what they can do to live a healthier life; |
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the CIGNA Well Aware for Better Health® program, which helps patients with
chronic conditions such as asthma, diabetes, depression and weight complications better manage
their conditions; |
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CIGNA Health Advisor®, one of our fastest-growing offerings, which provides
members with access to a personal health coach to help them reach their health and wellness
goals; |
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CIGNA’s Well Informed program, which uses clinical rules-based software to identify
potential gaps and omissions in members’ health care through analysis of the Company’s
integrated medical, behavioral, pharmacy and lab data allowing CIGNA HealthCare to communicate
the gaps to the member and the member’s doctor; and |
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CIGNA’s online coaching capabilities. |
Behavioral Health. CIGNA arranges for the provision of behavioral health care
services to individuals through its network of participating behavioral health care providers and
offers behavioral health care management services, employee assistance programs, and work/life
programs to employer and other groups sponsoring health benefit plans, HMOs, governmental entities
and disability insurers. CIGNA Behavioral Health focuses on integrating its programs and services
to facilitate customized, holistic care.
As of December 31, 2009, CIGNA’s behavioral national network had approximately 76,000 access
points to independent psychiatrists, psychologists and clinical social workers and approximately
6,100 facilities and clinics that are reimbursed on a contracted fee-for-service basis.
Dental. CIGNA Dental Health offers a variety of dental care products including dental
health maintenance organization plans, dental preferred provider organization (“DPPO”) plans,
dental exclusive provider organization plans, traditional dental indemnity plans and a dental
discount program. Employers and other groups can purchase CIGNA Dental Health products as
stand-alone products or integrated with CIGNA HealthCare’s medical products. As of December 31,
2009, CIGNA Dental Health members totaled approximately 9.9 million, representing employees at more
than one-third of all Fortune 100 companies. Managed dental care products are offered in 36 states
and the District of Columbia through a network of independent providers that have contracted with
CIGNA Dental Health to provide dental services to members.
CIGNA Dental Health members access care from one of the largest dental HMO and dental PPO
networks in the U.S., with approximately 160,000 DPPO-contracted access points (approximately
75,500 unique providers) and approximately 45,400 dental HMO-contracted access points
(approximately 14,000 unique providers).
CIGNA Dental Health stresses preventive dentistry; it believes that promoting preventive care
contributes to a healthier workforce, an improved quality of life, increased productivity and fewer
treatment claims and associated costs over time. CIGNA Dental Health offers members a dental
treatment cost estimator to educate individuals on oral health and aid them in their dental health
care decision-making.
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Pharmacy. CIGNA Pharmacy offers prescription drug plans to its insured and
self-funded customers both in conjunction with its medical products and on a stand-alone basis.
With a nationwide network of approximately 60,300 contracted pharmacies, CIGNA Pharmacy is a
comprehensive pharmacy benefits manager offering clinical integration programs, specialty pharmacy
solutions, and fast, efficient home delivery pharmacy capabilities that improve outcomes and reduce
costs for a Return On Health®.
Programs that reflect this integration of medical, behavioral and pharmacy offerings include:
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Well Informed. CIGNA’s Well Informed program focuses on the chronic conditions most likely
to benefit from disciplined prescription therapy, such as asthma, diabetes, back pain and high
cholesterol. |
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Step Therapy is a program that encourages individuals who take prescription drugs to treat
an ongoing medical condition to use generic and/or preferred brand drugs before progressing to
higher cost brand-named drugs within the relevant therapeutic drug class. This is
accomplished through claim management protocols, which may include communications with the
individual and the individual’s physician. |
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Specialty Pharmacy Solutions. Because it offers both medical and pharmacy benefit
management products and services, CIGNA HealthCare is uniquely positioned to manage holistic
care for individuals with chronic conditions. This approach allows individuals to access
medication in the most appropriate setting based on their unique circumstances. This results
in less confusion and disruption in care, which in turn promotes medication adherence and
healthier outcomes. |
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CIGNA Tel-Drug® Home Delivery Pharmacy. CIGNA HealthCare also offers cost-effective mail
order, telephone and on-line pharmaceutical fulfillment services through its home delivery
operation. CIGNA Tel-Drug Home Delivery Pharmacy provides an individual-focused, efficient
home delivery pharmacy with high standards of quality, accuracy and individual care relating
to maintenance and specialty medications. Orders may be submitted through the mail, via phone
or through the internet at myCIGNA.com. |
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CIGNA HealthCare also offers a suite of online tools to individuals, including our
award-winning Prescription Drug Price Quote Tool, which empowers individuals with actionable
information that helps them maximize their benefits and lower their out-of-pocket costs. |
Private Fee For Service. CIGNA’s Medicare Advantage private fee-for-service plan,
CIGNA Medicare Access Plan, has been approved by the Centers for Medicare and Medicaid Services to
be a replacement for Original Medicare. The CIGNA Medicare Access Plan offers the same benefits as
Original Medicare Parts A & B, as well as supplemental benefits, including annual physicals,
emergency worldwide coverage and health and wellness programs.
Medicare Part D. CIGNA’s Medicare Part D prescription drug program, CIGNA Medicare
Rx®, provides a number of plan options as well as service and information support to
Medicare and Medicaid eligible members. CIGNA Medicare Rx is available in all 50 states
and the District of Columbia.
Retail Pharmacies. CIGNA HealthCare operates 20 retail pharmacies, including on-site
retail pharmacies for members to serve the needs of CIGNA HealthCare members.
CIGNA Onsite Health was formed in 2007. The Company operates onsite health centers at
five CIGNA employee locations and expects to open several onsite health clinics at other employer
locations during 2010. In addition, the Company has multiple health advocates at employer sites
across the country. Onsite operations are projected to expand throughout 2010 and beyond.
Cost Containment Service. CIGNA administers cost containment programs with respect to
health care services/supplies that are covered under benefit plans. These programs, which may
involve contracted vendors, are intended to control health costs through the reduction of
out-of-network utilization, the auditing of provider bills and recovery of overpayments from other
insurance carriers or providers. CIGNA earns fees for providing or arranging these services.
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Vision. CIGNA Vision offers flexible, cost-effective PPO coverage that includes a
range of both in and out-of-network benefits for routine vision services. CIGNA’s national vision
care network, which consists of over 48,000 providers in approximately 21,800 locations, includes
private practice ophthalmologist and optometrist offices, as well as retail eye care centers.
Routine vision products are offered in conjunction with CIGNA HealthCare’s medical and dental
product offerings.
Funding Arrangements
The segment’s health care products and services are offered through the following funding
arrangements:
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Experience-rated (“Shared ReturnsSM”, including minimum premium funding
arrangements); and |
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Administrative Services Only. |
Guaranteed Cost. Under guaranteed cost funding arrangements, policyholders pay a
fixed premium and CIGNA HealthCare bears the risk for claims and costs. The HMO product is offered
only on a guaranteed cost basis.
Experience-rated (“Shared ReturnsSM”, including minimum premium). Under
insurance policies using an experience-rated funding arrangement, a premium that typically includes
a margin to partially protect against adverse claim fluctuations is determined at the beginning of
the policy period. CIGNA HealthCare generally bears the risk if claims and expenses exceed this
premium. If premiums exceed claims and expenses, any surplus amount is generally first used to
offset prior deficits and otherwise generally returned to the policyholder. For additional
discussion, see “Pricing, Reserves and Reinsurance” later within this section of the Form 10-K.
Under insurance policies using a minimum premium funding arrangement, instead of paying a
fixed monthly premium, the group policyholder establishes and funds a bank account and authorizes
the insurer to draw upon funds in the account to pay claims and other authorized expenses. The
policyholder pays a significantly reduced monthly “residual” premium while the policy is in effect
and a supplemental premium (to cover reserves for run-out claims and administrative expenses) upon
termination. Minimum premium funding arrangements combine insurance protection with an element of
self-funding. The policyholder is responsible for funding all claims up to a predetermined
aggregate, maximum monthly amount, and CIGNA HealthCare bears the risk for claim costs incurred in
excess of that amount. As with other experience-rated insurance products, CIGNA HealthCare may
recover deficits from margins in future years if the policy is renewed.
Administrative Services Only. CIGNA HealthCare contracts with employers, unions and
other groups sponsoring self-insured plans on an administrative services only (“ASO”) basis to
administer claims and perform other plan related services. CIGNA HealthCare collects
administrative service fees in exchange for providing these self-insured plans with access to CIGNA
HealthCare’s applicable participating provider network and for providing other services and
programs including: claim administration; quality management; utilization management; cost
containment; health advocacy; 24-hour help line; 24/7 call center; case management; disease
management; pharmacy benefit management; behavioral health care management services (through its
provider networks); or any combination of these services. The self-insured plan sponsor is
responsible for self-funding all claims, but may purchase stop-loss insurance from CIGNA HealthCare
or other insurers for claims in excess of a predetermined amount, for either individuals
(“specific”), the entire group (“aggregate”), or both.
In 2008, CIGNA purchased Great-West Healthcare, the healthcare division of Great-West Life &
Annuity Insurance Company (“Great-West Healthcare”). See Note 3 to the Consolidated Financial
Statements beginning on page 112 of this Form 10-K for details about this purchase.
Financial information, including premiums and fees, is presented in the Health Care section of
the MD&A beginning on page 62 and in Note 22 to CIGNA’s Consolidated Financial Statements beginning
on page 160 of this Form 10-K.
7
Service and Quality
CIGNA HealthCare operates 11 service centers that together processed approximately 122 million
medical claims in 2009. Satisfying customers and members is a primary business objective and
critical to the Company’s success. To further this objective, in 2009, the Company made its call
centers available 24 hours a day, seven days a week. As of December 31, 2009,
CIGNA operates six member service centers that members can call
toll-free about their healthcare benefits, wellness programs and
claims. CIGNA HealthCare customer service representatives are
empowered to immediately resolve a wide range of issues to help members obtain the most from their
benefit plans. In addition, a customer service representative can
resolve a member’s issue.
If an issue cannot be resolved informally, CIGNA HealthCare has a formal appeals process that can
be initiated by telephone or in writing and involves two levels of internal review. For those
matters not resolved by internal reviews, CIGNA HealthCare members are offered the option of a
voluntary external review of claims. The CIGNA HealthCare formal appeals process addresses member
inquiries and appeals concerning initial coverage determinations based on medical necessity and
other benefits/coverage determinations. CIGNA HealthCare’s formal appeals process meets National
Committee for Quality Assurance (“NCQA”), Employee Retirement Income Security Act of 1974
(“ERISA”), Utilization Review Accreditation Commission (“URAC”) and/or applicable state regulatory
requirements.
CIGNA HealthCare’s commitment to promoting quality care and service to its members is
reflected in a variety of activities including: credentialing medical providers and facilities
that participate in CIGNA HealthCare’s managed care and PPO networks; developing the CIGNA
CareSM specialist physician designation described below; and participating in
initiatives that provide information to members to enable educated health care decision-making.
Participating Provider Network. CIGNA HealthCare has an extensive national network of
participating health care providers which, as of December 31, 2009, consisted of approximately
5,400 hospitals and approximately 612,000 providers as well as other facilities, pharmacies and
vendors of health care services and supplies (these hospital and provider counts exclude the impact
of the Great-West Healthcare acquisition). As part of the purchase of Great-West Healthcare, CIGNA
acquired the participating provider network of Great-West Healthcare. In many cases, the providers
in the Great-West Healthcare network were already in the CIGNA HealthCare participating provider
network, however, the acquisition has expanded and strengthened CIGNA HealthCare’s network in some
regions of the country. CIGNA HealthCare continues to consolidate the network it acquired from
Great-West Healthcare with its existing participating provider network.
In most instances, CIGNA HealthCare contracts directly with the participating provider to
provide covered services to members at agreed-upon rates of reimbursement. In some instances,
however, CIGNA HealthCare companies contract with third parties for access to their provider
networks. In addition, CIGNA HealthCare has entered into strategic alliances with several regional
managed care organizations (Tufts Health Plan, HealthPartners, Inc., Health Alliance Plan, and MVP
Health Plan) to gain access to their provider networks and discounts.
CIGNA CareSM. CIGNA Care is a benefit design option
available for CIGNA HealthCare administered plans in 57 service areas across the country. CIGNA
Care is a subset of participating physicians in certain specialties who are designated as CIGNA
Care physicians based on specific clinical quality and cost-efficiency selection criteria. Members
pay reduced co-payments or co-insurance when they receive care from a specialist designated as a
CIGNA Care provider. CIGNA participating specialists are evaluated annually for the CIGNA Care
designation.
Provider Credentialing. CIGNA HealthCare credentials physicians, hospitals and other
health care providers in its participating provider networks using quality criteria which meet or
exceed the standards of external accreditation or state regulatory agencies, or both. Typically,
most providers are re-credentialed every three years.
Health Plan Credentialing. CIGNA continues to demonstrate its commitment to quality
and has expanded its scope of external validation of its quality programs through nationally
recognized accreditation organizations. Each of CIGNA’s 23 HMO and POS plans that have undergone an
accreditation review has earned Excellent or Commendable status from the NCQA, a private, nonprofit
organization dedicated to improving health care quality. CIGNA’s PPO and Open Access Plus plans in
all 50 states have full accreditation status from NCQA. In addition to achieving outstanding
accreditation outcomes for its HMO, POS, PPO and OAP products, CIGNA’s provider transparency,
wellness, utilization management, case management and demand management programs have been awarded
the highest outcomes possible. From NCQA, CIGNA earned Physician & Hospital Quality Certification
and Wellness and Health Promotion Accreditation. From URAC, an independent, nonprofit health care
accrediting organization dedicated to promoting health care quality through accreditation,
certification and commendation, CIGNA has full accreditation for Health Utilization Management,
Case Management and Health Call Centers.
8
HEDIS® Measures. In addition, CIGNA HealthCare participates in NCQA’s
Health Plan Employer Data and Information Set (“HEDIS®”) Quality Compass Report.
HEDIS® Effectiveness of Care measures are a standard set of metrics to evaluate the
effectiveness of managed care clinical programs. CIGNA HealthCare’s national results compare
favorably to industry averages.
Technology. CIGNA HealthCare understands the critical importance of information
technology to the level of service the Company is able to provide to its members and to the
continued growth of its health care business. The health care marketplace is evolving and the level
of service that is acceptable to consumers today may not be acceptable tomorrow. Therefore, CIGNA
HealthCare continues to strategically invest in its information technology infrastructure and
capabilities including technology essential to fundamental claim administration and customer
service, as well as tools and Internet-enabled technology that support CIGNA HealthCare’s focus on
engaging members in health care decisions.
For example, CIGNA HealthCare has developed a range of member decision support tools
including:
| • |
|
myCIGNA.com, CIGNA’s consumer Internet portal. The portal is personalized with each
member’s CIGNA medical, dental and pharmacy plan information; |
| • |
|
myCignaPlans.com, a website that allows prospective members to compare plan coverage and
pricing options, before enrolling, based on a variety of factors. The application gives
members information on the total health care cost to them and their employer; |
| • |
|
Health Risk Assessment, an online interactive tool through which members can identify
potential health risks and monitor their health status; |
| • |
|
a number of interactive online cost and quality information tools that compare hospital
quality and efficiency information, prescription drug choices and average price estimates and
member-specific average out-of-pocket cost estimates for certain medical procedures; and |
| • |
|
a special website designed for seniors that offers customized features as well as access to
both the myCIGNA.com and cigna.com websites. |
Pricing, Reserves and Reinsurance
Premiums and fees charged for HMO and most health insurance products and life insurance
products are generally set in advance of the policy period and are typically guaranteed for one
year (unless specified events occur, such as changes in benefits, significant changes in enrollment
or laws affecting the coverage or costs). Premium rates for fully insured products are established
either on a guaranteed cost basis or on a retrospectively experience-rated basis.
Charges to customers established on a guaranteed cost basis at the beginning of the policy
period cannot be adjusted to reflect actual claim experience during the policy period. A
guaranteed cost pricing methodology reflects assumptions about future claims, health care inflation
(unit cost, location of delivery of care and utilization), effective medical cost management,
expenses, credit risk, enrollment mix, investment returns, and profit margins. Claim and expense
assumptions may be based in whole or in part on prior experience of the account or on a pool of
accounts, depending on the group size and the statistical credibility of the experience.
Generally, guaranteed cost groups are smaller and less statistically credible than retrospectively
experience-rated groups. In addition, pricing for health care products that use networks of
contracted providers reflects assumptions about the future claims impact on the reimbursement rates
in the provider contracts. Premium rates may vary among accounts to reflect the anticipated
contract mix, family size, industry, renewal date, and other cost-predictive factors. In some
states, premium rates must be approved by the state insurance departments, and state laws may
restrict or limit the use of rating methods.
9
Premiums established for retrospectively experience-rated business may be adjusted for the
actual claim and, in some cases, administrative cost experience of the account through an
experience settlement process subsequent to the policy period. To the extent that the cost
experience is favorable in relation to the prospectively determined premium rates, a portion of the
initial premiums may be credited to the policyholder as an experience refund. If claim experience
is adverse in relation to the initial premiums, CIGNA HealthCare may recover the resulting
experience deficit, according to contractual provisions, through future premiums and experience
settlements, provided the policy remains in force.
CIGNA HealthCare contracts on an ASO basis with customers who fund their own claims. CIGNA
HealthCare charges these customers administrative fees based on the expected cost of administering
their self-funded programs. In some cases, CIGNA HealthCare provides performance guarantees
associated with meeting certain service related and other performance standards. If these
standards are not met, CIGNA HealthCare may be financially at risk up to a stated percentage of the
contracted fee or a stated dollar amount. CIGNA HealthCare establishes liabilities for estimated
payouts associated with these guarantees. See Note 23 to the Consolidated Financial Statements
beginning on page 163 of this Form 10-K for details about these guarantees.
In addition to paying current benefits and expenses under HMO and health insurance policies,
CIGNA HealthCare establishes reserves for amounts estimated to fund reported claims not yet paid,
as well as claims incurred, but not yet reported. Also, liabilities are established for estimated
experience refunds based on the results of retrospectively experience-rated policies and applicable
contract terms.
As of December 31, 2009, approximately $1.0 billion, or 59% of the reserves of CIGNA
HealthCare’s operations comprised liabilities that are likely to be paid within one year, primarily
for medical and dental claims, as well as certain group disability and life insurance claims. The
reserve amount expected to be paid within one year includes $206 million recoverable from certain
ASO customers and from minimum premium policyholders. The remaining reserves relate primarily to
contracts that are short term in nature, but have long term payouts and include liabilities for
group long-term disability insurance benefits and group life insurance benefits for disabled and
retired individuals, benefits paid in the form of both life and non-life contingent annuities to
survivors and contractholder deposit funds.
CIGNA HealthCare credits interest on experience refund balances to retrospectively
experience-rated policyholders through rates that are set by CIGNA HealthCare taking investment
performance and market rates into consideration. Interest-crediting rates are set at CIGNA
HealthCare’s discretion. Higher rates are credited to funds with longer expected payout terms
reflecting the fact that higher yields are generally available on investments with longer
maturities. For 2009, the rates of interest credited ranged from 2.25% to 4.0%, with a weighted
average rate of approximately 2.7%.
The profitability of CIGNA HealthCare’s fully insured health care products depends on the
adequacy of premiums charged relative to claims and expenses. For medical and dental products,
profitability reflects the accuracy of cost projections for health care (unit costs and
utilization), the adequacy of fees charged for administration and risk assumption and effective
medical cost and utilization management.
CIGNA HealthCare reduces its exposure to large catastrophic losses under group life,
disability and accidental death contracts by purchasing reinsurance from unaffiliated reinsurers.
10
Markets and Distribution
CIGNA HealthCare offers products in the following markets:
| • |
|
national accounts, which are multi-site employers generally with more than 5,000 employees; |
| • |
|
middle market, which is generally defined as multi-site employers with more than 250 but
fewer than 5,000 employees, and single-site employers with more than 250 employees; |
| • |
|
“Select,” which generally includes employers with more than 50 but fewer than 250
employees; |
| • |
|
small business, which generally includes employers with 2-50 employees; |
| • |
|
government, which includes employees in federal, state and local governments, primary and
secondary schools, and colleges and universities; |
| • |
|
Taft-Hartley plans, which includes members covered by union trust funds; |
| • |
|
seniors, which focuses on the health care needs of individuals 50 years and older; |
| • |
|
voluntary, which focuses on employers with hourly and part-time uninsured employees; and |
| • |
|
emerging markets, which includes non-CIGNA HealthCare payors to which leased network and
other services are offered. |
To date, the national and middle markets have comprised a significant amount of CIGNA
HealthCare’s business. With the acquisition of Great-West Healthcare, the “Select,” small
business, and emerging markets now constitute a larger share of CIGNA HealthCare’s business than
before the acquisition.
CIGNA HealthCare employs sales representatives to distribute its products and services through
insurance brokers and insurance consultants or directly to employers. CIGNA HealthCare also
employs representatives to sell utilization review services, managed behavioral health care and
employee assistance services directly to insurance companies, HMOs, third party administrators and
employer groups. As of December 31, 2009, the field sales force for the products and services of
this segment consisted of approximately 880 sales representatives in approximately 110 field
locations.
Competition
CIGNA HealthCare’s business is subject to intense competition, and industry consolidation has
created an even more competitive business environment. While no one competitor dominates the
health care market, CIGNA HealthCare expects a continuing trend of consolidation in the industry
given the current economic and political environment.
In certain geographic locations, some health care companies may have significant market share
positions. A large number of health care companies and other entities compete in offering similar
products. Competition in the health care market exists both for employers and other groups
sponsoring plans and for the employees in those instances where the employer offers its employees
the choice of products of more than one health care company. Most group policies are subject to
annual review by the policyholder, who may seek competitive quotations prior to renewal.
11
The principal competitive factors are: quality and cost-effectiveness of service and provider
networks; effectiveness of medical care management; product responsiveness to the needs of
customers and their employees; price; cost-containment services; technology; and effectiveness of
marketing and sales. Financial strength of the insurer, as indicated by ratings issued by
nationally recognized rating agencies, is also a competitive factor. For more information
concerning insurance ratings, see “Ratings” in Section K beginning on page 32 of this Form 10-K.
CIGNA HealthCare believes that its health advocacy capabilities, integrated approach to consumer
engagement, breadth of product offerings, clinical care and medical management capabilities and
funding options are strategic competitive advantages. These advantages allow CIGNA HealthCare to
respond to the diverse needs of its customer base. CIGNA HealthCare also believes that its focus
on helping to improve the health, well-being and sense of security of its members will allow it to
distinguish itself from its competitors.
CIGNA HealthCare’s principal competitors are:
| • |
|
other large insurance companies that provide group health and life insurance products; |
| • |
|
Blue Cross and Blue Shield organizations; |
| • |
|
stand-alone HMOs and PPOs; |
| • |
|
third-party administrators; |
| • |
|
HMOs affiliated with major insurance companies and hospitals; and |
| • |
|
national managed pharmacy, behavioral health and utilization review services companies. |
Competition also arises from smaller regional or specialty companies with strength in a
particular geographic area or product line, administrative service firms and, indirectly,
self-insurers. In addition to these traditional competitors, a new group of competitors is
emerging. These new competitors are focused on delivering employee benefits and services through
Internet-enabled technology that allows consumers to take a more active role in the management of
their health. This is accomplished primarily through financial incentives, access to enhanced
medical quality data and other information sharing. The effective use of the Company’s health
advocacy capabilities, decision support tools (some of which are web-based) and enabling technology
are critical to success in the health care industry, and CIGNA HealthCare believes they will be
competitive differentiators.
Industry Developments
Both state and federal lawmakers have supported a broad range of health care reform efforts.
These efforts intensified in 2009 with major health care legislative proposals being considered in
the U.S. Congress. The possible enactment of proposed reform legislation is uncertain but, if
enacted, could affect the health care industry in general and CIGNA, specifically. To improve the
United States’ (U.S.) healthcare system in a sustainable way, CIGNA believes that three fundamental
issues need to be addressed; cost, quality and access. CIGNA is intensely committed to developing
workable solutions for reforming the U.S. healthcare system and believes such solutions must first
address the underlying drivers of health care costs. Through continued development and wider
adoption of health advocacy programs, cost management and wellness initiatives, CIGNA believes the
U.S. health care system can better provide all its citizens access to affordable quality
healthcare. For more information concerning health care reform, see “Proposed Health Care Reform”
in the Industry Developments and Other Matters section of the MD&A on page 79.
12
E. Disability and Life
CIGNA’s Disability and Life segment (“CIGNA Disability and Life”) provides the following
insurance products and their related services: group long-term and short-term disability
insurance, group life insurance, workers’ compensation and disability case management, and accident
and specialty insurance. These products and services are provided by subsidiaries of CIGNA
Corporation. CIGNA Disability and Life markets products in all 50 states, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and Canada.
Principal Products and Services
Disability
CIGNA Disability and Life markets group long-term and short-term disability insurance products
and services. These products and services generally provide a fixed level of income to replace a
portion of wages lost because of disability. CIGNA Disability and Life also provides assistance to
the employee in returning to work and assistance to the employer in managing the cost of employee
disability. Group disability coverage is typically employer-paid or a combination of employer and
employee-paid, but may also include coverage paid for entirely by employees.
CIGNA Disability and Life, through its Intracorp® subsidiary, also provides case management
and related services to workers’ compensation insurers and employers who self-fund workers’
compensation and disability benefits.
CIGNA Disability and Life’s disability insurance products may be integrated with other
disability benefit programs, behavioral programs, workers’ compensation, medical programs, social
security advocacy, and leave of absence administration. CIGNA Disability and Life believes this
integration provides customers with increased efficiency and effectiveness in disability claims
management, enhances productivity and reduces overall costs to employers. Coordinating the
administration of CIGNA Disability and Life disability and CIGNA HealthCare’s medical programs may
provide enhanced opportunities to influence outcomes, reduce the cost of both medical and
disability events and improve the return to work rate. CIGNA Disability and Life has formalized an
integrated approach to health and wellness through CIGNA’s Disability and Healthcare Connect®
program. This program uses information from the CIGNA HealthCare and CIGNA Disability and Life
databases to help identify, treat and manage disabilities before they become chronic, longer in
duration and more costly. Proactive outreach from CIGNA Behavioral Health assists employees
suffering from a mental health condition, either as a primary condition or as a result of another
condition. CIGNA may receive fees for providing these integrated services to customers.
CIGNA Disability and Life is an industry leader in returning employees to work quickly.
Shorter disability claim durations mean higher productivity and lower cost for employers and a
better quality of life for their employees. Data from a recent industry customer satisfaction
survey showed that CIGNA Disability and Life’s short-term and long-term disability claimant
satisfaction levels meet and in certain metrics exceed those of our competitors.
Approximately 8,200 insured disability policies covering approximately 5.1 million lives were
outstanding as of December 31, 2009.
Life Insurance
Group life insurance products include group term life and group universal life. Group term
life insurance may be employer-paid basic life insurance, employee-paid supplemental life insurance
or a combination thereof.
CIGNA Disability and Life provides group universal life insurance to employers. Group
universal life insurance is a voluntary life insurance product in which the owner may accumulate
cash value. The cash value earns interest at rates declared from time to time, subject to a
minimum guaranteed contracted rate, and may be borrowed, withdrawn, or, within certain limits, used
to fund future life insurance coverage.
Approximately 4,300 group life insurance policies covering approximately 4.7 million lives
were outstanding as of December 31, 2009.
13
Other Products and Services
CIGNA Disability and Life offers personal accident insurance coverage, which consists
primarily of accidental death and dismemberment and travel accident insurance to employers. Group
accident insurance may be employer-paid or employee-paid.
CIGNA Disability and Life also offers specialty insurance services that consist primarily of
disability and life, accident, and medical insurance to professional associations, financial
institutions, and participant organizations. Renewal rights to CIGNA’s block of student and
participant accident insurance business were sold to an unaffiliated insurer during 2009.
Voluntary benefits are those paid by the employee and are offered at the employer’s worksite.
CIGNA Disability and Life plans provide employers, among other services, flexible enrollment
options, list billing, medical underwriting, and individual record keeping. CIGNA Disability and
Life designed its voluntary offerings to offer employers a complete and simple way to manage their
benefits, including personalized enrollment communication and administration of the benefits
program.
Financial information, including premiums and fees, is presented in the Disability and Life
section of the MD&A beginning on page 69 and in Note 22 to CIGNA’s Consolidated Financial
Statements beginning on page 160 of this Form 10-K.
Pricing, Reserves and Reinsurance
CIGNA Disability and Life’s products and services are offered on a fully insured,
experience-rated and ASO basis. Under fully insured arrangements, policyholders pay a fixed
premium and CIGNA Disability and Life bears the risk for claims and costs. Under experience-rated
funding arrangements, a premium that typically includes a margin to partially protect against
adverse claim fluctuations is determined at the beginning of the policy period. CIGNA Disability
and Life generally bears the risk if claims and expenses exceed this premium. If premiums exceed
claims and expenses, any surplus amount is generally first used to offset prior deficits and is
otherwise generally returned to the policyholder if surplus exceeds minimum contractual levels.
With experience-rated insurance products, CIGNA Disability and Life may recover deficits from
margins in future years if the policy is renewed. Under ASO arrangements, CIGNA Disability and
Life contracts with groups 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 CIGNA Disability and Life’s products and services are
fully insured.
Premiums and fees charged for disability and life insurance products are generally established
in advance of the policy period and are generally guaranteed for one to three years and selectively
guaranteed for up to five years, but policies can in most cases be subject to early termination by
the policyholder or by the insurance company.
Premium rates reflect assumptions about future claims, expenses, credit risk, investment
returns and profit margins. Assumptions may be based in whole or in part on prior experience of the
account or on a pool of accounts, depending on the group size and the statistical credibility of
the experience, which varies by product.
Premiums for group universal life insurance products consist of mortality, administrative and
surrender charges assessed against the policyholder’s fund balance. Interest credited and
mortality charges for group universal life, and mortality charges on group variable universal life,
may be adjusted prospectively to reflect expected interest and mortality experience. Mortality
charges are subject to guaranteed maximum rates, based on standard mortality tables, which rates
are stated in the policy.
In addition to paying current benefits and expenses, CIGNA Disability and Life establishes
reserves in amounts estimated to be sufficient to pay reported claims not yet paid, as well as
claims incurred but not yet reported. For liabilities with longer-term pay-out periods such as
long-term disability, reserves represent the present value of future expected payments. CIGNA
Disability and Life discounts these expected payments using assumptions for interest rates and the
length of time over which claims are expected to be paid. The annual effective interest rate
assumptions used in determining reserves for most of the long-term disability insurance business is
5% for claims that were incurred in 2009 and 4.75% for claims that were incurred in 2008. For
group universal life insurance, CIGNA Disability and Life establishes reserves for deposits
received and interest credited to the policyholder, less mortality and administrative charges
assessed against the policyholder’s fund balance.
14
The profitability of this segment’s products depends on the adequacy of premiums charged and
investment returns relative to claims and expenses. The effectiveness of return to work programs
and mortality levels also impact the profitability of disability insurance products. CIGNA
Disability and Life’s previous claim experience and industry data indicate a correlation between
disability claim incidence levels and economic conditions, with submitted claims rising under
adverse economic conditions, although the impact of the current adverse economic conditions is not
clear. For life insurance products, the degree to which future experience deviates from mortality,
morbidity and expense assumptions also affects profitability.
In order to reduce its exposure to large individual and catastrophic losses under group life,
disability and accidental death policies, CIGNA Disability and Life purchases reinsurance from
unaffiliated reinsurers.
Markets and Distribution
CIGNA Disability and Life markets the group insurance products and services described above to
employers, employees, professional and other associations and groups. In marketing these products,
CIGNA Disability and Life employs a sales force to target customers with 50 or more employees and
the products and services of this segment are primarily distributed through insurance brokers and
consultants, along with some direct sales. As of December 31, 2009, the field sales force for the
products and services of this segment consisted of approximately 200 sales professionals in 27
office locations.
Competition
The principal competitive factors that affect the CIGNA Disability and Life segment are
underwriting and pricing, the quality and effectiveness of claims management, relative operating
efficiency, investment and risk management, distribution methodologies and producer relations, the
breadth and variety of products and services offered, and the quality of customer service. The
Company believes that CIGNA Disability and Life’s claims management capabilities and integration
with CIGNA HealthCare’s benefits provide a competitive advantage in this marketplace.
For certain products with longer-term liabilities, such as group long-term disability
insurance, the financial strength of the insurer, as indicated by ratings issued by nationally
recognized rating agencies, is also a competitive factor. For more information concerning
insurance ratings, see “Ratings” in Section K beginning on page 32 of this Form 10-K.
The principal competitors of CIGNA’s group disability, life and accident businesses are other
large and regional insurance companies that market and distribute these or similar types of
products.
As of December 31, 2009, CIGNA is one of the top five providers of group disability, life and
accident insurance in the United States, based on premiums.
15
Industry Developments and Strategic Initiatives
The group insurance market remains highly competitive as the rising cost of providing medical
coverage to employees has forced companies to re-evaluate their overall employee benefit spending.
Demographic shifts have further driven demand for products and services that are sufficiently
flexible to meet the evolving needs of employers and employees who want innovative, cost-effective
solutions to their insurance needs. Employers continue to shift towards greater employee
participatory coverage and voluntary purchases.
Employers are also expressing a growing interest in employee wellness, absence management and
productivity and recognizing a strong link between health, productivity and their profitability.
CIGNA is well-positioned to offer employers programs that promote a healthy lifestyle, offer
assistance in returning to work and integrate health care and disability programs. CIGNA believes
it is well positioned to deliver integrated solutions that address these broad employer and
employee needs. CIGNA also believes that its strong disability management portfolio and fully
integrated programs provide employers and employees tools to improve health status. This focus on
managing the employee’s total absence enables CIGNA to increase the number and likelihood of
interventions and minimize disabling events.
The disability industry is under continuing review by regulators and legislators with respect
to its offset practices regarding Social Security Disability Insurance (“SSDI”). The Company has
received one Congressional inquiry and has responded to the information request. Also, at least
one state has considered legislation that would restrict the use of such offset provisions in
disability policies. The Company is also involved in related pending civil litigation. If the
industry is forced to change its offset SSDI procedures, the practices and products for this
segment could be significantly impacted.
16
F. International
CIGNA’s International segment (“CIGNA International”) offers life, accident and supplemental
health insurance products as well as international health care products and services. These
products and services are provided by subsidiaries of CIGNA Corporation, including foreign
operating entities.
Principal Products and Services
Life, Accident and Supplemental Health Insurance
CIGNA International’s life, accident and supplemental health insurance products generally
provide simple, affordable coverage of risks for the health and financial security of individuals.
Supplemental health products provide a specified payment for a variety of health risks and include
personal accident, accidental death, critical illness, hospitalization, dental, cancer and other
dread disease coverages. Variable universal life insurance products are also included in the
product portfolio. CIGNA International’s life, accident and supplemental health insurance products
are offered in South Korea, Taiwan, the European Union, Hong Kong, Indonesia, China, New Zealand
and Thailand.
International Health Care
CIGNA International’s health care businesses primarily consist of products and services to
meet the needs of multinational companies and their expatriate employees and dependents. These
benefits include medical, dental, vision, life, accidental death and dismemberment and disability
products. The expatriate benefits products and services are offered through guaranteed cost,
experience-rated, administrative services only, and minimum premium funding arrangements. For
definitions of funding arrangements, see “Funding Arrangements” in Section D beginning on page 3 of
this Form 10-K. The customers of CIGNA International’s expatriate benefits business are
multinational companies and international organizations headquartered in the United States, Canada,
Europe, the Middle East, Hong Kong, China and other international locations.
In addition, CIGNA International’s health care businesses include medical products, which are
primarily provided through group benefits programs to local employees in the United Kingdom and
Spain. These products include medical indemnity insurance coverage, with some offerings having
managed care or administrative service aspects. These products generally provide an alternative or
supplement to government provided national health care programs.
Financial information, including premiums and fees, is presented in the International section
of the MD&A beginning on page 71 and in Note 22 to CIGNA’s Consolidated Financial Statements
beginning on page 160 of this Form 10-K.
Pricing, Reserves and Reinsurance
Premiums for CIGNA International’s life, accident and supplemental health insurance products
are based on assumptions about mortality, morbidity, customer retention, expenses and target profit
margins, as well as interest rates. The profitability of these products is primarily driven by
mortality, morbidity, and customer retention.
Fees for variable universal life insurance products consist of mortality, administrative,
asset management and surrender charges assessed against the contractholder’s fund balance.
Mortality charges on variable universal life may be adjusted prospectively to reflect expected
mortality experience.
Premiums and fees for CIGNA International’s health care products reflect assumptions about
future claims, expenses, membership demographics, investment returns, and profit margins. For
products using networks of contracted providers, premiums reflect assumptions about the impact of
provider contracts and utilization management on future claims. Most of the premium volume for the
medical indemnity business is on a guaranteed cost basis. Other premiums are established on an
experience-rated basis. Most contracts permit rate changes at least annually.
The profitability of health care products is dependent upon the accuracy of projections for
health care inflation (unit cost, location of delivery of care, including currency of incurral and
utilization), membership demographics, the adequacy of fees charged for administration and
effective medical cost management.
17
In addition to paying current benefits and expenses, CIGNA International establishes reserves
in amounts estimated to be sufficient to settle reported claims not yet paid, claims incurred but
not yet reported as well as future amounts payable on experience-rated arrangements. Additionally,
for some individual life insurance and supplemental health insurance products, CIGNA International
establishes policy reserves which reflect the present value of expected future obligations less the
present value of expected future premiums attributable to policyholder obligations. CIGNA
International defers acquisition costs, such as commissions, telemarketing, direct response
marketing and policy fulfillment costs, incurred in the sales of long-duration life, accident and
supplemental health products. For most products, these costs are amortized in proportion to
premium revenue recognized, which is impacted by customer retention. For variable universal life
products, acquisition costs are amortized in proportion to expected gross profits.
CIGNA International reduces its exposure to large and/or multiple losses arising out of a
single occurrence by purchasing reinsurance from unaffiliated reinsurers.
Markets and Distribution
CIGNA International’s life, accident and supplemental health insurance products are generally
marketed through distribution partners with whom the individual insured has an affinity
relationship. These products are sold primarily through direct marketing channels, such as
outbound telemarketing and in-branch bancassurance. Marketing campaigns are conducted through
these channels under a variety of arrangements with affinity partners. These affinity partners
primarily include banks, credit card companies and other financial institutions. CIGNA
International also distributes directly to consumers via direct response television and the
Internet. CIGNA International’s life, accident and supplemental health insurance businesses are
located in South Korea, Taiwan, the European Union, Hong Kong, Indonesia, China, New Zealand and
Thailand.
CIGNA International’s health care products are distributed through independent brokers and
consultants, select partners and CIGNA International’s own sales personnel. The customers of CIGNA
International’s expatriate benefits business are multinational companies and international
organizations headquartered in the United States, Canada, Europe, the Middle East, Hong Kong, China
and other international locations. In addition, CIGNA International’s health care businesses
include medical products, which are provided through group and individual benefits programs in the
United Kingdom and Spain.
For CIGNA International’s life, accident and supplemental health insurance products, a
significant portion of premiums are billed and collected through credit cards. A substantial
contraction in consumer credit could impact CIGNA International’s ability to retain existing
policies and sell new policies. A decline in customer retention would result in both a reduction
of revenue and an acceleration of the amortization of acquisition related costs.
South Korea represents the single largest geographic market for CIGNA International’s
businesses. In 2009, South Korea generated 29% of CIGNA International’s revenues and 49% of its
segment earnings. For information on the concentration of risk with respect to CIGNA
International’s business in South Korea, see “Other Items Affecting International Results” in the
International section of the MD&A beginning on page 71 of this Form 10-K.
Competition
Competitive factors in CIGNA International’s life, accident and supplemental health and
expatriate benefits businesses include product and distribution innovation and differentiation,
efficient management of marketing processes and costs, commission levels paid to distribution
partners, and quality of claims and customer services.
The principal competitive factors that affect CIGNA International’s health care businesses are
underwriting and pricing, relative operating efficiency, relative effectiveness in network
development and medical cost management, product innovation and differentiation, broker relations,
and the quality of claims and customer service. In most overseas markets, perception of financial
strength is also an important competitive factor.
For the life, accident and supplemental health insurance line of business, competitors are
primarily locally based insurance companies, including insurance subsidiaries of banks primarily in
Asia and Europe. However, insurance company competitors in this segment primarily focus on
traditional product distribution through captive agents, with direct marketing being a secondary
objective. CIGNA International estimates that it has less than 2% market share of the total life
insurance premiums in any given market in which it operates.
18
With respect to the expatriate benefits business, CIGNA International is a market leader in
the U.S. Its primary competitors include U.S.-based and European health insurance companies with
global expatriate benefits operations. For the health care operations in the United Kingdom and
Spain, the primary competitors are regional and local insurers, with CIGNA’s market share at less
than 5% of the premiums of the total local health care market.
CIGNA International expects that the competitive environment will intensify as U.S. and
Europe-based insurance and financial services providers pursue global expansion opportunities.
Industry Developments
Pressure on social health care systems and increased wealth and education in emerging markets
is leading to higher demand for products providing health insurance and financial security. In the
life, accident and supplemental health business, direct marketing is growing and attracting new
competitors while industry consolidation among financial institutions and other affinity partners
continues. Increased regulations requiring foreign workers to show proof of health insurance are
creating opportunities for CIGNA International’s health care businesses. See “Risk Factors”
beginning on page 35 of this Form 10-K for a discussion of risks related to CIGNA International.
19
G. Run-off Reinsurance
Principal Products and Services
Until 2000, CIGNA offered reinsurance coverage for part or all of the risks written by other
insurance companies (or “ceding companies”) under life and annuity policies (both group and
individual) and accident policies (workers’ compensation, personal accident, and catastrophe
coverages). The products and services related to these operations were offered by subsidiaries of
CIGNA Corporation.
In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance
businesses. CIGNA placed its remaining reinsurance businesses (including its accident,
international life, and annuity reinsurance businesses) into run-off as of June 1, 2000, and
stopped underwriting new reinsurance business.
CIGNA’s exposures stem primarily from its annuity reinsurance business, including its
reinsurance of guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits
(“GMIB”) contracts. Additional exposures arise from its reinsurance of workers’ compensation and
other personal accident and catastrophic risks.
Life and Annuity Policies
Guaranteed Minimum Death Benefit Contracts
CIGNA’s reinsurance segment reinsured GMDB (also known as variable annuity death benefits
(“VADBe”)), under certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with a death benefit. CIGNA has
equity and other market exposures as a result of this product. The Company purchased
retrocessional protection that covers approximately 5% of the assumed risks. The Company also
maintains a dynamic hedge program (“GMDB equity hedge program”) to substantially reduce the equity
market exposures relating to GMDB contracts by entering into exchange-traded futures contracts.
For additional information about GMDB contracts, see “Guaranteed Minimum Death Benefits” under
Run-off Reinsurance section of the MD&A beginning on page 73 and Note 7 to CIGNA’s Consolidated
Financial Statements beginning on page 117 of this Form 10-K.
Guaranteed Minimum Income Benefit Contracts
In certain circumstances where CIGNA’s reinsurance operations reinsured the GMDB, CIGNA also
reinsured GMIB under certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with minimum income and death
benefits. All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. When
annuitants elect to receive these minimum income benefits, CIGNA may be required to make payments
which will vary based on changes in underlying mutual fund values and interest rates. CIGNA has
retrocessional coverage for 55% of the exposures on these contracts, provided by two external
reinsurers.
For additional information about GMIB contracts, see “Guaranteed Minimum Income Benefits”
under Run-off Reinsurance section of the MD&A beginning on page 73 and Note 11 to CIGNA’s
Consolidated Financial Statements beginning on page 132 of this Form 10-K.
Workers’ Compensation, Personal Accident and Catastrophe
CIGNA reinsured workers’ compensation and other personal accident and catastrophic risks in
the London market and in the United States. CIGNA purchased retrocessional coverage in these
markets to reduce the risk of loss on these contracts.
20
Markets and Distribution
These products under CIGNA’s Run-off Reinsurance segment were sold principally in North
America and Europe through a small sales force and through intermediaries.
Prior to 2000, CIGNA also purchased reinsurance to reduce the risk of losses on contracts that
it had written. CIGNA determines its net exposure for run-off reinsurance contracts by estimating
the portion of its policy and claim reserves that it expects will be recovered from its reinsurers
(or “retrocessionaires”) and reflecting these in its financial statements as Reinsurance
Recoverables, or, with respect to GMIB contracts discussed above, as Other Assets.
Other Risks
For more information on policy and claim reserves see the Run-off Reinsurance section of the
MD&A beginning on page 73, and Notes 8 and 11 to CIGNA’s Consolidated Financial Statements
beginning on pages 121 and 132 respectively of this Form 10-K. For more information on the risk
associated with Run-off Reinsurance, see the Risk Factors beginning on page 35 of this Form 10-K,
and the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K.
21
H. Other Operations
Other Operations consists of:
| • |
|
non-leveraged and leveraged corporate-owned life insurance; |
| • |
|
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. |
The products and services related to these operations are offered by subsidiaries of CIGNA
Corporation.
Corporate-owned Life Insurance (“COLI”)
Principal Products and Services
The principal products of the COLI business are permanent insurance contracts sold to
corporations to provide coverage on the lives of certain of their employees. Permanent life
insurance provides coverage that, when adequately funded, does not expire after a term of years.
The contracts are primarily non-participating universal life policies. The key distinction between
leveraged and non-leveraged COLI products is that, with leveraged COLI, the product design
anticipates borrowing by the policy owner of a portion of the surrender value, while policy loans
are not a significant feature of non-leveraged COLI.
Universal life policies typically provide flexible coverage and flexible premium payments.
Policy cash values fluctuate with the amount of the premiums paid, mortality and expense charges
assessed, and interest credited to the policy. Variable universal life policies are universal life
contracts in which the cash values vary directly with the performance of a specific pool of
investments underlying the policy.
The principal services provided by the COLI business are issuance and administration of the
insurance policies (e.g., maintenance of records regarding cash values and death benefits, claims
processing, etc.) as well as oversight of the investment management for separate account assets
that support the variable universal life product.
Product Features
Cash values on universal life policies are credited interest at a declared interest rate that
reflects the anticipated investment results of the assets backing these policies and may vary with
the characteristics of each product. Universal life policies generally have a minimum guaranteed
declared interest rate which may be cumulative from the issuance date of the policy. The declared
interest rate may be changed monthly, but is generally changed less frequently. In lieu of
credited interest rates, holders of certain universal life policies may elect to receive credited
income based on changes in an equity index, such as the S&P 500®. No such elections
have been made since 2004.
Cash values on variable universal life policies vary directly with the performance of a
specific pool of investments underlying the policy. A limited number of variable universal life
policies guarantee that the realized investment performance for a quarter, excluding the impact of
unrealized gains/losses and the impact of credit-related events, will not be negative.
Mortality risk is retained according to guidelines established by CIGNA. To the extent a
given policy carries mortality risk that exceeds these guidelines, reinsurance is purchased from
third parties for the balance.
Pricing, Reserves, and Reinsurance
Fees for universal life insurance products consist of mortality, administrative and surrender
charges assessed against the
policyholder’s fund balance. Interest credited and mortality charges for universal life and
mortality charges on variable
universal life may be adjusted prospectively to reflect expected interest and mortality experience.
For universal life insurance, CIGNA establishes reserves for deposits received and interest
credited to the contractholder, less mortality and administrative charges assessed against the
contractholder’s fund balance.
22
In order to reduce its exposure to large individual and catastrophe losses, CIGNA purchases
reinsurance from unaffiliated reinsurers.
Markets and Distribution
From 2004 to 2008, the Company was not actively marketing and distributing COLI products. In
2008, the Company decided to re-enter the market for COLI products, and is actively pursuing new
COLI business.
The principal markets for COLI products are regional to national account-sized corporations,
including banks. CIGNA’s COLI products are offered through a select group of independent brokers
with particular expertise in the bank market and in the use of COLI for the financing of benefit
plan liabilities.
Competition
The principal competitive factors that affect CIGNA’s COLI business are pricing, service,
product innovation and access to third-party distribution.
For CIGNA’s COLI business, competitors are primarily national life insurance companies,
including insurance subsidiaries of banks.
CIGNA expects that the competitive environment will intensify as the economy recovers and
competitors develop new investment strategies and product designs, and aggressively price their
offerings to build distribution capacity and gain market share.
Industry Developments and Strategic Initiatives
The legislative environment surrounding COLI has evolved considerably over the past decade,
and there are ongoing discussions at the state and federal levels that have the potential to impact
the policyholder’s tax treatment and/or administrative requirements. The Pension Protection Act of
2006 included provisions related to the notice requirements given to insured employees and limited
coverage to certain more highly compensated employees. These changes were widely viewed as
clarification of existing rules or industry best practices.
Sale of Individual Life Insurance & Annuity and Retirement Benefits Businesses
CIGNA sold its individual life insurance and annuity business in 1998 and its retirement
benefits business in 2004. Portions of the gains from these sales were deferred because the
principal agreements to sell these businesses were structured as reinsurance arrangements. The
deferred portion relating to the remaining reinsurance is being recognized at the rate that
earnings from the sold businesses would have been expected to emerge, primarily over 15 years on a
declining basis.
Because the individual life and annuity business was sold in an indemnity reinsurance
transaction, CIGNA is not relieved of primary liability for the reinsured business and had
reinsurance recoverables totaling $4.4 billion as of December 31, 2009. Effective as of December
14, 2007, the purchaser placed a significant portion of the assets supporting the reserves for the
purchased business into a trust for the benefit of CIGNA which qualifies to support CIGNA’s credit
for the reinsurance ceded under Regulation 114 of the New York Department of Insurance. Trust
assets are limited to cash, certificates of deposits in U.S. banks, and securities specified by
section 1404 (a) of the New York insurance law and consist primarily of fixed maturities. At
December 31, 2009, the value of the trust assets secured approximately 90% of the reinsurance
recoverable. The remaining balance is currently unsecured. If Lincoln National Life Insurance
Company and Lincoln Life & Annuity of New York do not maintain a specified minimum credit or claims
paying rating, these reinsurers are required to fully secure the outstanding balance. S&P has
assigned each of these companies a rating of AA-.
CIGNA’s sale of its retirement benefits business primarily took the form of an arrangement
under which CIGNA reinsured with the purchaser of the retirement business the general account
contractholder liabilities under an indemnity reinsurance arrangement and the separate account
liabilities under modified coinsurance and indemnity reinsurance arrangements. Since the sale of
the retirement benefits business in 2004, the purchaser of that business has entered into
agreements with certain insured party contractholders (“novation agreements”), which relieved CIGNA
of any remaining contractual obligations to the contractholders. As a result, CIGNA reduced
reinsurance recoverables, contractholder deposit funds, and separate account balances for these
obligations.
23
The purchaser of the retirement benefits business deposited assets associated with the
reinsurance of general account contracts into a trust (the “Ceded Business Trust”) to provide
security to CIGNA for the related reinsurance recoverables. The purchaser is permitted to withdraw
assets from the Ceded Business Trust equal to the reduction in CIGNA’s reserves whenever a
reduction occurs. For example, reductions will occur when the purchaser enters into additional
novation agreements and directly assumes liability to the insured party. Assets in the trust must
be greater than or equal to general account statutory liabilities of the ceded business. Trust
assets are limited to those types of investments that are permitted by the state of Connecticut for
general account investing and consist primarily of fixed maturities. As of December 31, 2009,
assets totaling $2.4 billion remained in the Ceded Business Trust, and the remaining reserves for
the purchased business were $1.7 billion.
Settlement Annuity Business
CIGNA’s settlement annuity business is a run-off block of contracts. These contracts are
primarily liability settlements with approximately 35% of the liabilities associated with payments
that are guaranteed and not contingent on survivorship. In the case of the contracts that involve
non-guaranteed payments, such payments are contingent on the survival of one or more parties
involved in the settlement.
The
settlement annuities business is premium deficient, meaning initial premiums were not
sufficient to cover all claims and profit. Liabilities are estimates of the present value of
benefits to be paid less the present value of investment income generated by the assets supporting
the product including realized and unrealized capital gains. The Company estimates these
liabilities based on assumptions for investment yields, mortality, and administrative expenses.
Refer to Note 2 to CIGNA’s Consolidated Financial Statements beginning on page 103 of this Form
10-K for additional information regarding reserves for this business.
Other Risks
For more information, see the Other Operations section of the MD&A beginning on page 77 of
this Form 10-K.
24
I. Investments and Investment Income
CIGNA’s investment operations provide investment management and related services primarily for
CIGNA’s corporate invested assets and the insurance-related invested assets in its General Account
(“Invested Assets”). CIGNA acquires or originates, directly or through intermediaries, various
investments including private placements, public securities, commercial mortgage loans, real estate
and short-term investments. CIGNA’s Invested Assets are managed primarily by CIGNA subsidiaries
and external managers with whom CIGNA’s subsidiaries contract.
The Invested Assets comprise a majority of the combined assets of the Health Care, Disability
and Life, Run-off Reinsurance and Other Operations segments (collectively, the “Domestic
Portfolios”). There are, in addition, portfolios containing Invested Assets that consist of the
assets of the International segment (collectively, the “International Portfolios”). Additionally,
CIGNA subsidiaries or external managers manage Separate Account assets on behalf of
contractholders. These assets are legally segregated from the Company’s other businesses and are
not included in the General Account Invested Assets. Income, gains and losses generally accrue
directly to the contractholders.
Net investment income and realized investment gains (losses) are not reported separately in
the investment operations. Instead, net investment income is included as a component of earnings
for each of CIGNA’s operating segments (Health Care, Disability and Life, Run-off Reinsurance,
Other Operations and International) and Corporate, net of the expenses attributable to the
investment operations. Realized investment gains (losses) are reported for each of CIGNA’s
operating segments.
Assets Under Management
CIGNA’s Invested Assets under management at December 31, 2009 totaled $19.8 billion. See
Schedule I to CIGNA’s 2009 Consolidated Financial Statements on page FS-3 of this Form 10-K for
more information as to the allocation to types of investments.
As of December 31, 2009, CIGNA’s separate account funds consisted of:
| • |
|
$1.4 billion in separate account assets that are managed by the buyer of the retirement
benefits business pursuant to reinsurance arrangements described in the Sales of Individual
Life Insurance & Annuity and Retirement Benefits Businesses sections in Note 3 to the
Consolidated Financial Statements beginning on page 112 of this Form 10-K; |
| • |
|
$2.6 billion in separate account assets, which constitute a portion of the assets of the
CIGNA Pension Plan; and |
| • |
|
$3.3 billion in separate account assets, which primarily support certain corporate-owned
life insurance, health care and disability and life products. |
Types of Investments
CIGNA invests in a broad range of asset classes, including domestic and international fixed
maturities and common stocks, commercial mortgage loans, real estate and short-term investments.
Fixed maturity investments include publicly traded and private placement corporate bonds,
government bonds, publicly traded and private placement asset-backed securities, and redeemable
preferred stocks.
For the International Portfolios, CIGNA invests primarily in publicly traded fixed maturities,
short-term investments and time deposits denominated in the currency of the relevant liabilities
and surplus.
Fixed Maturities
CIGNA’s fixed maturities are 92% investment grade as determined by external rating agencies
(for public investments) and by CIGNA (for private investments). These assets are well diversified
by individual holding and industry sector. For information about below investment grade holdings,
see the “Investment Assets” section of the MD&A beginning on page 87 of this Form 10-K.
25
Commercial Mortgages and Real Estate
Commercial mortgage loan investments are subject to underwriting criteria addressing
loan-to-value ratio, debt service coverage, cash flow, tenant quality, leasing, market, location
and borrower’s financial strength. Such investments consist primarily of first mortgage loans on
commercial properties and are diversified by property type, location and borrower. CIGNA invests
primarily in commercial mortgages on fully completed and substantially leased commercial
properties. Virtually all of CIGNA’s commercial mortgage loans are balloon payment loans, under
which all or a substantial portion of the loan principal is due at the end of the loan term. CIGNA
holds no direct residential mortgages. The weighted average loan-to-value ratio of the Company’s
commercial mortgage loan portfolio, based on management’s annual valuation completed in the third
quarter of 2009, was approximately 77% and the weighted average debt service coverage was
approximately 1.5 times.
CIGNA enters into joint ventures with local partners to develop, lease, manage, and sell
commercial real estate to maximize investment returns. CIGNA’s portfolio of real estate
investments consists of properties under development and stabilized properties, and is diversified
relative to property type and location. Additionally, CIGNA invests in third-party sponsored real
estate funds to maximize investment returns and to maintain diversity with respect to its real
estate related exposure.
CIGNA also could take possession of real estate through foreclosure of delinquent commercial
mortgage loans. CIGNA rehabilitates, re-leases, and sells foreclosed properties, a process that
usually takes from two to four years unless management considers a near-term sale preferable. As
of December 31, 2009, CIGNA held $59 million of foreclosed properties.
Mezzanine and Private Equity Partnerships
CIGNA invests in limited partnership interests in partnerships formed and managed by seasoned,
experienced fund managers with diverse mezzanine and private equity strategies.
Derivative Instruments
CIGNA generally uses derivative financial instruments to minimize its exposure to certain market
risks. CIGNA has also written derivative instruments to minimize certain insurance customers’
market risks. In addition, to enhance investment returns, CIGNA may invest in indexed credit
default swaps or other credit derivatives from time to time. However, as of December 31, 2009,
CIGNA held no indexed credit default swaps or other credit derivatives. For information about
CIGNA’s use of derivative financial instruments, see Note 13 to CIGNA’s 2009 Consolidated
Financial Statements beginning on page 146 of this Form 10-K.
See also the “Investment Assets” section of the MD&A beginning on page 87, and Notes 1, 12,
and 14 to the Consolidated Financial Statements beginning on pages 103, 141 and 149, respectively,
of this Form 10-K for additional information about CIGNA’s investments.
Domestic Portfolios — Investment Strategy
As of December 31, 2009, the Domestic Portfolios had $18.3 billion in Invested Assets,
allocated among fixed maturity investments (66%); commercial mortgage loan investments (19%); and
policy loans, real estate investments, short-term investments and mezzanine and private equity
partnership investments (15%).
CIGNA generally manages the characteristics of these assets to reflect the underlying
characteristics of related insurance and contractholder liabilities and related capital
requirements, as well as regulatory and tax considerations pertaining to those liabilities, and
state investment laws. CIGNA’s domestic insurance and contractholder liabilities as of December
31, 2009, excluding liabilities of businesses sold through the use of reinsurance arrangements,
were associated with the following products, and the Invested Assets are allocated proportionally
as follows: other life and health, 51%; fully guaranteed annuity, 18%; and interest-sensitive life
insurance, 31%.
26
While the businesses and products supported are described elsewhere in this Form 10-K, the
Invested Assets supporting the insurance and contractholder liabilities of each of the Company’s
segments are as follows:
| • |
|
assets supporting CIGNA’s Health Care segment are structured to emphasize investment
income, and provide the necessary liquidity to meet cash flow requirements. |
| • |
|
assets supporting CIGNA’s Disability and Life segment are also structured to emphasize
investment income, and provide necessary liquidity to meet cash flow requirements. Invested
Assets supporting longer-term group disability insurance benefits and group life waiver of
premium benefits are generally managed to an aggregate duration similar to that of the related
benefit cash flows. |
| • |
|
assets supporting the Run-off Reinsurance segment with respect to reinsurance provided for
guaranteed minimum death benefit contracts and guaranteed minimum income benefit contracts are
structured to emphasize investment income, and provide the necessary liquidity to meet cash
flow requirements. For information about CIGNA’s use of derivative financial instruments in
the Run-off Reinsurance segment, see Notes 7 and 11 to CIGNA’s Consolidated Financial
Statements beginning on pages 117 and 132 of this Form 10-K. |
| • |
|
assets supporting CIGNA’s Other Operations segment are associated primarily with fully
guaranteed annuities (primarily settlement annuities) and interest-sensitive life insurance
(primarily corporate-owned life insurance products). Because settlement annuities generally
do not permit withdrawal by policyholders prior to maturity, the amount and timing of future
benefit cash flows can be reasonably estimated so funds supporting these products are invested
in fixed income investments whose aggregate duration generally matches the cash flows of the
related benefits. As of December 31, 2009, the duration of assets that supported these
liabilities was approximately 11.2 years. Invested Assets supporting interest-sensitive life
insurance products are primarily fixed income investments and policy loans. Fixed income
investments emphasize investment yield while meeting the liquidity requirements of the related
liabilities. |
Investment strategy and results are affected by the amount and timing of cash available for
investment, competition for investments, economic conditions, interest rates and asset allocation
decisions. CIGNA routinely monitors and evaluates the status of its investments in light of
current economic conditions, trends in capital markets and other factors. Such factors include
industry sector considerations for fixed maturity investments and mezzanine and private equity
partnership investments, and geographic and property-type considerations for commercial mortgage
loan and real estate investments.
International Portfolios — Investment Strategy
As of December 31, 2009 the International Portfolios had $1.5 billion in Invested Assets,
allocated among fixed maturity investments (93%), short-term investments (5%) and other investments
(2%). The International Portfolios are primarily managed by external managers with whom CIGNA’s
subsidiaries contract.
The characteristics of these assets are generally managed to reflect the underlying
characteristics of related insurance and contractholder liabilities, as well as regulatory and tax
considerations in the countries where CIGNA’s subsidiaries operate. CIGNA International’s Invested
Assets are generally invested in the currency of related liabilities, typically the currency in
which the subsidiaries operate and with an aggregate duration generally matching the duration of
insurance liabilities and surplus. CIGNA’s investment policy allows the investment of subsidiary
assets in U.S. dollars to the extent permitted by applicable regulation. CIGNA International’s
Invested Assets as of December 31, 2009 were held primarily in support of statutory surplus and
liabilities associated with the life, accident and supplemental health and healthcare products
described in Section F on page 17 of this Form 10-K.
27
J. Regulation
CIGNA and its subsidiaries are subject to federal, state and international regulations and
CIGNA has established policies and procedures to comply with applicable requirements.
CIGNA’s insurance and HMO subsidiaries must be licensed by the jurisdictions in which they
conduct business. These subsidiaries are subject to numerous state and federal regulations related
to their business operations, including, but not limited to:
| • |
|
the form and content of customer contracts including benefit mandates (including special
requirements for small groups, generally under 50 employees); |
| • |
|
the content of agreements with participating providers of covered services; |
| • |
|
producer appointment and compensation; |
| • |
|
claims processing and appeals; |
| • |
|
underwriting practices; |
| • |
|
reinsurance arrangements; |
| • |
|
unfair trade and claim practices; |
| • |
|
protecting the privacy and confidentiality of the information received from members; |
| • |
|
risk sharing arrangements with providers; and |
| • |
|
the operation of consumer-directed plans (including health savings accounts, health
reimbursement accounts, flexible spending accounts and debit cards). |
CIGNA and its international subsidiaries comply with regulations in international
jurisdictions where foreign insurers are, in some countries, faced with greater restrictions than
their domestic competitors. These restrictions may include discriminatory licensing procedures,
compulsory cessions of reinsurance, required localization of records and funds, higher premium and
income taxes, and requirements for local participation in an insurer’s ownership.
CIGNA and its subsidiaries are also subject to state and federal laws relating to
business entities.
Regulatory agencies conduct routine and targeted market conduct examinations of CIGNA’s
insurance and HMO subsidiaries to assess compliance with applicable laws and regulations. Other
types of regulatory oversight predominantly as to CIGNA and its subsidiaries’ products and services
are described below.
Regulation of Insurance Companies
Financial Reporting
Regulators closely monitor the financial condition of licensed insurance companies and HMOs.
States regulate the form and content of statutory financial statements and the type and
concentration of permitted investments. CIGNA’s insurance and HMO subsidiaries are required to
file periodic financial reports with regulators in most of the jurisdictions in which they do
business, and their operations and accounts are subject to examination by such agencies at regular
intervals.
28
Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds
Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty
associations or indemnity funds, which are established to pay claims on behalf of insolvent
insurance companies. In the United States, these associations levy assessments on member insurers
licensed in a particular state to pay such claims.
Several states also require HMOs to participate in guaranty funds, special risk pools and
administrative funds. For additional information about guaranty fund and other assessments, see
Note 23 to CIGNA’s Consolidated Financial Statements beginning on page 163 of this Form 10-K.
Some states also require health insurers and HMOs to participate in assigned risk plans, joint
underwriting authorities, pools or other residual market mechanisms to cover risks not acceptable
under normal underwriting standards.
Solvency and Capital Requirements
Many states have adopted some form of the National Association of Insurance Commissioners
(“NAIC”) model solvency-related laws and risk-based capital rules (“RBC rules”) for life and health
insurance companies. The RBC rules recommend a minimum level of capital depending on the types and
quality of investments held, the types of business written and the types of liabilities incurred.
If the ratio of the insurer’s adjusted surplus to its risk-based capital falls below statutory
required minimums, the insurer could be subject to regulatory actions ranging from increased
scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are
based upon solvency, liquidity and reserve coverage measures. During 2009, CIGNA’s HMOs and life
and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with
applicable RBC and non-U.S. surplus rules.
Effective December 31, 2009 the Company’s principal life insurance subsidiary, Connecticut
General Life Insurance Company (“CGLIC”), implemented the NAIC’s Actuarial Guideline XLIII (also
known as AG 43 or VACARVM), which is applicable to CGLIC’s statutory reserves for GMDB and GMIB
contracts totaling $1.6 billion as of December 31, 2009. As provided under this guidance, CGLIC
received approval from the State of Connecticut to grade-in the full effect of the guideline over a
3-year period. Accordingly, upon implementation at December 31, 2009, statutory surplus for CGLIC
was reduced by $40 million. If the guidance had been fully implemented at December 31, 2009,
statutory surplus would have been reduced by $110 million. Management does not anticipate that
this implementation will have a material impact on the amount of dividends expected to be paid by
CGLIC to the parent company in 2010. This implementation has no impact on measurement of the
Company’s results of operations or financial condition as determined under GAAP.
Holding Company Laws
CIGNA’s domestic insurance companies and certain of its HMOs are subject to state laws
regulating subsidiaries of insurance holding companies. Under such laws, certain dividends,
distributions and other transactions between an insurance or HMO subsidiary and its affiliates may
require notification to, or approval by, one or more state insurance commissioners.
Marketing,
Advertising, and Products
In most states, CIGNA’s insurance companies and HMO subsidiaries are required to certify
compliance with applicable advertising regulations on an annual basis. CIGNA’s insurance companies
and HMO subsidiaries are also required in most states to file and secure regulatory approval of
products prior to the marketing, advertising, and sale of such products. State and/or federal
regulatory scrutiny of life and health insurance company and HMO marketing and advertising
practices, including the adequacy of disclosure regarding products and their administration, may
result in increased regulation. Product offerings, such as the CIGNA limited benefits plans issued
by the Star HRG business acquired in July 2006, attracted increased regulatory scrutiny in 2009.
29
Licensing Requirements
Pharmacy Licensure Laws
Certain CIGNA subsidiaries are pharmacies, which dispense prescription drugs to participants
of benefit plans administered or insured by CIGNA subsidiary HMOs and insurance companies. These
pharmacy-subsidiaries are subject to state licensing requirements and regulation.
International Licensure Laws
CIGNA International subsidiaries are often required to be licensed when entering new markets
or starting new operations in certain jurisdictions. The licensure requirements for these CIGNA
subsidiaries vary by country and are subject to change.
Claim Administration, Utilization Review and Related Services
Certain CIGNA subsidiaries contract for the provision of claim administration, utilization
management and other related services with respect to the administration of self-insured benefit
plans. These CIGNA subsidiaries may be subject to state third-party administration and other
licensing requirements and regulation.
Federal Regulations
Employee Retirement Income Security Act
CIGNA subsidiaries sell most of their products and services to sponsors of employee benefit
plans that are governed by ERISA. CIGNA subsidiaries may be subject to requirements imposed by
ERISA on plan fiduciaries and parties in interest, including regulations affecting claim and
appeals procedures for health, dental, disability, life and accident plans.
Medicare Regulations
Several CIGNA subsidiaries engage in businesses that are subject to federal Medicare
regulations such as:
| • |
|
those offering individual and group Medicare Advantage (HMO) coverage in Arizona; |
| • |
|
contractual arrangements with the federal government for the processing of certain Medicare
claims and other administrative services; and |
| • |
|
those offering Medicare Pharmacy (Part D) and Medicare Advantage Private Fee For Service
products that are subject to federal Medicare regulations. |
Several CIGNA subsidiaries are also subject to reporting requirements pursuant to Section 111
of the Medicare, Medicaid and SCHIP Extension Act of 2007.
Federal Audits of Government Sponsored Health Care Programs
Participation in government sponsored health care programs subjects CIGNA to a variety of
federal laws and regulations and risks associated with audits conducted under these programs.
These audits may occur in years subsequent to CIGNA providing the relevant services under audit.
These risks may include reimbursement claims as well as potential fines and penalties. For
example, the federal government requires Medicare and Medicaid providers to file detailed cost
reports for health care services provided. These reports may be audited in subsequent years.
CIGNA HMOs that contract to provide community-rated coverage to participants in the Federal
Employees Health Benefit Plan may be required to reimburse the federal government if, following an
audit, it is determined that a federal employee group did not receive the benefit of a discount
offered by a CIGNA HMO to one of the two groups closest in size to the federal employee group. See
“Health Care” in Section D beginning on page 3 of this Form 10-K for additional information about
CIGNA’s participation in government health-related programs.
30
Health Insurance Portability and Accountability Act Regulations
The federal Health Insurance Portability and Accountability Act of 1996 and its implementing
regulations (“HIPAA”) impose several different requirements on health insurers, HMOs, health plans,
health care providers and clearinghouses. Health insurers and HMOs are further subject to
regulations related to guaranteed issuance (for groups with 50 or fewer lives), guaranteed renewal,
and portability of health insurance.
HIPAA also imposes minimum standards for health plans, health insurers, health care providers
and their vendors to safeguard the privacy and security of individually identifiable or protected
health information (“PHI”). In 2009, HIPAA’s privacy and security requirements were expanded by the
Health Information Technology for Economic and Clinical Health Act (“HITECH”) which enhanced
penalties for HIPAA violations and required regulated entities to provide notice of breaches of
unsecured PHI. CIGNA has a project team addressing the provisions of HITECH.
HIPAA also establishes rules to standardize the format and content of certain electronic
transactions, including but not limited to, eligibility and claims. In 2008, federal regulations
were issued requiring entities subject to HIPAA to update their transaction formats for electronic
data interchange from the current HIPAA 4010 standards to new HIPAA 5010 standards. CIGNA has
launched a project to migrate to the required HIPAA 5010 standards by the January 1, 2012 effective
date. Regulations were also issued in 2008 requiring a conversion from the ICD-9 diagnosis and
procedure code set to the ICD-10 diagnosis and procedure code set. Implementation of the HIPAA
5010 standards is necessary to support the IDC-10 code set. CIGNA has initiated a project to
deliver ICD-10 capabilities by the October 1, 2013 effective date.
Antitrust Regulations
CIGNA subsidiaries are also engaged in activities that may be scrutinized under federal and
state antitrust laws and regulations. These activities include the administration of strategic
alliances with competitors, information sharing with competitors and provider contracting.
Anti-Money Laundering Regulations
Certain CIGNA products (“Covered Products” as defined in the Bank Secrecy Act) are subject to
U.S. Department of the Treasury anti-money laundering regulations. CIGNA has implemented anti-money
laundering policies designed to ensure that its Covered Products are underwritten and sold in
compliance with these regulations.
Investment-Related Regulations
Depending upon their nature, CIGNA’s investment management activities are subject to U.S.
federal securities laws, ERISA, and other federal and state laws governing investment related
activities. In many cases, the investment management activities and investments of individual
insurance companies are subject to regulation by multiple jurisdictions.
Regulatory and Legislative Developments
The business of administering and insuring employee benefit programs, particularly health care
programs, is heavily regulated by federal and state laws and administrative agencies, such as state
departments of insurance and the federal Departments of Labor and Justice, as well as the courts.
In the growing area of consumer-driven plans, health savings accounts, health reimbursement
accounts and flexible spending accounts are also regulated by the U.S. Department of the Treasury
and the Internal Revenue Service. For information on Regulatory and Industry Developments, see
page 79 in the MD&A and Note 23 to CIGNA’s Consolidated Financial Statements beginning on page 163
of this Form 10-K.
Federal and state regulation and legislation may affect CIGNA’s operations in a variety of
ways. In addition to proposals discussed above related to increased regulation of the health care
industry, other proposed measures that may significantly affect CIGNA’s operations include the
expansion of the government’s role in the health care arena and alternative assessments and tax
increases specific to the health care insurance industry or health care insurance products as part
of federal health care reform initiatives, as well as other modifications of the Medicare program,
and employee benefit regulation.
The economic and competitive effects of the legislative and regulatory proposals discussed
above on CIGNA’s business operations will depend upon the final form of any such legislation or
regulation.
31
K. Ratings
CIGNA and certain of its insurance subsidiaries are rated by nationally recognized rating
agencies. The significance of individual ratings varies from agency to agency. However, companies
that are assigned ratings at the top end of the range have, in the opinion of the rating agency,
the strongest capacity for repayment of debt or payment of claims, while companies at the bottom
end of the range have the weakest capacity.
Insurance ratings represent the opinions of the rating agencies on the financial strength
of a company and its capacity to meet the obligations of insurance policies. The principal agencies
that rate CIGNA’s insurance subsidiaries characterize their insurance rating scales as follows:
| |
• |
|
A.M. Best Company, Inc. (“A.M. Best”), A++ to S (“Superior” to “Suspended”); |
| |
• |
|
Moody’s Investors Service (“Moody’s”), Aaa to C (“Exceptional” to “Lowest”); |
| |
• |
|
Standard & Poor’s Corp. (“S&P”), AAA to R (“Extremely Strong” to “Regulatory Action”);
and |
| |
• |
|
Fitch, Inc. (“Fitch”), AAA to D (“Exceptionally Strong” to “Order of Liquidation”). |
As of February 25, 2010, the insurance financial strength ratings for CIGNA subsidiaries,
CGLIC and Life Insurance Company of North America (“LINA”) were as follows:
| |
|
|
|
|
| |
|
CGLIC |
|
LINA |
| |
|
Insurance |
|
Insurance |
| |
|
Ratings(1) |
|
Ratings(1) |
|
|
|
|
|
A.M. Best
|
|
A
(“Excellent,”
3rd of 16)
|
|
A
(“Excellent,”
3rd of 16) |
|
|
|
|
|
Moody’s
|
|
A2
(“Good,”
6th of 21)
|
|
A2
(“Good,”
6th of 21) |
|
|
|
|
|
S&P
|
|
A
(“Strong,”
6th of 21)
|
|
(Not Rated) |
|
|
|
|
|
Fitch
|
|
A
(“Strong,”
6th of 24)
|
|
A
(“Strong,”
6th of 24) |
| |
|
|
| (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). |
32
Debt ratings are assessments of the likelihood that a company will make timely payments
of principal and interest. The principal agencies that rate CIGNA’s senior debt characterize their
rating scales as follows:
| |
• |
|
Moody’s, Aaa to C (“Exceptional” to “Lowest”); |
| |
• |
|
S&P, AAA to D (“Extremely Strong” to “Default”); and |
| |
• |
|
Fitch, AAA to D (“Highest” to “Default”). |
The commercial paper rating scales for those agencies are as follows:
| |
• |
|
Moody’s, Prime-1 to Not Prime (“Superior” to “Not Prime”); |
| |
• |
|
S&P, A-1+ to D (“Extremely Strong” to “Default”); and |
| |
• |
|
Fitch, F-1+ to D (“Very Strong” to “Distressed”). |
As of February 25, 2010, the debt ratings assigned to CIGNA Corporation by the following
agencies were as follows:
Debt Ratings(1)
CIGNA CORPORATION
| |
|
|
|
|
| |
|
|
|
Commercial |
| |
|
Senior Debt |
|
Paper |
Moody’s
|
|
Baa2
(“Adequate,”
9th of 21)
|
|
P2
(“Strong,”
2nd of 4) |
S&P
|
|
BBB
(“Adequate,”
9th of 22)
|
|
A2
(“Good,”
3rd of 7) |
Fitch
|
|
BBB
(“Good,”
9th of 24)
|
|
F2
(“Moderately Strong,”
3rd of 7) |
| |
|
|
| (1) |
|
Includes the rating assigned, the agency’s characterization of the rating and the position
of the rating in the applicable agency’s rating scale. |
CIGNA is committed to maintaining appropriate levels of capital in its subsidiaries to
support financial strength ratings that meet customers’ expectations, and to improving the earnings
of the health care business. Lower ratings at the parent company level increase the cost to borrow
funds. Lower ratings of CGLIC and LINA could adversely affect new sales and retention of current
business.
33
L. Miscellaneous
CIGNA and its principal subsidiaries are not dependent on business from one or a few
customers. No customer accounted for 10% or more of CIGNA’s consolidated revenues in 2009. CIGNA
and its principal subsidiaries are not dependent on business from one or a few brokers or agents.
In addition, CIGNA’s insurance businesses are generally not committed to accept a fixed portion of
the business submitted by independent brokers and agents, and generally all such business is
subject to its approval and acceptance.
CIGNA had approximately 29,300, 30,300, and 26,600 employees as of December 31, 2009, 2008 and
2007, respectively.
34
As a large company operating in a complex industry, CIGNA encounters a variety of risks and
uncertainties including those identified in this Risk Factor discussion and elsewhere in this
report. CIGNA devotes resources to developing enterprise-wide risk management processes, in
addition to the risk management processes within its businesses. These factors represent risks and
uncertainties that could have a material adverse effect on CIGNA’s business, liquidity, results of
operations or financial condition. These risks and uncertainties are not the only ones CIGNA
faces. Other risks and uncertainties that CIGNA does not know about now, or that the Company does
not now think are significant and does not appropriately identify and manage, may impair its
business or the trading price of its securities. The following are significant risks identified by
CIGNA.
Future performance of CIGNA’s business will depend on the Company’s ability to execute on its
strategic and operational initiatives effectively.
The future performance of CIGNA’s business will depend in large part on CIGNA’s ability to execute
effectively and implement its growth strategy. These strategic and operational initiatives include
(1) growth in targeted geographies, product lines, buying segments and distribution channels; (2)
improving its strategic and financial flexibility; and (3) pursuing additional opportunities in
high-growth markets with particular focus on individuals.
Successful execution of these strategic and operational initiatives depends on a number of factors
including:
| • |
|
differentiating CIGNA’s products and services from those of its competitors by leveraging
its health advocacy capabilities and other strengths in targeted markets, geographies and
buyer segments; |
| • |
|
developing and introducing new products or programs, because of the inherent risks and
uncertainties associated with product development, particularly in response to government
regulation or the increased focus on consumer directed products; |
| • |
|
identifying and introducing the proper mix or integration of products that will be accepted
by the marketplace; |
| • |
|
attracting and retaining sufficient numbers of qualified employees; |
| • |
|
effectively managing balance sheet exposures; |
| • |
|
improving medical cost competitiveness in targeted markets;
and |
| • |
|
further reducing CIGNA HealthCare’s operating expenses. |
If these initiatives fail or are not executed effectively, it could harm the Company’s consolidated
financial position and results of operations. For example, if not managed effectively, the plan to
reduce operating expenses could cut necessary resources and the Company’s talent pool and,
consequently, could have long-term effects on the business by decreasing or slowing improvements in
its products and limiting its ability to retain or hire key personnel.
If CIGNA does not adequately invest in and effectively execute on improvements in its information
technology infrastructure and improve its functionality, it will not be able to deliver the
services required in the evolving marketplace at a competitive cost.
CIGNA’s success in executing on its consumer engagement strategy depends on the Company’s continued
improvements to its information technology infrastructure and customer service offerings. The
marketplace is evolving and the level of service that is acceptable to customers today will not
necessarily be acceptable tomorrow. The Company must continue to invest in long-term solutions
that will enable it to meet customer expectations. CIGNA’s success is dependent, in large part, on
maintaining the effectiveness of existing technology systems and continuing to deliver and enhance
technology systems that support the Company’s business processes in a cost-efficient and
resource-efficient manner. CIGNA also must develop new systems to meet the current market standard
and keep pace with continuing changes in information processing technology, evolving industry and
regulatory standards and customer needs. System development projects are long term in nature, may
be more costly than expected to complete and may not deliver the expected benefits upon completion.
35
CIGNA’s business depends on its ability to properly maintain the integrity or security of its data
or to strategically implement new information systems.
CIGNA’s business depends on effective information systems and the integrity and timeliness of the
data it uses to run its business. CIGNA’s business strategy requires providing members and
providers with Internet-enabled products and information to meet their needs. CIGNA’s ability to
adequately price its products and services, establish reserves, provide effective and efficient
service to its customers, and to timely and accurately report its financial results also depends
significantly on the integrity of the data in its information systems. If the information CIGNA
relies upon to run its businesses were found to be inaccurate or unreliable due to fraud or other
error, or if CIGNA were to fail to maintain effectively its information systems and data integrity,
the Company could have problems with, among other things: operational disruptions, which may
impact customers, physicians and other health care providers; determining medical cost estimates
and establishing appropriate pricing; retaining and attracting customers; and regulatory
compliance.
If CIGNA were unable to maintain the security of any sensitive data residing on the Company’s
systems, whether due to its own actions or those of any vendors, CIGNA’s reputation would be
adversely affected and the Company could be exposed to litigation or other actions, fines or
penalties.
If CIGNA fails to manage successfully its outsourcing projects and key vendors, CIGNA’s business
could be disrupted.
CIGNA takes steps to monitor and regulate the performance of independent third parties who provide
services or to whom the Company delegates selected functions. These third parties include
information technology system providers, independent practice associations, call center and claim
service providers and specialty service providers.
Arrangements with key vendors may make CIGNA’s operations vulnerable if third parties fail to
satisfy their obligations to the Company, including their obligations to maintain and protect the
security and confidentiality of the Company’s information and data, as a result of their
performance, changes in their own operations, financial condition, or other matters outside of
CIGNA’s control. In addition, to the extent CIGNA outsources selected services or selected
functions to third parties in foreign jurisdictions, the Company could be exposed to risks inherent
in conducting business outside of the United States, including international economic and political
conditions, additional costs associated with complying with foreign laws and fluctuations in
currency values. Further, CIGNA may not fully realize on a timely basis the anticipated economic
and other benefits of the outsourcing projects or other relationships it enters into with key
vendors, which could result in substantial costs or other operational or financial problems for the
Company. Terminating or transitioning arrangements with key vendors could result in additional
costs and a risk of operational delays, potential errors and possible control issues as a result of
the termination or during the transition phase.
In 2006, CIGNA entered into an agreement with IBM pursuant to which IBM operates certain software
applications and significant portions of CIGNA’s information technology infrastructure, including
the provision of services relating to its call center application, enterprise content management,
risk-based capital analytical infrastructure and voice and data communications network. The 2006
contract with IBM includes several service level agreements, or SLAs, related to issues such as
performance and job disruption with significant financial penalties if these SLAs are not met.
However, the Company may not be adequately indemnified against all possible losses through the
terms and conditions of the agreement and the fees paid could be a subject of dispute between the
parties. In addition, some of CIGNA’s termination rights are contingent upon payment of a fee,
which may be significant. If CIGNA’s relationship with IBM is abruptly terminated, the Company’s
customers may experience disruption of service.
36
Sustained or significant deterioration in economic conditions could significantly impact the
Company’s customers.
The Company is exposed to risks associated with the potential financial instability of its
customers, many of which could be adversely affected by volatile conditions in the financial
markets. Customers could experience cash flow problems and other financial difficulties in times
of a sustained or significant deterioration in the economy. As a result, they may modify, delay or
cancel plans to purchase the Company’s products, may make changes in the mix of products purchased
that are unfavorable to the Company, or may be forced to reduce their workforces. Specifically,
higher unemployment rates as a result of a prolonged economic downturn has lead and may continue to
lead to lower enrollment in the Company’s employer group plans, lower enrollment in our
non-employer individual plans and a higher number of employees opting out of CIGNA’s employer group
plans. The adverse economic conditions could also cause employers to stop offering certain health
care coverage as an employee benefit or elect to offer this coverage on a voluntary,
employee-funded basis as a means to reduce their operating costs. In addition, the economic
downturn could negatively impact the Company’s employer group renewal prospects and our ability to
increase premiums and could result in cancellation of products and services by customers. This
could also result in increased unemployment and an increase in the number of claims submitted. All
of these developments could lead to a decrease in CIGNA’s membership levels and premium and fee
revenues. Further, if customers are not successful in generating sufficient revenue or are
precluded from securing financing, they may not be able to pay, or may delay payment of, accounts
receivable that are owed to the Company.
A downgrade in the financial strength ratings of CIGNA’s insurance subsidiaries could adversely
affect new sales and retention of current business, and a downgrade in CIGNA’s debt ratings would
increase the cost of borrowed funds and affect ability to access capital.
Financial strength, claims paying ability and debt ratings by recognized rating organizations are
an important factor in establishing the competitive position of insurance companies and health
benefits companies. Ratings information by nationally recognized ratings 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 important factor in
marketing its products to certain of CIGNA’s customers. In addition, CIGNA Corporation’s debt
ratings impact both the cost and availability of future borrowings, and accordingly, its cost of
capital. Each of the rating agencies reviews CIGNA’s ratings periodically and there can be no
assurance that current ratings will be maintained in the future. In addition, a downgrade of these
ratings could make it more difficult to raise capital and to support business growth at CIGNA’s
insurance subsidiaries.
A description of CIGNA Corporation ratings, other subsidiary ratings, as well as more information
on these ratings, is included in “Ratings” in Section K beginning on page 32 of this Form 10-K.
Unfavorable claims experience related to workers’ compensation and personal accident insurance
exposures in CIGNA’s Run-off Reinsurance business could result in losses.
Unfavorable claims experience related to workers’ compensation and personal accident insurance
exposures in CIGNA’s Run-off
Reinsurance business is possible and could result in future losses. Further, CIGNA could have
losses attributable to its inability to recover amounts from retrocessionaires or ceding companies
either due to disputes with the retrocessionaires or ceding companies or their financial condition.
If CIGNA’s reserves for amounts recoverable from retrocessionaires or ceding companies, as well as
reserves associated with underlying reinsurance exposures are insufficient, it could result in
losses.
37
CIGNA’s equity hedge program for its guaranteed minimum death benefits contracts could fail to
reduce the risk of stock market declines.
As part of its Run-off Reinsurance business, CIGNA reinsured a guaranteed minimum death benefit
under certain variable annuities issued by other insurance companies. CIGNA maintains a hedge
program to reduce equity market risks related to these contracts by selling domestic and
foreign-denominated exchange-traded futures contracts. The purpose of this program is to reduce
the adverse effects of potential future domestic and international stock market declines on CIGNA’s
liabilities for these contracts. Under the program, increases in liabilities under the annuity
contracts from a declining equity market are offset by gains on the futures contracts. However,
the program will not perfectly offset the change in the liability in part because the market does
not offer futures contracts that exactly match the diverse mix of equity fund investments held by
contractholders. The impact of this mismatch may be higher in periods of significant volatility and
may result in higher losses to the Company. In addition, the number of futures contracts used in
the program is adjusted only when certain tolerances are exceeded and in periods of highly volatile
equity markets when actual volatility exceeds the expected volatility assumed in the liability
calculation, losses will result. Further, CIGNA could have difficulty in entering into appropriate
futures contracts. See “Run-off Reinsurance” in Section G beginning on page 20 of this Form 10-K
for more information on the program.
Actual experience could differ significantly from CIGNA’s assumptions used in estimating CIGNA’s
liabilities for reinsurance contracts covering guaranteed minimum death benefits or minimum income
benefits.
CIGNA estimates reserves for guaranteed minimum death benefit and minimum income benefit exposures
based on assumptions regarding lapse, partial surrender, mortality, interest rates, volatility,
reinsurance recoverables, and, for minimum income benefit exposures, annuity income election rates.
These estimates are currently based on CIGNA’s experience and future expectations. CIGNA monitors
actual experience to update these reserve estimates as necessary. CIGNA regularly evaluates the
assumptions used in establishing reserves and changes its estimates if actual experience or other
evidence suggests that earlier assumptions should be revised. In addition, the Company could have
losses attributable to its inability to recover amounts from retrocessionaires. See Notes 7 and 11
to CIGNA’s Consolidated Financial Statements beginning on pages 117 and 132, respectively of this
Form 10-K, for more information on assumptions used for the Company’s guaranteed minimum death
benefit and minimum income benefit exposures.
Significant stock market declines could result in larger net liabilities for guaranteed minimum
death benefit contracts or for guaranteed minimum income benefit contracts, the recognition of
additional pension obligations and increased funding for those obligations, and increased pension
plan expenses.
The Company calculates a provision for expected future partial surrenders as part of the liability
for guaranteed minimum death benefit contracts. As equity markets decline, the amount of
guaranteed death benefit exposure increases and the equity hedge program is designed to offset the
corresponding change in the liability. If a contractholder withdraws substantially all of its
mutual fund investments, the liability increases reflecting the lower assumed future premiums, the
lower likelihood of lapsation, and the lower likelihood of account
values recovering sufficiently to
reduce death benefit exposure in future periods. These effects are not covered by the Company’s
equity hedge program. Thus if equity markets decline, the provision for expected future partial
surrenders increases and there is no corresponding offset from the hedge program. As equity
markets decline, the claim amounts that the Company expects to pay out for the guaranteed minimum
income benefit business increases resulting in increased net liabilities and related losses.
CIGNA currently has unfunded obligations in its frozen pension plan. A significant decline in the
value of the plan’s equity and fixed income investments or unfavorable changes in applicable laws
or regulations could materially change the timing and amount of required plan funding, which could
increase CIGNA’s expenses and reduce the cash available to CIGNA, including its subsidiaries. See
Note 10 to CIGNA’s Consolidated Financial Statements beginning
on page 126 of this Form 10-K for
more information on the Company’s obligations under the pension plan.
38
Significant changes in market interest rates affect the value of CIGNA’s financial instruments that
promise a fixed return or benefit and the value of particular assets and liabilities.
As an insurer, CIGNA has substantial investment assets that support insurance and contractholder
deposit liabilities. Generally low levels of interest rates on investments, such as those
experienced in United States financial markets during recent years, have 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.
Substantially all of the Company’s investment assets are in fixed interest-yielding debt securities
of varying maturities, fixed redeemable preferred securities and commercial mortgage loans. The
value of these investment assets can fluctuate significantly with changes in market conditions. A
rise in interest rates could reduce the value of the Company’s investment portfolio and increase
interest expense if CIGNA were to access its available lines of credit.
The Company is also exposed to interest rate and equity risk based upon the discount rate and
expected long-term rate of return assumptions associated with the Company’s pension and other
post-retirement obligations. Sustained declines in interest rates could have an adverse impact on
the funded status of the Company’s pension plans and the Company’s re-investment yield on new
investments.
Changes in interest rates may also impact the discount rate and expected long-term rate of return
assumptions associated with the Company’s guaranteed minimum death benefit liabilities.
Significant, sustained declines in interest rates could cause the Company to reduce these long-term
assumptions, resulting in increased liabilities.
In addition, changes in interest rates impact the assumed market returns and the discount rate used
in the fair value calculations for the Company’s liabilities for guaranteed minimum income
benefits. Significant interest rate declines could significantly increase the Company’s
liabilities for these contracts.
As the 7-year Treasury rate (claim interest rate) declines, the claim amounts that the Company
expects to pay out for the guaranteed minimum income benefit business increases. For a subset of
the business, there is a contractually guaranteed floor of 3% for the claim interest rate.
Significant interest rate declines could significantly increase the Company’s net liabilities for
guaranteed minimum income benefit contracts because of increased exposures.
New accounting pronouncements or guidance could require CIGNA to change the way in which it
accounts for operations.
The Financial Accounting Standards Board, the Securities and Exchange Commission, and other
regulatory bodies may issue new accounting standards or pronouncements, or changes in the
interpretation of existing standards or pronouncements, from time to time, which could have a
significant effect on CIGNA’s reported results of operations and financial condition.
CIGNA faces risks related to litigation and regulatory investigations.
CIGNA is routinely involved in numerous claims, lawsuits, regulatory audits, investigations and
other legal matters arising in the ordinary course of the business of administering and insuring
employee benefit programs. Such legal matters include benefit claims, breach of contract actions,
tort claims, and disputes regarding reinsurance arrangements. In addition, CIGNA incurs and likely
will continue to incur liability for claims related to its health care business, such as failure to
pay for or provide health care, poor outcomes for care delivered or arranged, provider 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.
Court decisions and legislative activity may increase CIGNA’s exposure for any of these types of
claims. In some cases, substantial non-economic or punitive damages may be sought. CIGNA currently
has insurance coverage for some of these potential liabilities. Other potential liabilities may not
be covered by insurance, insurers may dispute coverage or the amount of insurance may not be
sufficient to cover the entire damages awarded. In addition, certain types of damages, such as
punitive damages, may not be covered by insurance, and insurance coverage for all or certain forms
of liability may become unavailable or prohibitively expensive in the future. It is possible that
the resolution of one or more of the legal matters and claims described in this risk factor could
result in losses material to CIGNA’s consolidated results of operations, liquidity or financial
condition.
39
A description of material legal actions and other legal matters in which CIGNA is currently
involved is included under “Legal Proceedings” in Item 3 beginning on page 44, Note 23 to CIGNA’s
Consolidated Financial Statements beginning on page 163 of this Form 10-K and “Regulation” in
Section J beginning on page 28. The outcome of litigation and other legal matters is always
uncertain, and outcomes that are not justified by the evidence or existing law can occur. CIGNA
believes that it has valid defenses to the legal matters pending against it and is defending itself
vigorously.
CIGNA’s business is subject to substantial government regulation, which, along with new regulation,
could increase its costs of doing business and could adversely affect its profitability.
CIGNA’s business is regulated at the international, federal, state and local levels. The laws and
rules governing CIGNA’s business and interpretations of those laws and rules are subject to
frequent change. Broad latitude is given to the agencies administering those regulations. Existing
or future laws and rules could force CIGNA to change how it does business, restrict revenue and
enrollment growth, increase health care, technology and administrative costs including pension
costs and capital requirements, take other actions such as changing its reserve levels with respect
to certain reinsurance contracts, change business practices in disability payments and increase
CIGNA’s liability in federal and state courts for coverage determinations, contract interpretation
and other actions.
CIGNA must comply with the various regulations applicable to its business. In addition, CIGNA must
obtain and maintain regulatory approvals to market many of its products, to increase prices for
certain regulated products and to consummate some of its acquisitions and divestitures. Delays in
obtaining or failure to obtain or maintain these approvals could reduce the Company’s revenue or
increase its costs.
For further information on regulatory matters relating to CIGNA, see “Regulation” in Section J
beginning on page 28 and “Legal Proceedings” in Item 3 beginning on page 44 of this Form 10-K.
CIGNA operates a pharmacy benefit management business, primary care clinics and a staff model HMO,
which are subject to a number of risks and uncertainties, in addition to those CIGNA faces with its
health care business.
CIGNA’s pharmacy benefit management business is subject to federal and state regulation, including
federal and state anti-remuneration laws, ERISA, HIPAA and laws related to the operation of
Internet and mail-service pharmacies.
The Company’s pharmacy benefit management business would also be adversely affected by an inability
to contract on favorable terms with pharmaceutical manufacturers and could suffer claims and
reputational harm in connection with purported errors by CIGNA’s mail order or retail pharmacy
businesses. Disruptions at any of the Company’s pharmacy business facilities due to failure of
technology or any other failure or disruption to these systems or to the infrastructure due to
fire, electrical outage, natural disaster, acts of terrorism or some other catastrophic event could
reduce CIGNA’s ability to process and dispense prescriptions and provide products and services to
customers.
The Company employs physicians, nurse practitioners, nurses and other health care professionals at
onsite low acuity and primary care clinics it operates for the Company’s customers (as well as
certain clinics for Company employees). The Company also owns and operates medical facilities in
the Phoenix, Arizona metropolitan area, including multispecialty health care centers, outpatient
surgery and urgent care centers, low acuity clinics, laboratory, pharmacy and other operations that
employ primary care as well as specialty care physicians and other types of health care
professionals. As a direct employer of health care professionals and as an operator of primary and
low-acuity care clinics and other types of medical facilities, the Company is subject to liability
for negligent acts, omissions, or injuries occurring at one of its clinics or caused by one of its
employees. Even if any claims brought against the Company were unsuccessful or without merit, it
would have to defend against such claims. The defense of any such actions may be time-consuming and
costly, and may distract management’s attention. As a result, CIGNA may incur significant expenses
and the Company’s financial results could be adversely affected.
40
CIGNA faces competitive pressure, particularly price competition, which could result in premiums
which are insufficient to cover the cost of the healthcare services delivered to its members and
inadequate medical claims reserves.
While health plans compete on the basis of many factors, including service quality of clinical
resources, claims administration services and medical management programs, and quality and
sufficiency of provider networks, CIGNA expects that price will continue to be a significant basis
of competition. CIGNA’s customer contracts are subject to negotiation as customers seek to contain
their costs, and customers may elect to reduce benefits in order to constrain increases in their
benefit costs. Such an election may result in lower premiums for the Company’s products, although
it may also reduce CIGNA’s costs. Alternatively, the Company’s customers may purchase different
types of products that are less profitable, or move to a competitor to obtain more favorable
premiums.
In addition, significant merger and acquisition activity has occurred in the health care industry
giving rise to speculation and uncertainty regarding the status of companies, which potentially can
affect marketing efforts and public perception. Consolidation may make it more difficult for the
Company to retain or increase customers, to improve the terms on which CIGNA does business with its
suppliers, or to maintain its competitive position or increase profitability. Factors such as
business consolidations, strategic alliances, legislative reform and marketing practices create
pressure to contain premium price increases, despite increasing medical costs. For example, the
Gramm-Leach-Bliley Act gives banks and other financial institutions the ability to affiliate with
insurance companies, which may lead to new competitors with significant financial resources in the
insurance and health benefits fields.
If CIGNA does not compete effectively in its markets, if CIGNA sets rates too high in highly
competitive markets to keep or increase its market share, if membership does not increase as it
expects, or if it declines, or if CIGNA loses accounts with favorable medical cost experience while
retaining or increasing membership in accounts with unfavorable medical cost experience, CIGNA’s
product margins and growth could be adversely affected.
CIGNA’s profitability depends, in part, on its ability to accurately predict and control future
health care costs through underwriting criteria, provider contracting, utilization management and
product design. Premiums in the health care business are generally fixed for one-year periods.
Accordingly, future cost increases in excess of medical cost projections reflected in pricing
cannot generally be recovered in the current contract year through higher premiums. Although CIGNA
bases the premiums it charges on its estimate of future health care costs over the fixed premium
period, actual costs may exceed what was estimated and reflected in premiums. Factors that may
cause actual costs to exceed premiums include: medical cost inflation; higher than expected
utilization of medical services; the introduction of new or costly treatments and technology; and
membership mix.
CIGNA records medical claims reserves for estimated future payments. The Company continually
reviews estimates of future payments relating to medical claims costs for services incurred in the
current and prior periods and makes necessary adjustments to its reserves. However, actual health
care costs may exceed what was estimated.
Public perception of CIGNA’s products and practices as well as of the health benefits industry, if
negative, could reduce enrollment in CIGNA’s health benefits programs.
The health care industry in general, and CIGNA specifically, are subject to negative publicity,
which can arise either from perceptions regarding the industry or CIGNA’s business practices or
products. This risk may be increased as CIGNA offers new products, such as products with limited
benefits or an integrated line of products targeted at market segments beyond those in which CIGNA
traditionally has operated. Negative publicity may adversely affect the CIGNA brand and its
ability to market its products and services, which could reduce the number of enrollees in CIGNA’s
health benefits programs.
Large-scale public health epidemics, bio-terrorist activity, natural disasters or other extreme
events could cause CIGNA’s covered medical and disability expenses, pharmacy costs and mortality
experience to rise significantly, and in severe circumstances, could cause operational disruption.
If widespread public health epidemics such as an influenza pandemic, bio-terrorist or other attack,
or catastrophic natural disaster were to occur, CIGNA’s covered medical and disability expenses,
pharmacy costs and mortality experience could rise significantly, depending on the government’s
actions and the responsiveness of public health agencies and insurers. In addition, depending on
the severity of the situation, a widespread outbreak could curtail economic activity in general,
and CIGNA’s operations in particular, which could result in operational and financial disruption to
CIGNA. Such disruption could, among other things, impact the timeliness of claims and revenue.
41
CIGNA’s business depends on the uninterrupted operation of its systems and business functions,
including information technology and other business systems.
CIGNA’s business is highly dependent upon its ability to perform, in an efficient and uninterrupted
fashion, its necessary business functions, such as: claims processing and payment; internet
support and customer call centers; and the processing of new and renewal business. A power outage,
pandemic, or failure of one or more of information technology, telecommunications or other systems
could cause slower system response times resulting in claims not being processed as quickly as
clients desire, decreased levels of client service and client satisfaction, and harm to CIGNA’s
reputation. In addition, because CIGNA’s information technology and telecommunications systems
interface with and depend on third-party systems, CIGNA could experience service denials if demand
for such service exceeds capacity or a third-party system fails or experiences an interruption. If
sustained or repeated, such a business interruption, systems failure or service denial could result
in a deterioration of CIGNA’s ability to pay claims in a timely manner, provide customer service,
write and process new and renewal business, or perform other necessary corporate functions. This
could result in a materially adverse effect on CIGNA’s business results and liquidity.
A security breach of CIGNA’s computer systems could also interrupt or damage CIGNA’s operations or
harm CIGNA’s reputation. In addition, CIGNA could be subject to liability if sensitive customer
information is misappropriated from CIGNA’s computer systems. These systems may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third parties or similar
disruptive problems. Any publicized compromise of security could result in a loss of customers or
a reduction in the growth of customers, increased operating expenses, financial losses, additional
litigation or other claims, which could have a material adverse effect on CIGNA’s business.
CIGNA is focused on further developing its business continuity program to address the continuation
of core business operations. While CIGNA continues to test and assess its business continuity
program to satisfy the needs of CIGNA’s core business operations and addresses multiple business
interruption events, there is no assurance that core business operations could be performed upon
the occurrence of such an event.
Global market, economic and geopolitical conditions may cause fluctuations in equity market prices,
interest rates and credit spreads which could impact the Company’s ability to raise or deploy
capital as well as affect the Company’s overall liquidity.
If the capital markets and credit market experience extreme volatility and disruption, there could
be downward pressure on stock prices and credit capacity for certain issuers without regard to
those issuers’ underlying financial strength. Extreme disruption in the credit markets could
adversely impact the Company’s availability and cost of credit in the future. In addition,
unpredictable or unstable market conditions could result in reduced opportunities to find suitable
opportunities to raise capital.
CIGNA is subject to potential changes in the political environment, which could adversely
affect the markets for its products.
Policy changes on the local, state and federal level, such as the expansion of the government’s
role in the health care arena and alternative assessments and tax increases specific to the health
care insurance industry or health care insurance products as part of federal health care reform
initiatives, could fundamentally change the dynamics of CIGNA’s industry.
CIGNA faces risks in successfully managing the integration of Great-West Healthcare (or any other
acquisition).
CIGNA acquired Great-West Healthcare with the expectation that the acquisition will result in
various benefits, including, among others, a broader distribution and provider network in certain
geographic areas, an expanded range of health benefits and products, cost savings, increased
profitability of the acquired business by improving its total medical cost position, and
achievement of operating efficiencies. Achieving the anticipated benefits of the acquisition is
subject to a number of uncertainties, including whether CIGNA integrates Great-West Healthcare in
an efficient and effective manner, and general competitive factors in the marketplace. Failure to
achieve these anticipated benefits could limit CIGNA’s ability to grow membership, particularly in
the “Select” market, result in increased costs, decreases in the amount of expected revenues and
diversion of management’s time and energy.
CIGNA faces intense competition to attract and retain key people.
CIGNA would be adversely impacted if it failed to attract additional key people and retain current
key people, as this could result in the inability to effectively execute the Company’s key
initiatives and business strategy.
42
CIGNA would be adversely affected if its prevention, detection or control systems fail to detect
and implement required changes to maintain regulatory compliance or prevent fraud.
Failure of CIGNA’s prevention, detection or control systems related to regulatory compliance and
compliance with CIGNA’s internal policies, including data systems security and unethical conduct by
managers and employees, could adversely affect CIGNA’s reputation and also expose it to litigation
and other proceedings, fines and penalties. Federal and state governments have made investigating
and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse
prohibitions encompass a wide range of activities, including kickbacks for referral of members,
billing for unnecessary medical services, improper marketing, and violations of patient privacy
rights. The regulations and contractual requirements applicable to us and other participants are
complex and subject to change. Although the Company believes its compliance efforts are adequate,
ongoing vigorous law enforcement and the highly technical regulatory scheme mean that its
compliance efforts in this area will continue to require significant resources.
In addition, provider or member fraud that is not prevented or detected could impact CIGNA’s
medical costs or those of its self-insured customers. Further, during an economic downturn,
CIGNA’s segments, including HealthCare, Disability and Life and International, may see increased
fraudulent claims volume which may lead to additional cost because of an increase in disputed
claims and litigation.
The Company’s international operations face political, legal, operational, regulatory, economic and
other risks that present unique challenges and could negatively affect those operations or our
long-term growth.
The Company’s international operations face political, legal, operational, regulatory,
economic and other risks, including government intervention and censorship that the Company does
not face in its domestic operations. CIGNA International faces the risk of discriminatory
regulation, nationalization or expropriation of assets, price controls or other pricing issues and
exchange controls or other restrictions that prevent it from transferring funds from these
operations out of the countries in which it operates or converting local currencies that CIGNA
International holds into U.S. dollars or other currencies. Additionally, foreign currency exchange
rates and fluctuations may have an impact on the future costs or on future sales and cash flows
from the Company’s international operations, and any measures that it may implement to reduce the
effect of volatile currencies and other risks of its international operations may not be effective.
Some of CIGNA’s foreign insurance operations are, and are likely to continue to be, in emerging
markets where these risks are heightened. In addition, CIGNA International relies on local sales
forces for some of its operations in these countries and may encounter labor problems and less
flexible employee relationships which can be difficult and expensive to terminate. In some
countries, CIGNA International voluntarily operates or is required to operate with local business
partners with the resulting risk of managing partner relationships to the business objectives.
The Company is currently planning to expand its international operations in markets where it
currently operates and in targeted new markets. This may require
considerable management time before any significant revenues and
earnings are generated.
International operations also require the Company to devote significant management resources
to implement its controls and systems in new markets, to comply with the U.S. anti-bribery and
anti-corruption as well as anti-money laundering provisions and similar laws in local jurisdictions
and to overcome logistical and other challenges based on differing languages, cultures and time
zones.
43
|
|
|
| Item 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
CIGNA’s headquarters, including staff support operations, along with CIGNA Disability and Life
Insurance, the domestic office of CIGNA International, and portions of CIGNA HealthCare, are
located in approximately 460,000 square feet of leased office space at Two Liberty Place, 1601
Chestnut Street, Philadelphia, Pennsylvania. CIGNA HealthCare is located in approximately 825,000
square feet of owned office space in the Wilde Building, located at 900 Cottage Grove Road,
Bloomfield, Connecticut. In addition, CIGNA owns or leases office buildings, or parts thereof,
throughout the United States and in other countries. CIGNA believes its properties are adequate
and suitable for its business as presently conducted. For additional information concerning leases
and property, see Notes 2 and 21 to CIGNA’s Consolidated Financial Statements beginning on pages
103 and 159 of this Form 10-K. This paragraph does not include information on investment
properties.
|
|
|
| Item 3. |
|
LEGAL PROCEEDINGS |
The information contained under “Litigation and Other Legal Matters” in Note 23 to CIGNA’s
2009 Financial Statements which begins on page 163 of this Form 10-K, is incorporated herein by
reference.
|
|
|
| Item 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
44
Executive Officers of the Registrant
All officers are elected to serve for a one-year term or until their successors are elected.
Principal occupations and employment during the past five years are listed below.
WILLIAM L. ATWELL, 59, President of CIGNA International beginning September 2008; Managing Director
of Atwell and Associates, LLC from January 2006 until August 2008; and Executive Vice President of
The Charles Schwab Corporation from August 2000 to December 2005.
DAVID M. CORDANI, 44, Chief Executive Officer of CIGNA beginning December 2009; President
of CIGNA beginning June 2008; Chief Operating Officer of CIGNA from June 2008 until December 2009;
President, CIGNA HealthCare from July 2005 until June 2008; Senior Vice President, Customer
Segments & Marketing, CIGNA HealthCare from July 2004 until July 2005; Senior Vice President and
Chief Financial Officer, CIGNA HealthCare, from September 2002 until July 2004; and a Director of
CIGNA since October 2009.
ANNMARIE T. HAGAN, 49, Executive Vice President and Chief Financial Officer of CIGNA beginning May
2009; Vice President, Chief Accounting Officer and Controller of CIGNA from July 2008 until May
2009; and Vice President and Chief Accounting Officer of CIGNA from March 2003 until July 2008.
MATTHEW G. MANDERS, 48, President, CIGNA, US Service, Clinical and Specialty beginning
January 2010; President, CIGNA HealthCare, Total Health, Productivity, Network & Middle Market from
June 2009 until January 2010; Customer Segments from July 2006 until June 2009; and President,
CIGNA HealthCare, Middle Market Segment from August 2004 until July 2006.
JOHN M. MURABITO, 51, Executive Vice President of CIGNA beginning August 2003, with
responsibility for Human Resources and Services.
CAROL ANN PETREN, 57, Executive Vice President and General Counsel of CIGNA beginning May 2006, and
Senior Vice President and Deputy General Counsel of MCI from August 2003 until March 2006.
MICHAEL WOELLER, 57, Executive Vice President and Chief Information Officer of CIGNA beginning
October 2007; Vice Chairman and Senior Vice President and Chief Information Officer, Canadian
Imperial Bank of Commerce from April 2000 until October 2007.
45
PART II
|
|
|
| Item 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
The information under the caption “Quarterly Financial Data—Stock and Dividend Data” appears on
page 169 and the number of shareholders of record as of December 31, 2009 appears under the caption
“Highlights” on page 47 of this Form 10-K. CIGNA’s common stock is listed with, and trades on, the
New York Stock Exchange 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, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer Purchases of Equity Securities |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate dollar value of |
|
| |
|
Total # of |
|
|
|
|
|
|
Total # of shares |
|
|
shares that may yet be |
|
| |
|
shares |
|
|
|
|
|
|
purchased |
|
|
purchased |
|
| |
|
purchased |
|
|
Average price |
|
|
as part of publicly |
|
|
as part of publicly announced |
|
| Period |
|
(1) |
|
|
paid per share |
|
|
announced program (2) |
|
|
program (3) |
|
October 1-31, 2009 |
|
|
220 |
|
|
$ |
28.83 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
November 1-30, 2009 |
|
|
1,879 |
|
|
$ |
30.38 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
December 1-31, 2009 |
|
|
959 |
|
|
$ |
32.91 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,058 |
|
|
$ |
31.06 |
|
|
|
0 |
|
|
|
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 220 shares in October, 1,879 shares in November,
and 959 shares in December. |
| |
| (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, generally without public
announcement. Remaining authorization under the program was $449 million as of December
31, 2009 and February 25, 2010. |
| |
| (3) |
|
Approximate dollar value of shares is as of the last date of the applicable month. |
46
|
|
|
| Item 6. |
|
SELECTED FINANCIAL DATA |
Highlights
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees and other revenues |
|
$ |
16,161 |
|
|
$ |
17,004 |
|
|
$ |
15,376 |
|
|
$ |
13,987 |
|
|
$ |
14,449 |
|
Net investment income |
|
|
1,014 |
|
|
|
1,063 |
|
|
|
1,114 |
|
|
|
1,195 |
|
|
|
1,358 |
|
Mail order pharmacy revenues |
|
|
1,282 |
|
|
|
1,204 |
|
|
|
1,118 |
|
|
|
1,145 |
|
|
|
883 |
|
Realized investment gains (losses) |
|
|
(43 |
) |
|
|
(170 |
) |
|
|
16 |
|
|
|
219 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
18,414 |
|
|
$ |
19,101 |
|
|
$ |
17,624 |
|
|
$ |
16,546 |
|
|
$ |
16,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
$ |
731 |
|
|
$ |
664 |
|
|
$ |
679 |
|
|
$ |
653 |
|
|
$ |
688 |
|
Disability and Life |
|
|
284 |
|
|
|
273 |
|
|
|
254 |
|
|
|
226 |
|
|
|
227 |
|
International |
|
|
183 |
|
|
|
182 |
|
|
|
176 |
|
|
|
138 |
|
|
|
109 |
|
Run-off Reinsurance |
|
|
185 |
|
|
|
(646 |
) |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
(64 |
) |
Other Operations |
|
|
86 |
|
|
|
87 |
|
|
|
109 |
|
|
|
106 |
|
|
|
339 |
|
Corporate |
|
|
(142 |
) |
|
|
(162 |
) |
|
|
(97 |
) |
|
|
(95 |
) |
|
|
(12 |
) |
Realized investment gains (losses), net of taxes and
noncontrolling interest |
|
|
(26 |
) |
|
|
(110 |
) |
|
|
10 |
|
|
|
145 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income from continuing operations |
|
|
1,301 |
|
|
|
288 |
|
|
|
1,120 |
|
|
|
1,159 |
|
|
|
1,276 |
|
Income from continuing operations attributable to
noncontrolling interest |
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,304 |
|
|
|
290 |
|
|
|
1,123 |
|
|
|
1,159 |
|
|
|
1,277 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
1 |
|
|
|
4 |
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,305 |
|
|
$ |
294 |
|
|
$ |
1,118 |
|
|
$ |
1,155 |
|
|
$ |
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
4.75 |
|
|
$ |
1.04 |
|
|
$ |
3.91 |
|
|
$ |
3.46 |
|
|
$ |
3.30 |
|
Diluted |
|
$ |
4.73 |
|
|
$ |
1.03 |
|
|
$ |
3.86 |
|
|
$ |
3.43 |
|
|
$ |
3.26 |
|
Shareholders’ net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
4.75 |
|
|
$ |
1.05 |
|
|
$ |
3.89 |
|
|
$ |
3.45 |
|
|
$ |
4.20 |
|
Diluted |
|
$ |
4.73 |
|
|
$ |
1.05 |
|
|
$ |
3.84 |
|
|
$ |
3.42 |
|
|
$ |
4.15 |
|
Common dividends declared per share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Total assets |
|
$ |
43,013 |
|
|
$ |
41,406 |
|
|
$ |
40,065 |
|
|
$ |
42,399 |
|
|
$ |
44,893 |
|
Long-term debt |
|
$ |
2,436 |
|
|
$ |
2,090 |
|
|
$ |
1,790 |
|
|
$ |
1,294 |
|
|
$ |
1,338 |
|
Shareholders’ equity |
|
$ |
5,417 |
|
|
$ |
3,592 |
|
|
$ |
4,748 |
|
|
$ |
4,330 |
|
|
$ |
5,360 |
|
Per share |
|
$ |
19.75 |
|
|
$ |
13.25 |
|
|
$ |
16.98 |
|
|
$ |
14.63 |
|
|
$ |
14.74 |
|
Common shares outstanding (in thousands) |
|
|
274,257 |
|
|
|
271,036 |
|
|
|
279,588 |
|
|
|
98,654 |
|
|
|
121,191 |
|
Shareholders of record |
|
|
8,888 |
|
|
|
9,014 |
|
|
|
8,696 |
|
|
|
9,117 |
|
|
|
9,440 |
|
Employees |
|
|
29,300 |
|
|
|
30,300 |
|
|
|
26,600 |
|
|
|
27,100 |
|
|
|
28,000 |
|
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Board’s (“FASB”)
updated earnings per share guidance. Prior year amounts have been restated. See Note 4 to the
Consolidated Financial Statements for additional information.
Effective January 1, 2009, the Company adopted the FASB’s updated guidance on accounting for
noncontrolling interests. Prior years’ net income, income from continuing operations, and revenues
have been restated. See Note 2(B) to the Consolidated Financial Statements for additional
information.
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc.
For additional information, see the Health Care section of the Management’s Discussion and
Analysis beginning on page 62 of this Form 10-K.
In 2008, the Company recorded significant charges related to the guaranteed minimum income benefits
and guaranteed minimum death benefits businesses as well as an after-tax litigation charge of $52
million in Corporate related to the CIGNA pension plan. For additional information, see the
Run-off Reinsurance section of the Management’s Discussion and Analysis beginning on page 73 and
Note 23 to the Consolidated Financial Statements.
During 2007, CIGNA completed a three-for-one stock split of CIGNA’s common shares. Per share
figures for 2006 and 2005 reflect the stock split.
Pro forma common shares outstanding, calculated as if the stock split had occurred at the beginning
of the prior periods, were as follows: 295,963 in 2006 and 363,573 in 2005.
47
|
|
|
| Item 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
INDEX
| |
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
95 |
|
INTRODUCTION
In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (the
“Company”) make certain forward-looking statements relating to the Company’s financial condition
and results of operations, as well as to trends and assumptions that may affect the Company.
Generally, forward-looking statements can be identified through the use of predictive words (e.g.,
“Outlook for 2010”). Actual results may differ from the Company’s predictions. Some factors that
could cause results to differ are discussed throughout Management’s Discussion and Analysis
(“MD&A”), including in the Cautionary Statement beginning on page 95 of this Form 10-K. The
forward-looking statements contained in this filing represent management’s estimate as of the date
of this filing. Management does not assume any obligation to update these estimates.
Unless otherwise indicated, financial information in the MD&A is presented in accordance with
accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications
have been made to prior period amounts to conform to the presentation of 2009 amounts. In
addition, certain amounts have been restated as a result of the adoption of new accounting
pronouncements. See Note 2 to the Consolidated Financial Statements for additional information.
Overview
The Company constitutes one of the largest investor-owned health service organizations in the
United States. Its subsidiaries are major providers of health care and related benefits, the
majority of which are offered through the workplace. In addition, the Company has an international
operation that offers life, accident and supplemental health insurance products as well as
international health care products and services to businesses and individuals in selected markets.
The Company also has certain inactive businesses, including a Run-off Reinsurance segment.
48
Ongoing Operations
The Company’s ability to increase revenue, shareholders’ net income and operating cash flows from
ongoing operations is directly related to progress on the execution of its strategic initiatives,
the success of which is measured by certain key factors, including the Company’s ability to:
| • |
|
profitably price products and services at competitive levels that reflect emerging
experience; |
| • |
|
maintain and grow its customer base; |
| • |
|
cross sell its various health and related benefit products; |
| • |
|
invest available cash at attractive rates of return for appropriate durations; |
| • |
|
reduce other operating expenses in the Health Care segment; and |
| • |
|
effectively deploy capital. |
Strategy
As a global health service organization, CIGNA’s mission remains focused on helping the people
it serves improve their health, well-being and sense of security. CIGNA’s long-term growth
strategy is based on: (1) growth in targeted geographies, product lines, buying segments and
distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing
additional opportunities in high-growth markets with particular focus on individuals.
CIGNA expects to focus on the following areas it believes represent the markets or areas with
the most potential for profitable growth:
| • |
|
In the Health Care segment, the Company is concentrating on: (1) further
enhancing its geographic focus in the middle market in order to create geographic density; (2)
growing the “Select” market, which generally includes employers with more than 50 but fewer
than 250 employees, by leveraging the Company’s customer knowledge, differentiated service
model, product portfolio and distribution model; and (3) engaging those national account
employers who share and will benefit from the Company’s value proposition of using health
advocacy and employee engagement to increase productivity, performance and the health outcomes
of their employees. |
| • |
|
In the Disability and Life segment, CIGNA’s strategy is to grow its Disability
business by fully leveraging the key components of its industry-leading disability management
model to reduce medical costs for its clients and return their employees to work sooner
through: (1) early claim notification and outreach, (2) a full suite of clinical and
return-to-work resources, and (3) specialized case management services. |
| • |
|
In the International segment, the Company is targeting growth through: (1)
product and channel expansion in its life, accident and health business in key Asian
geographies, (2) the introduction of new expatriate benefits products, and (3) further
geographic expansion. |
The Company plans to improve its strategic and financial flexibility by driving further
reductions in its Health Care operating expenses, improving its medical cost competitiveness in
targeted markets and effectively managing balance sheet exposures.
Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to
health advocacy as a means of creating sustainable solutions for employers, improving the health of
the individuals that the Company serves, and lowering the costs of health care for all
constituencies.
49
Run-off Operations
Effectively managing the various exposures of its run-off operations is important to the Company’s
ongoing profitability, operating cash flows and available capital. The results are influenced by a
range of economic factors, especially movements in equity markets and interest rates. In order to
substantially reduce the impact of equity market movements on the liability for guaranteed minimum
death benefits (“GMDB”, also known as “VADBe”), the Company operates an equity hedge program. The
Company actively monitors the performance of the hedge program, and evaluates the cost/benefit of
hedging other risks. Results are also influenced by behavioral factors, including future partial
surrender election rates for GMDB contracts, annuity election rates for guaranteed minimum income
benefits (“GMIB”) contracts, annuitant lapse rates, as well as the collection of amounts
recoverable from retrocessionaires. The Company actively studies policyholder behavior experience
and adjusts future expectations based on the results of the studies, as warranted. The Company
also performs regular audits of ceding companies to ensure that premiums received and claims paid
properly reflect the underlying risks, and to maximize the probability of subsequent collection of
claims from retrocessionaires. Finally, the Company monitors the financial strength and credit
standing of the retrocessionaires and establishes or collects collateral when warranted.
Summary
The Company’s overall results are influenced by a range of economic and other factors, especially:
| • |
|
cost trends and inflation for medical and related services; |
| • |
|
utilization patterns of medical and other services; |
| • |
|
the tort liability system; |
| • |
|
developments in the political environment both domestically and internationally, including
efforts to reform the U.S. health care system; |
| • |
|
interest rates, equity market returns, foreign currency fluctuations and credit market
volatility, including the availability and cost of credit in the future; and |
| • |
|
federal, state and international regulation. |
The Company regularly monitors the trends impacting operating results from the above mentioned key
factors to appropriately respond to economic and other factors affecting its operations. The
Company’s ability to achieve its financial objectives is dependent upon its ability to effectively
execute on its strategy and to appropriately respond to emerging economic, industry and
company-specific trends. See the Health Care section of the MD&A beginning on page 62 of this Form
10-K for further discussion on the Company’s plans to execute on its strategic initiatives.
Acquisition of Great-West Healthcare
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc.
(“Great-West Healthcare” or the “acquired business”). See Note 3 to the Consolidated Financial
Statements for additional information.
50
Initiatives to Lower Operating Expenses
As part of its strategy, the Company has undertaken several initiatives to realign its organization
and consolidate support functions in an effort to increase efficiency and responsiveness to
customers and to reduce costs.
During 2008 and 2009, the Company conducted a comprehensive review to reduce the operating expenses
of its ongoing businesses (“cost reduction program”). As a result, the Company recognized
severance-related and real estate charges in other operating expenses.
Severance charges in 2008 and 2009 resulted from reductions of approximately 2,350 positions in the
Company’s workforce.
Cost reduction activity for 2008 and 2009 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Pre-tax (In millions) |
|
Severance |
|
|
Real estate |
|
|
Total |
|
Fourth quarter 2008 charge (balance carried to January 1, 2009) |
|
$ |
44 |
|
|
$ |
11 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
|
14 |
|
|
|
— |
|
|
|
14 |
|
Third quarter |
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
Fourth quarter |
|
|
20 |
|
|
|
— |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal — 2009 charges |
|
|
44 |
|
|
|
— |
|
|
|
44 |
|
Less: Payments |
|
|
55 |
|
|
|
3 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
33 |
|
|
$ |
8 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
The Health Care segment recorded $37 million pre-tax ($24 million after-tax) of the 2009
charges and $44 million pre-tax ($27 million after-tax) of the 2008 charge. The remainder of the
2009 and 2008 charges were reported as follows: Disability and Life: $5 million pre-tax ($4
million after-tax) in 2009 and $3 million pre-tax ($2 million after-tax) in 2008; and
International: $2 million pre-tax ($1 million after-tax) in 2009 and $8 million pre-tax ($6 million
after-tax) in 2008.
Substantially all severance is expected to be paid by the end of 2010. Upon completion of the job
eliminations, the Company expects annualized after-tax savings from this cost reduction program to
be approximately $130 million in 2011 and beyond. A portion of the savings was realized in 2009
while most is expected to be realized in 2010.
51
CONSOLIDATED RESULTS OF OPERATIONS
The Company measures the financial results of its segments using “segment earnings (loss)”, which
is defined as shareholders’ income (loss) from continuing operations before after-tax realized
investment results. Adjusted income from operations is defined as consolidated segment earnings
(loss) excluding special items (defined below) and the results of the GMIB business. Adjusted
income from operations is another measure of profitability used by the Company’s management because
it presents the underlying results of operations of the Company’s businesses and permits analysis
of trends in underlying revenue, expenses and shareholders’ net income. This measure is not
determined in accordance with GAAP and should not be viewed as a substitute for the most directly
comparable GAAP measure, which is shareholders’ income from continuing operations.
Summarized below is a reconciliation between shareholders’ income from continuing operations and
adjusted income from operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
16,041 |
|
|
$ |
16,253 |
|
|
$ |
15,008 |
|
Net investment income |
|
|
1,014 |
|
|
|
1,063 |
|
|
|
1,114 |
|
Mail order pharmacy revenues |
|
|
1,282 |
|
|
|
1,204 |
|
|
|
1,118 |
|
Other revenues |
|
|
120 |
|
|
|
751 |
|
|
|
368 |
|
Realized investment gains (losses) |
|
|
(43 |
) |
|
|
(170 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
18,414 |
|
|
|
19,101 |
|
|
|
17,624 |
|
Benefits and expenses |
|
|
16,516 |
|
|
|
18,719 |
|
|
|
15,990 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
1,898 |
|
|
|
382 |
|
|
|
1,634 |
|
Income taxes |
|
|
594 |
|
|
|
92 |
|
|
|
511 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,304 |
|
|
|
290 |
|
|
|
1,123 |
|
Less: income from continuing operations attributable to noncontrolling interest |
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income from continuing operations |
|
|
1,301 |
|
|
|
288 |
|
|
|
1,120 |
|
Less: realized investment gains (losses), net of taxes |
|
|
(26 |
) |
|
|
(110 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
|
1,327 |
|
|
|
398 |
|
|
|
1,110 |
|
Less: adjustments to reconcile to adjusted income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB business (after-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
Charge on adoption of fair value measurements for GMIB contracts |
|
|
— |
|
|
|
(131 |
) |
|
|
— |
|
Results of GMIB business excluding charge on adoption |
|
|
209 |
|
|
|
(306 |
) |
|
|
(91 |
) |
Special items (after-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain (See Note 10 to the Consolidated Financial Statements) |
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Cost reduction charges (See Note 6 to the Consolidated Financial Statements) |
|
|
(29 |
) |
|
|
(35 |
) |
|
|
— |
|
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) |
|
|
20 |
|
|
|
— |
|
|
|
23 |
|
Charges related to litigation matters (See Note 23 to the Consolidated Financial Statements) |
|
|
— |
|
|
|
(76 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
1,097 |
|
|
$ |
946 |
|
|
$ |
1,178 |
|
|
|
|
|
|
|
|
|
|
|
Summarized below is adjusted income from operations by segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Adjusted Income (Loss) From Operations |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Health Care |
|
$ |
729 |
|
|
$ |
715 |
|
|
$ |
679 |
|
Disability and Life |
|
|
279 |
|
|
|
275 |
|
|
|
248 |
|
International |
|
|
182 |
|
|
|
188 |
|
|
|
174 |
|
Run-off Reinsurance |
|
|
(24 |
) |
|
|
(209 |
) |
|
|
80 |
|
Other Operations |
|
|
85 |
|
|
|
87 |
|
|
|
104 |
|
Corporate |
|
|
(154 |
) |
|
|
(110 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,097 |
|
|
$ |
946 |
|
|
$ |
1,178 |
|
|
|
|
|
|
|
|
|
|
|
52
Overview of 2009 Consolidated Results of Operations
Shareholders’ income from continuing operations for the year ended December 31, 2009 was
significantly higher than 2008, reflecting improved adjusted income from operations, as explained
below, as well as the following:
| • |
|
substantially improved results in the GMIB business due to improved equity market
conditions and generally higher interest rates; |
| • |
|
improved realized investment results, also reflecting better market conditions during 2009;
and |
| • |
|
the favorable year over year impact of the following special items as noted in the above
table: completion of the IRS examination; the curtailment gain on the pension plan; and the
absence of litigation charges in 2009. |
Adjusted income from operations increased 16% in 2009 compared with 2008, primarily reflecting
significantly improved results in the Run-off Reinsurance segment due to a lower amount of reserve
strengthening for the GMDB business in 2009 compared with 2008. This result was primarily due to
improved equity market conditions in 2009. Also, in the aggregate, adjusted income from operations
from the Company’s ongoing operating segments (Health Care, Disability and Life, and International)
improved slightly in 2009 over 2008. These favorable effects were partially offset by higher
unallocated costs (including interest) reported in Corporate.
Overview of 2008 Consolidated Results of Operations
Shareholders’ income from continuing operations for the year ended December 31, 2008 declined
significantly compared with 2007, reflecting lower adjusted income from operations as explained
below, as well as the following:
| • |
|
higher losses in the GMIB business, reflecting the deterioration in the financial markets
in 2008 and the effect of adopting new fair value guidance; |
| • |
|
significant net realized investment losses primarily due to impairments caused largely by
the deterioration in the financial markets. These losses were partially offset by gains on
the sale of real estate; and |
| • |
|
special charges for litigation and cost reduction matters discussed below. |
Adjusted income from operations decreased 20% in 2008 compared with 2007 due to losses in the GMDB
business resulting from the adverse equity market conditions in 2008, partially offset by higher
earnings in each of the Company’s ongoing operating segments.
Special Items and GMIB
Management does not believe that the special items noted in the table above are representative of
the Company’s underlying results of operations. Accordingly, the Company excluded these special
items from adjusted income from operations in order to facilitate an understanding and comparison
of results of operations and permit analysis of trends in underlying revenue, expenses and
shareholders’ income from continuing operations.
Special items for 2009 included a curtailment gain resulting from the decision to freeze the
pension plan (see Note 10 to the Consolidated Financial Statements for additional information),
cost reduction charges related to the previously announced 2008 cost reduction program (see the
Introduction section of the MD&A beginning on page 48 of this Form 10-K), and benefits resulting
from the completion of the 2005 and 2006 IRS examinations (see Note 19 to the Consolidated
Financial Statements for additional information).
Special items for 2008 included a cost reduction charge related to the previously announced 2008
cost reduction program (see the Introduction section of the MD&A beginning on page 48 of this Form
10-K), a litigation matter related to the CIGNA Pension Plan (see Note 23 to the Consolidated
Financial Statements for additional information) reported in Corporate and charges related to
certain other litigation matters, which are reported in the Health Care segment.
The special item for 2007 consisted of previously unrecognized tax benefits resulting from the
completion of the IRS examination for the 2003 and 2004 tax years.
The Company also 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, which are reported in
shareholders’ net income, are volatile and unpredictable. See the Critical Accounting Estimates
section of the MD&A beginning on page 55 of this Form 10-K for more information on the effect of
capital market assumption changes on shareholders’ net income. Because of this volatility, and
since the GMIB business is in run-off, management does not believe that its results are meaningful
in assessing underlying results of operations.
53
Outlook for 2010
The Company expects 2010 adjusted income from operations to be comparable to or slightly higher
than 2009. Information is not available for management to reasonably estimate the future results
of the GMIB business or realized investment results due in part to interest rate and stock market
volatility and other internal and external factors. This outlook includes an assumption that GMDB
(also known as “VADBe”) results will be approximately break-even for full-year 2010, reflective of
the Company’s view that the long-term reserve assumptions are appropriate and assumes that capital
markets remain stable during the year. In addition, the Company is not able to identify or
reasonably estimate the financial impact of special items in 2010 however they may include
potential adjustments associated with cost reduction, litigation, and tax-related items.
The Company’s outlook for 2010 is subject to the factors cited in the Cautionary Statement
beginning on page 95 of this Form 10-K and the sensitivities discussed in the Critical Accounting
Estimates section of the MD&A beginning on page 55 of this Form 10-K. If unfavorable equity market
and interest rate movements occur, the Company could experience losses related to investment
impairments and the GMIB and GMDB businesses. These losses could adversely impact the Company’s
consolidated results of operations and financial condition by potentially reducing the capital of
the Company’s insurance subsidiaries and reducing their dividend-paying capabilities.
Revenues
Total
revenues decreased by 4% in 2009, compared with 2008, and increased by 8% in 2008 compared
with 2007. Changes in the components of total revenue are described more fully below.
Premiums and Fees
Premiums
and fees decreased by 1% in 2009, compared with 2008, reflecting membership declines in
Health Care resulting from higher unemployment and the unfavorable effect of foreign currency
translation in International, offset by the absence of premium and fees from the acquired business
in the first quarter of 2008 since this business was acquired April 1, 2008.
Premiums and fees increased by 8% in 2008, compared with 2007 reflecting the impact of the acquired
business, growth in the Disability and Life segment, as well as growth and rate increases in the
International segment. See segment reporting discussions for additional details.
Net Investment Income
Net
investment income decreased by 5% in 2009, compared with 2008, primarily due to lower income
from real estate funds and security partnerships, unfavorable foreign exchange rates and lower
investment yields partially offset by higher invested assets.
Net
investment income decreased by 5% in 2008, compared with 2007, primarily due to lower yields
driven by declines in short-term interest rates, commercial mortgage pre-payment fees, and income
from security partnerships.
Mail Order Pharmacy Revenues
Mail
order pharmacy revenues increased by 6% in 2009, compared with 2008, primarily due to rate
increases and by 8% in 2008, compared with 2007 due to increased script volume and rate increases.
Other Revenues
Other revenues include the impact of futures contracts associated with the GMDB equity hedge
program. In 2009, the Company reported losses of $282 million associated with the GMDB equity
hedge program, compared with gains of $333 million in 2008. The losses in 2009 primarily reflected
increases in stock market values, while the gains in 2008 primarily reflected declines in stock
market values. Excluding the impact of the futures contracts associated with the GMDB equity hedge
program, Other revenues decreased 4% in 2009, compared with 2008, primarily reflecting declines in
amortization of deferred gains on the sales of the retirement benefits and individual life
insurance and annuity businesses.
Excluding the impact of the futures contracts associated with the GMDB equity hedge program, Other
revenues increased 5% in 2008, compared with 2007, primarily reflecting the impact of the acquired
business. In 2008, the Company reported a gain of $333 million associated with the GMDB equity
hedge program, compared with a loss of $32 million in 2007.
54
Realized Investment Results
Realized investment results in 2009 were significantly improved compared to 2008 primarily due to:
| • |
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lower asset write-downs on fixed maturities largely reflecting improved market conditions; |
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gains on sales of fixed maturities and equities in 2009 compared with losses in 2008; and |
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gains on hybrid securities in 2009 compared with losses in 2008 (changes in fair value for
these securities are reported in realized investment results). |
These favorable effects were partially offset by higher impairments of investments in real estate
entities and commercial mortgage loans in 2009 due to the impact of the continued weak economic
environment on the commercial real estate market and the absence of significant gains on the sales
of real estate ventures reported during 2008.
Realized investment results in 2008 were lower than in 2007, primarily due to higher losses
associated with asset write-downs and increases in valuation allowances primarily due to higher
interest rates and credit losses resulting from adverse economic conditions during 2008. In
addition, the Company had higher losses on sales of fixed maturities and equity securities. These
losses were partially offset by higher gains on sales of real estate investments held in joint
ventures.
See Note 14 to the Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP requires management to
make estimates and assumptions that affect reported amounts and related disclosures in the
consolidated financial statements. Management considers an accounting estimate to be critical if:
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it requires assumptions to be made that were uncertain at the time the estimate was made;
and |
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changes in the estimate or different estimates that could have been selected could have a
material effect on the Company’s consolidated results of operations or financial condition. |
Management has discussed the development and selection of its critical accounting estimates with
the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the
disclosures presented below.
In addition to the estimates presented in the following table, there are other accounting estimates
used in the preparation of the Company’s consolidated financial statements, including estimates of
liabilities for future policy benefits other than those identified in the following table, as well
as estimates with respect to goodwill, unpaid claims and claim expenses, postemployment and
postretirement benefits other than pensions, certain compensation accruals, and income taxes.
Management believes the current assumptions used to estimate amounts reflected in the Company’s
consolidated financial statements are appropriate. However, if actual experience differs from the
assumptions used in estimating amounts reflected in the Company’s consolidated financial
statements, the resulting changes could have a material adverse effect on the Company’s
consolidated results of operations, and in certain situations, could have a material adverse effect
on the Company’s liquidity and financial condition.
See Note 2 to the Consolidated Financial Statements for further information on significant
accounting policies that impact the Company.
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Future policy benefits —
Guaranteed minimum death
benefits (“GMDB” also known as
“VADBe”)
These liabilities are estimates of
the present value of net amounts
expected to be paid, less the
present value of net future
premiums expected to be received.
The amounts to be paid represent
the excess of the guaranteed death
benefit over the values of
contractholders’ accounts. The
death benefit coverage in force at
December 31, 2009 (representing
the amount payable if all of
approximately 590,000
contractholders had submitted
death claims as of that date) was
approximately $7 billion.
Liabilities for future policy
benefits for these contracts as of
December 31 were as follows (in
millions):
• 2009 — $1,285
• 2008 — $1,609
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The Company estimates
these liabilities based on
assumptions for lapse,
partial surrender,
mortality, interest rates
(mean investment
performance and discount
rate), and volatility.
These assumptions are
based on the Company’s
experience and future
expectations over the
long-term period. The
Company monitors actual
experience to update these
estimates as necessary.
Lapse refers to the full
surrender of an annuity
prior to a
contractholder’s death.
Partial surrender refers
to the fact that most
contractholders have the
ability to withdraw
substantially all of their
mutual fund investments
while retaining any
available death benefit
coverage in effect at the
time of the withdrawal.
Once a partial surrender
is made, the liability
increases reflecting lower
future assumed premiums, a
lower likelihood of lapse,
and a lower likelihood of
account values recovering
sufficiently to reduce the
death benefit exposure in
future periods. These
effects are not covered by
the Company’s GMDB equity
hedge program. Market
declines could expose the
Company to higher amounts
of death benefit exposure
that can be retained by
contractholders subsequent
to a significant partial
surrender and to higher
election rates of future
partial surrenders. Thus,
if equity markets decline,
the Company’s liability
for partial surrenders
increases and there is no
corresponding offset from
the hedge program. The
election rate for expected
future partial surrenders
is updated quarterly based
on emerging experience.
Interest rates include
both (a) the mean
investment performance
assumption, and (b) the
liability discount rate
assumption. The mean
investment performance for
underlying equity mutual
funds considers the
Company’s GMDB equity
hedge program which
reflects the average
short-term interest rate
to be earned over the life
of the program. The mean
investment performance for
underlying fixed income
mutual funds considers the
expected market return
over the life of the
contracts.
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Current assumptions used to estimate these
liabilities are detailed in Note 7 to the
Consolidated Financial Statements. Based on current
and historical market, industry and
Company-specific experience and management’s
judgment, the Company believes that it is
reasonably likely that the unfavorable changes in
the key assumptions and/or conditions described
below could occur. If these unfavorable assumption
changes were to occur, the approximate after-tax
decrease in shareholders’ net income would be as
follows:
• 5% increase in mortality rates — $30
million
• 10% decrease in lapse rates — $25 million
• 10% increase in election rates for future
partial surrenders — $5 million
• 50 basis point decrease in interest rates:
• Mean Investment Performance — $20 million
• Discount Rate — $25 million
• 10% increase in volatility — $20 million
As of December 31, 2009, if contractholder account
values invested in underlying equity mutual funds
declined by 10% due to equity market performance,
the after-tax decrease in shareholders’ net income
resulting from an increase in the provision for
partial surrenders would be approximately $10
million.
As of December 31, 2009, if contractholder account
values invested in underlying bond/money market
mutual funds declined by 2% due to bond/money
market performance, the after-tax decrease in
shareholders’ net income resulting from an increase
in the provision for partial surrenders and an
increase in unhedged exposure would be
approximately $10 million.
The amounts would be reflected in the Run-off
Reinsurance segment. |
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Volatility refers to the
degree of variation of
future market returns of
the underlying mutual fund
investments. |
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Health Care medical claims payable
Medical claims payable for the
Health Care segment include both
reported claims and estimates for
losses incurred but not yet
reported.
Liabilities for medical claims
payable as of December 31 were as
follows (in millions):
• 2009 — gross $921; net
$715
• 2008 — gross $924; net
$713
These liabilities are presented
above both gross and net of
reinsurance and other
recoverables.
These liabilities generally
exclude amounts for administrative
services only business.
See Note 5 to the Consolidated
Financial Statements for
additional information.
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The Company develops
estimates for Health Care
medical claims payable
using actuarial principles
and assumptions based on
historical and projected
claim payment patterns,
medical cost trends, which
are impacted by the
utilization of medical
services and the related
costs of the services
provided (unit costs),
benefit design,
seasonality, and other
relevant operational
factors. The Company
consistently applies these
actuarial principles and
assumptions each reporting
period, with consideration
given to the variability
of these factors, and
recognizes the actuarial
best estimate of the
ultimate liability within
a level of confidence, as
required by actuarial
standards of practice,
which require that the
liabilities be adequate
under moderately adverse
conditions.
The Company’s estimate of
the liability for medical
claims incurred but not
yet reported is primarily
calculated using
historical claim payment
patterns and expected
medical cost trends. The
Company analyzes the
historical claim payment
patterns by comparing the
dates claims were
incurred, generally the
dates services were
provided, to the dates
claims were paid to
determine “completion
factors”, which are a
measure of the time to
process claims. A
completion factor is
calculated for each month
of incurred claims. The
Company uses historical
completion factors
combined with an analysis
of current trends and
operational factors to
develop current estimates
of completion factors.
The Company estimates the
ultimate liability for
claims incurred in each
month by applying the
current estimates of
completion factors to the
current paid claims data.
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For the year ended December 31, 2009, actual
experience differed from the Company’s key
assumptions, resulting in $43 million of favorable
incurred claims related to prior years’ medical
claims payable or 0.6% of the current year incurred
claims as reported for the year ended December 31,
2008. For the year ended December 31, 2008, actual
experience differed from the Company’s key
assumptions, resulting in $60 million of favorable
incurred claims related to prior years’ medical
claims, or 0.9% of the current year incurred claims
reported for the year ended December 31, 2007.
Specifically, the favorable impact is due to faster
than expected completion factors and lower than
expected medical cost trends, both of which
included an assumption for moderately adverse
experience.
The corresponding impact of favorable prior year
development on net income was not material for the
year ended December 31, 2009. The change in the
amount of the incurred claims related to prior
years in the medical claims payable liability does
not directly correspond to an increase or decrease
in shareholders’ net income. |
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The difference between
this estimate of the
ultimate liability and the
current paid claims data
is the estimate of the
remaining claims to be
paid for each incurral
month. These monthly
estimates are aggregated
and included in the
Company’s Health Care
medical claims payable at
the end of each reporting
period. Completion
factors are used to
estimate the health care
medical claims payable for
all months where claims
have not been completely
resolved and paid, except
for the most recent month
as described below. |
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Completion factors are
impacted by several key
items including changes in
the level of claims
processed electronically
versus manually
(auto-adjudication),
changes in provider claims
submission rates,
membership changes and the
mix of products. As
noted, the Company uses
historical completion
factors combined with an
analysis of current trends
and operational factors to
develop current estimates
of completion factors.
This approach implicitly
assumes that historical
completion rates will be a
useful indicator for the
current period. It is
possible that the actual
completion rates for the
current period will
develop differently from
historical patterns, which
could have a material
impact on the Company’s
medical claims payable and
net income. |
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Claims incurred in the
most recent month have
limited paid claims data,
since a large portion of
health care claims are not
submitted to the Company
for payment in the month
services have been
provided. This makes the
completion factor approach
less reliable for claims
incurred in the most
recent month. As a
result, in any reporting
period, for the estimates
of the ultimate claims
incurred in the most
recent month, the Company
primarily relies on
medical cost trend
analysis, which reflects
expected claim payment
patterns and other
relevant operational
considerations. Medical
cost trend is impacted by
several key factors
including medical service
utilization and unit costs
and the Company’s ability
to manage these factors
through benefit design,
underwriting, provider
contracting and the
Company’s medical
management initiatives.
These factors are affected
by changes in the level
and mix of medical
benefits offered,
including inpatient,
outpatient and pharmacy,
the impact of copays and
deductibles, changes in
provider practices and
changes in consumer
demographics and
consumption behavior. |
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Because historical trend
factors are often not
representative of current
claim trends, the trend
experienced for the most
recent history along with
an analysis of emerging
trends, have been taken
into consideration in
establishing the liability
for medical claims payable
at December 31, 2009 and
2008. It is possible that
the actual medical trend
for the current period
will develop differently
from the expected, which
could have a material
impact on the Company’s
medical claims payable and
net income. |
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For each reporting period,
the Company evaluates key
assumptions by comparing
the assumptions used in
establishing the medical
claims payable to actual
experience. When actual
experience differs from
the assumptions used in
establishing the
liability, medical claims
payable are increased or
decreased through current
period net income.
Additionally, the Company
evaluates expected future
developments and emerging
trends which may impact
key assumptions. The
estimation process
involves considerable
judgment, reflecting the
variability inherent in
forecasting future claim
payments. The adequacy of
these estimates is highly
sensitive to changes in
the Company’s key
assumptions, specifically
completion factors, which
are impacted by actual or
expected changes in the
submission and payment of
medical claims, and
medical cost trends, which
are impacted by actual or
expected changes in the
utilization of medical
services and unit costs. |
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Accounts payable, accrued
expenses and other liabilities, and
Other assets —
Guaranteed minimum income benefits (“GMIB”)
These liabilities are estimates of
the present value of net amounts
expected to be paid, less the
present value of net future
premiums expected to be received.
The amounts to be paid represent
the excess of the expected value of
the income benefit over the value
of the annuitants’ accounts at the
time of annuitization.
The assets associated with these
contracts represent receivables in
connection with reinsurance that
the Company has purchased from two
external reinsurers, which covers
55% of the exposures on these
contracts.
As discussed in Note 2(B) to the
Consolidated Financial Statements,
the Company implemented new
guidance for fair value
measurements on January 1, 2008. At
adoption, the Company was required
to change certain assumptions to
reflect those that it believes a
hypothetical market participant
would use to determine an exit
price. As a result, the Company
recorded a charge of $131 million
after-tax, net of reinsurance ($202
million pre-tax).
Liabilities related to these
contracts as of December 31, were
as follows (in millions):
• 2009 — $903
• 2008 — $1,757
As of December 31, estimated
amounts receivable related to these
contracts from two external
reinsurers, were as follows (in
millions):
• 2009 — $482
• 2008 — $953
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The Company considers the
various assumptions used
to estimate the fair
values of assets and
liabilities associated
with these contracts in
two categories: 1) capital
market inputs; and 2)
future annuitant behavior
and other assumptions.
Capital market inputs
include market returns and
discount rates, claim
interest rates and market
volatility. This group of
assumptions is largely
based on market-observable
inputs.
Interest rates include (a)
market returns, (b) the
liability discount rate
assumption and (c) the
projected interest rates
used to calculate the
reinsured income benefit
at the time of
annuitization (claim
interest rate).
Volatility refers to the
degree of variation of
future market returns of
the underlying mutual fund
investments.
The second group of
assumptions consists of
future annuitant behavior
and other inputs, and
includes annuity election
rates, lapse, mortality,
nonperformance risk (for
both the Company and its
retrocessionnaires), and a
risk and profit charge.
This group of assumptions
is based on the Company’s
experience, industry data,
and management’s judgment.
Annuity election rates
refer to the proportion of
annuitants who elect to
receive their income
benefit as an annuity.
Lapse refers to the full
surrender of an annuity
prior to annuitization of
the policy.
Nonperformance risk refers
to the market’s perception
that either the Company
will not fulfill its GMIB
liability (own credit) or
the Company will not
collect on its GMIB
retrocessional coverage
(reinsurer credit risk).
Risk and profit charge
refers to the amount that
a hypothetical market
participant would include
in the valuation to cover
the uncertainty of
outcomes and the desired
return on capital.
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Current assumptions used to estimate these
liabilities are detailed in Note 11 to the
Consolidated Financial Statements. The
Company’s results of operations are expected to
be volatile in future periods because most
capital market assumptions will be based
largely on market-observable inputs at the
close of each period including interest rates
and market implied volatilities.
Based on current and historical market,
industry and Company-specific experience and
management’s judgment, the Company believes
that it is reasonably likely that the
unfavorable changes in the key assumptions
and/or conditions described below could occur.
If these unfavorable assumption changes were to
occur, the approximate after-tax decrease in
shareholders’ net income, net of estimated
amounts receivable from reinsurers, would be as
follows:
• 50 basis point decrease in interest
rates (which are aligned with LIBOR) used for
projecting market returns and discounting —
$15 million
• 50 basis point decrease in interest
rates used for projecting claim exposure
(7-year Treasury rates) — $25 million
• 20% increase in implied market
volatility — $5 million
• 5% decrease in mortality — $1 million
• 10% increase in annuity election rates
— $5 million
• 10% decrease in lapse rates — $5
million
• 10% increase to the risk and profit
charge — $3 million
Market declines which reduce annuitants’
account values expose the Company to higher
potential claims which results in a larger net
liability. If annuitants’ account values
invested in underlying equity mutual funds as
of December 31, 2009 declined by 10% due to
equity market performance, the approximate
after-tax decrease in shareholders’ net income,
net of estimated amounts receivable from
reinsurers, would be approximately $20 million.
If annuitants’ account values invested in
underlying bond/money market/mutual funds as of
December 31, 2009 declined by 2% due to
bond/money market performance, the approximate
after-tax decrease in shareholders’ net income,
net of estimated amounts receivable from
reinsurers, would be approximately $2 million.
If credit default swap spreads used to evaluate
the nonperformance risk of the Company were to
narrow or the credit rating of its principal
life insurance subsidiary were to improve, it
would cause a decrease in the discount rate of
the GMIB liability, resulting in an unfavorable
impact to earnings. If the discount rate
decreased by 25 bps due to this, the
approximate after-tax decrease in shareholders’
net income would be approximately $10 million. |
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If credit default swap spreads
used to evaluate the nonperformance
risk of the Company’s GMIB
retrocessionnaires were to widen or
the retrocessionnaires’ credit
ratings were to weaken, it would
cause an increase in the discount
rate of the GMIB asset, resulting
in an unfavorable impact to
earnings. If the discount rate
increased by 25 bps due to this,
the approximate after-tax decrease
in shareholders’ net income would
be approximately $5 million.
All of these estimated impacts due
to unfavorable changes in
assumptions could vary from quarter
to quarter depending on actual
reserve levels, the actual market
conditions or changes in the
anticipated view of a hypothetical
market participant as of any future
valuation date.
The amounts would be reflected in
the Run-off Reinsurance segment in
GMIB expense. |
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Reinsurance recoverables —
Reinsurance recoverables in
Run-off Reinsurance
Collectability of reinsurance
recoverables requires an
assessment of risks that such
amounts will not be collected,
including risks associated with
reinsurer default and disputes
with reinsurers regarding
applicable coverage.
Gross and net reinsurance
recoverables in the Run-off
Reinsurance segment as of December
31, were as follows (in millions):
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The amount of reinsurance
recoverables in the
Run-off Reinsurance
segment, net of reserves,
represents management’s
best estimate of
recoverability, including
an assessment of the
financial strength of
reinsurers.
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A 10% reduction of net reinsurance
recoverables due to
uncollectability at December 31,
2009, would reduce shareholders’
net income by approximately $10
million after-tax.
The amounts would be reflected in
the Run-off Reinsurance segment.
See Note 8 to the Consolidated
Financial Statements for additional
information. |
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• 2009 — gross $127;
net $121
• 2008 — gross $180;
net $169 |
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Accounts payable, accrued expenses
and other liabilities — pension
liabilities
These liabilities are estimates of
the present value of the qualified
and nonqualified pension benefits
to be paid (attributed to employee
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):
• 2009 — $1,513
• 2008 — $1,853
See Note 10 to the Consolidated
Financial Statements for
additional information.
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The Company estimates
these liabilities and the
related expense with
actuarial models using
various assumptions
including discount rates
and an expected long-term
return on plan assets.
Discount rates are set by
applying actual annualized
yields at various
durations from the
Citigroup Pension
Liability curve, without
adjustment, to the
expected cash flows of the
pension liabilities.
The expected long-term
return on plan assets for
the domestic qualified
pension plan is developed
considering actual
historical returns,
expected long-term market
conditions, plan asset mix
and management’s
investment strategy. In
addition, to measure
pension costs the Company
uses a market-related
asset value method for
domestic qualified pension
plan assets invested in
non-fixed income
investments, which are
approximately 80% of total
plan assets. This method
recognizes the difference
between actual and
expected returns in the
non-fixed income portfolio
over 5 years, a method
that reduces the
short-term impact of
market fluctuations on
pension cost. At December
31, 2009, the
market-related asset value
was approximately $3.3
billion compared with a
market value of $2.9
billion.
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Using past experience, the Company
expects that it is reasonably
possible that a favorable or
unfavorable change in these key
assumptions of 50 basis points
could occur. An unfavorable change
is a decrease in these key
assumptions with resulting impacts
as discussed below.
If discount rates for the qualified
and nonqualified pension plans
decreased by 50 basis points:
• annual pension costs for
2010 would decrease by
approximately $3 million,
after-tax; and
• the accrued pension benefit
liability would increase by
approximately $200 million as of
December 31, 2009 resulting in an
after-tax decrease to shareholders’
equity of approximately $130
million as of December 31, 2009.
If the expected long-term return on
domestic qualified pension plan
assets decreased by 50 basis
points, annual pension costs for
2010 would increase by
approximately $10 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 2010 would
increase by approximately $30
million, after-tax.
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The accumulated unrecognized actuarial
loss of $1.6 billion at December 31, 2009
primarily reflects the significant decline in
the value of equity securities during 2008.
The actuarial loss is adjusted for
unrecognized changes in market-related asset
values and amortized over the average
remaining life expectancy of plan
participants if the adjusted loss exceeds 10%
of the market-related value of plan assets or
10% of the projected benefit obligation,
whichever is greater. As of December 31,
2009, approximately $0.7 billion of the
adjusted actuarial loss exceeded 10% of the
projected benefit obligation. As a result,
approximately $16 million after-tax will be
expensed in 2010 net income. For the year
ended December 31, 2009, $22 million
after-tax was expensed in net income.
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If the December 31, 2009 fair
values of domestic qualified plan
assets decreased by 10%, the
accrued pension benefit liability
would increase by approximately
$285 million as of December 31,
2009 resulting in an after-tax
decrease to shareholders’ equity of
approximately $185 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. |
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Investments — Fixed maturities
Recognition of losses from “other-
than-
temporary” impairments of
public and
private placement
fixed maturities
To assess whether a fixed
maturity’s decline in fair value
below its amortized cost is other
than temporary, the Company
evaluates 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.
When the Company does not expect
to recover a fixed maturity’s
amortized cost, its fair value and
expected future cash flows must be
estimated by management to record
an impairment loss. The credit
portion of an impairment loss is
recognized in net income and
measured as the difference between
a fixed maturity’s amortized cost
and the net present value of its
projected future cash flows. The
non-credit portion, if any, is
recognized in a separate component
of shareholders’ equity.
See Note 2 (C) to the Consolidated
Financial Statements for
additional information regarding the Company’s accounting policies
for fixed maturities.
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When evaluating whether a loss is other than
temporary, the Company considers factors
including;
• length of time and severity of
decline;
• financial health and specific
near term prospects of the issuer;
• changes in the regulatory, economic
or general market environment of the issuer’s
industry or geographic region; and
• the Company’s intent to sell or the
likelihood of a required sale prior to
recovery.
Management estimates other-than-temporary
impairments based on fair values using quoted
market prices for public securities with
active markets and generally the present
value of future cash flows for private
placement bonds and other public securities.
Expected future cash flows for each fixed
maturity are based on the Company’s
assessment of qualitative and quantitative
factors, including the probability of
default, and the estimated timing and amount
of any recovery in value. See Note 11 to the
Consolidated Financial Statements for a
discussion of the Company’s fair value
measurements.
The Company recognized other-than-temporary impairments of investments in fixed
maturities as follows (in millions,
after-tax):
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For all fixed maturities with cost
in excess of their fair value, if
this excess was determined to be
other-than-temporary, shareholders’
net income for the year ended
December 31, 2009 would have
decreased by approximately $86
million after-tax.
For private placement bonds
considered impaired, a decrease of
10% of all expected future cash
flows for the impaired bonds would
reduce shareholders’ net income by
approximately $2 million after-tax. |
|
|
• 2009 — $31
• 2008 — $138
• 2007 — $20
See Note 12 to the Consolidated Financial
Statements for a discussion of the Company’s
review of declines in fair value. |
|
|
60
| |
|
|
|
|
| Balance Sheet Caption / |
|
|
|
|
| Nature of Critical Accounting Estimate |
|
Assumptions / Approach Used |
|
Effect if Different Assumptions Used |
Investments — Commercial
Mortgage Loans — Valuation Reserves
Recognition of losses from valuation
reserves for impaired commercial
mortgage loans
To determine whether a commercial
mortgage loan is impaired, the
Company evaluates the likelihood of
collecting all interest and principal
payments in accordance with the
contractual terms of the original
loan agreement. When it is probable
that the Company will not collect
amounts due according to the terms of
the original loan agreement, a loan
is considered impaired and the
Company must estimate the fair value
of the underlying property to measure
an impairment loss. An impairment
loss is recorded using a valuation
allowance for an impaired commercial
mortgage loan’s carrying value in
excess of the estimated fair value of
its underlying property. Changes to
valuation reserves are recorded in
Realized investment gains (losses).
See Note 2 (C) to the Consolidated
Financial Statements for additional
information regarding the Company’s
accounting policies for commercial
mortgage loans.
|
|
The Company’s evaluation of the likelihood of collecting
all contractual payments and the collateral fair value
for commercial mortgage loans is a qualitative and
quantitative process which is subject to uncertainties.
The Company carefully evaluates all facts and
circumstances for each loan and its supporting
collateral.
When evaluating the likelihood of collecting the
contractual payments of a commercial mortgage loan, the
Company considers factors including:
• financial statements, budgets and operating plans
for the property;
• inspection reports of the property completed by
third party servicers;
• debt service coverage of the underlying
collateral;
• the borrower’s continuing financial commitment to
the property; and
• conditions and factors pertinent to the property
and its local market.
When it becomes probable that all contractual payments
will not be collected according to the terms of the
original loan agreement, the Company calculates the
estimated fair value of the underlying property based on
a 10-year discounted cash flow analysis. Factors key to
this valuation include the following:
|
|
If property values declined by 10%
across the commercial mortgage loan
portfolio as of December 31, 2009,
approximately 20% of the
portfolio’s loans would have
carrying values in excess of their
underlying properties’ fair values
totaling approximately $85 million.
And if each of these loans were
considered impaired as of December
31, 2009, shareholders’ net income
would decrease by approximately $55
million after-tax.
If underlying property values
declined by 10% for impaired
commercial mortgage loans with
valuation reserves as of December
31, 2009, shareholders’ net income
would decrease by approximately $8
million after-tax. |
|
|
• net operating income of the property;
• rental and growth rates for the property and its
local market;
• capital requirements for the property; and
• current market discount and
capitalization rates. |
|
|
|
|
|
|
|
|
|
These evaluations are based primarily on an in-depth
review of the commercial mortgage loan portfolio which is
completed annually in the third quarter. The Company
updates this annual review as material changes in these
factors are identified.
The Company recognized impairment losses from commercial
mortgage loan valuation reserves as follows (in millions,
after-tax): |
|
|
|
|
|
|
|
|
|
• 2009 — $11
• 2008 — $0
• 2007 — $0 |
|
|
|
|
|
|
|
|
|
See the Investment Assets section of the MD&A beginning
on page 87 for discussion of the Company’s problem and
potential problem mortgage loans and Note 12 to the
Consolidated Financial Statements for further information
surrounding impaired commercial mortgage loans. |
|
|
61
SEGMENT REPORTING
Operating segments generally reflect groups of related products, but the International segment is
generally based on geography. The Company measures the financial results of its segments using
“segment earnings (loss),” which is defined as shareholders’ income (loss) from continuing
operations excluding after-tax realized investment gains and losses. “Adjusted income from
operations” for each segment is defined as segment earnings excluding special items and the results
of the Company’s GMIB business. Adjusted income from operations is another measure of
profitability used by the Company’s management because it presents the underlying results of
operations of the segment and permits analysis of trends. This measure is not determined in
accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP
measure, which is segment earnings. Each segment provides a reconciliation between segment
earnings and adjusted income from operations.
Health Care Segment
Segment Description
The Health Care segment includes medical, dental, behavioral health, prescription drug and other
products and services that may be integrated to provide consumers with comprehensive health care
solutions. This segment also includes group disability and life insurance products that were
historically sold in connection with certain experience-rated medical products. These products and
services are offered through a variety of funding arrangements such as guaranteed cost,
retrospectively experience-rated and administrative services only arrangements.
The Company measures the operating effectiveness of the Health Care segment using the following key
factors:
| • |
|
segment earnings and adjusted income from operations; |
| • |
|
sales of specialty products to core medical customers; |
| • |
|
changes in operating expenses per member; and |
| • |
|
medical expense as a percentage of premiums (medical care ratio) in the guaranteed cost
business. |
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
11,384 |
|
|
$ |
11,665 |
|
|
$ |
10,666 |
|
Net investment income |
|
|
181 |
|
|
|
200 |
|
|
|
202 |
|
Mail order pharmacy revenues |
|
|
1,282 |
|
|
|
1,204 |
|
|
|
1,118 |
|
Other revenues |
|
|
262 |
|
|
|
267 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
13,109 |
|
|
|
13,336 |
|
|
|
12,236 |
|
Mail order pharmacy cost of goods sold |
|
|
1,036 |
|
|
|
961 |
|
|
|
904 |
|
Benefits and other expenses |
|
|
10,943 |
|
|
|
11,359 |
|
|
|
10,295 |
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
|
11,979 |
|
|
|
12,320 |
|
|
|
11,199 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,130 |
|
|
|
1,016 |
|
|
|
1,037 |
|
Income taxes |
|
|
399 |
|
|
|
352 |
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
|
731 |
|
|
|
664 |
|
|
|
679 |
|
Less: special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain (See Note 10 to the Consolidated Financial Statements) |
|
|
25 |
|
|
|
— |
|
|
|
— |
|
Cost reduction charge (See Note 6 to the Consolidated Financial Statements) |
|
|
(24 |
) |
|
|
(27 |
) |
|
|
— |
|
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
Charge related to litigation matters (See Note 23 to the Consolidated Financial Statements) |
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
729 |
|
|
$ |
715 |
|
|
$ |
679 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
(19 |
) |
|
$ |
(13 |
) |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
62
The Health Care segment’s adjusted income from operations for 2009, as compared with 2008, was
favorably impacted by the absence of a $7 million after-tax adjustment related to a large
experience-rated life and non-medical account in run-out recorded in the first quarter of 2008.
Excluding this item, adjusted income from operations for 2009 was slightly higher than 2008
reflecting:
| • |
|
lower operating expenses, excluding the impact of an additional quarter from the acquired
business (effective April 1, 2008), primarily driven by cost reduction initiatives and pension
plan changes, partially offset by higher management incentive compensation and higher
information technology spend; |
| • |
|
higher stop loss earnings largely from the acquired business (effective April 1, 2008),
tempered by lower margins on the remaining book; and |
| • |
|
improved specialty earnings. |
These favorable effects were largely offset by:
| • |
|
lower guaranteed cost earnings primarily reflecting a higher medical care ratio driven by
unfavorable prior year development, as well as higher in-year claims due, in part to H1N1
flu-related claims; and |
| • |
|
lower investment income primarily reflecting lower income from real estate funds. |
The Health Care segment’s adjusted income from operations in 2008, as compared with 2007, was
favorably impacted by lower management incentive compensation expense of $21 million after-tax.
Excluding the items mentioned above, adjusted income from operations increased in 2008 compared
with 2007 due to:
| • |
|
earnings from the acquired business (effective April 1, 2008); |
| • |
|
higher service fees due to membership growth and rate increases; |
| • |
|
favorable specialty earnings due to increased sales to core medical customers as well as
strong performance in the direct specialty business; and |
| • |
|
improved Medicare Part D results due in part to increased membership. |
These favorable effects were partially offset by:
| • |
|
lower membership and a higher medical care ratio in the guaranteed cost business; |
| • |
|
lower medical margins in the experience-rated business; and |
| • |
|
higher operating expenses reflecting spending on operational improvement initiatives,
including segment expansion and investments in information technology, partially offset by
expense reductions in certain areas, primarily service operations. |
63
Revenues
The table below shows premiums and fees for the Health Care segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medical: |
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed cost excluding voluntary/limited benefits (1),(2) |
|
$ |
3,148 |
|
|
$ |
3,504 |
|
|
$ |
3,877 |
|
Voluntary/limited benefits |
|
|
232 |
|
|
|
200 |
|
|
|
160 |
|
Experience-rated (2),(3) |
|
|
1,699 |
|
|
|
1,953 |
|
|
|
1,877 |
|
Stop loss |
|
|
1,274 |
|
|
|
1,197 |
|
|
|
589 |
|
Dental |
|
|
731 |
|
|
|
785 |
|
|
|
773 |
|
Medicare |
|
|
595 |
|
|
|
400 |
|
|
|
349 |
|
Medicare Part D |
|
|
342 |
|
|
|
327 |
|
|
|
326 |
|
Other (4) |
|
|
515 |
|
|
|
518 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
Total medical |
|
|
8,536 |
|
|
|
8,884 |
|
|
|
8,424 |
|
Life and other non-medical |
|
|
179 |
|
|
|
184 |
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
8,715 |
|
|
|
9,068 |
|
|
|
8,659 |
|
Fees (2),(5) |
|
|
2,669 |
|
|
|
2,597 |
|
|
|
2,007 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees |
|
$ |
11,384 |
|
|
$ |
11,665 |
|
|
$ |
10,666 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Includes guaranteed cost premiums primarily associated with open access and commercial HMO, as well as other risk-related products. |
| |
| (2) |
|
Premiums and/or fees associated with certain specialty products are also included. |
| |
| (3) |
|
Includes minimum premium members, who have a risk profile similar to experience-rated funding arrangements. The risk portion of minimum
premium revenue is reported in experience-rated medical premium whereas the self funding portion of minimum premium revenue is recorded in fees.
Also, includes certain non-participating cases for which special customer level reporting of experience is required. |
| |
| (4) |
|
Other medical premiums include risk revenue and specialty products. |
| |
| (5) |
|
Represents administrative service fees for medical members and related specialty product fees for non-medical members as well as fees related to
Medicare Part D of $41 million in 2009, $69 million in 2008, and $61 million in 2007. |
Premiums and fees decreased by 2% in 2009, compared with 2008, primarily reflecting lower
membership largely due to disenrollment resulting from higher unemployment. This impact was
partially offset by:
| • |
|
rate actions across all products; |
| • |
|
increases in fees relating to specialty products; |
| • |
|
membership growth in the Medicare private fee for service and Voluntary products; and |
| • |
|
the impact of the acquired business (effective April 1, 2008). |
Premiums and fees increased 9% in 2008, compared with 2007, primarily reflecting:
| • |
|
the impact of the acquired business (effective April 1, 2008); |
| • |
|
increases in the experience-rated business due to rate increases; |
| • |
|
higher other medical premiums due to increased sales to core medical customers and rate
increases in specialty business; and |
| • |
|
higher service fees due to increased membership and rate increases. |
These factors were partially offset by a decrease in the guaranteed cost business which was due to
membership declines largely in commercial HMO business partially offset by rate increases.
Net investment income decreased by 10% in 2009 compared with 2008 primarily reflecting lower income
from real estate funds partially offset by higher invested assets. Net investment income decreased
by 1% in 2008 compared with 2007 primarily reflecting lower yields partially offset by higher
average assets.
Other revenues for the Health Care segment consist of revenues earned on direct channel sales of
certain specialty products, including behavioral health and disease management.
64
Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medical claims expense |
|
$ |
6,927 |
|
|
$ |
7,252 |
|
|
$ |
6,798 |
|
Other benefit expenses |
|
|
169 |
|
|
|
193 |
|
|
|
225 |
|
Mail order pharmacy cost of goods sold |
|
|
1,036 |
|
|
|
961 |
|
|
|
904 |
|
Other operating expenses |
|
|
3,847 |
|
|
|
3,914 |
|
|
|
3,272 |
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
$ |
11,979 |
|
|
$ |
12,320 |
|
|
$ |
11,199 |
|
|
|
|
|
|
|
|
|
|
|
Medical claims expense decreased by 4% in 2009 compared with 2008 largely due to lower
membership, particularly in the experience-rated and guaranteed cost businesses. This impact was
partially offset by growth in Medicare membership and increases in medical expenses due to medical
cost inflation as well as H1N1 flu-related claims.
Medical claims expense increased 7% in 2008 compared with 2007 largely due to the impact of the
acquired business.
Other benefit expenses include expenses associated with life, long-term disability and other
non-medical products. These expenses have decreased 12% in 2009 compared with 2008 and 14% in 2008
compared with 2007, primarily reflecting the continued run-off of this business, as the Health Care
segment no longer actively markets these products.
Other operating expenses include expenses related to:
| • |
|
both retail and mail order pharmacy; |
| |
| • |
|
disease management; |
| |
| • |
|
voluntary and limited benefits; |
| |
| • |
|
Medicare claims administration businesses; and |
| |
| • |
|
integration costs associated with the acquired business. |
Excluding the items noted above, as well as special items, other operating expenses increased
slightly in 2009, compared with 2008, primarily due to expenses related to the acquired business
(effective April 1, 2008), higher management incentive compensation and higher information
technology spend, mostly offset by cost reduction initiatives and pension plan changes as a result
of the comprehensive review of ongoing expenses, as well as lower volume-related expenses. Other
operating expenses increased in 2008, compared with 2007, primarily reflecting expenses related to
the acquired business and higher spending on operational improvement initiatives, including market
segment expansion and investments in information technology. This increase was partially offset by
lower management incentive compensation expenses in 2008.
65
Other Items Affecting Health Care Results
Medical Membership
The Health Care segment’s medical membership includes any individual for whom the Company retains
medical underwriting risk, who uses the Company’s network for services covered under their medical
coverage or for whom the Company administers medical claims. As of December 31, estimated medical
membership was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Guaranteed cost excluding voluntary/limited benefits (1) |
|
|
780 |
|
|
|
891 |
|
|
|
1,038 |
|
Voluntary/limited benefits |
|
|
221 |
|
|
|
201 |
|
|
|
180 |
|
Medicare |
|
|
52 |
|
|
|
35 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
Total guaranteed cost |
|
|
1,053 |
|
|
|
1,127 |
|
|
|
1,249 |
|
Experience-rated (2) |
|
|
761 |
|
|
|
864 |
|
|
|
907 |
|
Service |
|
|
9,226 |
|
|
|
9,688 |
|
|
|
8,013 |
|
|
|
|
|
|
|
|
|
|
|
Total medical membership |
|
|
11,040 |
|
|
|
11,679 |
|
|
|
10,169 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Includes guaranteed cost members primarily associated with open access and commercial HMO, as well as other risk-related products. |
| |
| (2) |
|
Includes minimum premium members, who have a risk profile similar to experience-rated members. |
The net decrease in the Health Care segment’s medical membership was 5.5% as of December 31,
2009 when compared with December 31, 2008. The decrease was primarily driven by disenrollment
across all funding arrangements as a result of higher unemployment. The net increase in medical
membership of 15% as of December 31, 2008 compared with December 31, 2007 was due to the
acquisition of Great-West Healthcare, effective April 1, 2008.
Operational Strategies
The Health Care segment is focused on several operational strategies including improving the
efficiency of its operations, while growing its customer base in targeted markets and meeting the
needs of its customers. Savings generated from the reduction of operating expenses will provide
the financial flexibility and capital to make investments that will enable the Company to enhance
its capabilities, particularly in product development and the delivery of customer service, health
advocacy and related technology. These capabilities are critical to enabling the Health Care
segment to execute on its strategies to achieve profitable growth and retain customers. Successful
execution of these operational strategies is critical to maintaining and improving its competitive
position in the healthcare marketplace.
The operational strategies currently underway are discussed below.
Reducing operating expenses. The Company operates in an intensely competitive marketplace and its
ability to establish a competitive cost structure over time is crucial to achieving its overall
strategy. Accordingly, the Health Care segment is focused on reducing operating expenses, while
investing prudently in technology and service capabilities to drive future growth.
The Health Care segment’s operating expenses are comprised of three components and are
approximately allocated as follows: healthcare (70%), specialty and market segment expansion
(20%), and premium taxes/commissions (10%).
| |
• |
|
The healthcare component is the primary focus of the cost reduction activity. This
component includes: |
| |
• |
|
fulfillment activities, which are comprised of service operations,
technology, and medical and network management; |
| |
• |
|
customer acquisition, which represent costs for sales and account
management, underwriting, and marketing and product development; and |
| |
• |
|
staff functions, which represent finance, legal and human resources. |
| |
• |
|
The specialty and market segment expansion and the premium tax/commission expense
components would increase over time as revenues grow. Specialty includes pharmacy,
Medicare Part D, disease management, dental and behavioral coverages. |
66
In 2009, excluding the impact of Great-West Healthcare, the Health Care segment significantly
reduced healthcare operating expenses and expects to continue to meaningfully reduce these over
time. These reductions are, and will continue to be, driven by actions in the following areas:
| |
• |
|
employment-related savings; |
| |
• |
|
vendor management and procurement actions; |
| |
• |
|
reduction of the Health Care segment’s real estate footprint; |
| |
• |
|
leveraging technology to drive operating efficiencies; and |
| |
• |
|
targeted outsourcing actions. |
The Health Care segment expects to drive reductions in its operating expenses while remaining
focused on its other business strategies including investing in areas that are critical to the
Company’s growth initiatives and segment expansions, ensuring continued excellence in customer
service and clinical programs, and leveraging technology to drive further operating efficiencies.
Profitable growth and customer retention. The Health Care segment continues to focus on retaining
profitable relationships, expanding on those relationships and growing profitable new business by
focusing on:
| |
• |
|
targeted market segments where buyers value our health improvement capabilities; |
| |
• |
|
targeted geographic regions where the Company already has a strong market presence and
competitive networks; |
| |
• |
|
providing a diverse product portfolio that meets current market needs, as well as
emerging consumer-directed trends; |
| |
• |
|
developing and implementing the systems, information technology and infrastructure to
deliver member service that keeps pace with the emerging consumer-directed market trends;
and |
| |
• |
|
increasing penetration of our specialty healthcare programs and services and
cross-selling products sold primarily by other segments of the Company. |
The Health Care segment is focused on market segment and product expansion. With respect to market
segment expansion, the focus is predominantly in the “Middle Market” (employers with generally more
than 250 but fewer than 5,000 employees), “Select” (employers with generally more than 50 but fewer
than 250 employees), and “Individual” market segments. The Health Care segment is focusing on
several strategic growth industries and targeting key geographic markets within the Select and
Middle Market segments that align with our competitive strengths. The Health Care segment expects
to grow its presence in these market segments by leveraging its customer knowledge, differentiated
service model, product portfolio and distribution model. The Health Care segment continues to
increase its penetration into the Individual market segment and will refine its strategy for this
market segment pending the outcome of health care reform legislation. In the “National” market
segment (multi-site, multi-state commercial employers with generally more than 5,000 employees),
the Company will selectively focus on clients that value its differentiated product offering.
These clients include those seeking engagement and incentive based programs designed to improve
health, and those that purchase multiple products and services from a single company.
Driving additional cross-selling is also key to the Company’s integrated benefits value
proposition. The Company is expanding network access for its dental product and improving network
flexibility to drive better alignment with customers’ needs including increasing disability and
pharmacy penetration across the entire book.
Offering products that meet emerging customer and market trends. In addition to designing lower
cost plan offerings to meet emerging customer and market trends, enhancements to the Company’s
suite of products (CIGNA Choice Fund® CIGNA Health Advisor, CIGNA Incentive Points Program, CIGNA
Choicelinx/Custom Benefit Builder) offer various options to customers and employers that are key to
our customer engagement strategy. By providing tools to our customers which will facilitate access
and greater understanding of their healthcare choices, customers are better equipped to make
effective health related decisions. CIGNA’s Cost of Care Estimator, Quicken Health and
improvements to customer Explanation of Benefits and Health Statements are a part of the Company’s
strategy to engage the individual by making information more available and easier to understand.
67
Effectively managing medical costs. The Health Care segment operates under a centralized medical
management model, which helps improve the health, well being and sense of security of its members,
while reducing infrastructure expenses and driving productivity.
The Health Care segment is focused on continuing to effectively manage medical utilization and unit
costs. The Company believes that by increasing the quality of medical care and improving access to
care it can drive reductions in total medical cost and better outcomes, resulting in healthier
members. To help achieve this, the Company continues to focus on contracting with providers to
strengthen its networks in targeted markets, enhancing clinical capabilities and engaging its
customers and clients/employers. In connection with the April 2008 Great-West Healthcare
acquisition, the Company continues to integrate its offerings onto one extensive preferred provider
network, in order to offer access to a broad range of utilization review and case management
services at a competitive medical cost.
Delivering superior service to customers and health care professionals. The Company is focused on
delivering consistent, reliable and superior service to customers, health care professionals and
clients. The Company believes that further enhancing service can improve customer retention and,
when combined with useful health information and tools, can help motivate customers to become more
engaged in their personal health. This will help to promote healthy outcomes thereby removing cost
from the healthcare system. The evolution of the consumer-driven health care market is driving
increased product and service complexity and is raising customers’ expectations with respect to
service levels, which is expected to require significant investment, management attention and
heightened interaction with customers.
The Company continues to focus on the development and enhancement of its service model that is
capable of meeting the challenges brought on by the increasing product and service complexity and
the heightened expectations of health care customers. The Company continues to make significant
investments in the development and implementation of systems and technology to improve the provider
service experience for customers and health care professionals (e.g. opening its Call Center 24/7),
thereby enhancing its capabilities and improving its competitive position.
68
Disability and Life Segment
Segment Description
The Disability and Life segment includes group disability, life, accident and specialty insurance
and case management for disability and workers’ compensation.
Key factors for this segment are:
| • |
|
premium growth, including new business and customer retention; |
| • |
|
benefits expense as a percentage of earned premium (loss ratio); and |
| • |
|
other operating expense as a percentage of earned premiums and fees (expense ratio). |
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
2,634 |
|
|
$ |
2,562 |
|
|
$ |
2,374 |
|
Net investment income |
|
|
244 |
|
|
|
256 |
|
|
|
276 |
|
Other revenues |
|
|
113 |
|
|
|
117 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
2,991 |
|
|
|
2,935 |
|
|
|
2,781 |
|
Benefits and expenses |
|
|
2,598 |
|
|
|
2,553 |
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
393 |
|
|
|
382 |
|
|
|
346 |
|
Income taxes |
|
|
109 |
|
|
|
109 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
|
284 |
|
|
|
273 |
|
|
|
254 |
|
Less: special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain (See Note 10 to the Consolidated Financial Statements) |
|
|
4 |
|
|
|
— |
|
|
|
— |
|
Cost reduction charge (See Note 6 to the Consolidated Financial Statements) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
— |
|
Completion of IRS examination (See Note 19 to the Consolidated Financial
Statements) |
|
|
5 |
|
|
|
— |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
279 |
|
|
$ |
275 |
|
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment (losses), net of taxes |
|
$ |
(1 |
) |
|
$ |
(48 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
The Disability and Life segment’s adjusted income from operations increased 1% in 2009
compared to 2008 reflecting:
| • |
|
favorable claims experience in the disability insurance business and the favorable
after-tax impact of disability reserve studies of $20 million in 2009 compared with $8 million
in 2008. The results in 2008 also included a $3 million favorable after-tax impact of a
reinsurance settlement. The favorable claims experience and reserve study impacts are largely
driven by continued strong disability claims management programs; |
| • |
|
improved claims experience in the accident business including the favorable after-tax
impact of reserve studies of $5 million in 2009 compared with $3 million in 2008; and |
| • |
|
higher premiums and fees in the disability and life businesses. |
Largely offsetting these factors were:
| • |
|
lower results in the group life insurance business in 2009 primarily due to less favorable
current year life claims experience, partially offset by the favorable after-tax impact of
reserve studies of $9 million in 2009 compared with $3 million in 2008; |
| • |
|
a higher operating expense ratio, including a litigation expense charge of $4 million; |
| • |
|
lower net investment income; and |
| • |
|
the absence of the 2008 favorable after-tax impact of specialty reserve studies of $2
million. |
69
The Disability and Life segment’s adjusted income from operations increased 11% in 2008 compared to
2007 reflecting:
| • |
|
improved claims experience in the disability insurance business and the favorable after-tax
impact of disability reserve studies of $8 million in 2008 compared with $12 million in 2007.
The results in 2008 also included a $3 million favorable after-tax impact of a reinsurance
settlement. The favorable claims experience and reserve study impacts are largely driven by
continued strong disability claims management programs; |
| • |
|
improved claims experience in the specialty business including the favorable after-tax
impact of reserve studies of $2 million in 2008 compared with an unfavorable impact of $10
million in 2007; |
| • |
|
a lower expense ratio due to effective operating expense management and lower management
incentive compensation; and |
| • |
|
business growth resulting in increased premiums and fees in the disability, life and
accident businesses. |
These factors were partially offset by:
| • |
|
lower results in the group life insurance business due to less favorable life claims
experience and lower year over year favorable after-tax impacts of reserve studies of $3
million in 2008 compared with $7 million in 2007; |
| • |
|
less favorable accident claims experience driven by higher average new claims size. Group
accident results included the favorable after-tax impact of reserve studies of $3 million in both
2008 and 2007; and |
| • |
|
lower net investment income. |
Revenues
Premiums and fees increased by 3% in 2009 reflecting disability and life sales growth and solid
persistency, partially offset by lower employment levels at the customers we serve, the Company’s
exit from a large, low-margin assumed government life reinsurance program and the sale of the
renewal rights for the student and participant accident business. Premiums and fees increased by
8% in 2008 reflecting new sales growth and solid customer retention in the disability, life and
accident lines of business, partially offset by less favorable customer retention in the specialty
line of business.
Net investment income decreased by 5% in 2009 reflecting lower yields and lower security and real
estate partnership income. Net investment income decreased by 7% in 2008 reflecting lower yields
and lower security partnership income.
Benefits and Expenses
Excluding the pre-tax impact of the reserve studies, expense charge and special items noted above,
benefits and expenses increased 3% in 2009 compared with 2008, primarily reflecting:
| • |
|
disability and life business growth; |
| • |
|
less favorable life claims experience driven by the higher average size of death claims;
and |
| • |
|
a higher expense ratio in 2009 compared with 2008 reflecting strategic investments in the
claim operations and information technology initiatives partially offset by a continued focus
on operating expense management and lower disability and workers’ compensation case management
expenses. |
These effects were partially offset by:
| • |
|
more favorable accident claim experience, driven by lower new claims; |
| • |
|
more favorable disability claims experience resulting from higher resolutions driven by
strong disability management programs partially offset by higher new claims; and |
| • |
|
the Company’s exit from the government life insurance program and sale of the renewal
rights for the student and participant accident business. |
70
Excluding the pre-tax impact of the reserve studies, reinsurance settlement and cost reduction
charge noted above, benefits and expenses increased 5% in 2008 compared with 2007, reflecting:
| • |
|
business growth in the disability, life and accident lines of business; and |
| • |
|
less favorable claims experience in the life and accident businesses. |
These effects were partially offset by:
| • |
|
favorable claims experience in the disability and specialty businesses; and |
| • |
|
a lower expense ratio, driven by continued focus on operating expense management, lower
disability and workers’ compensation case management expenses and lower management incentive
compensation expenses. |
International Segment
Segment Description
The International segment includes life, accident and supplemental health insurance products and
international health care products and services, including those offered to expatriate employees of
multinational corporations.
The key factors for this segment are:
| • |
|
premium growth, including new business and customer retention; |
| • |
|
benefits expense as a percentage of earned premium (loss ratio); |
| • |
|
operating expense as a percentage of earned premium (expense ratio); and |
| • |
|
impact of foreign currency movements. |
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
1,882 |
|
|
$ |
1,870 |
|
|
$ |
1,800 |
|
Net investment income |
|
|
69 |
|
|
|
79 |
|
|
|
77 |
|
Other revenues |
|
|
22 |
|
|
|
18 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
1,973 |
|
|
|
1,967 |
|
|
|
1,884 |
|
Benefits and expenses |
|
|
1,717 |
|
|
|
1,679 |
|
|
|
1,610 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
256 |
|
|
|
288 |
|
|
|
274 |
|
Income taxes |
|
|
70 |
|
|
|
104 |
|
|
|
96 |
|
Income attributable to noncontrolling interest |
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
|
183 |
|
|
|
182 |
|
|
|
176 |
|
Less: special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction charge (See Note 6 to the Consolidated Financial Statements) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
— |
|
Curtailment gain (See Note 10 to the Consolidated Financial Statements) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
Completion of IRS examination (See Note 19 to the Consolidated Financial
Statements) |
|
|
1 |
|
|
|
— |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
182 |
|
|
$ |
188 |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency movements included in segment earnings |
|
$ |
(15 |
) |
|
$ |
(13 |
) |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
2 |
|
|
$ |
(3 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
71
During the second quarter of 2009, the Company’s International segment implemented a capital
management strategy to permanently invest the earnings of its South Korean operation overseas.
Income taxes for this operation will therefore be recorded at the tax rate of the foreign
jurisdiction. The International segment’s adjusted income from operations reflected favorable tax
adjustments of $14 million from the implementation of this strategy for 2009. In addition to the
implementation effect, adjusted income from operations also reflects $8 million from the ongoing
impact of the lower tax rate on the permanently invested earnings for 2009. Excluding the impact
of the South Korean tax adjustments and foreign currency movements, the International segment’s
adjusted income from operations decreased 7% for 2009, compared with 2008. The decrease was
primarily driven by unfavorable claims experience in the life, accident and supplemental health
insurance business and the expatriate employee benefits business. The unfavorable effects were
partially offset by revenue growth and competitively strong margins in both businesses. 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. Special items were generally not denominated in foreign currency.
Excluding the impact of foreign currency movements noted in the table above, the International
segment’s adjusted income from operations increased 16% in 2008 compared with 2007, primarily due
to continued growth in the life, accident and supplemental health insurance business and the
expatriate employee benefits business, as well as continued competitively strong margins.
Revenues
Premiums and fees. Excluding the effect of foreign currency movements, premiums and fees were
$2,042 million in 2009 compared with reported premiums of $1,870 million in 2008, an increase of
9%. The increase was primarily attributable to new sales growth in the life, accident and
supplemental health insurance operations, particularly in South Korea, and membership growth in the
expatriate employee benefits business. Excluding the effect of foreign currency movements,
premiums and fees were $1,971 million in 2008 compared with reported premiums of $1,800 million in
2007, an increase of 10%. This increase was primarily attributable to new sales growth in the
life, accident and supplemental health insurance operations, particularly in Taiwan and South
Korea, and membership growth in the expatriate employee benefits business.
To exclude the effect of foreign currency movements, premiums and fees were calculated using the
prior years’ comparable period exchange rates, allowing foreign currency neutral comparison to the
prior years’ reported premiums and fees.
Net investment income decreased by 13% in 2009 compared with 2008. The decrease was primarily due
to unfavorable foreign currency movements, particularly in South Korea. Net investment income
increased by 3% in 2008 compared with 2007. The increase was primarily due to higher asset levels
offset by unfavorable foreign currency movements.
Benefits and Expenses
Benefits and expenses increased by 2% in 2009, compared with 2008. The increase was primarily
driven by higher loss ratios, business growth and increased amortization of deferred acquisition
costs, partially offset by foreign currency movements.
Benefits and expenses increased by 4% in 2008 compared with 2007, primarily due to business growth
in all lines of business, partially offset by foreign currency movements, primarily in South
Korea. Loss ratios decreased in 2008 in the life, accident and supplemental health business due to
favorable claims experience.
Expense ratios decreased in 2009 reflecting effective expense management. Expense ratios increased
slightly in 2008 in the life, accident and supplemental health business and the expatriate benefits
business as a result of higher expenses to support growth initiatives and expansion. Expense
ratios in the life, accident and health and expatriate benefits businesses continue to be strong
due to effective expense management.
Other Items Affecting International Results
For the Company’s International segment, South Korea is the single largest geographic market. South
Korea generated 29% of the segment’s revenues and 49% of the segment’s earnings in 2009. Due to
the concentration of business in South Korea, the International segment is exposed to potential
losses resulting from economic and geopolitical developments in that country, as well as foreign
currency movements affecting the South Korean currency, which could have a significant impact on
the segment’s results and the Company’s consolidated financial results.
72
Run-off Reinsurance Segment
Segment Description
The Company’s reinsurance operations were discontinued and are now an inactive business in run-off
mode since the sale of the U.S. individual life, group life and accidental death reinsurance
business in 2000. This segment is predominantly comprised of GMDB, GMIB, workers’ compensation and
personal accident reinsurance products.
The determination of liabilities for GMDB and GMIB requires the Company to make critical accounting
estimates. In 2008, the Company updated the assumptions for GMIB and the effects of hypothetical
changes in those assumptions in connection with the implementation of the FASB’s fair value
disclosure and measurement guidance (ASC 820). The Company describes the assumptions used to
develop the reserves for GMDB in Note 7 to the Consolidated Financial Statements and for the assets
and liabilities associated with GMIB in Note 11 to the Consolidated Financial Statements. The
Company also provides the effects of hypothetical changes in those assumptions in the Critical
Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K.
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, which are reported in
shareholders’ net income, are volatile and unpredictable. See the “Critical Accounting Estimates”
section of the MD&A beginning on page 55 of this Form 10-K for more information on the effect of
capital market assumption changes on shareholders’ net income.
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
29 |
|
|
$ |
43 |
|
|
$ |
60 |
|
Net investment income |
|
|
113 |
|
|
|
104 |
|
|
|
93 |
|
Other revenues |
|
|
(283 |
) |
|
|
331 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
(141 |
) |
|
|
478 |
|
|
|
106 |
|
Benefits and expenses |
|
|
(419 |
) |
|
|
1,499 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefits) |
|
|
278 |
|
|
|
(1,021 |
) |
|
|
(54 |
) |
Income taxes (benefits) |
|
|
93 |
|
|
|
(375 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Segment earnings (loss) |
|
|
185 |
|
|
|
(646 |
) |
|
|
(11 |
) |
Less: results of GMIB business (after-tax) included in segment
earnings (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Charge on adoption of fair value measurements for GMIB contracts |
|
|
— |
|
|
|
(131 |
) |
|
|
— |
|
Results of GMIB business excluding charge on adoption |
|
|
209 |
|
|
|
(306 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted income (loss) from operations |
|
$ |
(24 |
) |
|
$ |
(209 |
) |
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
(2 |
) |
|
$ |
(19 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
Overview of 2009 Results
Overall segment results, including GMIB, improved significantly in 2009 compared with 2008.
Segment earnings were favorably affected by substantially higher results from the GMIB business
reflecting improved equity markets and generally higher interest rates. In addition, adjusted
income from operations for Run-off Reinsurance improved significantly in 2009 compared with 2008
due to significantly reduced losses in the GMDB business ($52 million after-tax for 2009, compared
with $267 million for 2008) resulting from a substantially lower amount of reserve strengthening.
The improvement in GMDB results in 2009 primarily reflected the recovery and stabilization of the
financial markets. Adjusted income from operations also included the favorable after-tax impact of
reserve studies for the workers compensation and personal accident business of $16 million in 2009
and $30 million in 2008.
73
Overview of 2008 Results
Segment loss for 2008 reflected significant losses from the GMIB business of $437 million,
including a charge of $131 million related to the implementation of new fair value accounting
guidance in 2008. Excluding this charge, GMIB losses in 2008 primarily reflected the declines in
equity market and interest rates and increased market volatility.
In addition, adjusted loss from operations for Run-off Reinsurance was significantly higher in 2008
primarily reflecting a loss in the GMDB business of $267 million after-tax primarily reflecting
reserve strengthening. This loss was primarily related to declines in equity markets and interest
rates and increased market volatility. Adjusted loss from operations for Run-off Reinsurance in
2008 compared with 2007 was also negatively impacted by reduced favorable settlement activity
related to personal accident and workers’ compensation.
See the Benefits and Expenses section for further discussion around the results of the GMIB and
GMDB businesses.
Other Revenues
Other revenues included pre-tax losses of $282 million in 2009 from futures contracts used in the
GMDB equity hedge program (see Note 7 to the Consolidated Financial Statements), compared with
pre-tax gains of $333 million in 2008 and pre-tax losses of $32 million in 2007. Amounts
reflecting corresponding changes in liabilities for GMDB contracts were included in benefits and
expenses consistent with GAAP when a premium deficiency exists (see below “Other Benefits and
Expenses”). The Company held futures contract positions related to this program with a notional
amount of $1.0 billion at December 31, 2009.
Benefits and Expenses
Benefits and expenses were comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
GMIB (income) expense |
|
$ |
(304 |
) |
|
$ |
690 |
|
|
$ |
147 |
|
Other benefits and expenses |
|
|
(115 |
) |
|
|
809 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
$ |
(419 |
) |
|
$ |
1,499 |
|
|
$ |
160 |
|
|
|
|
|
|
|
|
|
|
|
GMIB (Income) Expense. Under the GAAP guidance for fair value measurements, the Company’s
results of operations are expected to be volatile in future periods because capital market
assumptions needed to estimate the assets and liabilities for the GMIB business are based largely
on market-observable inputs at the close of each reporting period including interest rates (LIBOR
swap curve) and market-implied volatilities. See Note 11 to the Consolidated Financial Statements
for additional information about assumptions and asset and liability balances related to GMIB.
For 2009 the pre-tax income for GMIB was $304 million, and was primarily due to the following
factors:
| • |
|
increases in interest rates: $248 million; |
| • |
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures: $98 million; |
| • |
|
specific adjustments to nonperformance risk for the Company net of nonperformance risk of
its reinsurers: $16 million; and |
| • |
|
updates to the risk and profit charge estimates: $30 million. |
These favorable effects were partially offset by:
| • |
|
higher than expected claim experience: $26 million; |
| • |
|
increases to the annuitization assumption, reflecting higher utilization experience: $21
million; |
| • |
|
updates to the lapse assumption: $14 million; |
| • |
|
updates to fund correlation assumptions: $4 million; and |
| • |
|
other amounts, including experience varying from assumptions, model and in-force updates:
$23 million. |
74
GMIB expense in 2008 includes a pre-tax charge of $202 million for the adoption of the FASB’s fair
value disclosure and measurement guidance, which is discussed in Notes 2(B) and 11 to the
Consolidated Financial Statements.
Excluding the charge on adoption of the FASB’s fair value disclosure and measurement guidance, the
GMIB business generated additional pre-tax expense of $488 million in 2008 primarily as a result
of:
| • |
|
decreases in interest rates since December 31, 2007: $232 million; |
| • |
|
the impact of declines in underlying account values in the period, driven by declines in
equity markets and bond fund returns during 2008, resulting in increased exposure: $158
million; |
| • |
|
updates to the risk and profit charge estimate: $50 million; |
| • |
|
updates to other assumptions that are used in the fair value calculation: $25 million; and |
| • |
|
other amounts including the compounding effects of declines in interest rates and equity
markets, as well as experience varying from assumptions: $23 million. |
Excluding the charge to update assumptions for annuity elections and lapse rates, the GMIB business
generated additional pre-tax expense of $61 million in 2007, primarily the result of unfavorable
annuitization and lapse experience.
The GMIB liabilities and related assets are calculated using a complex internal model and
assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and
related asset) is higher than the Company believes will ultimately be required to settle claims
primarily because market-observable interest rates are used to project growth in account values of
the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market
participant. The Company’s payments for GMIB claims are expected to occur over the next 15 to 20
years and will be based on actual values of the underlying mutual funds and the 7-year Treasury
rate at the dates benefits are elected. Management does not believe that current market-observable
interest rates reflect actual growth expected for the underlying mutual funds over that timeframe,
and therefore believes that the recorded liability and related asset do not represent what
management believes will ultimately be required as this business runs off.
However, significant declines in mutual fund values that underlie the contracts (increasing the
exposure to the Company) together with declines in the 7-year treasury rates (used to determine
claim payments) similar to what occurred during 2008 would increase the expected amount of claims
that would be paid out for contractholders who choose to annuitize. It is also possible that such
unfavorable market conditions would have an impact on the level of contractholder annuitizations,
particularly if these unfavorable market conditions persisted for an extended period.
Other Benefits and Expenses. Other benefits and expenses reflected income for 2009, compared to
expense during 2008. This fluctuation reflects the impact of significant improvements in the
equity markets on guaranteed minimum death benefit contracts, compared with equity market declines
during 2008. Equity market improvements result in increases in the underlying annuity account
values, which decreases the exposure under the contracts. Equity market declines result in
decreases in the underlying annuity account values, which increases the exposure under the
contracts. These changes in benefits expense are partially offset by futures gains and losses,
discussed in Other Revenues above.
Although 2009 benefit expenses included reserve strengthening of $73 million ($47 million
after-tax) to increase GMDB reserves, no additional reserve strengthening was required for GMDB
after the first quarter, primarily due to the stabilization and recovery of equity markets. The
components of the first quarter reserve strengthening were:
| • |
|
adverse impacts of overall market declines of $50 million ($32 million after-tax). This
includes (a) $39 million ($25 million after-tax) primarily related to the provision for future
partial surrenders and (b) $11 million ($7 million after-tax) related to declines in the
values of contractholders’ non-equity investments such as bond funds, neither of which is
included in the GMDB equity hedge program; |
| • |
|
adverse volatility-related impacts of $11 million ($7 million after-tax) due to turbulent
equity market conditions, including higher than expected claims and the performance of the
diverse mix of equity fund investments held by contractholders being different than expected;
and |
| • |
|
adverse interest rate impacts of $12 million ($8 million after-tax). Interest rate risk is
not covered by the GMDB equity hedge program, and the interest rate returns on the futures
contracts were less than the Company’s long-term assumption for mean investment performance. |
75
During 2008, the Company recorded additional other benefits expenses of $412 million ($267 million
after-tax) primarily to strengthen GMDB reserves following an analysis of experience and reserve
assumptions. These amounts were due to:
| • |
|
adverse impacts of overall market declines of $210 million ($136 million after-tax). This
includes (a) $185 million ($120 million after-tax) related to the provision for partial
surrenders, including $40 million ($26 million after-tax) for an increase in the assumed
election rates for future partial surrenders and (b) $25 million ($16 million after-tax)
related to declines in the values of contractholders’ non-equity investments such as bond
funds, neither of which is included in the GMDB equity hedge program; |
| • |
|
adverse volatility-related impacts due to turbulent equity market conditions. Volatility
risk is not covered by the GMDB equity hedge program. Also, the equity market volatility,
particularly during the second half of the year, impacted the effectiveness of the hedge
program. In aggregate, these volatility-related impacts totaled $182 million ($118 million
after-tax). The GMDB equity hedge program is designed so that changes in the value of a
portfolio of actively managed futures contracts will offset changes in the liability resulting
from equity market movements. In periods of equity market declines, the liability will
increase; the program is designed to produce gains on the futures contracts to offset the
increase in the liability. However, the program will not perfectly offset the change in the
liability, in part because the market does not offer futures contracts that exactly match the
diverse mix of equity fund investments held by contractholders, and because there is a time
lag between changes in underlying contractholder mutual funds, and corresponding changes in
the hedge position. In 2008, the impact of this mismatch was higher than most prior periods
due to the relatively large changes in market indices from day to day. In addition, the
number of futures contracts used in the program is adjusted only when certain tolerances are
exceeded and in periods of highly volatile equity markets when actual volatility exceeds the
expected volatility assumed in the liability calculation, losses will result. These
conditions have had an adverse impact on earnings, and during 2008, the increase in the
liability due to equity market movements was only partially offset by the results of the
futures contracts; and |
| • |
|
adverse interest rate impacts. Interest rate risk is not covered by the GMDB equity hedge
program, and the interest rate returns on the futures contracts were less than the Company’s
long-term assumption for mean investment performance generating an additional $14 million ($9
million after-tax). |
See Note 7 to the Consolidated Financial Statements for additional information about assumptions
and reserve balances related to GMDB.
Segment Summary
The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under
these contracts are based on ceding companies’ claim payments. For GMDB and GMIB, claim payments
vary because of changes in equity markets and interest rates, as well as mortality and policyholder
behavior. For workers’ compensation and personal accident, the claim payments relate to accidents
and injuries. Any of these claim payments can extend many years into the future, and the amount of
the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment
obligations and corresponding ultimate collection from retrocessionaires may not be known with
certainty for some time.
The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for
amounts recoverable from retrocessionaires, are considered appropriate as of December 31, 2009,
based on current information. However, it is possible that future developments, which could
include but are not limited to worse than expected claim experience and higher than expected
volatility, could have a material adverse effect on the Company’s consolidated results of
operations and could have a material adverse effect on the Company’s financial condition. The
Company bears the risk of loss if its payment obligations to cedents increase or if its
retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to
the Company.
76
Other Operations Segment
Segment Description
Other Operations consist of:
| • |
|
non-leveraged and leveraged corporate-owned life insurance (“COLI”); |
| • |
|
deferred gains recognized from the 1998 sale of the individual life insurance and annuity
business and the 2004 sale of the retirement benefits business; and |
| • |
|
run-off settlement annuity business. |
COLI has contributed the majority of the earnings in 2009, 2008 and 2007 for Other Operations.
Federal legislation enacted in 1996 affected certain policies sold by the COLI business by
eliminating on a prospective basis the tax deduction for policy loan interest for most leveraged
COLI products. There have been no sales of this particular product since 1997. As a result of an
Internal Revenue Service initiative to settle tax disputes regarding leveraged products, some
customers have surrendered their policies and management expects earnings associated with these
products to continue to decline. Management does not expect this initiative to have a significant
impact on the future operating results of the segment.
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums and fees |
|
$ |
112 |
|
|
$ |
113 |
|
|
$ |
108 |
|
Net investment income |
|
|
407 |
|
|
|
414 |
|
|
|
437 |
|
Other revenues |
|
|
64 |
|
|
|
71 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
583 |
|
|
|
598 |
|
|
|
627 |
|
Benefits and expenses |
|
|
466 |
|
|
|
468 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
117 |
|
|
|
130 |
|
|
|
154 |
|
Income taxes |
|
|
31 |
|
|
|
43 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
|
86 |
|
|
|
87 |
|
|
|
109 |
|
Less: special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Completion of IRS examination (See Note 19 to the
Consolidated Financial Statements) |
|
|
1 |
|
|
|
— |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
85 |
|
|
$ |
87 |
|
|
$ |
104 |
|
|
|
|
|
|
|
|
|
|
|
Realized investment (losses), net of taxes |
|
$ |
(6 |
) |
|
$ |
(27 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations for Other Operations declined in 2009 compared with 2008,
reflecting a continued decline in deferred gain amortization associated with the sold businesses
offset by increased COLI earnings driven by higher investment income and improved operating
expenses.
Adjusted income from operations for Other Operations declined in 2008 compared with 2007,
reflecting lower results from the COLI business driven by less favorable mortality and lower
interest margins. Interest margins decreased due to the movement of assets from the general
account to separate accounts, and lower interest rates. In addition, the continuing decline in
deferred gain amortization associated with sold businesses contributed to lower earnings.
Revenues
Net investment income. Net investment income decreased 2% in 2009 compared with 2008, primarily
reflecting lower average invested assets and lower real estate income. Net investment income
decreased 5% in 2008 compared with 2007 primarily reflecting lower average invested assets due in
part to the movement of assets from the general account to separate accounts in the COLI business
as well as lower interest rates.
Other revenues. Other revenues decreased 10% in 2009 compared with 2008 and decreased 13% in 2008
compared with 2007 primarily due to lower deferred gain amortization related to the sold retirement
benefits and individual life insurance and annuity businesses. The amount of the deferred gain
amortization recorded was $32 million in 2009, $38 million in 2008 and $47 million in 2007.
77
Corporate
Description
Corporate reflects amounts not allocated to other 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Segment loss |
|
$ |
(142 |
) |
|
$ |
(162 |
) |
|
$ |
(97 |
) |
Less: special items (after-tax) included in segment loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Charge related to litigation matter (See Note 23 to the
Consolidated Financial Statements) |
|
|
— |
|
|
|
(52 |
) |
|
|
— |
|
Completion of IRS examination (See Note 19 to the
Consolidated Financial Statements) |
|
|
12 |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted loss from operations |
|
$ |
(154 |
) |
|
$ |
(110 |
) |
|
$ |
(107 |
) |
|
|
|
|
|
|
|
|
|
|
Corporate’s adjusted loss from operations was higher in 2009, compared with 2008, primarily
reflecting:
| • |
|
higher net interest expense attributable to lower average invested assets and increased
debt used for general corporate purposes, including the repayment of some of the Company’s
outstanding commercial paper issued to finance the acquired business; |
| • |
|
higher directors’ deferred compensation expenses caused by an increase in the Company’s
stock price during 2009 compared with a decrease during 2008; and |
| • |
|
spending on certain strategic initiatives. |
Corporate’s adjusted loss from operations was higher in 2008, compared with 2007, primarily
reflecting higher net interest expense attributable to lower average invested assets and increased
debt to finance the acquired business. These factors were partially offset by lower directors’
deferred compensation expenses caused by a decline in the Company’s stock price in 2008.
DISCONTINUED OPERATIONS
Description
Discontinued operations represent results associated with certain investments or businesses that
have been sold or are held for sale.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income before income (taxes) benefits |
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
25 |
|
Income (taxes) benefits |
|
|
1 |
|
|
|
1 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1 |
|
|
|
4 |
|
|
|
18 |
|
Impairment loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations,
net of taxes |
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Discontinued operations for 2009 primarily represents a tax benefit from a past divestiture
resolved at the completion of the 2005 and 2006 IRS examinations.
Discontinued operations for 2008 primarily represents a gain of $3 million after-tax from the
settlement of certain issues related to a past divestiture.
78
Discontinued operations for 2007 primarily reflects:
| • |
|
impairment losses related to the dispositions of several Latin American insurance
operations as discussed in Note 3 to the Consolidated Financial Statements; and |
| • |
|
realized gains on the disposition of certain directly-owned real estate investments as
discussed in Note 14 to the Consolidated Financial Statements. |
INDUSTRY DEVELOPMENTS AND OTHER MATTERS
Proposed Health Care Reform
Addressing the affordability and availability of health insurance, including reducing the number of
uninsured, is a major initiative of President Obama and the U.S. Congress, and proposals that may
address these issues are pending in the U.S. Congress. The proposals vary and include measures
that would change the dynamics of the health care industry and/or the employer’s role in the
provision of benefits, such as the potential creation of a new government-run health plan(s) that
would compete with the Company and other private health plans; the potential creation of federal or
state-level exchanges (or similar constructs) that could serve as a distribution mechanism and/or
additional regulatory structure for certain segments of the health care market; potential changes
to medical coverage, such as expansion of eligibility under existing public programs, minimum
medical benefit ratios for health plans, and mandatory issuance of insurance coverage; requirements
that would limit the ability of health plans and insurers to vary premiums based on assessments of
underlying risk; and new taxes and assessments specific to health care insurers and/or certain
benefit plan designs. Any comprehensive health care reform package enacted will likely be phased
in over a number of years and would be subject to a broader regulatory process. Because of the
unsettled nature of these initiatives and the numerous steps required to implement them the Company
remains uncertain as to the ultimate impact these changes will have on its business. For
additional discussion regarding our risks related to health care reform, see “Item 1A. Risk
Factors” beginning on page 35 of this Form 10-K.
Other Matters
The disability industry is under continuing review by regulators and legislators with respect to
its offset practices regarding Social Security Disability Insurance (“SSDI”). There has been
specific inquiry as to the industry’s role in providing assistance to individuals with their
applications for SSDI. The Company has received one Congressional inquiry and has responded to the
information request. Also, legislation prohibiting the offset of SSDI payments against private
disability insurance payments for prospectively issued policies was introduced but not enacted in
the Connecticut state legislature. The Company is also involved in related pending litigation. If
the industry is forced to change its offset SSDI procedures, the practices and products for the
Company’s Disability and Life segment could be significantly impacted.
In 1998, the Company sold its individual life insurance and annuity business to The Lincoln
National Life Insurance Company and its affiliates (“Lincoln”). Because this business was sold in
an indemnity reinsurance transaction, the Company is not relieved of primary liability for the
reinsured business and had reinsurance recoverables totaling $4.4 billion as of December 31, 2009.
Lincoln has secured approximately 90% of its reinsurance obligations under these arrangements by
placing assets into a trust which qualifies under Regulation 114 of the New York Insurance
Department.
The Company’s remaining reinsurance recoverables from Lincoln are unsecured. If Lincoln National
Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified financial
strength rating, at the Company’s request, Lincoln is contractually required to provide additional
assurance that it will meet its reinsurance obligations, to include placing assets in a trust to
secure these remaining reinsurance recoverables. S&P has assigned each of these reinsurers a
rating of AA-.
79
LIQUIDITY AND CAPITAL RESOURCES
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| Financial Summary |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Short-term investments |
|
$ |
493 |
|
|
$ |
236 |
|
|
$ |
21 |
|
Cash and cash equivalents |
|
$ |
924 |
|
|
$ |
1,342 |
|
|
$ |
1,970 |
|
Short-term debt |
|
$ |
104 |
|
|
$ |
301 |
|
|
$ |
3 |
|
Long-term debt |
|
$ |
2,436 |
|
|
$ |
2,090 |
|
|
$ |
1,790 |
|
Shareholders’ equity |
|
$ |
5,417 |
|
|
$ |
3,592 |
|
|
$ |
4,748 |
|
Liquidity
The Company maintains liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
| • |
|
claim and benefit payments to policyholders; and |
| |
| • |
|
operating expense requirements, primarily for employee compensation and benefits. |
| The Company’s subsidiaries normally meet their operating requirements by: |
| |
| • |
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
| |
| • |
|
using cash flows from operating activities; |
| |
| • |
|
selling investments; |
| |
| • |
|
matching investment durations to those estimated for the related insurance and contractholder liabilities; and |
| |
| • |
|
borrowing from its parent company. |
Liquidity requirements at the parent level generally consist of:
| • |
|
debt service and dividend payments to shareholders; and |
| |
| • |
|
pension plan funding. |
The parent normally meets its liquidity requirements by:
| • |
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
| |
| • |
|
collecting dividends from its subsidiaries; |
| |
| • |
|
using proceeds from issuance of debt and equity securities; and |
| |
| • |
|
borrowing from its subsidiaries. |
Cash flows for the years ended December 31, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating activities |
|
$ |
745 |
|
|
$ |
1,656 |
|
|
$ |
1,342 |
|
Investing activities |
|
$ |
(1,485 |
) |
|
$ |
(2,572 |
) |
|
$ |
269 |
|
Financing activities |
|
$ |
307 |
|
|
$ |
314 |
|
|
$ |
(1,041 |
) |
Cash flows from operating activities consist of cash receipts and disbursements for premiums
and fees, mail order pharmacy and other revenues, gains (losses) recognized in connection with the
Company’s GMDB equity hedge program, investment income, taxes, and benefits and expenses.
Because certain income and expense transactions do not generate cash, and because cash transactions
related to revenue and expenses may occur in periods different from when those revenues and
expenses are recognized in shareholders’ net income, cash flows from operating activities can be
significantly different from shareholders’ net income.
80
Cash flows from investing activities generally consist of net investment purchases or sales and net
purchases of property and equipment, which includes capitalized software, as well as cash used to
acquire businesses.
Cash flows from financing activities are generally comprised of issuances and re-payment of debt at
the parent level, proceeds on the issuance of common stock resulting from stock option exercises,
and stock repurchases. In addition, the subsidiaries report net deposits/withdrawals to/from
investment contract liabilities (which include universal life insurance liabilities) because such
liabilities are considered financing activities with policyholders.
2009:
Operating activities
For the year ended December 31, 2009, cash flows from operating activities were less than net
income by $560 million. Net income contains certain after-tax non-cash income and expense items,
including:
| • |
|
GMIB income of $209 million; |
| |
| • |
|
a curtailment gain of $30 million, net of a cost reduction charge of $29 million; |
| |
| • |
|
tax benefits related to the IRS examination of $20 million; |
| |
| • |
|
depreciation and amortization charges of $174 million; and |
| |
| • |
|
realized investment losses of $26 million. |
Cash flows from operating activities were lower than net income excluding the non-cash items noted
above by $530 million. This decrease was primarily due to pre-tax cash outflows of $282 million
associated with the GMDB equity hedge program which did not affect shareholders’ net income and
pre-tax contributions to the domestic pension plans of approximately $410 million, partially offset
by the favorable effect of the pension contributions on tax payments.
Cash flows from operating activities decreased by $911 million in 2009 compared with
2008. Excluding the results of the GMDB equity hedge program (which did not affect net income),
cash flows from operating activities decreased by $296 million. This decrease in 2009 primarily
reflects pre-tax contributions to the qualified domestic pension plan of approximately $410 million
for 2009 compared with none for 2008, partially offset by the favorable effect of the pension
contributions on tax payments.
Investing activities
Cash used in investing activities was $1.5 billion. This use of cash primarily consisted of net
purchases of investments of $1.2 billion and net purchases of property and equipment of $307
million.
Financing activities
Cash provided from financing activities primarily consisted of net proceeds from the issuance of
long-term debt of $346 million, partially offset by repayments of short-term debt, principally
commercial paper, of $199 million. Financing activities also included net deposits to
contractholder deposit funds of $89 million and proceeds on issuances of common stock of $30
million.
81
2008:
Operating activities
For the year ended December 31, 2008, cash flows from operating activities were greater than net
income by $1.4 billion. Net income contains certain after-tax non-cash income and expense items,
including:
| • |
|
GMIB expense of $437 million including the effect of adoption of new fair value measurement
guidance of $131 million; |
| |
| • |
|
GMDB charges of $267 million; |
| |
| • |
|
litigation accruals of $76 million and cost reduction charges of $35 million; |
| |
| • |
|
depreciation and amortization charges of $159 million; and |
| |
| • |
|
realized investment losses of $110 million. |
Cash flows from operating activities were higher than net income excluding the non-cash items noted
above by $278 million. This increase was primarily due to cash inflows associated with the GMDB
equity hedge program of $333 million.
Cash flows from operating activities increased by $314 million in 2008 compared with
2007. Excluding the results of the GMDB equity hedge program (which did not affect net income),
cash flows from operating activities decreased by $51 million. This decrease in 2008 primarily
reflects higher payments for certain prepaid expenses in 2008.
Investing activities
Cash used in investing activities was $2.6 billion, consisting of $1.3 billion to fund the
acquisition of Great-West Healthcare, net purchases of investments of $988 million and net
purchases of property and equipment of $257 million.
Financing activities
Cash provided from financing activities primarily consisted of proceeds from the net issuance of
short-term debt of $298 million and long-term debt of $297 million. These borrowing arrangements
were entered into for general corporate purposes, including the financing of the acquisition of
Great-West Healthcare. Financing activities also included net deposits to contractholder deposit
funds of $91 million, proceeds from the issuance of common stock under the Company’s stock plans of
$37 million and dividends on and repurchases of common stock of $392 million.
Interest Expense
Interest expense on long-term debt, short-term debt and capital leases was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest expense |
|
$ |
166 |
|
|
$ |
146 |
|
|
$ |
122 |
|
| |
|
|
|
|
|
|
|
|
|
The increase in interest expense in 2009 was primarily due to the issuance of debt used for
general corporate purposes, including the repayment of some of the Company’s outstanding commercial
paper issued to finance the acquired business.
The increase in 2008 was primarily due to the issuance of debt in connection with the Great-West
Healthcare acquisition.
82
Capital Resources
The Company’s capital resources (primarily retained earnings and the proceeds from the issuance of
debt and equity securities) provide protection for policyholders, furnish the financial strength to
underwrite insurance risks and facilitate continued business growth.
Management, guided by regulatory requirements and rating agency capital guidelines, determines the
amount of capital resources that the Company maintains. Management allocates resources to new
long-term business commitments when returns, considering the risks, look promising and when the
resources available to support existing business are adequate.
The Company prioritizes its use of capital resources to:
| • |
|
provide capital necessary to support growth and maintain or improve the financial strength
ratings of subsidiaries; |
| • |
|
consider acquisitions that are strategically and economically advantageous; and |
| • |
|
return capital to investors through share repurchase. |
The availability of capital resources will be impacted by equity and credit market conditions.
Extreme volatility in credit or equity market conditions may reduce the Company’s ability to issue
debt or equity securities. Significant volatility and deterioration of the equity markets during
2008 resulted in reduced retained earnings and the capital available for growth, acquisitions, and
share repurchase.
On May 4, 2009, the Company issued $350 million of 8.50% Notes ($349 million, net of debt discount,
with an effective interest rate of 9.90% per year). The difference between the stated and
effective interest rates primarily reflects the effect of treasury locks. See Note 13 to the
Consolidated Financial Statements for further information. Interest is payable on May 1 and
November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for
general corporate purposes, including the repayment of some of the Company’s outstanding commercial
paper. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate
of 6.68% per year). The difference between the stated and effective interest rates primarily
reflects the effect of treasury locks. Interest is payable on March 15 and September 15 of each
year beginning September 15, 2008. The proceeds of this debt were used for general corporate
purposes, including financing the acquisition of Great-West Healthcare. These Notes will mature on
March 15, 2018.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal
to the greater of:
| • |
|
100% of the principal amount of the Notes to be redeemed; or |
| • |
|
the present value of the remaining principal and interest payments on the Notes being
redeemed discounted at the applicable Treasury Rate plus 50 basis points (8.5% Notes due 2019)
or 40 basis points (6.35% Notes due 2018). |
On March 14, 2008, the Company entered into a commercial paper program (“the Program”). Under the
Program, the Company is authorized to sell from time to time short-term unsecured commercial paper
notes up to a maximum of $500 million. The proceeds are used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share repurchases. The Company
uses the credit facility described below as back-up liquidity to support the outstanding commercial
paper. If at any time funds are not available on favorable terms under the Program, the Company
may use the Credit Agreement (see below) for funding. In October 2008, the Company added an
additional dealer to its Program. As of December 31, 2009, the Company had $100 million in
commercial paper outstanding, at a weighted average interest rate of 0.35% and remaining maturities
ranging from 11 to 35 days.
In June 2007, the Company amended and restated its five-year committed revolving credit and letter
of credit agreement for $1.75 billion, which permits up to $1.25 billion to be used for letters of
credit. This agreement is diversified among 22 banks, with three banks each having 11% of the
commitment and the other 21 banks having the remaining 67% of the commitment. The credit agreement
includes options, which are subject to consent by the administrative agent and the committing
banks, to increase the commitment amount up to $2.0 billion and to extend the term of the
agreement. The Company entered into the agreement for general corporate purposes, including support
for the issuance of commercial paper and to obtain statutory reserve credit for certain reinsurance
arrangements. There was a $27 million letter of credit issued as of December 31, 2009.
83
Liquidity and Capital Resources Outlook
At December 31, 2009, there was approximately $475 million in cash available at the parent company
level. In 2010, the parent company’s debt service consists of scheduled interest payments of $168
million on outstanding long-term debt of $2.4 billion at December 31, 2009 and approximately $100
million of commercial paper that will mature over the next three months. There are no scheduled
long-term debt repayments in 2010. The Company expects to either repay the commercial paper or
refinance it either by issuing long-term debt or re-issuing commercial paper.
The Company funds its qualified pension plans at least at the minimum amount required by the
Employee Retirement Income Security Act of 1974 (“ERISA”) and the Pension Protection Act of 2006.
For 2010, the Company expects minimum required contributions to be approximately $70 million. This
amount could change based on final valuation amounts. In addition, the Company currently plans to
make voluntary contributions of approximately $140 million during 2010. Based on its current
funded status, the Company does not believe that the litigation matter discussed in Note 23 to the
Consolidated Financial Statements would have an impact on 2010 funding requirements even if
resolved in 2010. Future years’ contributions will ultimately be based on a wide range of factors
including but not limited to asset returns, discount rates, and funding targets.
The availability of resources at the parent company level is partially dependent on dividends from
the Company’s subsidiaries, most of which are subject to regulatory restrictions and rating agency
capital guidelines, and partially dependent on the availability of liquidity from the issuance of
debt or equity securities.
The Company expects, based on current projections for cash activity, to have sufficient liquidity
to meet its obligations.
However, the Company’s cash projections may not be realized and the demand for funds could exceed
available cash if:
| • |
|
ongoing businesses experience unexpected shortfalls in earnings; |
| |
| • |
|
regulatory restrictions or rating agency capital guidelines reduce the amount of dividends available to be distributed
to the parent company from the insurance and HMO subsidiaries (including the impact of equity market deterioration and
volatility on subsidiary capital); |
| |
| • |
|
significant disruption or volatility in the capital and credit markets reduces the Company’s ability to raise capital
or creates unexpected losses related to the GMDB and GMIB businesses; |
| |
| • |
|
a substantial increase in funding over current projections is required for the Company’s pension plan; or |
| |
| • |
|
a substantial increase in funding is required for the Company’s GMDB equity hedge program. |
84
In those cases, the Company expects to have the flexibility to satisfy liquidity needs through a
variety of measures, including intercompany borrowings and sales of liquid investments. The parent
company may borrow up to $400 million from CGLIC without prior state approval. In addition, the
Company may use short-term borrowings, such as the commercial paper program and the committed line
of credit agreement of up to $1.75 billion subject to the maximum debt leverage covenant in its
line of credit agreement. As of December 31, 2009, the Company had an additional $1.5 billion of
borrowing capacity within the maximum debt leverage covenant in the line of credit agreement in
addition to the $2.5 billion of debt outstanding.
Though the Company believes it has adequate sources of liquidity, significant disruption or
volatility in the capital and credit markets could affect the Company’s ability to access those
markets for additional borrowings or increase costs associated with borrowing funds.
Solvency
regulation. Many states have adopted some form of the National Association of
Insurance Commissioners (“NAIC”) model solvency-related laws and risk-based capital rules (“RBC
rules”) for life and health insurance companies. The RBC rules recommend a minimum level of
capital depending on the types and quality of investments held, the types of business written and
the types of liabilities incurred. If the ratio of the insurer’s adjusted surplus to its
risk-based capital falls below statutory required minimums, the insurer could be subject to
regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based
upon solvency, liquidity and reserve coverage measures. During 2009, the Company’s HMOs and life
and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with
applicable RBC and non-U.S. surplus rules.
Effective December 31, 2009 the Company’s principal life insurance subsidiary, CGLIC, implemented
the NAIC’s Actuarial Guideline XLIII (also known as AG 43 or VACARVM), which is applicable to
CGLIC’s statutory reserves for GMDB and GMIB contracts totaling $1.6 billion as of December 31,
2009. As provided under this guidance, CGLIC received approval from the State of Connecticut to
grade-in the full effect of the guideline over a 3-year period. Accordingly, upon implementation
at December 31, 2009, statutory surplus for CGLIC was reduced by $40 million. If the guidance had
been fully implemented at December 31, 2009, statutory surplus would have been reduced by $110
million. Management does not anticipate that this implementation will have a material impact on
the amount of dividends expected to be paid by CGLIC to the parent company in 2010. This
implementation has no impact on measurement of the Company’s results of operations or financial
condition as determined under GAAP.
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, 2009, are estimated to be as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions, on an |
|
|
|
|
|
Less than 1 |
|
|
1-3 |
|
|
4-5 |
|
|
After 5 |
|
| undiscounted basis) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
On-Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder deposit funds |
|
$ |
7,613 |
|
|
$ |
667 |
|
|
$ |
840 |
|
|
$ |
769 |
|
|
$ |
5,337 |
|
Future policy benefits |
|
|
11,040 |
|
|
|
452 |
|
|
|
852 |
|
|
|
860 |
|
|
|
8,876 |
|
Health Care medical claims
payable |
|
|
921 |
|
|
|
914 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
Unpaid claims and claims
expenses |
|
|
4,315 |
|
|
|
1,292 |
|
|
|
941 |
|
|
|
606 |
|
|
|
1,476 |
|
Short-term debt |
|
|
103 |
|
|
|
103 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Long-term debt |
|
|
4,620 |
|
|
|
168 |
|
|
|
753 |
|
|
|
278 |
|
|
|
3,421 |
|
Non-recourse obligations |
|
|
25 |
|
|
|
2 |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
Other long-term liabilities |
|
|
1,355 |
|
|
|
617 |
|
|
|
218 |
|
|
|
134 |
|
|
|
386 |
|
Off-Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
1,173 |
|
|
|
495 |
|
|
|
483 |
|
|
|
144 |
|
|
|
51 |
|
Operating leases |
|
|
500 |
|
|
|
116 |
|
|
|
190 |
|
|
|
104 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,665 |
|
|
$ |
4,826 |
|
|
$ |
4,307 |
|
|
$ |
2,895 |
|
|
$ |
19,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
On-Balance Sheet:
| • |
|
Insurance liabilities. Contractual cash obligations for insurance liabilities, excluding
unearned premiums and fees, represent estimated net benefit payments for health, life and
disability insurance policies and annuity contracts. Recorded contractholder deposit funds
reflect current fund balances primarily from universal 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 current fund balances based on current
investment yields less the estimated cost of insurance charges and mortality and
administrative fees. Actual obligations in any single year will vary based on actual
morbidity, mortality, lapse, withdrawal, investment and premium experience. The sum of the
obligations presented above exceeds the corresponding insurance and contractholder liabilities
of $15.3 billion recorded on the balance sheet because the recorded insurance liabilities
reflect discounting for interest and the recorded contractholder liabilities exclude future
interest crediting, charges and fees. The Company manages its investment portfolios to
generate cash flows needed to satisfy contractual obligations. Any shortfall from expected
investment yields could result in increases to recorded reserves and adversely impact results
of operations. The amounts associated with the sold retirement benefits and individual life
insurance and annuity businesses are excluded from the table above as net cash flows
associated with them are not expected to impact the Company. The total amount of these
reinsured reserves excluded is approximately $6.2 billion. |
| • |
|
Short-term debt represents commercial paper and current obligations under capital leases. |
| • |
|
Long-term debt includes scheduled interest payments. Capital leases are included in
long-term debt and represent obligations for software licenses. |
| • |
|
Nonrecourse obligations represent principal and interest payments due which may be limited
to the value of specified assets, such as real estate properties held directly or in joint
ventures. |
| • |
|
Other long-term liabilities. These items are presented in accounts payable, accrued
expenses and other liabilities in the Company’s Consolidated Balance Sheets. This table
includes estimated payments for GMIB contracts, pension and other postretirement and
postemployment benefit obligations, supplemental and deferred compensation plans, interest
rate and foreign currency swap contracts, and certain tax and reinsurance liabilities. |
Estimated payments of $127 million for deferred compensation, non-qualified and International
pension plans and other postretirement and postemployment benefit plans are expected to be paid
in less than one year. The Company’s best estimate is that contributions to the qualified
domestic pension plan during 2010 will be approximately $210 million. The Company expects to
make payments subsequent to 2010 for these obligations, however subsequent payments have been
excluded from the table as their timing is based on plan assumptions which may materially differ
from actual activities (see Note 10 to the Consolidated Financial Statements for further
information on pension and other postretirement benefit obligations).
The above table also does not contain $214 million of gross liabilities for uncertain tax
positions because the Company cannot reasonably estimate the timing of their resolution with the
respective taxing authorities. See Note 19 to the Consolidated Financial Statements for the
year ended December 31, 2009 for further information.
Off-Balance Sheet:
| • |
|
Purchase obligations. As of December 31, 2009, purchase obligations consisted of estimated
payments required under contractual arrangements for future services and investment
commitments as follows: |
| |
|
|
|
|
| (In millions) |
|
|
|
|
Fixed maturities |
|
$ |
72 |
|
Commercial mortgage loans |
|
|
41 |
|
Real estate |
|
|
10 |
|
Limited liability entities (other long-term investments) |
|
|
591 |
|
|
|
|
|
Total investment commitments |
|
|
714 |
|
Future service commitments |
|
|
459 |
|
|
|
|
|
Total purchase obligations |
|
$ |
1,173 |
|
|
|
|
|
86
The Company had commitments to invest in limited liability entities that hold real estate,
loans to real estate entities or securities. See Note 12(C) to the Consolidated Financial
Statements for additional information.
Future service commitments include an agreement with IBM for various information technology (IT)
infrastructure services. The Company’s remaining commitment under this contract is
approximately $376 million over the next four years. The Company has the ability to terminate
this agreement with 90 days notice, subject to termination fees.
| |
|
The Company’s remaining estimated future service commitments primarily represent contracts for
certain outsourced business processes and IT maintenance and support. The Company generally has
the ability to terminate these agreements, but does not anticipate doing so at this time.
Purchase obligations exclude contracts that are cancelable without penalty or those that do not
specify minimum levels of goods or services to be purchased. |
| • |
|
Operating leases. For additional information, see Note 21 to the Consolidated Financial
Statements. |
Guarantees
The Company, through its subsidiaries, is contingently liable for various financial and other
guarantees provided in the ordinary course of business. See Note 23 to the Consolidated Financial
Statements for additional information on guarantees.
Share Repurchase
The Company maintains a share repurchase program, which was authorized by its Board of Directors.
The decision to repurchase shares depends on market conditions and alternative uses of capital.
The Company has, and may continue from time to time, to repurchase shares on the open market
through a Rule 10b5-1 plan which permits a company to repurchase its shares at times when it
otherwise might be precluded from doing so under insider trading laws or because of self-imposed
trading blackout periods.
The Company did not repurchase any shares in 2009. In 2008 the Company repurchased 10.0 million
shares for $378 million.
The total remaining share repurchase authorization as of February 25, 2010, was $449 million.
INVESTMENT ASSETS
The Company’s investment assets do not include separate account assets. Additional information
regarding the Company’s investment assets and related accounting policies is included in Notes 2,
11, 12, 14 and 17 to the Consolidated Financial Statements.
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor
and trading securities. Fixed maturities and equity securities include hybrid securities. Fair
values are based on quoted market prices when available. When market prices are not available,
fair value is generally estimated using discounted cash flow analyses, incorporating current market
inputs for similar financial instruments with comparable terms and credit quality. In instances
where there is little or no market activity for the same or similar instruments, the Company
estimates fair value using methods, models and assumptions that the Company believes a hypothetical
market participant would use to determine a current transaction price.
The Company performs ongoing analyses on prices to conclude that they represent reasonable
estimates of fair value. This process involves quantitative and qualitative analysis and is
overseen by the Company’s investment professionals. This process also includes review of pricing
methodologies, pricing statistics and trends and back testing recent trades.
The Company’s fixed maturity portfolio continues to be diversified by issuer and industry type,
with no single industry constituting more than 10% of total invested assets as of December 31,
2009.
87
| |
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
Federal government and agency |
|
$ |
571 |
|
|
$ |
762 |
|
State and local government |
|
|
2,521 |
|
|
|
2,486 |
|
Foreign government |
|
|
1,070 |
|
|
|
944 |
|
Corporate |
|
|
8,585 |
|
|
|
6,856 |
|
Federal agency mortgage-backed |
|
|
34 |
|
|
|
37 |
|
Other mortgage-backed |
|
|
121 |
|
|
|
125 |
|
Other asset-backed |
|
|
541 |
|
|
|
571 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,443 |
|
|
$ |
11,781 |
|
|
|
|
|
|
|
|
Other mortgage-backed assets consist principally of commercial mortgage-backed securities and
collateralized mortgage obligations of which $37 million were residential mortgages and home equity
lines of credit, all of which were originated using standard underwriting practices and are not
considered sub-prime loans.
Quality ratings
As of December 31, 2009, $12.3 billion, or 92%, of the fixed maturities in the Company’s investment
portfolio were investment grade (Baa and above, or equivalent), and the remaining $1.1 billion were
below investment grade. Most of the bonds that are below investment grade are rated at the higher
end of the non-investment grade spectrum.
Private placement investments are generally less marketable than publicly-traded bonds, but yields
on these investments tend to be higher than yields on publicly-traded bonds with comparable credit
risk. The fair value of private placement investments was $5.1 billion as of December 31, 2009 and
$4.4 billion as of December 31, 2008. The Company maintains controls on its participation in
private placement investments. In particular, the Company performs a credit analysis of each
issuer, diversifies investments by industry and issuer and requires financial and other covenants
that allow the Company to monitor issuers for deteriorating financial strength so the Company can
take remedial actions, if warranted.
Because of the higher yields and the inherent risk associated with privately placed investments and
below investment grade securities, gains or losses from such investments could affect future
results of operations. However, since management matches the duration of assets to the duration of
liabilities, it expects to hold a significant portion of these assets for the long term and
therefore, does not expect such gains or losses to be material to the Company’s liquidity or
financial condition.
The value of the Company’s fixed maturity portfolio increased $574 million in 2009 driven by a
decline in market yields. Although asset values have improved significantly, there are securities
with amortized cost in excess of fair value by $133 million as of December 31, 2009.
As of December 31, 2009, approximately 64% or $1,605 million of the Company’s total investments in
state and local government securities of $2,521 million were guaranteed by monoline bond insurers.
The quality ratings of these investments with and without this guaranteed support as of December
31, 2009 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As of December 31, 2009 |
|
| |
|
|
|
Fair Value |
|
| |
|
|
|
With |
|
|
Without |
|
| (In millions) |
|
Quality Rating |
|
Guarantee |
|
|
Guarantee |
|
State and local governments |
|
Aaa |
|
$ |
61 |
|
|
$ |
59 |
|
|
|
Aa1-Aa3 |
|
|
1,143 |
|
|
|
971 |
|
|
|
A1-A3 |
|
|
341 |
|
|
|
448 |
|
|
|
Baa1-Baa3 |
|
|
60 |
|
|
|
72 |
|
|
|
Not available |
|
|
— |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
Total state and local
governments |
|
|
|
$ |
1,605 |
|
|
$ |
1,605 |
|
|
|
|
|
|
|
|
|
|
88
As of December 31, 2009, approximately 79% or $428 million of the Company’s total investments
in other asset-backed securities of $541 million were guaranteed by monoline bond insurers. All of
these securities had quality ratings of Baa2 or better. Quality ratings without considering the
guarantees for these other asset-backed securities were not available.
As of December 31, 2009, 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, 2009 were:
| |
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
Guarantor Quality |
|
|
|
|
|
As of December 31, 2009 |
|
| Guarantor |
|
Rating |
|
|
|
|
|
Indirect Exposure |
|
AMBAC |
|
Caa2 |
|
|
|
|
|
$ |
196 |
|
MBIA, Inc. |
|
Baa1 |
|
|
|
|
|
|
1,204 |
|
Financial
Securities
Assurance |
|
Aa3 |
|
|
|
|
|
|
594 |
|
Financial Guaranty
Insurance Co. |
|
Not rated |
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
2,033 |
|
|
|
|
|
|
|
|
|
|
|
The Company continues to underwrite investments in these securities focusing on the underlying
issuer’s credit quality, without regard for guarantees. As such, this portfolio of state and local
government securities, guaranteed by monoline bond insurers is of high quality with approximately
92% rated A3 or better without their guarantees.
Commercial Mortgage Loans
The Company’s commercial mortgage loans are made exclusively to commercial borrowers. These fixed
rate loans are diversified by property type, location and borrower to reduce exposure to potential
losses. Loans are secured by the related property and are generally made at less than 75% of the
property’s value at origination of the loan. In addition to property value, the Company evaluates
the quality of each commercial mortgage loan using “debt service coverage”, which is the ratio of
the estimated cash flows from the property to the required loan
payments (principal and interest).
The Company completed its annual in depth review of its commercial mortgage loan portfolio in the
third quarter of 2009. This review included an analysis of each property’s financial statements as
of December 31, 2008, rent rolls and operating plans and budgets for 2009, a physical inspection of
the property and other pertinent factors. Based on each property’s value determined during this
review, the portfolio’s average loan to value ratio increased from 64% as of December 31, 2008 to
77% at December 31, 2009, driven by an average decline in property values of 18% since completion
of the previous review during the third quarter of 2008. This 18% decrease is less than reported
declines in commercial real estate values of 20% to 30% from peak prices achieved in late 2006 and
into early 2007 to real estate values estimated during the second quarter of 2009. This was driven
by management’s decision to not fully reflect peak prices in prior valuations, along with declines
in value recognized during the Company’s 2008 portfolio review. In 2009, overall debt service
coverage for the portfolio of commercial mortgage loans was approximately 1.5, which was unchanged
since the 2008 portfolio review.
89
The following table reflects the commercial mortgage loan portfolio as of December 31, 2009
summarized by loan to value ratio based on the annual loan review completed in July, 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loan to Value Distribution |
|
| |
|
Amortized Cost |
|
|
|
|
| Loan to Value Ratios |
|
Senior |
|
|
Subordinated |
|
|
Total |
|
|
% of Mortgage Loans |
|
Below 50% |
|
$ |
199 |
|
|
$ |
164 |
|
|
$ |
363 |
|
|
|
10 |
% |
50% to 59% |
|
|
309 |
|
|
|
— |
|
|
|
309 |
|
|
|
9 |
% |
60% to 69% |
|
|
383 |
|
|
|
37 |
|
|
|
420 |
|
|
|
12 |
% |
70% to 79% |
|
|
524 |
|
|
|
72 |
|
|
|
596 |
|
|
|
17 |
% |
80% to 89% |
|
|
838 |
|
|
|
47 |
|
|
|
885 |
|
|
|
25 |
% |
90% to 99% |
|
|
666 |
|
|
|
17 |
|
|
|
683 |
|
|
|
19 |
% |
100% or above |
|
|
251 |
|
|
|
15 |
|
|
|
266 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,170 |
|
|
$ |
352 |
|
|
$ |
3,522 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As summarized above, $352 million or 10% of the commercial mortgage loan portfolio is
comprised of subordinated notes and loans, including $319 million of loans secured by first
mortgages, which were fully underwritten and originated by the Company using its standard
underwriting procedures. Senior interests in these first mortgage loans were then sold to other
institutional investors. This strategy allowed the Company to effectively utilize its origination
capabilities to underwrite high quality loans with strong borrower sponsorship, limit individual
loan exposures, and achieve attractive risk adjusted yields. In the event of a default, the Company
would pursue remedies up to and including foreclosure jointly with the holders of the senior
interests, but would receive repayment only after satisfaction of the senior interest.
There are seven loans where the aggregate carrying value of the mortgage loans exceeds the value of
the underlying properties by $16 million. Five of these loans have current debt service coverage of
1.0 or greater and two with debt service coverage below 1.0 have other mitigating factors including
strong borrower sponsorship.
Although the property value declines increased the portfolio loan to value ratios, all but four of
the approximately 180 loans that comprise the Company’s total mortgage loan portfolio continue to
perform under their contractual terms, and the actual aggregate default rate is 3.6%. Given the
quality and diversity of the underlying real estate, positive debt service coverage, significant
borrower cash investment averaging nearly 30%, and only $201 million of loans maturing in the next
twelve months, the Company remains confident that the vast majority of borrowers will continue to
perform as required.
Commercial real estate fundamentals and values continued to decline in 2009 after completion of the
portfolio review in the third quarter. While the vast majority of loans in the Company’s portfolio
have positive debt service coverage of at least 1.0, the Company expects declines in debt service
coverage to reflect further deterioration in fundamentals (higher vacancy rates and lower rental
rates) resulting from ongoing weak economic conditions. Management’s current view is that property
values have fallen by approximately 10% on average from values estimated as part of the third
quarter 2009 portfolio review. However, the value of well located, well leased, institutional
quality real estate appears to be stabilizing. See Critical Accounting Estimates beginning on page
55 of this Form 10-K for more information on the effect of declines in property values on
commercial mortgage loans.
Other Long-term Investments
The Company’s other long-term investments include $561 million in private equity and real estate
funds as well as direct investments in real estate joint ventures. The funds typically invest in
mezzanine debt or equity of privately held companies and equity real estate. Because these
investments have a subordinate position in the capital structure, the Company assumes a higher
level of risk for higher expected returns. Many of these entities have experienced a decline in
value over the last several quarters due to economic weakness and the disruption in the capital
markets. To mitigate risk, these investments are diversified across approximately 60 separate
partnerships, and approximately 35 general partners who manage one or more of these partnerships.
Also, the funds’ underlying investments are diversified by industry sector, property type, and
geographic region. No single partnership investment exceeds 8% of the Company’s private equity and
real estate partnership portfolio. Given the current economic environment, future impairments are
possible; however, management does not expect those losses to have a material effect on the
Company’s financial condition.
90
Problem and Potential Problem Investments
“Problem” bonds and commercial mortgage loans are either delinquent by 60 days or more or have been
restructured as to terms (interest rate or maturity date). “Potential problem” bonds and
commercial mortgage loans are considered current (no payment more than 59 days past due), but
management believes they have certain characteristics that increase the likelihood that they may
become problems. The characteristics management considers include, but are not limited to, the
following:
| • |
|
request from the borrower for restructuring; |
| • |
|
principal or interest payments past due by more than 30 but fewer than 60 days; |
| • |
|
downgrade in credit rating; |
| • |
|
collateral losses on asset-backed securities; and |
| • |
|
for commercial mortgages, deterioration of debt service coverage below 1.0 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 2009 or 2008.
The following table shows problem and potential problem investments at amortized cost, net of
valuation reserves and write-downs:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
| (In millions) |
|
Gross |
|
|
Reserve |
|
|
Net |
|
|
Gross |
|
|
Reserve |
|
|
Net |
|
Problem bonds |
|
$ |
103 |
|
|
$ |
(49 |
) |
|
$ |
54 |
|
|
$ |
94 |
|
|
$ |
(59 |
) |
|
$ |
35 |
|
Problem commercial mortgage loans |
|
|
169 |
|
|
|
(11 |
) |
|
|
158 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreclosed real estate |
|
|
59 |
|
|
|
— |
|
|
|
59 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total problem investments |
|
$ |
331 |
|
|
$ |
(60 |
) |
|
$ |
271 |
|
|
$ |
94 |
|
|
$ |
(59 |
) |
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential problem bonds |
|
$ |
94 |
|
|
$ |
(10 |
) |
|
$ |
84 |
|
|
$ |
140 |
|
|
$ |
(14 |
) |
|
$ |
126 |
|
Potential problem commercial
mortgage loans |
|
|
245 |
|
|
|
(6 |
) |
|
|
239 |
|
|
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential problem investments |
|
$ |
339 |
|
|
$ |
(16 |
) |
|
$ |
323 |
|
|
$ |
232 |
|
|
$ |
(14 |
) |
|
$ |
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net problem investments represent 1.5% of total investments excluding policy loans. Net
problem investments increased $236 million during 2009 primarily reflecting deterioration on six
commercial mortgage loans totaling $217 million, one of which is held as foreclosed real estate.
Net potential problem investments represent 1.8% of total investments excluding policy loans. Net
potential problem investments increased $105 million during 2009 primarily reflecting the addition
of nine loans totaling $169 million to the potential problem loan list that were exhibiting signs
of distress such as an elevated loan to value ratio or a low or negative debt service coverage.
These loans were all performing according to their original contractual terms as of December 31,
2009 and although they are showing signs of distress, most of these loans are adequately
collateralized. These additional nine loans were added to potential problem investments as a
result of management’s in-depth commercial mortgage loan portfolio review completed in the third
quarter of 2009.
91
Commercial mortgage loans are considered impaired when it is probable that the Company will not
collect amounts due according to the terms of the original loan agreement. Problem and potential
problem commercial mortgage loans totaling $222 million, presented in the above table, are
considered impaired. During 2009, the Company recorded a $17 million pre-tax ($11 million
after-tax) increase to valuation reserves on impaired commercial mortgage loans. See Note 12 to
the Consolidated Financial Statements and the Critical Accounting Estimates section of the MD&A
beginning on page 55 of this Form 10-K for additional information regarding impaired commercial
mortgage loans.
Summary
The Company recorded after-tax realized investment losses for investment asset write-downs and
changes in valuation reserves as follows:
| |
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
Credit-related (1) |
|
$ |
61 |
|
|
$ |
44 |
|
Other (2) |
|
|
8 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Total (3) |
|
$ |
69 |
|
|
$ |
141 |
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Credit-related losses
include other-than-temporary
declines in value of fixed
maturities and equity
securities, and impairments
of commercial mortgage loans
and real estate entities.
The amount related to credit
losses on fixed maturities
for which a portion of the
impairment was recognized in
other comprehensive income
was not significant. |
| |
| (2) |
|
Prior to adoption of new
GAAP guidance for
other-than-temporary
impairments on April 1,
2009, Other primarily
represented the impact of
rising market yields on
investments where the
Company could not
demonstrate the intent and
ability to hold until
recovery. |
| |
| (3) |
|
Includes
other-than-temporary
impairments on debt
securities of $31 million in
2009, $138 million in 2008
and $20 million in 2007.
These impairments are
included in both the credit
related and other categories
above. |
The financial markets experienced a significant improvement during 2009. Both investment
grade and below investment grade corporate credit indices reported significantly lower credit
spreads and the S&P 500 posted a return of approximately 25% during this period. While credit
spreads tightened in 2009 and asset values increased significantly, substantial uncertainty remains
concerning the economic environment. As a result of this economic environment, risks in the
Company’s investment portfolio remain elevated.
Continued economic weakness for an extended period could cause default rates to increase and
recoveries to decline resulting in additional impairment losses for the Company. Future realized
and unrealized investment results will be impacted largely by market conditions that exist when a
transaction occurs or at the reporting date. These future conditions are not reasonably
predictable. Management believes that the vast majority of the Company’s fixed maturity
investments will continue to perform under their contractual terms, and that declines in their fair
values below carrying value are temporary. Based on the strategy to match the duration of invested
assets to the duration of insurance and contractholder liabilities, the Company expects to hold a
significant portion of these assets for the long term. Therefore, future credit-related losses are
not expected to have a material adverse effect on the Company’s liquidity or financial condition.
While management believes the commercial mortgage loan portfolio is positioned to perform well due
to the solid aggregate loan to value ratio, strong debt service coverage and minimal underwater
position, the commercial real estate market continues to exhibit significant signs of distress and
if these conditions remain for an extended period or worsen substantially, it could result in an
increase in problem and potential problem loans. Given the current economic environment, future
impairments are possible; however, management does not expect those losses to have a material
effect on the Company’s financial condition.
92
MARKET RISK
Financial Instruments
The Company’s assets and liabilities include financial instruments subject to the risk of potential
losses from adverse changes in market rates and prices. The Company’s primary market risk
exposures are:
| • |
|
Interest-rate risk on fixed-rate, domestic, medium-term instruments. Changes in market
interest rates affect the value of instruments that promise a fixed return and impact the
value of liabilities for reinsured GMDB and GMIB contracts. |
| • |
|
Foreign currency exchange rate risk of the U.S. dollar primarily to the South Korean won,
Taiwan dollar, euro, British pound, New Zealand dollar, and Hong Kong dollar. An unfavorable
change in exchange rates reduces the carrying value of net assets denominated in foreign
currencies. |
| • |
|
Equity price risk for domestic equity securities and for the value of reinsured GMDB and
GMIB contracts resulting from unfavorable changes in variable annuity account values based on
underlying mutual fund investments. |
For further discussion of reinsured contracts, see Note 7 for GMDB contracts and Note 11 for GMIB
contracts in the Consolidated Financial Statements.
The Company’s Management of Market Risks
The Company predominantly relies on three techniques to manage its exposure to market risk:
| • |
|
Investment/liability matching. The Company generally selects investment assets with
characteristics (such as duration, yield, currency and liquidity) that correspond to the
underlying characteristics of its related insurance and contractholder liabilities so that the
Company can match the investments to its obligations. Shorter-term investments support
generally shorter-term life and health liabilities. Medium-term, fixed-rate investments
support interest-sensitive and health liabilities. Longer-term investments generally support
products with longer pay out periods such as annuities and long-term disability liabilities. |
| • |
|
Use of local currencies for foreign operations. The Company generally conducts its
international business through foreign operating entities that maintain assets and liabilities
in local 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. |
| • |
|
Use of derivatives. The Company generally uses derivative financial instruments to
minimize certain market risks and, from time to time, to enhance investment returns. |
See Notes 2(C) and 13 to the Consolidated Financial Statements for additional information about
financial instruments, including derivative financial instruments.
Effect of Market Fluctuations on the Company
The examples that follow illustrate the effect of hypothetical changes in market rates or prices on
the fair value of certain financial instruments including:
| • |
|
hypothetical changes in market interest rates, primarily for fixed maturities and
commercial mortgage loans, partially offset by liabilities for long-term debt and GMIB
contracts; |
| • |
|
hypothetical changes in market rates for foreign currencies, primarily for the net assets
of foreign subsidiaries denominated in a foreign currency; and |
| • |
|
hypothetical changes in market prices for equity exposures, primarily for equity securities
and GMIB contracts. |
In addition, hypothetical effects of changes in equity indices and foreign exchange rates are
presented separately for futures contracts used in the GMDB equity hedge program.
93
Management believes that actual results could differ materially from these examples because:
| • |
|
these examples were developed using estimates and assumptions; |
| • |
|
changes in the fair values of all insurance-related assets and liabilities have been
excluded because their primary risks are insurance rather than market risk; |
| • |
|
changes in the fair values of investments recorded using the equity method of accounting
and liabilities for pension and other postretirement and postemployment benefit plans (and
related assets) have been excluded, consistent with the disclosure guidance; and |
| • |
|
changes in the fair values of other significant assets and liabilities such as goodwill,
deferred policy acquisition costs, taxes, and various accrued liabilities have been excluded;
because they are not financial instruments, their primary risks are other than market risk. |
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:
| |
|
|
|
|
|
|
|
|
|
|
| Market scenario for |
|
|
|
|
|
| certain non-insurance |
|
Loss in fair value |
|
| financial
instruments (in millions) |
|
2009 |
|
|
2008 |
|
100 basis point increase in
interest rates |
|
$ |
700 |
|
|
$ |
700 |
|
10% strengthening in U.S.
dollar to foreign currencies |
|
$ |
190 |
|
|
$ |
160 |
|
10% decrease in market prices
for equity exposures |
|
$ |
50 |
|
|
$ |
50 |
|
The Company’s foreign operations hold investment assets, such as fixed maturities, that are
generally invested in the currency of the related liabilities. Due to the increase in the fair
value of these investments in 2009, which are primarily denominated in the South Korean won, the
effect of a hypothetical 10% strengthening in U.S. dollar to foreign currencies at December 31,
2009 was greater than that effect at December 31, 2008.
The effect of a hypothetical increase in interest rates was determined by estimating the present
value of future cash flows using various models, primarily duration modeling and, for GMIB
contracts, stochastic modeling. The effect of a hypothetical strengthening of the U.S. dollar
relative to the foreign currencies held by the Company was estimated to be 10% of the U.S. dollar
equivalent fair value. The effect of a hypothetical decrease in the market prices of equity
exposures was estimated based on a 10% decrease in the equity mutual fund values underlying
guaranteed minimum income benefits reinsured by the Company and a 10% decrease in the value of
equity securities held by the Company. See Note 11 to the Consolidated Financial Statements for
additional information.
The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce
the effect of equity market changes on certain reinsurance contracts that guarantee minimum death
benefits based on unfavorable changes in underlying variable annuity account values. The
hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX
(Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to
the Japanese yen, British pound and euro would have been a decrease of approximately $100 million
in the fair value of the futures contracts outstanding under this program as of December 31, 2009.
A corresponding decrease in liabilities for GMDB contracts would result from the hypothetical 10%
increase in these equity indices and 10% weakening in the U.S. dollar. See Note 7 to the
Consolidated Financial Statements for further discussion of this program and related GMDB
contracts.
As noted above, the Company manages its exposures to market risk by matching investment
characteristics to its obligations.
Stock Market Performance
The performance of equity markets can have a significant effect on the Company’s businesses,
including on:
| • |
|
risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial
Statements) and GMIB contracts (see Note 11 to the Consolidated Financial Statements); and |
| • |
|
pension liabilities since equity securities comprise a significant portion of the assets of
the Company’s employee pension plans. |
94
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 representatives may from time to
time make written and oral forward-looking statements, including statements contained in press
releases, in the Company’s filings with the Securities and Exchange Commission, in its reports to
shareholders and in meetings with analysts and investors. Forward-looking statements may contain
information about financial prospects, economic conditions, trends and other uncertainties. These
forward-looking statements are based on management’s beliefs and assumptions and on information
available to management at the time the statements are or were made. Forward-looking statements
include but are not limited to the information concerning possible or assumed future business
strategies, financing plans, competitive position, potential growth opportunities, potential
operating performance improvements, trends and, in particular, the Company’s productivity
initiatives, litigation and other legal matters, operational improvement initiatives in the health
care operations, and the outlook for the Company’s results for full year 2010 and beyond.
Forward-looking statements include all statements that are not historical facts and can be
identified by the use of forward-looking terminology such as the words “believe”, “expect”, “plan”,
“intend”, “anticipate”, “estimate”, “predict”, “potential”, “may”, “should” or similar expressions.
You should not place undue reliance on these forward-looking statements. The Company cautions that
actual results could differ materially from those that management expects, depending on the outcome
of certain factors. Some factors that could cause actual results to differ materially from the
forward-looking statements include:
| |
1. |
|
increased medical costs that are higher than anticipated in establishing premium rates in the
Company’s health care operations, including increased use and costs of medical services; |
| |
| |
2. |
|
increased medical, administrative, technology or other costs resulting from new legislative
and regulatory requirements imposed on the Company’s employee benefits businesses; |
| |
| |
3. |
|
challenges and risks associated with implementing operational improvement initiatives and
strategic actions in the ongoing operations of the businesses, including those related to: (i)
growth in targeted geographies, product lines, buying segments and distribution channels, (ii)
offering products that meet emerging market needs, (iii) strengthening underwriting and
pricing effectiveness, (iv) strengthening medical cost and medical membership results, (v)
delivering quality member and provider service using effective technology solutions, (vi)
lowering administrative costs and (vii) transitioning to an integrated operating company
model, including operating efficiencies related to the transition; |
| |
| |
4. |
|
risks associated with pending and potential state and federal class action lawsuits, disputes
regarding reinsurance arrangements, other litigation and regulatory actions challenging the
Company’s businesses, including disputes related to payments to providers, government
investigations and proceedings, and tax audits and related litigation; |
| |
| |
5. |
|
heightened competition, particularly price competition, which could reduce product margins
and constrain growth in the Company’s businesses, primarily the Health Care business; |
| |
| |
6. |
|
risks associated with the Company’s mail order pharmacy business which, among other things,
includes any potential operational deficiencies or service issues as well as loss or
suspension of state pharmacy licenses; |
| |
| |
7. |
|
significant changes in interest rates and deterioration in the loan to value ratios of
commercial real estate investments for a sustained period of time; |
| |
| |
8. |
|
downgrades in the financial strength ratings of the Company’s insurance subsidiaries, which
could, among other things, adversely affect new sales and retention of current business as
well as the downgrade in the financial strength ratings of reinsurers which could result in
increased statutory reserve or capital requirements; |
| |
| |
9. |
|
limitations on the ability of the Company’s insurance subsidiaries to dividend capital to the
parent company as a result of downgrades in the subsidiaries’ financial strength ratings,
changes in statutory reserve or capital requirements or other financial constraints; |
| |
| |
10. |
|
the inability of the hedge program adopted by the Company to substantially reduce equity
market risks for reinsurance contracts that guarantee minimum death benefits under certain
variable annuities (including possible market difficulties in entering into appropriate
futures contracts and in matching such contracts to the underlying equity risk); |
| |
| |
11. |
|
adjustments to the reserve assumptions (including lapse, partial surrender, mortality,
interest rates and volatility) used in estimating the Company’s liabilities for reinsurance
contracts covering guaranteed minimum death benefits under certain variable annuities; |
| |
| |
12. |
|
adjustments to the assumptions (including annuity election rates and amounts collectible
from reinsurers) used in estimating the Company’s assets and liabilities for reinsurance
contracts covering guaranteed minimum income benefits under certain variable annuities; |
| |
| |
13. |
|
significant stock market declines, which could, among other things, result in increased
expenses for guaranteed minimum income benefit contracts, guaranteed minimum death benefit
contracts and the Company’s pension plan in future periods as well as the recognition of
additional pension obligations; |
| |
| |
14. |
|
unfavorable claims experience related to workers’ compensation and personal accident
exposures of the run-off reinsurance business, including losses attributable to the inability
to recover claims from retrocessionaires; |
95
| |
15. |
|
significant deterioration in economic conditions and significant market volatility, which
could have an adverse effect on the Company’s operations, investments, liquidity and access to
capital markets; |
| |
| |
16. |
|
significant deterioration in economic conditions and significant market volatility, which
could have an adverse effect on the businesses of our customers (including the amount and type
of healthcare services provided to their workforce and our customers’ ability to pay
receivables) and our vendors (including their ability to provide services); |
| |
| |
17. |
|
changes in public policy and in the political environment, which could affect state and
federal law, including legislative and regulatory proposals related to health care issues
(including health care reform legislation that could include, among other items, a broad based
public sector alternative and/or alternative assessments and tax increases specific to the
Company’s industry), which could increase cost and affect the market for the Company’s health
care products and services; and amendments to income tax laws, which could affect the taxation
of employer provided benefits and certain insurance products such as corporate-owned life
insurance; |
| |
| |
18. |
|
potential public health epidemics and bio-terrorist activity, which could, among other
things, cause the Company’s covered medical and disability expenses, pharmacy costs and
mortality experience to rise significantly, and cause operational disruption, depending on the
severity of the event and number of individuals affected; |
| |
| |
19. |
|
risks associated with security or interruption of information systems, which could, among
other things, cause operational disruption; |
| |
| |
20. |
|
challenges and risks associated with the successful management of the Company’s outsourcing
projects or key vendors, including the agreement with IBM for provision of technology
infrastructure and related services; |
| |
| |
21. |
|
the ability to successfully integrate and operate the businesses acquired from Great-West by,
among other things, renewing insurance and administrative services contracts on competitive
terms, retaining and growing membership, realizing revenue, expense and other synergies,
successfully leveraging the information technology platform of the acquired businesses, and
retaining key personnel; and |
| |
| |
22. |
|
the ability of the Company to execute its growth plans by successfully managing Great-West
Healthcare’s outsourcing projects and leveraging the Company’s capabilities and those of the
businesses acquired from Great-West to further enhance the combined organization’s network
access position, underwriting effectiveness, delivery of quality member and provider service,
and increased penetration of its membership base with differentiated product offerings. |
This list of important factors is not intended to be exhaustive. Other sections of the Form 10-K,
including the “Risk Factors” section, and other documents filed with the Securities and Exchange
Commission include both expanded discussion of these factors and additional risk factors and
uncertainties that could preclude the Company from realizing the forward-looking statements. The
Company does not assume any obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law.
96
Management’s Annual Report on Internal Control over Financial Reporting
Management of CIGNA Corporation (“the Company”) is responsible for establishing and maintaining
adequate internal controls over financial reporting. The Company’s internal controls were designed
to provide reasonable assurance to the Company’s Management and Board of Directors that the
Company’s consolidated published financial statements for external purposes were prepared in
accordance with generally accepted accounting principles. The Company’s internal controls over
financial reporting include those policies and procedures that:
| |
(i) |
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets and liabilities of the Company; |
| |
(ii) |
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorization of management and directors of the Company; and |
| |
(iii) |
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of the Company’s assets that could have a material effect
on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements.
Management assessed the effectiveness of the Company’s internal controls over financial reporting
as of December 31, 2009. In making this assessment, Management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework. Based on Management’s assessment and the criteria set forth by COSO,
it was determined that the Company’s internal controls over financial reporting are effective as of
December 31, 2009.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers, has audited
the effectiveness of the Company’s internal control over financial reporting, as stated in their
report located on page 168 in this Form 10-K.
97
|
|
|
| Item 7A. |
|
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.
98
|
|
|
| Item 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
CIGNA Corporation
Consolidated Statements of Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees |
|
$ |
16,041 |
|
|
$ |
16,253 |
|
|
$ |
15,008 |
|
Net investment income |
|
|
1,014 |
|
|
|
1,063 |
|
|
|
1,114 |
|
Mail order pharmacy revenues |
|
|
1,282 |
|
|
|
1,204 |
|
|
|
1,118 |
|
Other revenues |
|
|
120 |
|
|
|
751 |
|
|
|
368 |
|
Realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on debt
securities, net |
|
|
(47 |
) |
|
|
(213 |
) |
|
|
(31 |
) |
Other realized investment gains |
|
|
4 |
|
|
|
43 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses) |
|
|
(43 |
) |
|
|
(170 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
18,414 |
|
|
|
19,101 |
|
|
|
17,624 |
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care medical claims expense |
|
|
6,927 |
|
|
|
7,252 |
|
|
|
6,798 |
|
Other benefit expenses |
|
|
3,407 |
|
|
|
4,285 |
|
|
|
3,401 |
|
Mail order pharmacy cost of goods sold |
|
|
1,036 |
|
|
|
961 |
|
|
|
904 |
|
Guaranteed minimum income benefits (income) expense |
|
|
(304 |
) |
|
|
690 |
|
|
|
147 |
|
Other operating expenses |
|
|
5,450 |
|
|
|
5,531 |
|
|
|
4,740 |
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
16,516 |
|
|
|
18,719 |
|
|
|
15,990 |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations before Income
Taxes |
|
|
1,898 |
|
|
|
382 |
|
|
|
1,634 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefits): |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
275 |
|
|
|
313 |
|
|
|
511 |
|
Deferred |
|
|
319 |
|
|
|
(221 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total taxes |
|
|
594 |
|
|
|
92 |
|
|
|
511 |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
1,304 |
|
|
|
290 |
|
|
|
1,123 |
|
Income (Loss) from Discontinued Operations, Net of
Taxes |
|
|
1 |
|
|
|
4 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,305 |
|
|
|
294 |
|
|
|
1,118 |
|
Less: Net Income Attributable to Noncontrolling
Interest |
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Net Income |
|
$ |
1,302 |
|
|
$ |
292 |
|
|
$ |
1,115 |
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income from continuing operations |
|
$ |
4.75 |
|
|
$ |
1.04 |
|
|
$ |
3.91 |
|
Shareholders’ income (loss) from discontinued
operations |
|
|
— |
|
|
|
0.01 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Shareholders’ net income |
|
$ |
4.75 |
|
|
$ |
1.05 |
|
|
$ |
3.89 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income from continuing operations |
|
$ |
4.73 |
|
|
$ |
1.03 |
|
|
$ |
3.86 |
|
Shareholders’ income (loss) from discontinued
operations |
|
|
— |
|
|
|
0.02 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Shareholders’ net income |
|
$ |
4.73 |
|
|
$ |
1.05 |
|
|
$ |
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared Per Share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to CIGNA: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ income from continuing operations |
|
$ |
1,301 |
|
|
$ |
288 |
|
|
$ |
1,120 |
|
Shareholders’ income (loss) from discontinued
operations |
|
|
1 |
|
|
|
4 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Shareholders’ Net Income |
|
$ |
1,302 |
|
|
$ |
292 |
|
|
$ |
1,115 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
99
CIGNA Corporation
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions, except per share amounts) |
|
|
|
|
|
|
| As of December 31, |
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost, $12,580;
$11,492) |
|
|
|
|
|
$ |
13,443 |
|
|
|
|
|
|
$ |
11,781 |
|
Equity securities, at fair value (cost, $137; $140) |
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
112 |
|
Commercial mortgage loans |
|
|
|
|
|
|
3,522 |
|
|
|
|
|
|
|
3,617 |
|
Policy loans |
|
|
|
|
|
|
1,549 |
|
|
|
|
|
|
|
1,556 |
|
Real estate |
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
53 |
|
Other long-term investments |
|
|
|
|
|
|
595 |
|
|
|
|
|
|
|
632 |
|
Short-term investments |
|
|
|
|
|
|
493 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
|
|
|
|
19,839 |
|
|
|
|
|
|
|
17,987 |
|
Cash and cash equivalents |
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
1,342 |
|
Accrued investment income |
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
225 |
|
Premiums, accounts and notes receivable, net |
|
|
|
|
|
|
1,361 |
|
|
|
|
|
|
|
1,407 |
|
Reinsurance recoverables |
|
|
|
|
|
|
6,597 |
|
|
|
|
|
|
|
6,973 |
|
Deferred policy acquisition costs |
|
|
|
|
|
|
943 |
|
|
|
|
|
|
|
789 |
|
Property and equipment |
|
|
|
|
|
|
862 |
|
|
|
|
|
|
|
804 |
|
Deferred income taxes, net |
|
|
|
|
|
|
1,029 |
|
|
|
|
|
|
|
1,617 |
|
Goodwill |
|
|
|
|
|
|
2,876 |
|
|
|
|
|
|
|
2,878 |
|
Other assets, including other intangibles |
|
|
|
|
|
|
1,056 |
|
|
|
|
|
|
|
1,520 |
|
Separate account assets |
|
|
|
|
|
|
7,288 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
43,013 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder deposit funds |
|
|
|
|
|
$ |
8,484 |
|
|
|
|
|
|
$ |
8,539 |
|
Future policy benefits |
|
|
|
|
|
|
8,136 |
|
|
|
|
|
|
|
8,754 |
|
Unpaid claims and claim expenses |
|
|
|
|
|
|
3,968 |
|
|
|
|
|
|
|
4,037 |
|
Health Care medical claims payable |
|
|
|
|
|
|
921 |
|
|
|
|
|
|
|
924 |
|
Unearned premiums and fees |
|
|
|
|
|
|
427 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance and contractholder liabilities |
|
|
|
|
|
|
21,936 |
|
|
|
|
|
|
|
22,668 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
5,797 |
|
|
|
|
|
|
|
6,869 |
|
Short-term debt |
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
301 |
|
Long-term debt |
|
|
|
|
|
|
2,436 |
|
|
|
|
|
|
|
2,090 |
|
Nonrecourse obligations |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
16 |
|
Separate account liabilities |
|
|
|
|
|
|
7,288 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
37,584 |
|
|
|
|
|
|
|
37,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies — Note 23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (par value per share, $0.25; shares issued,
351) |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
Additional paid-in capital |
|
|
|
|
|
|
2,514 |
|
|
|
|
|
|
|
2,502 |
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
378 |
|
|
|
|
|
|
$ |
(147 |
) |
|
|
|
|
Net unrealized appreciation, equity securities |
|
|
4 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
|
(30 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
Net translation of foreign currencies |
|
|
(12 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
Postretirement benefits liability adjustment |
|
|
(958 |
) |
|
|
|
|
|
|
(861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(618 |
) |
|
|
|
|
|
|
(1,074 |
) |
Retained earnings |
|
|
|
|
|
|
8,625 |
|
|
|
|
|
|
|
7,374 |
|
Less treasury stock, at cost |
|
|
|
|
|
|
(5,192 |
) |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
|
|
|
|
5,417 |
|
|
|
|
|
|
|
3,592 |
|
Noncontrolling interest |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
5,429 |
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
|
|
|
$ |
43,013 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity Per Share |
|
|
|
|
|
$ |
19.75 |
|
|
|
|
|
|
$ |
13.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
100
CIGNA Corporation
Consolidated Statements of Comprehensive Income
and Changes in Total Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
|
2007 |
|
| |
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
| (In millions, except per share amounts) |
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
| For the years ended December 31, |
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
Common Stock, beginning of year |
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
40 |
|
Effect of issuance of stock for stock split |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, end of year |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, beginning of year |
|
|
|
|
|
|
2,502 |
|
|
|
|
|
|
|
2,474 |
|
|
|
|
|
|
|
2,451 |
|
Effect of issuance of stock for stock split |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(48 |
) |
Effect of issuance of stock for employee benefit plans |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, end of year |
|
|
|
|
|
|
2,514 |
|
|
|
|
|
|
|
2,502 |
|
|
|
|
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss),
beginning of year |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
(169 |
) |
Implementation effect of updated guidance on
other-than-temporary impairments (see Note 2) |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Implementation effect of updated guidance on certain
hybrid
financial instruments (See Note 2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(12 |
) |
Net unrealized appreciation (depreciation), fixed
maturities |
|
$ |
543 |
|
|
|
543 |
|
|
$ |
(287 |
) |
|
|
(287 |
) |
|
$ |
(47 |
) |
|
|
(47 |
) |
Net unrealized depreciation, equity securities |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on securities |
|
|
540 |
|
|
|
|
|
|
|
(287 |
) |
|
|
|
|
|
|
(50 |
) |
|
|
|
|
Net unrealized appreciation (depreciation), derivatives |
|
|
(17 |
) |
|
|
(17 |
) |
|
|
6 |
|
|
|
6 |
|
|
|
(4 |
) |
|
|
(4 |
) |
Net translation of foreign currencies |
|
|
48 |
|
|
|
48 |
|
|
|
(121 |
) |
|
|
(121 |
) |
|
|
28 |
|
|
|
28 |
|
Postretirement benefits liability adjustment |
|
|
(97 |
) |
|
|
(97 |
) |
|
|
(723 |
) |
|
|
(723 |
) |
|
|
258 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
474 |
|
|
|
|
|
|
|
(1,125 |
) |
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), end of year |
|
|
|
|
|
|
(618 |
) |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, beginning of year |
|
|
|
|
|
|
7,374 |
|
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
6,177 |
|
Implementation effect of updated guidance on
other-than-temporary impairments (See Note 2) |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Implementation effect of updated guidance on certain
hybrid
financial instruments (See Note 2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
12 |
|
Implementation effect of updated guidance on uncertain
tax positions (See Note 2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(29 |
) |
Shareholders’ net income |
|
|
1,302 |
|
|
|
1,302 |
|
|
|
292 |
|
|
|
292 |
|
|
|
1,115 |
|
|
|
1,115 |
|
Effect of issuance of stock for employee benefit plans |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(151 |
) |
Common dividends declared (per share: $0.04; $0.04;
$0.04) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, end of year |
|
|
|
|
|
|
8,625 |
|
|
|
|
|
|
|
7,374 |
|
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, beginning of year |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
(4,978 |
) |
|
|
|
|
|
|
(4,169 |
) |
Repurchase of common stock |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(378 |
) |
|
|
|
|
|
|
(1,158 |
) |
Other, primarily issuance of treasury stock for employee
benefit plans |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, end of year |
|
|
|
|
|
|
(5,192 |
) |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
(4,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Comprehensive Income (Loss) and
Shareholders’ Equity |
|
|
1,776 |
|
|
|
5,417 |
|
|
|
(833 |
) |
|
|
3,592 |
|
|
|
1,347 |
|
|
|
4,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, beginning of year |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
3 |
|
Net income attributable to noncontrolling interest |
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Accumulated other comprehensive income attributable
to noncontrolling interest |
|
|
3 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, end of year |
|
|
6 |
|
|
|
12 |
|
|
|
— |
|
|
|
6 |
|
|
|
3 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income and Total Equity |
|
$ |
1,782 |
|
|
$ |
5,429 |
|
|
$ |
(833 |
) |
|
$ |
3,598 |
|
|
$ |
1,350 |
|
|
$ |
4,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
101
CIGNA Corporation
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
|
|
|
|
|
|
|
| For the years ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,305 |
|
|
$ |
294 |
|
|
$ |
1,118 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
5 |
|
Insurance liabilities |
|
|
(357 |
) |
|
|
485 |
|
|
|
(24 |
) |
Reinsurance recoverables |
|
|
30 |
|
|
|
63 |
|
|
|
159 |
|
Deferred policy acquisition costs |
|
|
(109 |
) |
|
|
(74 |
) |
|
|
(106 |
) |
Premiums, accounts and notes receivable |
|
|
49 |
|
|
|
219 |
|
|
|
47 |
|
Other assets |
|
|
452 |
|
|
|
(860 |
) |
|
|
(134 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(1,321 |
) |
|
|
1,466 |
|
|
|
150 |
|
Current income taxes |
|
|
55 |
|
|
|
(72 |
) |
|
|
10 |
|
Deferred income taxes |
|
|
319 |
|
|
|
(221 |
) |
|
|
— |
|
Realized investment (gains) losses |
|
|
43 |
|
|
|
170 |
|
|
|
(16 |
) |
Depreciation and amortization |
|
|
268 |
|
|
|
244 |
|
|
|
194 |
|
Gains on sales of businesses (excluding discontinued operations) |
|
|
(32 |
) |
|
|
(38 |
) |
|
|
(47 |
) |
Mortgage loans originated and held for sale |
|
|
— |
|
|
|
— |
|
|
|
(80 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
1 |
|
|
|
1 |
|
|
|
76 |
|
Other, net |
|
|
43 |
|
|
|
(17 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
745 |
|
|
|
1,656 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
927 |
|
|
|
1,459 |
|
|
|
1,012 |
|
Equity securities |
|
|
22 |
|
|
|
6 |
|
|
|
28 |
|
Commercial mortgage loans |
|
|
61 |
|
|
|
48 |
|
|
|
1,293 |
|
Other (primarily short-term and other long-term investments) |
|
|
910 |
|
|
|
492 |
|
|
|
260 |
|
Investment maturities and repayments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
1,100 |
|
|
|
872 |
|
|
|
973 |
|
Commercial mortgage loans |
|
|
94 |
|
|
|
98 |
|
|
|
123 |
|
Investments purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(2,916 |
) |
|
|
(2,681 |
) |
|
|
(2,150 |
) |
Equity securities |
|
|
(14 |
) |
|
|
(18 |
) |
|
|
(27 |
) |
Commercial mortgage loans |
|
|
(175 |
) |
|
|
(488 |
) |
|
|
(693 |
) |
Other (primarily short-term and other long-term investments) |
|
|
(1,187 |
) |
|
|
(776 |
) |
|
|
(394 |
) |
Property and equipment sales |
|
|
— |
|
|
|
— |
|
|
|
82 |
|
Property and equipment purchases |
|
|
(307 |
) |
|
|
(257 |
) |
|
|
(262 |
) |
Acquisition of Great-West Healthcare, net of cash acquired |
|
|
— |
|
|
|
(1,319 |
) |
|
|
— |
|
Cash provided by investing activities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
70 |
|
Other (primarily other acquisitions/dispositions) |
|
|
— |
|
|
|
(8 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(1,485 |
) |
|
|
(2,572 |
) |
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and interest credited to contractholder deposit funds |
|
|
1,312 |
|
|
|
1,305 |
|
|
|
1,175 |
|
Withdrawals and benefit payments from contractholder deposit funds |
|
|
(1,223 |
) |
|
|
(1,214 |
) |
|
|
(1,368 |
) |
Change in cash overdraft position |
|
|
53 |
|
|
|
(17 |
) |
|
|
(20 |
) |
Net change in short-term debt |
|
|
(199 |
) |
|
|
298 |
|
|
|
— |
|
Net proceeds on issuance of long-term debt |
|
|
346 |
|
|
|
297 |
|
|
|
498 |
|
Repayment of long-term debt |
|
|
(1 |
) |
|
|
— |
|
|
|
(378 |
) |
Repurchase of common stock |
|
|
— |
|
|
|
(378 |
) |
|
|
(1,185 |
) |
Issuance of common stock |
|
|
30 |
|
|
|
37 |
|
|
|
248 |
|
Common dividends paid |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
307 |
|
|
|
314 |
|
|
|
(1,041 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes on cash and cash equivalents |
|
|
15 |
|
|
|
(26 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(418 |
) |
|
|
(628 |
) |
|
|
578 |
|
Cash and cash equivalents, beginning of year |
|
|
1,342 |
|
|
|
1,970 |
|
|
|
1,392 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
924 |
|
|
$ |
1,342 |
|
|
$ |
1,970 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
220 |
|
|
$ |
366 |
|
|
$ |
455 |
|
Interest paid |
|
$ |
158 |
|
|
$ |
140 |
|
|
$ |
122 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
102
Notes to the Consolidated Financial Statements
Note 1 — Description of Business
CIGNA Corporation together with its subsidiaries (referred to collectively as “the Company”)
constitutes one of the largest investor-owned health service organizations in the United States.
Its subsidiaries are major providers of health care and related benefits, the majority of which are
offered through the workplace, including health care products and services such as medical
coverages, pharmacy, behavioral health, dental benefits, and disease management; group disability,
life and accident insurance; and disability and workers’ compensation case management and related
services. In addition, the Company has an international operation that offers life, accident and
supplemental health insurance products and international health care products and services to
businesses and individuals in selected markets. The Company also has certain inactive businesses,
including a run-off reinsurance operation.
Note 2 — Summary of Significant Accounting Policies
A. Basis of Presentation
The consolidated financial statements include the accounts of CIGNA Corporation, its significant
subsidiaries, and variable interest entities for which the Company has determined it is the primary
beneficiary. 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 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.
In preparing these consolidated financial statements, the Company has evaluated events that
occurred between the balance sheet date and February 25, 2010.
Certain reclassifications have been made to prior period amounts to conform to the presentation of
2009 amounts. In addition, certain amounts have been restated as a result of the adoption of new
accounting pronouncements.
Discontinued operations. Summarized financial data for discontinued operations in 2009 primarily
represents a tax benefit from a past divestiture resolved at the completion of the 2005 and 2006
IRS examinations.
Discontinued operations for 2008 primarily represents an after-tax gain of $3 million from the
settlement of certain issues related to a past divestiture.
Discontinued operations for 2007 primarily reflects:
| • |
|
impairment losses related to the dispositions of several Latin American insurance
operations as discussed in Note 3; and |
| • |
|
realized gains on the disposition of certain directly-owned real estate investments as
discussed in Note 14. |
Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income before income (taxes) benefits |
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
25 |
|
Income (taxes) benefits |
|
|
1 |
|
|
|
1 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1 |
|
|
|
4 |
|
|
|
18 |
|
Impairment loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations,
net of taxes |
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
(5 |
) |
|
|
|
|
|
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Variable interest entities. As of December 31, 2009 and 2008 the Company determined it was not
a primary beneficiary in any variable interest entities.
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B. Recent Accounting Pronouncements
Accounting Standards Codification. The Financial Accounting Standards Board (“FASB”) has
established the Accounting Standards Codification (“Codification” or “ASC”) as the single source of
authoritative accounting guidance effective for financial reporting in 2009. Therefore, the
Company has used the Codification section or description when referring to GAAP.
Other-than-temporary impairments. On April 1, 2009, the Company adopted the FASB’s updated
guidance for evaluating whether an impairment is other than temporary for fixed maturities with
declines in fair value below amortized cost (ASC 320). It requires assessing the Company’s intent
to sell or whether it is more likely than not that the Company will be required to sell such fixed
maturities before their fair values recover. If so, an impairment loss is recognized in net income
for the excess of the amortized cost over fair value. The Company must also determine if it does
not expect to recover the amortized cost of fixed maturities with declines in fair value (even if
it does not intend to sell or will not be required to sell these fixed maturities). In this case,
the credit portion of the impairment loss is recognized in net income and the non-credit portion of
an impairment loss is recognized in a separate component of shareholders’ equity. A
reclassification adjustment from retained earnings to accumulated other comprehensive income was
required for previously impaired fixed maturities that have a non-credit loss as of the date of
adoption, net of related tax effects.
The cumulative effect of adoption increased the Company’s retained earnings with an offsetting
decrease to accumulated other comprehensive income of $18 million, with no overall change to
shareholders’ equity. See Note 12 for information on the Company’s other-than-temporary
impairments including additional required disclosures.
Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted the
FASB’s updated guidance on accounting for noncontrolling interests (ASC 810) through retroactive
restatement of prior financial statements and reclassified $3 million of noncontrolling interest as
of January 1, 2007 from Accounts payable, accrued expenses and other liabilities to Noncontrolling
interest in total equity. In addition, net income attributable to the noncontrolling interest of
$2 million in 2008 and $3 million in 2007 has been reclassified to be included in net income, with
a reduction to net income to determine net income attributable to the Company’s shareholders
(“shareholders’ net income”).
Earnings per share. Effective January 1, 2009, the Company adopted the FASB’s updated earnings per
share guidance (ASC 260) for determining participating securities that requires unvested restricted
stock awards containing rights to nonforfeitable dividends to be included in the denominator of
both basic and diluted earnings per share (“EPS”) calculations. Prior period EPS data have been
restated to reflect the adoption of this guidance. See Note 4 for the effects of this guidance on
previously reported EPS amounts.
Business combinations. Effective January 1, 2009, the Company adopted the FASB’s guidance on
accounting for business combinations (ASC 805) that requires fair value measurements for all future
acquisitions, including contingent purchase price and certain contingent assets or liabilities of
the entity to be acquired, requires acquisition-related and restructuring costs to be expensed as
incurred and requires changes in tax items after the acquisition date to be reported in income tax
expense. There were no effects to the Company’s Consolidated Financial Statements at adoption.
Derivatives disclosures. Effective January 1, 2009, the Company expanded its disclosures on
derivatives and hedging activities to comply with the FASB’s updated guidance (ASC 815) that
requires the Company to disclose the purpose for using derivative instruments, their accounting
treatment and related effects on financial condition, results of operations and liquidity. See
Note 13 for information on the Company’s derivative financial instruments including these
additional required disclosures.
Fair value measurements. Effective January 1, 2008, the Company adopted the FASB’s fair value
disclosure and measurement guidance (ASC 820) that expands disclosures about fair value
measurements and clarifies how to measure fair value by focusing on the price that would be
received when selling an asset or paid to transfer a liability (exit price). In addition, the FASB
amended the fair value guidance in 2008 to provide additional guidance for determining the fair
value of a financial asset when the market for that instrument is not active. In 2009, the Company
also adopted FASB guidance on measuring the fair value of non-financial assets and liabilities,
certain financial liabilities and investments in certain entities using their net asset value or
its equivalent. See Note 11 for information on the Company’s fair value measurements. In addition,
in 2009 the Company adopted new FASB guidance on expanded fair value disclosures for assets
supporting its pension and other postretirement benefit plans. See Note 10 for further
information.
104
The Company carries certain financial instruments at fair value in the financial statements
including approximately $14 billion in invested assets at December 31, 2009. The Company also
carries derivative instruments at fair value, including assets and liabilities for reinsurance
contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain
variable annuity contracts issued by other insurance companies and related retrocessional
contracts. The Company also reports separate account assets at fair value; however, changes in the
fair values of these assets accrue directly to policyholders and are not included in the Company’s
revenues and expenses. At the adoption of this fair value guidance, there were no effects to the
Company’s measurements of fair values for financial instruments other than for GMIB assets and
liabilities discussed below. In addition, there were no effects to the Company’s measurements of
financial assets and non-financial assets and liabilities from adopting the FASB’s 2008 and 2009
amendments to their fair value guidance.
At adoption, the Company was required to change certain assumptions used to estimate the fair
values of GMIB assets and liabilities. Because there is no market for these contracts, the
assumptions used to estimate their fair values at adoption were determined using a hypothetical
market participant’s view of exit price, rather than using historical market data and actual
experience to establish the Company’s future expectations. Certain of these assumptions (primarily
related to annuitant behavior) have limited or no observable market data so determining an exit
price requires the Company to exercise significant judgment and make critical accounting estimates.
On adoption, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202
million pre-tax), in Run-off Reinsurance.
The Company’s results of operations related to this business are expected to continue to be
volatile in future periods because several underlying assumptions (primarily interest rates) will
be based on current market-observable inputs which will likely change each period. See Note 11 for
additional information.
Transfers of financial assets. In 2009, the FASB issued guidance for accounting for transfers of
financial assets (ASC 860) that changes the requirements for recognizing the transfer of financial
assets and requires additional disclosures about a transferor’s continuing involvement in
transferred financial assets. The guidance also eliminates the concept of a “qualifying special
purpose entity” when assessing transfers of financial instruments. The recognition and measurement
provisions of this guidance must be applied to transfers that occur on or after January 1, 2010.
On adoption, the Company does not expect a material effect to its results of operations or
financial condition.
Variable interest entities. In 2009, the FASB amended guidance (ASC 810) that requires quarterly
qualitative analysis to determine whether a variable interest entity must be consolidated by the
Company primarily based on the entity’s purpose and design, the Company’s ability to direct the
entity’s activities that most significantly impact its economic performance, and the Company’s
right or obligation to participate in that performance. A variable interest entity is
insufficiently capitalized or is not controlled through voting or similar rights. These amendments
must also be applied to qualifying special-purpose entities formerly excluded from such analysis.
Any changes in the Company’s consolidated entities resulting from these requirements may be
recognized through an adjustment to retained earnings for the cumulative effect of implementing at
the January 1, 2010 date of adoption or through retrospective restatement of prior period financial
statements. In addition, this guidance requires the Company to disclose any significant judgments
and assumptions made in determining whether it must consolidate a variable interest entity. On
adoption, the Company does not expect a material effect to its results of operations or financial
condition.
Fair value option. Effective January 1, 2008, the Company adopted FASB updated guidance for the
fair value option for financial assets and liabilities (ASC 825), which permits entities to choose
fair value measurement at the time of acquisition of many financial instruments, including
insurance contracts, with subsequent changes in fair value to be reported in net income for the
period. The adoption of this guidance did not impact the Company’s consolidated financial
statements, as no items were elected for fair value measurement.
Uncertain tax positions. Effective January 1, 2007, the Company implemented updated FASB guidance
(ASC 740) on accounting for uncertain tax positions that are “more likely than not” to result in a
benefit if challenged by the Internal Revenue Service (“IRS”). The cumulative effect of
implementing the guidance for unrecognized tax benefits decreased opening retained earnings by $29
million. See Note 19 for additional information.
Certain financial instruments. Effective January 1, 2007, the Company adopted updated FASB
guidance on accounting for certain hybrid financial instruments (ASC 815). At adoption, the Company
elected to fair value certain existing investments in preferred stock and debt securities with call
or conversion features (hybrid securities) and future changes in the fair value of these
investments will be reported in net income. As a result, the Company reclassified $12 million
after-tax of unrealized appreciation from the opening balance of accumulated other comprehensive
loss to retained earnings with no net change to total shareholders’ equity. See Note 12(A) for a
review of instruments that the Company has elected to fair value.
105
C. Investments
The Company’s accounting policies for investment assets are discussed below:
Fixed maturities and equity securities. Fixed maturities include bonds, mortgage and other
asset-backed securities and preferred stocks redeemable by the investor. Equity securities include
common stocks and preferred stocks that are non-redeemable or redeemable only by the issuer. These
investments are primarily classified as available for sale and are carried at fair value with
changes in fair value recorded in accumulated other comprehensive income (loss) within
shareholders’ equity. Beginning April 1, 2009, when the Company determines it does not expect to
recover the amortized cost basis of fixed maturities with declines in fair value (even if it does
not intend to sell or will not be required to sell these fixed maturities), the credit portion of
the impairment loss is recognized in net income and the non-credit portion, if any, is recognized
in a separate component of shareholders’ equity. The credit portion is the difference between the
amortized cost basis of the fixed maturity and the net present value of its projected future cash
flows. Projected future cash flows are based on qualitative and quantitative factors, including
probability of default, and the estimated timing and amount of recovery. For mortgage and
asset-backed securities, estimated future cash flows are based on assumptions about the collateral
attributes including prepayment speeds, default rates and changes in value. Equity securities and,
prior to April 1, 2009, fixed maturities were considered impaired, and their cost basis was written
down to fair value through earnings, when management did not expect to recover the amortized cost,
or if the Company could not demonstrate its intent or ability to hold the investment until full
recovery. Fixed maturities and equity securities also include certain trading and hybrid
securities carried at fair value with changes in fair value reported in realized investment gains
and losses, beginning after the implementation of updated guidance on certain hybrid financial
instruments on January 1, 2007. The Company elected fair value accounting for certain hybrid
securities to simplify accounting and mitigate volatility in results of operations and financial
condition.
Commercial mortgage loans. Mortgage loans held by the Company are made exclusively to commercial
borrowers, therefore there is no exposure to either prime or sub-prime residential mortgages.
Generally, commercial mortgage loans are carried at unpaid principal balances and are issued at a
fixed rate of interest. Commercial mortgage loans held for sale are carried at the lower of unpaid
principal balance or fair value with any resulting valuation allowance reported in realized
investment gains and losses. Commercial mortgage loans are considered impaired when it is probable
that the Company will not collect amounts due according to the terms of the original loan
agreement. Impaired loans are carried at the lower of unpaid principal or fair value of the
underlying collateral. Valuation reserves reflect any changes in fair value. The Company
estimates the fair value of the underlying collateral using internal valuations generally based on
discounted cash flow analyses.
Policy loans. Policy loans are carried at unpaid principal balances.
Real estate. Investment real estate can be “held and used” or “held for sale”. The Company
accounts for real estate as follows:
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Real estate “held and used” is expected to be held longer than one year and includes real
estate acquired through the foreclosure of commercial mortgage loans. The Company carries
real estate held and used at depreciated cost less any write-downs to fair value due to
impairment and assesses impairment when cash flows indicate that the carrying value may not be
recoverable. Depreciation is generally calculated using the straight-line method based on the
estimated useful life of the particular real estate asset. |
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Real estate is “held for sale” when a buyer’s investigation is completed, a deposit has
been received and the sale is expected to be completed within the next year. Real estate held
for sale is carried at the lower of carrying value or current fair value, less estimated costs
to sell, and is not depreciated. Valuation reserves reflect any changes in fair value. |
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The Company uses several methods to determine the fair value of real estate, but relies
primarily on discounted cash flow analyses and, in some cases, third-party appraisals. |
At the time of foreclosure, properties are reclassified from commercial mortgage loans to real
estate. The Company rehabilitates, re-leases and sells foreclosed properties. This process
usually takes from two to four years unless management considers a near-term sale preferable.
Other long-term investments. Other long-term investments include investments in unconsolidated
entities. These entities include certain limited partnerships and limited liability companies
holding real estate, securities or loans. These investments are carried at cost plus the Company’s
ownership percentage of reported income or loss in cases where the Company has significant
influence, otherwise the investment is carried at cost. Income from certain entities is reported
on a one quarter lag depending on when their financial information is received. Also included in
other long-term investments are loans to unconsolidated real estate entities secured by the equity
interests of these real estate entities, which are carried at unpaid principal balances (mezzanine
loans). These other long-term investments are considered impaired, and written down to their fair
value, when cash flows indicate that the carrying value may not be recoverable. Fair value is
generally determined based on a discounted cash flow analysis.
106
Additionally, other long-term investments include interest rate and foreign currency swaps carried
at fair value. See Note 13 for information on the Company’s accounting policies for these
derivative financial instruments.
Short-term investments. Investments with maturities of less than one year from time of purchase are
classified as short-term, available for sale and carried at fair value, which approximates cost.
Derivative financial instruments. Note 13 discusses the Company’s accounting policies for
derivative financial instruments.
Net investment income. When interest and principal payments on investments are current, the
Company recognizes interest income when it is earned. The Company stops recognizing interest
income when interest payments are delinquent or when certain terms (interest rate or maturity date)
of the investment have been restructured. Net investment income on these investments is only
recognized when interest payments are actually received. Interest and dividends earned on trading
and hybrid securities are included in net investment income.
Investment gains and losses. Realized investment gains and losses result from sales, investment
asset write-downs, changes in the fair values of trading and hybrid securities and certain
derivatives and changes in valuation reserves, based on specifically identified assets. Realized
investment gains and losses on the disposition of certain directly owned real estate investments
are eliminated from ongoing operations and reported in discontinued operations when the operations
and cash flows of the underlying assets are clearly distinguishable and the Company has no
significant continuing involvement in their operations.
Unrealized gains and losses on fixed maturities and equity securities carried at fair value
(excluding trading and hybrid securities) and certain derivatives are included in accumulated other
comprehensive income (loss), net of:
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amounts required to adjust future policy benefits for the run-off settlement annuity
business; and |
D. Cash and Cash Equivalents
Cash equivalents consist of short-term investments with maturities of three months or less from the
time of purchase that are classified as held to maturity and carried at amortized cost. The
Company reclassifies cash overdraft positions to “accounts payable, accrued expenses and other
liabilities” when the legal right of offset does not exist.
E. Premiums, Accounts and Notes Receivable and Reinsurance Recoverables
Premiums, accounts and notes receivable are reported net of an allowance for doubtful accounts of
$43 million as of December 31, 2009 and $50 million as of December 31, 2008. Reinsurance
recoverables are estimates of amounts that the Company will receive from reinsurers and are
recorded net of an allowance for unrecoverable reinsurance of $15 million as of December 31, 2009
and $23 million as of December 31, 2008. The Company estimates these allowances for doubtful
accounts for premiums, accounts and notes receivable, as well as for reinsurance recoverables,
using management’s best estimate of collectibility, taking into consideration the aging of
receivables, historical collection patterns and other economic factors.
F. Deferred Policy Acquisition Costs
Acquisition costs include sales compensation, commissions, direct response marketing,
telemarketing, premium taxes and other costs that the Company incurs in connection with new and
renewal business. Depending on the product line they relate to, the Company records acquisition
costs in different ways. Acquisition costs for:
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Universal life products are deferred and amortized in proportion to the present value of
total estimated gross profits over the expected lives of the contracts. |
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Annuity and other individual life insurance (primarily international) and group health
indemnity products are deferred and amortized, generally in proportion to the ratio of
periodic revenue to the estimated total revenues over the contract periods. |
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Other products are expensed as incurred. |
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For universal life, annuity and other individual products, management estimates the present value
of future revenues less expected payments. For group health indemnity products, management
estimates the sum of future expected claims and related costs less unearned premiums and
anticipated net investment income. If management’s estimates are less than the deferred costs, the
Company reduces deferred policy acquisition costs and records an expense. Anticipated investment
income is considered in the calculation of premium deficiency losses for short-duration contracts.
The Company recorded in other operating expenses amortization for policy acquisition costs of $299
million in 2009, $314 million in 2008 and $242 million in 2007. There are no deferred policy
acquisition costs attributable to the sold individual life insurance and annuity and retirement
businesses or the run-off reinsurance operations.
G. Property and Equipment
Property and equipment is carried at cost less accumulated depreciation. When applicable, cost
includes interest, real estate taxes and other costs incurred during construction. Also included
in this category is internal-use software that is acquired, developed or modified solely to meet
the Company’s internal needs, with no plan to market externally. Costs directly related to
acquiring, developing or modifying internal-use software are capitalized.
The Company calculates depreciation and amortization principally using the straight-line method
based on the estimated useful life of each asset as follows: buildings and improvements, 1 year to
40 years; and equipment and software, 1 year to 10 years. See Note 9 for additional information.
H. Goodwill
Goodwill represents the excess of the cost of businesses acquired over the fair value of their net
assets. Substantially all goodwill relates to the Health Care segment. The Company evaluates
goodwill for impairment annually during the third quarter at the reporting unit level, based on
discounted cash flow analyses and writes it down through results of operations if impaired.
Consistent with prior years, the Company’s evaluations used the best information available at 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 Company’s weighted average cost of capital, consistent with that used for investment
decisions considering the specific and detailed operating plans and strategies within the Health
Care segment. The resulting discounted cash flow analyses indicated an estimated fair value for the
reporting units of the Health Care segment exceeding their carrying values, including goodwill and
other intangibles. Finally, the Company determined that no events or circumstances occurred
subsequent to the annual evaluation of goodwill that would more likely than not reduce the fair
value of the reporting units of the Health Care segment below their carrying values. See Note 9 for
additional information.
I. Other Assets, including Other Intangibles
Other assets consist of various insurance-related assets and the gain position of certain
derivatives, primarily GMIB assets. The Company’s other intangible assets include purchased
customer and producer relationships, provider networks, and trademarks. The Company amortizes
other intangibles on an accelerated or straight-line basis over periods from 1 to 30 years.
Management revises amortization periods if it believes there has been a change in the length of
time that an intangible asset will continue to have value. Costs incurred to renew or extend the
terms of these intangible assets are generally expensed as incurred. See Note 9 for additional
information.
J. Separate Account Assets and Liabilities
Separate account assets and liabilities are contractholder funds maintained in accounts with
specific investment objectives. The assets of these accounts are legally segregated and are not
subject to claims that arise out of any of the Company’s other businesses. These separate account
assets are carried at fair value with equal amounts for related separate account liabilities. The
investment income, gains and losses of these accounts generally accrue to the contractholders and
are not included in the Company’s revenues and expenses. Fees earned for asset management services
are reported in premiums and fees.
K. Contractholder Deposit Funds
Liabilities for contractholder deposit funds include deposits received from customers for
investment-related and universal life products and investment earnings on their fund balances.
These liabilities are adjusted to reflect administrative charges and, for universal life fund
balances, mortality charges.
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L. Future Policy Benefits
Future policy benefits are liabilities for the present value of estimated future obligations under
long-term life and supplemental health insurance policies and annuity products currently in force.
These obligations are estimated using actuarial methods and primarily consist of reserves for
annuity contracts, life insurance benefits, guaranteed minimum death benefit (“GMDB”) contracts and
certain life, accident and health insurance products in our International operations.
Obligations for annuities represent specified periodic benefits to be 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. Management
estimates these obligations based on assumptions as to premiums, interest rates, mortality and
surrenders, allowing for adverse deviation. Mortality, morbidity, and surrender assumptions are
based on either the Company’s own experience or actuarial tables. Interest rate assumptions are
based on management’s judgment considering the Company’s experience and future expectations, and
range from 1.5% to 10%. Obligations for the run-off settlement annuity business include
adjustments for investment returns consistent with requirements of GAAP when a premium deficiency
exists.
Certain reinsurance contracts contain guaranteed minimum death benefits under variable annuities
issued by other insurance companies. These obligations represent the guaranteed death benefit in
excess of the contractholder’s account values (based on underlying equity and bond mutual fund
investments). These obligations are estimated based on assumptions regarding lapse, partial
surrenders, mortality, interest rates (mean investment performance and discount rate), market
volatility as well as investment returns and premiums, consistent with the requirements of GAAP
when a premium deficiency exists. Lapse, partial surrenders, mortality, interest rates and
volatility are based on management’s judgment considering the Company’s experience and future
expectations. The results of futures contracts used in the GMDB equity hedge program are reflected
in the liability calculation as a component of investment returns. See also Note 7 for additional
information.
M. Unpaid Claims and Claims Expenses
Liabilities for unpaid claims and claim expenses are estimates of payments to be made under
insurance coverages (primarily long-term disability, workers’ compensation and life and health) for
reported claims and for losses incurred but not yet reported.
The Company develops these estimates for losses incurred but not yet reported using actuarial
principles and assumptions based on historical and projected claim incidence patterns, claim size
and the length of time over which payments are expected to be made. The Company consistently
applies these actuarial principles and assumptions each reporting period, with consideration given
to the variability of these factors, and recognizes the actuarial best estimate of the ultimate
liability within a level of confidence, as required by actuarial standards of practice, which
require that the liabilities be adequate under moderately adverse conditions.
The Company’s estimate of the liability for disability claims reported but not yet paid is
primarily calculated as the present value of expected benefit payments to be made over the
estimated time period that a policyholder remains disabled. The Company estimates the expected
time period that a policyholder may be disabled by analyzing the rate at which an open claim is
expected to close (claim resolution rate). Claim resolution rates may vary based upon the length
of time a policyholder is disabled, the covered benefit period, cause of disability, benefit design
and the policyholder’s age, gender and income level. The Company uses historical resolution rates
combined with an analysis of current trends and operational factors to develop current estimates of
resolution rates. The reserve for the gross monthly disability benefits due to a policyholder is
reduced (offset) by the income that the policyholder receives under other benefit programs, such as
Social Security Disability Income, worker’s compensation, statutory disability or other group
disability benefit plans. For awards of such offsets that have not been finalized, the Company
estimates the probability and amount of the offset based on the Company’s experience over the past
three to five years.
The Company discounts certain claim liabilities related to group long-term disability and workers’
compensation because benefit payments may be made over an extended period. Discount rate
assumptions are based on projected investment returns for the asset portfolios that support these
liabilities and range from 3.5% to 7.3%. When estimates change, the Company records the adjustment
in benefits and expenses in the period in which the change in estimate is identified. Discounted
liabilities associated with the long-term disability and certain workers’ compensation businesses
were $3.1 billion at December 31, 2009 and $3.2 billion at December 31, 2008.
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N. Health Care Medical Claims Payable
Medical claims payable for the Health Care segment include both reported claims and estimates for
losses incurred but not yet reported.
The Company develops these estimates using actuarial principles and assumptions based on historical
and projected claim payment patterns, medical cost trends, which are impacted by the utilization of
medical services and the related costs of the services provided (unit costs), benefit design,
seasonality, and other relevant operational factors. The Company consistently applies these
actuarial principles and assumptions each reporting period, with consideration given to the
variability of these factors, and recognizes the actuarial best estimate of the ultimate liability
within a level of confidence, as required by actuarial standards of practice, which require that
the liabilities be adequate under moderately adverse conditions.
The Company’s estimate of the liability for medical claims incurred but not yet reported is
primarily calculated using historical claim payment patterns and expected medical cost trends. The
Company analyzes the historical claim payment patterns by comparing the dates claims were incurred,
generally the dates services were provided, to the dates claims were paid to determine “completion
factors”, which are a measure of the time to process claims. A completion factor is calculated for
each month of incurred claims. The Company uses historical completion factors combined with an
analysis of current trends and operational factors to develop current estimates of completion
factors. The Company estimates the ultimate liability for claims incurred in each month by
applying the current estimates of completion factors to the current paid claims data. The
difference between this estimate of the ultimate liability and the current paid claims data is the
estimate of the remaining claims to be paid for each incurral month. These monthly estimates are
aggregated and included in the Company’s Health Care medical claims payable at the end of each
reporting period. Completion factors are used to estimate the Health Care medical claims payable
for all months where claims have not been completely resolved and paid, except for the most recent
month as described below.
Completion factors are impacted by several key items including changes in the level of claims
processed electronically versus manually (auto-adjudication), changes in provider claims submission
rates, membership changes and the mix of products. As noted, the Company uses historical
completion factors combined with an analysis of current trends and operational factors to develop
current estimates of completion factors. This approach implicitly assumes that historical
completion rates will be a useful indicator for the current period. It is possible that the actual
completion rates for the current period will develop differently from historical patterns, which
could have a material impact on the Company’s medical claims payable and net income.
Claims incurred in the most recent month have limited paid claims data, since a large portion of
health care claims are not submitted to the Company for payment in the month services have been
provided. This makes the completion factor approach less reliable for claims incurred in the most
recent month. As a result, in any reporting period, for the estimates of the ultimate claims
incurred in the most recent month, the Company primarily relies on medical cost trend analysis,
which reflects expected claim payment patterns and other relevant operational considerations.
Medical cost trend is impacted by several key factors including medical service utilization and
unit costs and the Company’s ability to manage these factors through benefit design, underwriting,
provider contracting and the Company’s medical management initiatives. These factors are affected
by changes in the level and mix of medical benefits offered, including inpatient, outpatient and
pharmacy, the impact of copays and deductibles, changes in provider practices and changes in
consumer demographics and consumption behavior.
Because historical trend factors are often not representative of current claim trends, the trend
experienced for the most recent history along with an analysis of emerging trends, have been taken
into consideration in establishing the liability for Health Care medical claims payable at December
31, 2009 and 2008. It is possible that the actual medical trend for the current period will
develop differently from that expected, which could have a material impact on the Company’s medical
claims payable and net income.
For each reporting period, the Company evaluates key assumptions by comparing the assumptions used
in establishing the medical claims payable to actual experience. When actual experience differs
from the assumptions used in establishing the liability, medical claims payable are increased or
decreased through current period net income. Additionally, the Company evaluates expected future
developments and emerging trends which may impact key assumptions. The estimation process involves
considerable judgment, reflecting the variability inherent in forecasting future claim payments.
The adequacy of these estimates is highly sensitive to changes in the Company’s key assumptions,
specifically completion factors, which are impacted by actual or expected changes in the submission
and payment of medical claims, and medical cost trends, which are impacted by actual or expected
changes in the utilization of medical services and unit costs.
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O. Unearned Premiums and Fees
Premiums for life, accident and health insurance are recognized as revenue on a pro rata basis over
the contract period. Fees for mortality and contract administration of universal life products are
recognized ratably over the coverage period. The unrecognized portion of these amounts is recorded
as unearned premiums and fees.
P. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consist principally of pension, other
postretirement and postemployment benefits and various insurance-related liabilities, including
amounts related to reinsurance contracts and insurance-related assessments that management can
reasonably estimate. Accounts payable, accrued expenses and other liabilities also include certain
overdraft positions and the loss position of certain derivatives, primarily for GMIB contracts (see
Note 13). Legal costs to defend the Company’s litigation and arbitration matters are expensed when
incurred in cases for which the Company cannot reasonably estimate the ultimate cost to defend. In
cases for which the Company can reasonably estimate the cost to defend, these costs are recognized
when the claim is reported.
Q. Translation of Foreign Currencies
The Company generally conducts its international business through foreign operating entities that
maintain assets and liabilities in local currencies, which are generally their functional
currencies. The Company uses exchange rates as of the balance sheet date to translate assets and
liabilities into U.S. dollars. Translation gains or losses on functional currencies, net of
applicable taxes, are recorded in accumulated other comprehensive income (loss). The Company uses
average monthly exchange rates during the year to translate revenues and expenses into U.S.
dollars.
R. Premiums and Fees, Revenues and Related Expenses
Premiums for life, accident and health insurance and managed care coverages are recognized as
revenue on a pro rata basis over the contract period. Benefits and expenses are recognized when
incurred.
Premiums for individual life insurance and individual and group annuity products, excluding
universal life and investment-related products, are recognized as revenue when due. Benefits and
expenses are matched with premiums.
Revenue for investment-related products is recognized as follows:
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Net investment income on assets supporting investment-related products is recognized as
earned. |
| • |
|
Contract fees, which are based upon related administrative expenses, are recognized in
premiums and fees as they are earned ratably over the contract period. |
Benefits and expenses for investment-related products consist primarily of income credited to
policyholders in accordance with contract provisions.
Revenue for universal life products is recognized as follows:
| • |
|
Net investment income on assets supporting universal life products is recognized as earned. |
| • |
|
Fees for mortality and surrender charges are recognized as assessed, which is as earned. |
| • |
|
Administration fees are recognized as services are provided. |
Benefits and expenses for universal life products consist of benefit claims in excess of
policyholder account balances. Expenses are recognized when claims are submitted, and income is
credited in accordance with contract provisions.
Contract fees and expenses for administrative services only programs and pharmacy programs and
services are recognized as services are provided. Mail order pharmacy revenues and cost of goods
sold are recognized as each prescription is shipped.
111
S. Stock Compensation
The Company records compensation expense for stock awards and options over their vesting periods
based on the estimated fair value of the stock options, which is calculated using an option-pricing
model. Compensation expense is recorded for restricted stock grants and units over their vesting
periods based on fair value, which is equal to the market price of the Company’s common stock on
the date of grant.
T. Participating Business
The Company’s participating life insurance policies entitle policyholders to earn dividends that
represent a portion of the earnings of the Company’s life insurance subsidiaries. Participating
insurance accounted for approximately 1% of the Company’s total life insurance in force at the end
of 2009 and approximately 2% of the Company’s total life insurance in force at the end of 2008 and
2007.
U. Income Taxes
The Company and its domestic subsidiaries file a consolidated United States federal income tax
return. The Company’s foreign subsidiaries file tax returns in accordance with foreign law. U.S.
taxation of these foreign subsidiaries may differ in timing and amount from taxation under foreign
laws. Reportable amounts, including credits for foreign tax paid by these subsidiaries, are
reflected in the U.S. tax return of the affiliates’ domestic parent.
The Company recognizes deferred income taxes when the financial statement and tax-based carrying
values of assets and liabilities are different and recognizes deferred income tax liabilities on
the unremitted earnings of foreign subsidiaries that are not permanently invested overseas. For
subsidiaries whose earnings are considered permanently invested overseas, income taxes are accrued
at the local foreign tax rate. The Company establishes valuation allowances against deferred tax
assets if it is more likely than not that the deferred tax asset will not be realized. The need
for a valuation allowance is determined based on the evaluation of various factors, including
expectations of future earnings and management’s judgment. Note 19 contains detailed information
about the Company’s income taxes.
The Company recognizes interim period income taxes by estimating an annual effective tax rate and
applying it to year-to-date results. The estimated annual effective tax rate is periodically
updated throughout the year based on actual results to date and an updated projection of full year
income. Although the effective tax rate approach is generally used for interim periods, taxes on
significant, unusual and infrequent items are recognized at the statutory tax rate entirely in the
period the amounts are realized.
Note 3 — Acquisitions and Dispositions
The Company may from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
A. Great-West Healthcare Acquisition
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc.
(“Great-West Healthcare” or the “acquired business”) through 100% indemnity reinsurance agreements
and the acquisition of certain affiliates and other assets and liabilities of Great-West
Healthcare. The purchase price of approximately $1.5 billion consisted of a payment to the seller
of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities
under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily
sells medical plans on a self-funded basis with stop loss coverage to select and regional employer
groups. Great-West Healthcare’s offerings also include the following specialty products: stop
loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death
and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed
through a combination of cash and the issuance of both short and long-term debt.
In accordance with the FASB’s guidance on accounting for business combinations, the Company
completed its allocation of the total purchase price to the tangible and intangible net assets
acquired based on management’s estimates of their fair values. Accordingly, approximately $290
million was allocated to intangible assets, primarily customer relationships and internal-use
software. The weighted average amortization period was 9 years for customer relationships and 6
years for internal-use software. The remainder, net of tangible net assets acquired, was goodwill
which approximated $1.1 billion and was allocated entirely to the Health Care segment.
Substantially all of the goodwill is tax deductible and is being amortized over 15 years for
federal income tax purposes.
112
The condensed balance sheet of Great-West Healthcare at the acquisition date was as follows:
| |
|
|
|
|
| (In millions) |
|
|
|
|
Investments |
|
$ |
147 |
|
Cash and cash equivalents |
|
|
55 |
|
Premiums, accounts and notes receivable |
|
|
226 |
|
Reinsurance recoverables |
|
|
12 |
|
Property and equipment (primarily capitalized software) |
|
|
142 |
|
Deferred income taxes |
|
|
7 |
|
Goodwill |
|
|
1,095 |
|
Other assets, including other intangibles |
|
|
151 |
|
|
|
|
|
Total assets acquired |
|
|
1,835 |
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
|
78 |
|
Unpaid claims and claim expenses |
|
|
15 |
|
Health Care medical claims payable |
|
|
90 |
|
Accounts payable, accrued expenses and other liabilities (1) |
|
|
278 |
|
|
|
|
|
Total liabilities acquired |
|
|
461 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
1,374 |
|
|
|
|
|
| |
|
|
| (1) |
|
Includes $18 million of liabilities related to integration activities: severance of $14
million and consolidation of facilities of $4 million. |
The results of Great-West Healthcare have been included in the Company’s Consolidated
Financial Statements from the date of acquisition.
The following table presents selected unaudited pro forma information for the Company assuming the
acquisition had occurred as of January 1, 2007. The 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.