ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Index
Introduction 45
Consolidated Results of Operations 50
Critical Accounting Estimates 53
Segment Reporting 54
Health Care 54
International 58
Disability and Life 59
Run-off Reinsurance 61
Other Operations 63
Corporate 64
Liquidity and Capital Resources 64
Investment Assets 68
Market Risk 72
Cautionary Statement 73
Introduction
--------------------------------------------------------------------------------
In this filing and in other marketplace communications, the Company makes
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 2012"). Actual results may differ
materially 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 73. The
forward-looking statements contained in this filing represent management's
current estimate as of the date of this filing. Management does not assume any
obligation to update these estimates.
The following discussion addresses the financial condition of the Company as of
June 30, 2012, compared with December 31, 2011, and its results of operations
for the three months and six months ended June 30, 2012 compared with the same
periods last year. This discussion should be read in conjunction with the MD&A
included in the Company's 2011 Form 10-K, to which the reader is directed for
additional information.
The Company is a global health service organization with insurance subsidiaries
that are major providers of medical, dental, disability, life and accident
insurance and related products and services. In the U.S., the majority of these
products and services are offered through employers and other groups
(e.g. unions and associations) and in selected international markets, Cigna
offers supplemental health, life and accident insurance products and
international health care coverage to businesses, governmental and
non-governmental organizations and individuals. In addition to its ongoing
operations described above, the Company also has certain run-off operations,
including a Run-off Reinsurance segment.
The preparation of interim consolidated financial statements necessarily relies
heavily on estimates. This and certain other factors, such as the seasonal
nature of portions of the health care and related benefits business, as well as
competitive and other market conditions, call for caution in estimating full
year results based on interim results of operations.
Unless otherwise indicated, financial information in the MD&A is presented in
accordance with GAAP. As discussed in Note 2 to the Consolidated Financial
Statements, in 2012, the Company adopted, as required, amended accounting
guidance for deferred acquisition costs by selecting retrospective adjustment of
prior periods. Summarized below are the impacts of the new guidance on
previously reported amounts. This adoption had no impact on the underlying
economic value or cash flows of the Company's businesses, nor did it impact the
Company's liquidity or the statutory surplus of its insurance subsidiaries.
CIGNA CORPORATION - Form 10-Q 45
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Consolidated Financial Summary
Three Months Ended June 30, 2011
Effect of
As amended As
previously accounting retrospectively
(In millions) reported guidance adjusted
Revenues, excluding other revenue $ 5,436 $ - $
5,436
Other revenues 73 (2) 71
Total revenues 5,509 (2) 5,507
Benefits and expenses 4,893 22 4,915
Income before taxes 616 (24) 592
Income taxes 208 (7) 201
Net income 408 (17) 391
Less: net income attributable to
noncontrolling interest - - -
Shareholders' net income 408 (17) 391
Less: realized investment gains, net of
taxes 11 - 11
SEGMENT EARNINGS 397 (17) 380
Less: adjustments to reconcile to
adjusted income from operations
Results of GMIB business (after-tax) (21) -
(21)
Special item, after-tax
Completion of IRS examination (See
Note 15 to the Consolidated Financial
Statements) - - -
ADJUSTED INCOME FROM OPERATIONS $ 418 $ (17) $ 401
International Financial Summary
Three Months Ended June 30, 2011
Effect of
As amended As
previously accounting retrospectively
(In millions) reported guidance adjusted
Revenues, excluding other revenue $ 761 $ - $
761
Other revenues 5 (2) 3
Total revenues 766 (2) 764
Benefits and expenses 660 22 682
Income before taxes 106 (24) 82
Income taxes 32 (7) 25
Income attributable to noncontrolling
interest - - -
SEGMENT EARNINGS $ 74 $ (17) $ 57
46 CIGNA CORPORATION - Form 10-Q
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Consolidated Financial Summary
Six Months Ended June 30, 2011
Effect of
As amended As
previously accounting retrospectively
(In millions) reported guidance adjusted
Revenues, excluding other revenue $ 10,813 $ - $
10,813
Other revenues 109 (4) 105
Total revenues 10,922 (4) 10,918
Benefits and expenses 9,706 41 9,747
Income before taxes 1,216 (45) 1,171
Income taxes 378 (12) 366
Net income 838 (33) 805
Less: net income attributable to
noncontrolling interest 1 - 1
Shareholders' net income 837 (33) 804
Less: realized investment gains, net of
taxes 28 - 28
Segment earnings 809 (33) 776
Less: adjustments to reconcile to
adjusted income from operations
Results of GMIB business (after-tax) (8) -
(8)
Special item, after-tax
Completion of IRS examination (See
Note 15 to the Consolidated Financial
Statements) 24 -
24
ADJUSTED INCOME FROM OPERATIONS $ 793 $ (33) $ 760
International Financial Summary
Six Months Ended June 30, 2011
Effect of
amended As
As previously accounting retrospectively
(In millions) reported guidance adjusted
Revenues, excluding other revenue $ 1,482 $ - $
1,482
Other revenues 13 (4) 9
Total revenues 1,495 (4) 1,491
Benefits and expenses 1,281 41 1,322
Income before taxes 214 (45) 169
Income taxes 62 (12) 50
Income attributable to
noncontrolling interest 1 - 1
SEGMENT EARNINGS $ 151 $ (33) $ 118
Key Consolidated Financial Data
As explained previously in the introduction section of this MD&A and in Note 2
to the Consolidated Financial Statements, the Company adopted, as required,
amended accounting guidance for deferred policy acquisition costs by selecting
retrospective adjustment of prior periods. See the tables above and Note 2 to
the Consolidated Financial Statements for the effect of this new guidance on
previously reported amounts.
CIGNA CORPORATION - Form 10-Q 47
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
As discussed in Note 3 to the Consolidated Financial Statements, on January 31,
2012, the Company acquired HealthSpring, Inc. The results of HealthSpring are
included in the data below from the date of acquisition.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 2012 2011 2012 2011
Consolidated Total Revenues $ 7,457 $ 5,507 $
14,245 $ 10,918
Consolidated Operating Revenues (1) $ 7,430$ 5,487$ 14,300$ 10,912
Medical customers (in thousands) (2)
13,843 12,620
Shareholders' net income $ 380 $ 391 $
751 $ 804
Adjusted income from operations (3) $ 434 $ 401$ 793$ 760
Cash flows from operating activities $ 936 $ 528 $ 1,877 $ 579
Shareholders' equity $ 9,022 $ 7,216
(1)
For a definition of consolidated operating revenues, see the "Consolidated
Results of Operations" section of the MD&A beginning on page 50.
(2)
Includes medical customers of the Company's Health Care segment as well as the
International health care business, including global health benefits.
(3)
For a definition of adjusted income from operations, see the "Consolidated
Results of Operations" section of this MD&A beginning on page 50.
Results of Operations
•
Consolidated Revenues and Consolidated Operating Revenues increased 35% for the
three months ended June 30, 2012, primarily reflecting the acquisition of
HealthSpring as well as solid growth in each of the Company's ongoing
businesses.
•
Medical customers increased 10% primarily attributable to growth in
strategically targeted domestic and international markets as well as the
acquisition of HealthSpring.
•
Shareholders' net income decreased 3% for the three months and 7% for the six
months ended June 30, 2012. The decrease for the quarter primarily reflects
higher GMIB losses and lower realized investment results, mostly offset by an
increase in adjusted income from operations as discussed below. For the six
months, the decline is primarily due to the 2012 special items related to the
HealthSpring acquisition and to a litigation matter as well as the absence of
the special item reported in the first quarter 2011 related to the settlement of
the 2007 and 2008 IRS audit. These effects were partially offset by higher
adjusted income from operations as discussed below.
•
Adjusted income from operations increased 8% for the three months ended June 30,
2012 and 4% for the six months ended June 30, 2012, largely attributable to
earnings growth from the ongoing business segments partially offset by the
financing costs of the HealthSpring transaction (reported in Corporate) and
charges in the GMDB business resulting from assumption updates.
•
Cash flows from operating activities were significantly higher for the six
months ended June 30, 2012, primarily attributable to the timing of receipts for
Medicare Advantage and Medicare Part D programs, strong earnings and business
growth in the Company's ongoing business segments, and lower tax payments.
Liquidity and Financial Condition
During the six months ended June 30, 2012, the Company entered into several
transactions as follows:
•
acquired HealthSpring for approximately $3.8 billion, using funds available;
•
repaid HealthSpring debt of $326 million as required; and
•
contributed $112 million to the Company's pension plans.
Cash at the parent company as of June 30, 2012 was approximately $650 million.
Shareholders' equity increased substantially since the second quarter of 2011,
reflecting strong earnings in the second half of 2011 and the first half of 2012
and net proceeds of $629 million from the fourth quarter 2011 equity offering of
15.2 million shares used to finance the HealthSpring acquisition.
Business Strategy
For information on the Company's business strategy, see the strategy section of
the Company's 2011 Form 10-K beginning on page 2. The Company's ability to
increase revenue, shareholders' net income and operating cash flows from ongoing
operations is directly related to progress in executing its strategy as well as
other key factors, including the Company's ability to:
•
profitably price products and services at competitive levels that reflect
emerging experience;
•
effectively underwrite its product offerings and manage risk;
•
cross sell its various health and related benefit products;
48 CIGNA CORPORATION - Form 10-Q
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
•
invest available cash at attractive rates of return for appropriate durations;
and
•
effectively deploy capital.
In addition to the Company-specific factors cited above, 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;
•
employment levels;
•
the tort liability system;
•
developments in the political environment both domestically and internationally,
including U.S. Health Care Reform;
•
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, both in its ongoing and run-off operations.
Run-off Operations
The Company's run-off reinsurance operations have significant exposures,
primarily for its guaranteed minimum death benefits ("GMDB", also known as
"VADBe") and guaranteed minimum income benefits ("GMIB") products. These
products are influenced significantly by changes in equity markets and interest
rates. As part of its strategy to effectively manage these exposures, the
Company operates an equity hedge program to substantially reduce the impact of
equity market movements on the liability for the GMDB business. In 2011, the
Company implemented a hedge designed to offset a portion of the equity market
risk for GMIB contracts as well as hedges designed to offset a portion of the
interest rate risk related to GMDB and GMIB. In the second quarter of 2012, the
equity hedge program for GMIB was expanded. The Company actively monitors the
performance of the hedging programs, and will continue to evaluate further
adjustments to the hedging programs. The Company also studies policyholder
behavior for the GMDB and GMIB products, including lapse, mortality, annuity
election rates and future partial surrender elections and adjusts future
expectations based on the results of those studies.
Health Care Reform
In the first quarter of 2010, the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act ("Health Care Reform") were
signed into law. Certain of the law's provisions that affected the Company
became effective during 2010 and 2011 and others will take effect from 2012 to
2018. The Company has implemented the provisions of Health Care Reform that are
currently in effect (including the commercial minimum medical loss ratio
requirements) and continues its implementation planning for those provisions
that must be adopted in the future. Management is currently unable to estimate
the full impact of Health Care Reform on the Company's future results of
operations, and its financial condition and liquidity due to uncertainties
related to interpretation, implementation and timing of its many provisions as
well as the potential for the law to be repealed or amended. It is possible;
however, that certain provisions of Health Care Reform could have a material
impact on future results of operations.
Certain fees, including the annual health insurer fee, become effective in 2013
and 2014 for Cigna and others to help fund the additional insurance benefits and
coverages provided by this legislation. Payment of these fees will result in
charges to the Company's financial results in future periods. In addition,
because these fees will generally not be tax deductible, the Company's effective
tax rate is expected to be adversely impacted in future periods. The amount of
the fees is expected to be material, although the Company is unable to estimate
the impact of these fees on shareholders' net income and the effective tax rate
because guidance for these calculations has not been finalized.
Health Care Reform also impacts Cigna'sMedicare Advantage and Medicare Part D
prescription drug plan businesses acquired with HealthSpring in a variety of
additional ways, including reduced Medicare premium rates (which began with the
2011 contract year), mandated minimum reductions to risk scores (beginning in
2014), transition of Medicare Advantage "benchmark" rates to Medicare
fee-for-service parity, reduced enrollment periods and limitations on
disenrollment, providing "quality bonuses" for Medicare Advantage plans with a
rating of four or five stars from CMS, and mandated consumer discounts on brand
name and generic prescription drugs for Medicare Part D plan participants in the
coverage gap. In addition, effective in 2014, Medicare Advantage plans will be
required to maintain a minimum medical loss ratio of 85% under rules that have
not yet been issued. Funding for Medicare Advantage plans has been and may
continue to be altered by federal legislation.
On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of most
parts of Health Care Reform, including the obligation to purchase health care
coverage (the "individual mandate"). Management continues to closely monitor the
implementation of Health Care Reform and is actively engaged with regulators and
policymakers on the conversion of legislation to regulation. In addition,
management is implementing
CIGNA CORPORATION - Form 10-Q 49
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
the necessary capabilities to ensure that the Company is compliant with the law
and assessing potential opportunities arising from Health Care Reform. These
opportunities include the continued evolution and innovation of our broad health
and wellness portfolio to improve the health and productivity of our clients and
customers as well as the expansion of our physician partnership capabilities to
improve the quality of care and service experience for our customers while
lowering costs and improving overall value.
Acquisitions
In line with its growth strategy, the Company has strengthened its market
position through the following acquisition transactions. See Note 3 for
additional information.
Joint Venture Agreement with Finansbank
On July 12, 2012, the Company entered into a joint venture partnership to market
life and pension products in Turkey with a Turkish retail bank, Finansbank, for
a purchase price of approximately $100 million. See Note 3 to the Consolidated
Financial Statements for additional information.
Acquisition of Great American Supplemental Benefits Group
On May 10, 2012, the Company entered into a definitive agreement to acquire
Great American Supplemental Benefits Group for a purchase price of approximately
$300 million. See Note 3 to the Consolidated Financial Statements for additional
information.
Acquisition of HealthSpring, Inc.
On January 31, 2012, the Company acquired the outstanding shares of
HealthSpring, Inc. ("HealthSpring") for $55 per share in cash and Cigna stock
awards, representing an estimated cost of approximately $3.8 billion. See Note 3
to the Consolidated Financial Statements for additional information.
Acquisition of FirstAssist
On November 30, 2011, the Company acquired FirstAssist Group Holdings Limited
("FirstAssist") for approximately $115 million. See Note 3 to the Consolidated
Financial Statements for additional information.
Consolidated Results of Operations
--------------------------------------------------------------------------------
The Company measures the financial results of its segments using "segment
earnings (loss)", that is defined as shareholders' net income (loss) 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 accounting principles
generally accepted in the United States ("GAAP") and should not be viewed as a
substitute for the most directly comparable GAAP measure, which is shareholders'
net income.
As explained previously in the introduction section of this MD&A and in Note 2
to the Consolidated Financial Statements, the Company adopted, as required,
amended accounting guidance for deferred policy acquisition costs by selecting
retrospective adjustment of prior periods. See the Introduction section of this
MD&A for the effect of this new guidance on previously reported amounts.
As discussed in Note 3 to the Consolidated Financial Statements, on January 31,
2012, the Company acquired HealthSpring, Inc. The results of HealthSpring are
included in the financial summary below from the date of acquisition.
50 CIGNA CORPORATION - Form 10-Q
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summarized in the following table is a reconciliation between shareholders' net
income and adjusted income from operations.
Three Months Ended Six Months Ended
Financial Summary June 30, June 30,
(In millions) 2012 2011 2012 2011
Premiums and fees $ 6,686 $ 4,786 $ 12,827 $ 9,519
Net investment income 283 284 571 563
Mail order pharmacy revenues 402 349 788 688
Other revenues 90 71 50 105
Total realized investment gains (losses) (4) 17 9 43
Total revenues 7,457 5,507 14,245 10,918
Benefits and expenses 6,869 4,915 13,105 9,747
Income before taxes 588 592 1,140 1,171
Income taxes 208 201 389 366
Net income 380 391 751 805
Less: net income attributable to noncontrolling interest - - - 1
Shareholders' net income 380 391 751 804
Less: realized investment gains (losses), net of taxes (3) 11 9 28
SEGMENT EARNINGS 383 380 742 776
Less: adjustments to reconcile to adjusted income from operations:
Results of GMIB business (after-tax)
(51) (21) (10) (8)
Special items (after-tax):
Costs associated with HealthSpring acquisition - - (28) -
Litigation matter (See Note 17 to the Consolidated Financial
Statements)
- - (13) -
Completion of IRS Examination (See Note 15 to the
Consolidated Financial Statements) - - - 24
ADJUSTED INCOME FROM OPERATIONS $
434 $ 401$ 793$ 760
Summarized below is adjusted income from operations by segment:
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2012 2011 2012 2011
Adjusted Income (Loss) From Operations
Health Care $ 332 $ 280 $ 594 $ 526
International 65 57 145 118
Disability and Life 89 88 154 165
Run-off Reinsurance (11) (1) (22) (1)
Other Operations 21 20 41 39
Corporate (62) (43) (119) (87)
TOTAL $ 434 $ 401 $ 793 $ 760
Overview of June 30, 2012 Consolidated Results of Operations
Shareholders' net income decreased 3% for the three months and 7% for the six
months ended June 30, 2012 compared with the same periods in 2011. The second
quarter decrease is primarily due to higher GMIB losses and lower realized
investment results, mostly offset by higher adjusted income from operations as
discussed below. See the Run-off Reinsurance section of this MD&A beginning on
page 61 for further discussion about the GMIB businesses. For the six months,
the decrease is largely attributable to the impact of the special items for
costs incurred in the first quarter of 2012 related to the acquisition of
HealthSpring and a litigation matter, as well as the absence of the special item
reported in the first quarter 2011 related to the settlement of the 2007 and
2008 IRS audit. These effects were partially offset by higher adjusted income
from operations as discussed below.
Adjusted income from operations increased 8% for the three months and 4% for the
six months ended June 30, 2012 compared with the same periods in 2011. The
increases are largely the result of earnings growth from the ongoing reporting
segments partially offset by financing costs of the HealthSpring transaction
(reported in Corporate) and charges in the GMDB business caused by assumption
updates. See the individual segment sections of this MD&A for further
discussion.
CIGNA CORPORATION - Form 10-Q 51
--------------------------------------------------------------------------------
Back to Contents
PART I
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
The special items for the six months ended June 30, 2012 reflect after-tax costs
associated with the January 2012 acquisition of HealthSpring and an accrual for
a litigation matter.
The special item for the six months ended June 30, 2011 resulted from the
completion of the 2007 and 2008 IRS examinations. See Note 15 to the
Consolidated Financial Statements for additional information.
The Company also excludes the results of the GMIB business, including the
results of the related hedges starting in 2011, 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 58 of the Company's 2011 Form 10-K for more
information on the effects 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.
Outlook for 2012
The Company expects 2012 consolidated adjusted income from operations to be
higher than 2011, reflecting expected earnings contributions from HealthSpring
and expected continued strong earnings from the other ongoing operating
segments. This outlook includes the impact of year to date results for GMDB
(also known as "VADBe"), but does not include an estimate for future impacts.
Future potential impacts from GMDB are not known or reasonably estimable,
including the impact of changes in capital markets or periodic updates to long
term reserve assumptions. See Note 6 to the Consolidated Financial Statements as
well as the 2011 Form 10-K under the Critical Accounting Estimates section of
the MD&A beginning on page 58 for more information on the potential effects of
capital market and other assumption changes on shareholders' net income.
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. In addition, the Company is not able to identify or reasonably estimate
the financial impact of special items in 2012, however they may include
potential adjustments associated with litigation.
The Company's outlook for 2012 is subject to the factors cited above and in the
Cautionary Statement beginning on page 73 of this Form 10-Q and the
sensitivities discussed in the 2011 Form 10-K under the Critical Accounting
Estimates section of the MD&A beginning on page 58. 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 increased 35% for the three months and 30% for the six months
ended June 30, 2012, compared with the same periods in 2011.
Consolidated operating revenues increased 35% for the three months ended and 31%
for the six months ended June 30, 2012, compared with the same period last year.
Summarized below are the key components of these increases.
Consolidated operating revenues exclude hedge gains or losses reported in Other
Revenues in the Run-off Reinsurance segment and realized investment results.
Consolidated operating revenue is a measure used by the Company's management
because it presents the underlying volume of the Company's businesses and
permits trend analysis. This measure is not determined in accordance with GAAP
and should not be viewed as a
52 CIGNA CORPORATION - Form 10-Q
--------------------------------------------------------------------------------
Back to Contents
