CIGNA
Executive Overview 53
Liquidity and Capital Resources 59
Critical Accounting Estimates 63
Segment Reporting 67
Evernorth 67
Cigna Healthcar e 69
Other Operations 71
Corporate 72
Investment Assets 72
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information to assist you in better
understanding and evaluating our financial condition as of December 31, 2021
compared with December 31, 2020 and our results of operations for 2021 compared
with 2020 and 2019 and is intended to help you understand the ongoing trends in
our business. We encourage you to read this MD&A in conjunction with our
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K ("Form 10-K") and the "Risk Factors" contained in Part I,
Item 1A of this Form 10-K.
Unless otherwise indicated, financial information in this MD&A is presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). See Note 2 to the Consolidated Financial Statements in this
Form 10-K for additional information regarding the Company's significant
accounting policies. In some of our financial tables in this MD&A, we present
either percentage changes or "N/M" when those changes are so large as to become
not meaningful. Changes in percentages are expressed in basis points ("bps").
In this MD&A, our consolidated measures "adjusted income from operations,"
earnings per share on that same basis and "adjusted revenues" are not determined
in accordance with GAAP and should not be viewed as substitutes for the most
directly comparable GAAP measures of "shareholders' net income," "earnings per
share" and "total revenues." We also use pre-tax adjusted income (loss) from
operations and adjusted revenues to measure the results of our segments.
The Company uses "pre-tax adjusted income (loss) from operations" and "adjusted
revenues" as its principal financial measures of segment operating performance
because management believes these metrics best reflect the underlying results of
business operations and permit analysis of trends in underlying revenue,
expenses and profitability. We define adjusted income from operations as
shareholders' net income (or income before income taxes for the segment metric)
excluding net realized investment results, amortization of acquired intangible
assets, results of transitioning clients prior to 2020 and special items.
Cigna's share of certain realized investment results of its joint ventures
reported in the Cigna Healthcare segment using the equity method of accounting
are also excluded. Special items are matters that management believes are not
representative of the underlying results of operations due to their nature or
size. Adjusted income (loss) from operations is measured on an after-tax basis
for consolidated results and on a pre-tax basis for segment results.
Consolidated adjusted income (loss) from operations is not determined in
accordance with GAAP and should not be viewed as a substitute for the most
directly comparable GAAP measure, shareholders' net income. See the below
Financial Highlights section for a reconciliation of consolidated adjusted
income from operations to shareholders' net income.
The Company defines adjusted revenues as total revenues excluding the following
adjustments: special items, revenue contribution from transitioning clients
prior to 2020 and Cigna's share of certain realized investment results of its
joint ventures reported in the Cigna Healthcare segment using the equity method
of accounting. Special items are matters that management believes are not
representative of the underlying results of operations due to their nature or
size. We exclude these items from this measure because management believes they
are not indicative of past or future underlying performance of the business.
Adjusted revenues is not determined in accordance with GAAP and should not be
viewed as a substitute for the most directly comparable GAAP measure, total
revenues. See the below Financial Highlights section for a reconciliation of
consolidated adjusted revenues to total revenues.
52
--------------------------------------------------------------------------------EXECUTIVE OVERVIEW
Cigna Corporation , together with its subsidiaries (either individually or collectively referred to as "Cigna," the "Company," "we," "our" or "us") is a global health services organization with a mission of helping those we serve improve their health, well-being and peace of mind by making health care affordable, predictable and simple. Our subsidiaries offer a differentiated set of pharmacy, medical, dental and related products and services. For further information on our business and strategy, see Item 1, "Business" in this Form 10-K. Financial Highlights
See Note 1 to the Consolidated Financial Statements for a description of our segments.
Summarized below are certain key measures of our performance by segment for the years endedDecember 31, 2021 , 2020 and 2019: Financial highlights by segment For the Years Ended December 31, Increase (Decrease) Increase (Decrease) (Dollars in millions, except per share amounts) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenues
Adjusted revenues by segment Evernorth$ 131,912 $ 116,130 $ 96,447 14 % 20 % Cigna Healthcare 44,652 41,135 39,089 9 5 Other Operations 3,989 8,446 8,215 (53) 3 Corporate, net of eliminations (6,475) (5,644) (3,576) (15) (58) Adjusted revenues 174,078 160,067 140,175 9 14 Revenue contribution from transitioning clients - - 13,347 N/M N/M Net realized investment results from certain equity method investments - 130 44 N/M 195 Special item related to contractual adjustment for a former client - 204 - N/M N/M Total revenues$ 174,078 $ 160,401 $ 153,566 9 % 4 % Shareholders' net income$ 5,365 $ 8,458 $ 5,104 (37) % 66 % Adjusted income from operations$ 6,980 $ 6,795 $ 6,476 3 % 5 % Earnings per share (diluted) Shareholders' net income$ 15.73 $ 22.96 $ 13.44 (31) % 71 % Adjusted income from operations$ 20.47 $ 18.45 $ 17.05 11 % 8 % Pre-tax adjusted income (loss) from operations by segment Evernorth$ 5,818 $ 5,363 $ 5,092 8 % 5 % Cigna Healthcare 3,609 4,031 3,963 (10) 2 Other Operations 889 966 1,131 (8) (15) Corporate, net of eliminations (1,339) (1,552) (1,824) 14 15 Consolidated pre-tax adjusted income from operations 8,977 8,808 8,362 2 5 Adjustment for transitioning clients - - 1,726 N/M N/M Income attributable to noncontrolling interests 58 37 20 57 85 Net realized investment gains (losses) (1) 196 279 221 (30) 26 Amortization of acquired intangible assets (1,998) (1,982) (2,949) (1) 33 Special items (451) 3,726 (810) N/M N/M Income before income taxes$ 6,782 $ 10,868 $ 6,570 (38) % 65 % (1) Includes the Company's share of certain realized investment results of its joint ventures reported in theCigna Healthcare segment using the equity method of accounting.
For further analysis and explanation of each segment's results, see the "Segment Reporting" section of this MD&A.
53
--------------------------------------------------------------------------------Consolidated Results of Operations (GAAP basis)
For the Years Ended December 31 , Increase (Decrease) Increase (Decrease)
(Dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Pharmacy revenues $ 121,413 $ 107,769 $ 103,099 $ 13,644 13 % $ 4,670 5 %
Premiums 41,154 42,627 39,714 (1,473) (3) 2,913 7
Fees and other revenues 9,962 8,761 9,363 1,201 14 (602) (6)
Net investment income 1,549 1,244 1,390 305 25 (146) (11)
Total revenues 174,078 160,401 153,566 13,677 9 6,835 4
Pharmacy and other service costs 117,553 103,484 97,668 14,069 14 5,816 6
Medical costs and other benefit
expenses 33,562 32,710 30,819 852 3 1,891 6
Selling, general and
administrative expenses 13,030 14,072 14,053 (1,042) (7) 19 -
Amortization of acquired
intangible assets 1,998 1,982 2,949 16 1 (967) (33)
Total benefits and expenses 166,143 152,248 145,489 13,895 9 6,759 5
Income from operations 7,935 8,153 8,077 (218) (3) 76 1
Interest expense and other (1,208) (1,438) (1,682) 230 16 244 15
Debt extinguishment costs (141) (199) (2) 58 29 (197) N/M
Gain (loss) on sale of business - 4,203 - (4,203) N/M 4,203 N/M
Net realized investment gains (losses) 196 149 177 47 32 (28) (16) Income before income taxes 6,782 10,868 6,570 (4,086) (38) 4,298 65 Total income taxes 1,367 2,379 1,450 (1,012) (43) 929 64 Net income 5,415 8,489 5,120 (3,074) (36) 3,369 66 Less: Net income attributable to noncontrolling interests 50 31 16 19 61 15 94 Shareholders' net income$ 5,365 $ 8,458 $ 5,104 $ (3,093) (37) %$ 3,354 66 % Consolidated effective tax rate 20.2 % 21.9 % 22.1 % (170) bps (20) bps Medical customers (in thousands) 17,081 16,650 17,137 431 3 % (487) (3) % Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations Dollars in Millions Diluted Earnings Per Share For the Years Ended December 31, For
the Years Ended
2021 2020 2019 2021 2020 2019
Shareholders' net income $ 5,365 $ 8,458 $ 5,104 $ 15.73 $ 22.96 $ 13.44 After-tax adjustments required to reconcile to adjusted income from operations Net realized investment (gains) losses (1)
(158) (244) (190) (0.46) (0.66) (0.50)
Amortization of acquired intangible assets 1,494 1,431 2,248 4.38 3.88 5.92
Adjustment for transitioning clients - - (1,316) - - (3.46)
Special items
Charge for organizational efficiency plan 119 24 162 0.35 0.07 0.43
Debt extinguishment costs 110 151 - 0.32 0.41 -
Integration and transaction-related (benefits)
costs 71 404 427 0.21 1.10 1.11
(Benefits) charges associated with litigation
matters (21) 19 41 (0.06) 0.05 0.11
Risk corridors recovery - (76) - - (0.21) -
Contractual adjustment for a former client - (155) - - (0.42) -
(Gain) on sale of business - (3,217) - - (8.73) -
Total special items 279 (2,850) 630 0.82 (7.73) 1.65
Adjusted income from operations $ 6,980 $ 6,795 $ 6,476 $ 20.47 $ 18.45 $ 17.05
(1) Includes the Company's share of certain realized investment results of its
joint ventures reported in the Cigna Healthcare segment using the equity method
of accounting.
54
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COVID-19 Update
Cigna's commitment to the health, well-being and peace of mind of our employees and the people we serve remains the primary focus as the pandemic continues to impact all aspects of daily life. Cigna is leveraging its resources, expertise, data and actionable intelligence to assist customers, clients and care providers navigate the evolving dynamics of the pandemic. The Company continues to encourage COVID-19 vaccinations across all eligible populations to help control the spread of the virus, limit the severity of the disease and save lives. Cigna has also expanded access to testing, care and supportive resources to help everyone it serves take care of their physical and mental health during this time, and will continue to do so. For the fourth quarter of 2021, ourCigna Healthcare segment reflected net unfavorable COVID-19 related impacts, although not as significant when compared to those recognized in the same period in 2020. For the year endedDecember 31, 2021 compared to 2020, the net unfavorable impacts reflect increased direct costs of COVID-19 testing, treatment and vaccines as well as the significant deferral of care by our customers in 2020. These impacts were partially offset by the absence of the premium relief programs implemented in 2020. We continue to optimize purchasing volume across the pharmaceutical supply chain in order to mitigate risk of disruption with prescription drug supply due to ongoing global supply disruptions. The situation surrounding COVID-19 remains fluid with continued uncertainty and a wide range of potential outcomes. We continue to actively manage our response and assess impacts to our financial position and operating results, as well as mitigate adverse developments in our business. There continues to be uncertainty surrounding the pace, duration and extent of the COVID-19 pandemic and its related impacts - including vaccination efforts and new COVID-19 variants (including the delta and omicron variants) - on our results for 2022 and beyond. We believe that such financial results may continue to be impacted by, among other things, higher medical costs to treat those affected by the virus, vaccine-related costs, test reimbursement costs, lower risk adjustment revenue due to disrupted care impeding appropriate documentation of customer risk profiles in our Medicare Advantage plans, the pace at which costs return as well as the severity of costs for those who had previously deferred care, the potential for future deferral of care, lower customer volumes due to a disrupted employment market, or volatility in the economic markets.
For further information regarding the potential impact of COVID-19 on the Company, see "Risk Factors" contained in Part I, Item 1A of this Form 10-K.
Commentary: 2021 versus 2020
The commentary presented below, and in the segment discussions that follow,
compare results for the year ended
Shareholders' net income decreased, reflecting the absence of the gain on sale of the Group Disability and Life business reported in 2020, partially offset by higher adjusted income from operations. Adjusted income from operations increased, primarily resulting from higher earnings in Evernorth and lower net interest expense. Improved results in our international businesses held for sale (reported in Other Operations) also contributed to the increase. These favorable effects were partially offset by lower earnings inCigna Healthcare and the absence of earnings in 2021 from the sold Group Disability and Life business. The increase in earnings in the Evernorth segment was primarily attributable to continued contract affordability improvements and business growth (see "Evernorth Segment" section of this MD&A). Lower earnings inCigna Healthcare were primarily driven by the unfavorable impacts of COVID-19, partially offset by higher net investment income (see "Cigna Healthcare Segment" section of this MD&A).
Medical customers grew, reflecting a higher customer base in Individual and
Medicare Advantage, as well as our Middle Market,
Pharmacy revenues increased, reflecting inflation on branded drugs and higher claim volume, primarily due to our collaboration with Prime Therapeutics. See the "Evernorth Segment" section of this MD&A for further discussion of Pharmacy revenues. Premiums were lower, reflecting the impact of the sale of the Group Disability and Life business. This effect was partially offset by an increase inCigna Healthcare premiums resulting from customer growth in our insured businesses, higher premium rates due to anticipated underlying medical cost trend and the absence of premium relief programs implemented in the second quarter of 2020 in response to deferred care due to the COVID-19 pandemic. 55 --------------------------------------------------------------------------------
Fees and other revenues increased, primarily driven by customer growth (see "Evernorth Segment" section of this MD&A).
Net investment income increased due to strong returns on our securities limited partnership investments, partially offset by lower average assets due to the sale of the Group Disability and Life business. See the "Investment Assets" section of this MD&A for further discussion.
Pharmacy and other service costs increased, reflecting inflation on branded drugs and higher claim volume, primarily due to our collaboration with Prime Therapeutics.
Medical costs and other benefit expenses increased, resulting from higher medical costs inCigna Healthcare primarily driven by net unfavorable COVID-19 related impacts, underlying medical cost trend and customer growth in our insured business. These unfavorable effects were substantially offset by the impact of the sale of the Group Disability and Life business. Selling, general and administrative expenses decreased, primarily reflecting the impact of the sale of the Group Disability and Life business, lower integration and transaction costs and the repeal of the health insurance industry tax. These favorable effects were partially offset by expense growth inEvernorth and Cigna Healthcare reflecting business growth.
Interest expense and other decreased primarily due to a lower average interest rate and lower levels of average outstanding debt resulting from debt repayments.
Debt extinguishment costs were lower because the debt repaid in 2021 had lower interest rates than the debt repaid in 2020.
Realized investment results improved, primarily due to gains on sales of real estate joint ventures in 2021, favorable market value adjustments on equity securities in 2021 compared with 2020 and lower credit loss reserves on debt securities. These favorable effects were partially offset by lower gains on sales of debt securities in 2021 compared with 2020. Income tax expense decreased in 2021, reflecting the absence of taxes recorded in 2020 on the sale of the Group Disability and Life business. The consolidated effective tax rate decreased, primarily driven by the repeal of the nondeductible health insurance industry tax in 2021 and the absence of incremental tax expense associated with the sale of the Group Disability and Life business in 2020. Commentary: 2020 vs 2019
Due to the segment changes made in 2021, the following commentary comparing consolidated 2020 results to 2019 is provided as an update to the commentary provided in our 2020 Form 10-K.
Shareholders' net income increased, driven by the gain on sale of the Group Disability and Life business, lower amortization of acquired intangible assets and higher adjusted income from operations, partially offset by the absence of earnings from transitioning clients. Adjusted income from operations increased, driven in part by higher earnings in the Evernorth segment reflecting customer growth and increased script volumes and lower interest costs in Corporate due to a lower level of outstanding debt. These favorable effects were partially offset by lower earnings from the sold Group Disability and Life business (reported in Other Operations) primarily reflecting significantly elevated life claims related to the effects of COVID-19. Medical customers decreased due to declines in the Middle Market and National Accounts market segments and increased disenrollment driven by the impacts of COVID-19. Those decreases were partially offset by growth in theSelect and International Health market segments, as well as Medicare Advantage customers. Pharmacy revenues increased, reflecting the transition ofCigna Healthcare's customers to Evernorth, higher claims volumes, driven by the Evernorth collaboration with Prime Therapeutics and increased prices, primarily due to inflation on branded drugs. These factors were substantially offset by the absence of revenues from the transitioning clients and, to a lesser extent, an increase in the generic fill rate. See the "Evernorth Segment" section of this MD&A for further discussion of pharmacy revenues. Premiums increased, reflecting customer growth in insured products and rate increases reflecting expected medical cost inflation and the return of the health insurance industry tax. These factors were partially offset by the impact of premium relief programs implemented in response to significantly lower than historical utilization as customers deferred care in 2020 due to the COVID-19 pandemic. 56
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Fees and other revenues decreased, primarily reflecting the transition of
Net investment income decreased, driven by lower yields, including lower income from partnership investments due to current economic conditions. These effects were partially offset by higher average assets. Pharmacy and other service costs increased, reflecting the transition ofCigna Healthcare's customers to Evernorth, higher claims volumes, driven by the Evernorth collaboration with Prime Therapeutics and an increase in pricing, primarily due to inflation on branded drugs. These factors were substantially offset by the impact of the absence of the transitioning clients and, to a lesser extent, continued contract affordability improvements and the favorable impact of the mix of claims. Medical costs and other benefit expenses increased, reflecting both customer growth and direct costs associated with COVID-19, partially offset by care deferrals in insured products inCigna Healthcare and higher life claims in the sold Group Disability and Life business due to the effects of the COVID-19 pandemic. Selling, general and administrative expenses were essentially flat, primarily reflecting lower charges in 2020 for the 2019 organizational efficiency plan and resolving our Affordable Care Act risk corridors claim againstthe United States Federal Government in the third quarter of 2020. These decreases were offset by the return of the health insurance industry tax. Amortization of acquired intangible assets decreased, primarily reflecting lower amortization of customer-related intangibles associated with the transitioning clients. Income tax expense increased for 2020, largely attributable to the sale of Cigna's Group Disability and Life business. The consolidated effective tax rate decreased slightly, driven by recognition of certain incremental federal and state tax benefits, largely offset by the return of the nondeductible health insurance industry tax.
Key Transactions and Business Developments
Organizational Efficiency Plan
As discussed in Note 15 to the Consolidated Financial Statements, during the fourth quarter of 2021, the Company approved a strategic plan to drive operational efficiencies. We believe this plan, coupled with the previously announced divestiture of the international life, accident and supplemental health benefits businesses (described below), will further leverage the Company's ongoing growth to drive operational efficiency through enhancements to organizational structure and increased use of automation and shared services. In connection with these plans, Cigna has updated its reporting segments to align with the new business reporting structure and recognized a charge in the fourth quarter of 2021 in the amount of$168 million , pre-tax ($119 million , after-tax). We expect to realize annualized after-tax savings of approximately$180 million . A substantial portion of the savings is expected to be realized in 2022. Although a substantial portion of the actions associated with these strategic steps have been reflected in the charge recognized in the fourth quarter of 2021, additional amounts are expected to be recorded in the second quarter of 2022 as we finalize our plans following the completion of the divestiture. See Note 15 for further information regarding our organizational efficiency charge.
Agreement to Sell International Life, Accident and Supplemental Benefits Businesses
We entered into a definitive agreement inOctober 2021 to sell our life, accident and supplemental benefits businesses in seven countries toChubb INA Holdings, Inc. ("Chubb") for$5.75 billion cash (the "Chubb Transaction"). Subject to applicable regulatory approvals and customary closing conditions, we expect to complete the sale of our life, accident and supplemental benefits businesses inHong Kong ,Indonesia ,New Zealand ,South Korea ,Taiwan ,Thailand and our interest in a joint venture inTurkey in the second quarter of 2022. The "Liquidity and Capital Resources" section of this MD&A provides discussion of the expected impact of this transaction to liquidity.
Purchase of
As discussed in Note 4 to the Consolidated Financial Statements, onApril 19, 2021 Cigna's Evernorth segment completed the acquisition ofMDLIVE, Inc. ("MDLIVE"), a 24/7 virtual care platform (the "MDLIVE Acquisition"). The acquisition ofMDLIVE will enable Evernorth to continue expanding access to virtual care and delivering a more affordable, convenient and connected care experience for consumers. The "Liquidity and Capital Resources" section of this MD&A provides discussion of the impact of the MDLIVE Acquisition on liquidity. 57 --------------------------------------------------------------------------------
Sale of Group Disability and Life Business
As discussed in Note 4 to the Consolidated Financial Statements, Cigna sold itsU.S. Group Disability and Life business to New York Life Insurance Company for$6.2 billion onDecember 31, 2020 (the "New York Life Divestiture"). The "Liquidity and Capital Resources" section of this MD&A provides discussion of the use of proceeds from the New York Life Divestiture.
Merger with Express Scripts
Cigna acquired Express Scripts onDecember 20, 2018 . Costs related to this transaction are reported in "integration and transaction-related costs" as a special item and excluded from adjusted income from operations because they are not indicative of future underlying performance of the business. The integration of this acquisition has been completed. OnJanuary 30, 2019 , Anthem, Inc. ("Anthem"), a former client of Express Scripts, exercised its early termination right and terminated its pharmacy benefit management services agreement with us, effectiveMarch 1, 2019 . There was a twelve-month transition period that endedMarch 1, 2020 . We excluded the results of Express Scripts' contract with Anthem (and alsoCoventry Health Care, Inc. ) from our non-GAAP reporting metrics adjusted revenues and adjusted income from operations for 2019 and refer to these clients as transitioning clients. As ofDecember 31, 2019 , the transition was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our reported adjusted revenues and adjusted income from operations. Additionally, for the year endedDecember 31, 2020 , we recorded an adjustment related to this contract that was excluded from adjusted revenues and adjusted income from operations.
Medicare Star Quality Ratings ("Star Ratings")
TheCenters for Medicare & Medicaid Services ("CMS") uses a Star Rating system to measure how well Medicare Advantage ("MA") plans perform, scoring how well plans perform in several categories, including quality of care and customer service. Star Ratings range from one to five stars. CMS recognizes plans with Star Ratings of four stars or greater with quality bonus payments and the ability to offer enhanced benefits. Approximately 87% of our MA customers were in four star or greater plans for bonus payments received in 2021 and approximately 89% were in four star or greater plans for bonus payments to be received in 2022; we expect this percentage to decrease to 86% for bonus payments to be received in 2023 based upon the mix of new and existing MA plans.
Medicare Advantage ("MA") Rates
OnJanuary 15, 2021 , CMS published the Calendar Year 2022 Medicare Advantage and Part D Rate Announcement (the "2022 Final Notice"), finalizing reimbursement rates for 2022. OnFebruary 2, 2022 , CMS released the Calendar Year 2023 Advance Notice of Methodological Changes for Medicare Advantage Capitation Rates and Part C and Part D Payment Policies (the "Advance Notice"). We do not expect the new rates to have a material impact on our consolidated results of operations in 2022 or 2023. CMS will accept comments on the Advance Notice throughMarch 4, 2022 , before publishing the final rate announcement byApril 4, 2022 . The Advance Notice is subject to the required notice and comment period, and we cannot predict when or to what extent CMS will adopt the proposals in the Advance Notice. 58 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (In millions) Financial Summary 2021 2020 2019 Short-term investments$ 428 $ 359 $ 423 Cash and cash equivalents$ 5,081 $ 10,182 $ 4,619 Short-term debt$ 2,545 $ 3,374 $ 5,514 Long-term debt$ 31,125 $ 29,545 $ 31,893 Shareholders' equity$ 47,112 $ 50,321 $ 45,338 Liquidity
We maintain liquidity at two levels: the subsidiary level and the parent company level.
Cash requirements at the subsidiary level generally consist of:
•pharmacy, medical costs and other benefit payments; •expense requirements, primarily for employee compensation and benefits, information technology and facilities costs; •income taxes; and •debt service.
Our subsidiaries normally meet their liquidity requirements by:
•maintaining appropriate levels of cash, cash equivalents and short-term investments; •using cash flows from operating activities; •matching investment durations to those estimated for the related insurance and contractholder liabilities; •selling investments; and •borrowing from affiliates, subject to applicable regulatory limits.
Cash requirements at the parent company level generally consist of:
•debt service; •payment of declared dividends to shareholders; •lending to subsidiaries as needed; and •pension plan funding.
The parent company normally meets its liquidity requirements by:
•maintaining appropriate levels of cash and various types of marketable investments; •collecting dividends from its subsidiaries; •using proceeds from issuing debt and common stock; and •borrowing from its subsidiaries, subject to applicable regulatory limits. Dividends from our insurance,Health Maintenance Organization ("HMO") and certain foreign subsidiaries are subject to regulatory restrictions. See Note 20 to the Consolidated Financial Statements in this Form 10-K for additional information regarding these restrictions. Most of the Evernorth segment operations are not subject to regulatory restrictions regarding dividends and therefore provide significant financial flexibility to Cigna. 59 --------------------------------------------------------------------------------
Cash flows for the years ended
2021 2020 2019
Net cash provided by operating activities $ 7,191
(61) 5,592 -
Other acquisitions (1,833) (139) (153)
Net investment sales (purchases) (660) (1,406) 480
Purchases of property and equipment, net (1,154) (1,094) (1,050)
Other, net 97 23 (11)
Net investing activities (3,611) 2,976 (734)
Net cash (used in) financing activities:
Debt (repayments) issuances 521 (4,736) (5,175)
Stock repurchase (7,742) (4,042) (1,987)
Dividend payments (1,341) (15) (15)
Other, net 350 260 (10)
Net financing activities (8,212) (8,533) (7,187)
Foreign currency effect on cash (65) 41 (8)
Change in cash, cash equivalents and restricted cash $ (4,697) The following discussion explains variances in the various categories of cash flows for the year endedDecember 31, 2021 compared with the year endedDecember 31, 2020 . For comparisons of liquidity and capital resources for the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 , please refer to the previously filed MD&A included in Part II, Item 7 of our Form 10-K for the year endedDecember 31, 2020 .
Operating activities
Cash flows from operating activities consist principally of cash receipts and disbursements for pharmacy revenues and costs, premiums, fees, investment income, taxes, benefit costs and other expenses.
Cash provided by operating activities decreased, driven by increases in accounts receivable due to higher pharmacy claim volume and business growth and a delay in the annual CMS Part D settlement, the timing of pharmacy and other service cost payables as well as higher tax payments largely related to the sale of the Group Disability and Life business. These decreases were partially offset by the absence of the health insurance industry tax payments.
Investing and Financing activities
Cash used in investing activities increased, primarily due to the acquisition ofMDLIVE in 2021, the absence of the net proceeds from the sale of the Group Disability and Life business in 2020, partially offset by lower net investment activities.
Cash used in financing activities decreased primarily due to lower debt repayments, offset by higher stock repurchases including shares purchased pursuant to the ASR agreements (described below) and an increase in dividends paid.
Capital Resources Our capital resources consist primarily of cash, cash equivalents and investments maintained at regulated subsidiaries required to underwrite insurance risks, cash flows from operating activities, our commercial paper program, credit agreements and the issuance of long-term debt and equity securities. Our businesses generate significant cash flow from operations, some of which is subject to regulatory restrictions relative to the amount and timing of dividend payments to the parent company. Dividends fromU.S. regulated subsidiaries were$2.8 billion and$2.3 billion for the years endedDecember 31, 2021 and 2020, respectively. Non-regulated subsidiaries also generate significant cash flow from operating activities, which is typically available immediately to the parent company for general corporate purposes. 60 --------------------------------------------------------------------------------
We prioritize our use of capital resources to:
•Invest in capital expenditures, primarily related to technology to support innovative solutions for our customers, provide the capital necessary to maintain or improve the financial strength ratings of subsidiaries and to repay debt and fund pension obligations if necessary; •pay dividends to shareholders; •consider acquisitions that are strategically and economically advantageous; and •return capital to shareholders through share repurchases.
Funds Available
Commercial Paper Program. Cigna maintains a commercial paper program and may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers at any time not to exceed an aggregate amount of$5.0 billion . The net proceeds of issuances have been and are expected to be used for general corporate purposes. Revolving Credit Agreements. Our revolving credit agreements provide us with the ability to borrow amounts for general corporate purposes, including for the purpose of providing liquidity support if necessary under our commercial paper program discussed above. Cigna's revolving credit agreements include: a$3.0 billion five-year revolving credit and letter of credit agreement that expires inApril 2026 ; a$1.0 billion three-year revolving credit agreement that expires inApril 2024 ; and a$1.0 billion 364-day revolving credit agreement that expires inApril 2022 . As ofDecember 31, 2021 , we had$5.0 billion of undrawn committed capacity under our revolving credit agreements (these amounts are available for general corporate purposes, including providing liquidity support for our commercial paper program),$3.0 billion of remaining capacity under our commercial paper program and$5.5 billion in cash and short-term investments, approximately$1.7 billion of which was held by the parent company or certain non-regulated subsidiaries.
See Note 7 to the Consolidated Financial Statements for further information on our credit agreements and commercial paper program.
AtDecember 31, 2021 , our debt-to-capitalization ratio was 41.7%, an increase from 39.5% atDecember 31, 2020 , reflecting higher commercial paper balances and the impact of share repurchase on shareholders' equity.
We actively monitor our debt obligations and engage in issuance or redemption activities as needed in accordance with our capital management strategy.
Subsidiary Borrowings. In addition to the sources of liquidity discussed above, the parent company can borrow an additional$2.0 billion from its subsidiaries without further approvals as ofDecember 31, 2021 .
Use of capital resources
Capital Expenditures. Capital expenditures for property, equipment and computer software were$1.2 billion in 2021 compared to$1.1 billion in 2020. We expect to continue to invest in technology that we believe will drive future growth. Anticipated capital expenditures will be funded primarily from operating cash flow. Dividends. For 2021, Cigna declared and paid quarterly cash dividends of$1.00 per share of Cigna common stock. See Note 8 to the Consolidated Financial Statements for further information on our dividend payments. OnFebruary 3, 2022 , the Board of Directors declared and increased the quarterly cash dividend to$1.12 per share of Cigna common stock to be paid onMarch 24, 2022 to shareholders of record onMarch 9, 2022 . Cigna currently intends to pay regular quarterly dividends, with future declarations subject to approval by its Board of Directors and the Board's determination that the declaration of dividends remains in the best interests of Cigna and its shareholders. The decision of whether to pay future dividends and the amount of any such dividends will be based on the Company's financial position, results of operations, cash flows, capital requirements, the requirements of applicable law and any other factors the Board of Directors may deem relevant.
Acquisition. In
Share repurchases. We maintain a share repurchase program authorized by our
Board of Directors, under which we may repurchase shares of our common stock
from time to time. The timing and actual number of shares repurchased will
depend on a variety of factors including price, general business and market
conditions and alternate uses of capital. The share repurchase program may be
effected through open market purchases in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended, including through Rule 10b5-1
trading plans or privately negotiated transactions. The program may be suspended
or discontinued at any time.
61
-------------------------------------------------------------------------------- OnAugust 23, 2021 , as part of our existing share repurchase program, we entered into accelerated share repurchase agreements to repurchase$2.0 billion of common stock. The total number of shares repurchased under the ASR agreements was 9.5 million. See Note 8 to the Consolidated Financial Statements for additional information. For the year endedDecember 31, 2021 , we repurchased 35.2 million shares for approximately$7.7 billion including the$2.0 billion paid under the ASR agreements. FromJanuary 1, 2022 throughFebruary 23, 2022 , we repurchased 5.0 million shares for approximately$1.2 billion . Share repurchase authority was$6.0 billion as ofFebruary 23, 2022 . Pension liability. As ofDecember 31, 2021 , our unfunded pension liability was$377 million , a decrease of$600 million fromDecember 31, 2020 , primarily attributable to strong investment asset returns and an increase in discount rates of 33 basis points. In 2021, we made immaterial contributions to the qualified pension plans as required under the Pension Protection Act of 2006 and we expect the required contributions for 2022 to be immaterial. See Note 16 to the Consolidated Financial Statements for additional information.
Divestitures
Group Disability and Life Sale. In connection with the sale of this business that closed onDecember 31, 2020 , we deployed approximately$3.0 billion to debt repayment by: (i) repaying in full our$1.4 billion 364-Day Term Loan Credit Agreement entered into onApril 1, 2020 , onDecember 31, 2020 ; (ii) redeeming in full the$1.0 billion aggregate principal amount of Cigna's Senior Floating Rate Notes due 2021 onJanuary 15, 2021 at a redemption price calculated in accordance with the terms and conditions of the indenture governing the Notes; and (iii) repaying certain balances of our outstanding commercial paper inJanuary 2021 . Sale of life, accident and supplemental benefits businesses in seven countries. Cigna entered into a definitive agreement inOctober 2021 to sell its life, accident and supplemental benefits businesses in seven countries to Chubb for$5.75 billion cash. Subject to applicable regulatory approvals and customary closing conditions, we expect to complete the sale of our life, accident and supplemental benefits businesses inHong Kong ,Indonesia ,New Zealand ,South Korea ,Taiwan ,Thailand and our interest in a joint venture inTurkey in the second quarter of 2022. Cigna estimates it will receive approximately$5.4 billion of net after-tax proceeds from this transaction and expects to utilize the after-tax proceeds from the transaction primarily for share repurchases. Risks to our liquidity and capital resources outlook include cash projections that may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings or we experience material adverse effects from one or more risks or uncertainties described more fully in the "Risk Factors" section of this Form 10-K. Though we believe we have adequate sources of liquidity, significant disruption or volatility in the capital and credit markets could affect our ability to access those markets for additional borrowings or increase costs.
Guarantees and Contractual Obligations
We are contingently liable for various contractual obligations and financial and other guarantees entered into in the ordinary course of business. See Note 22 to the Consolidated Financial Statements for discussion of various guarantees.
On balance sheet:
•Insurance liabilities •Insurance liabilities inclusive of the businesses held for sale are$21.5 billion , which include contractholder deposit funds, future policy benefits and unpaid claims and claim expenses. •Of the total obligation amount,$4.3 billion of insurance liabilities are associated with the sold retirement benefits, individual life insurance and annuity businesses, as well as the group life and personal accident businesses as their related net cash flows are not expected to impact our cash flows. •The$22.3 billion of total obligations exceeds the corresponding insurance and contractholder liabilities of$17.3 billion recorded on the balance sheet. This is because some of the recorded insurance liabilities reflect discounting for interest and the recorded contractholder liabilities exclude future interest crediting, charges and fees. The timing and amount of actual future cash flows may differ from the projected amount disclosed. •We expect$5.2 billion of insurance liabilities to be paid within the next twelve months beginningJanuary 1, 2022 . •See Note 9 to the Consolidated Financial Statements for information regarding insurance liabilities. •Long-term debt •Total scheduled payments on long-term debt are$48.2 billion , which include scheduled interest payments and maturities of long-term debt. •We expect$1.7 billion of long-term debt payments, which include scheduled interest payments and current maturities of long-term debt to be paid within the next twelve months beginningJanuary 1, 2022 . 62 -------------------------------------------------------------------------------- •Finance leases are included in long-term debt and primarily represent obligations for information technology network storage, servers and equipment. See Note 19 to the Consolidated Financial Statements for information regarding finance leases. •See Note 7 to the Consolidated Financial Statements for information regarding principal maturities of long-term debt. •Other noncurrent liabilities •These include approximately$704 million of estimated payments for guaranteed minimum income benefit ("GMIB") contracts (without considering any related reinsurance arrangements), other postretirement and postemployment benefit obligations, pension, supplemental and deferred compensation plans, interest rate and foreign currency swap contracts and reinsurance liabilities. •We expect$121 million of other noncurrent liabilities to be paid within the next twelve months beginningJanuary 1, 2022 . •See Note 16 to the Consolidated Financial Statements for further information on pension obligations. •Operating leases •These include operating lease payments of$641 million . •We expect$152 million of operating lease payments to be due within the next twelve months beginningJanuary 1, 2022 . •See Note 19 to the Consolidated Financial Statements for additional information. •Uncertain Tax Positions •In the event we are unable to sustain all of our$1.2 billion of uncertain tax positions, it could result in future tax payments of approximately$900 million . We cannot reasonably estimate the timing of such future payments. •See Note 21 to the Consolidated Financial Statements for additional information on uncertain tax positions. Off-balance sheet: •Purchase obligations •These include agreements to purchase goods or services that are enforceable and legally binding. Purchase obligations exclude contracts that are cancellable without penalty and those that do not contractually require minimum levels of goods or services to be purchased. •As ofDecember 31, 2021 , purchase obligations consisted of a total of$4.3 billion of estimated payments required under contractual arrangements. This includes: ?$3.4 billion of investment commitments, primarily comprised of other-long-term investments and equity securities. ?$932 million of future service commitments, primarily comprised of contracts for certain outsourced businesses process and information technology maintenance and support. •We expect$2.0 billion of purchase obligations to be paid within the next twelve months beginningJanuary 1, 2022 , of which$1.6 billion relates to investment commitments and$368 million relates to future service commitments. •See Note 11 of the Consolidated Financial Statements for additional information on investment commitments. 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:
•it requires assumptions to be made that were uncertain at the time the estimate
was made; and
•changes in the estimate or different estimates that could have been selected
could have a material effect on our consolidated results of operations or
financial condition.
Management has discussed how critical accounting estimates are developed and
selected with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed the disclosures presented in this Form 10-K. We regularly
evaluate items that may impact critical accounting estimates.
In addition to the estimates presented in the following tables, the Notes to the
Consolidated Financial Statements describe other estimates that management has
made in preparation of the financial statements. Management believes the current
assumptions used to estimate amounts reflected in our Consolidated Financial
Statements are appropriate. However, if actual experience significantly differs
from the assumptions used in estimating amounts reflected in our Consolidated
Financial Statements, the resulting changes could have a material adverse effect
on our consolidated results of operations and in certain situations, could have
a material adverse effect on liquidity and our financial condition. The tables
below present the adverse impacts of certain possible changes in assumptions.
The effect of assumption changes in the opposite direction would be a positive
impact to our consolidated results of
63
--------------------------------------------------------------------------------
operations, liquidity or financial condition, except for assessing impairment of
goodwill.
Balance Sheet Caption /
Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Goodwill and other intangible assets We completed our
normal annual evaluations for
impairment of goodwill and intangible assets
Goodwill represents the excess of the cost of during the third quarter of 2021. The evaluations
businesses acquired over the fair value of their net indicated that the fair value estimates of our
assets at the acquisition date. Intangible assets reporting units exceed their carrying values by
primarily reflect the value of customer significant margins. Changes in assumptions
relationships and other intangibles acquired in concerning future financial results or other
business combinations. underlying assumptions, including macroeconomic
factors, government legislation, changes in the
Fair values of reporting units are estimated based competitive landscape or other market conditions
on discounted cash flow analysis and market approach could impact our ability to achieve profitability
models using assumptions that we believe a projections. If we consistently do not achieve
hypothetical market participant would use to our earnings and cash flow projections or our
determine a current transaction price. The cost of capital rises significantly, the
significant assumptions and estimates used in assumptions and estimates underlying the goodwill
determining fair value primarily include the and intangible asset impairment evaluations could
discount rate and future cash flows. A discount rate be adversely affected and result in future
is selected to correspond with each reporting unit's impairment charges that would negatively impact
weighted average cost of capital, consistent with our operating results and financial position.
that used for investment decisions considering the
specific and detailed operating plans and strategies Specific to the U.S. Government reporting unit,
within each reporting unit. Projections of future in 2021 we experienced elevated medical claims
cash flows differ by reporting unit and are and lower risk adjustment revenues primarily due
consistent with our ongoing strategy and projection to the COVID-19 pandemic. If these factors were
processes. Future cash flows for Evernorth are to worsen or continue beyond our current
primarily driven by the forecasted gross margins of expectations, profitability could be further
the business, as well as operating expenses and impacted and significantly reduce the fair value
long-term growth rates. Future cash flows for our of this reporting unit.
other reporting units are primarily driven by
forecasted revenues, benefit expenses, operating
expenses and long-term growth rates.
The fair value of intangibles and the amortization
method were determined using an income approach that
relies on projected future cash flows including key
assumptions for customer attrition and discount
rates. 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.
Our U.S. Government reporting unit contracts with
CMS to provide managed health care services,
including Medicare Advantage and Medicare-approved
prescription drug plans. Estimated future cash flows
for this reporting unit's Medicare Advantage
business incorporate the current reimbursement
structure for 2022 and beyond. Revenues from the
Medicare programs are dependent, in whole or in
part, upon annual funding from the federal
government through CMS. Funding levels for these
programs are dependent on many factors including
changes to the risk adjustment payment methodology,
government efforts to contain health care costs,
budgetary constraints and general political issues
and priorities.
The Company conducts its quantitative evaluation for
goodwill impairment at least annually during the
third quarter at the reporting unit level and
performs qualitative impairment assessments on a
quarterly basis to determine if events or changes in
circumstances indicate that it is more likely than
not that the carrying value of a reporting unit
exceeds its estimated fair value.
Goodwill and other intangibles as of December 31
were as follows (in millions):
·2021 -
See Note 18 to the Consolidated Financial Statements for additional discussion of our goodwill and other intangible assets.
64
--------------------------------------------------------------------------------
Balance Sheet Caption /
Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Income taxes - uncertain tax positions The factors that could
impact our estimates of
uncertain tax positions include the likelihood
We evaluate tax positions to determine whether of being sustained upon audit based on the
the benefits are more likely than not to be technical merits of the tax position and related
sustained on audit based on their technical assumed interest and penalties. If our positions
merits. The Company establishes a liability if are upheld upon audit, our net income would
the probability that the position will be increase.
sustained is 50% or less. For uncertain
positions that management believes are more
likely than not to be sustained, the Company
recognizes a liability based upon management's
estimate of the most likely settlement outcome
with the taxing authority. These amounts
primarily relate to federal and state uncertain
positions of the value and timing of deductions
and uncertain positions of attributing taxable
income to states
Balances that are included in the Consolidated
Balance Sheets are as follows (in millions):
·2021 - $1,230
·2020 - $1,210
See Note 21 to the Consolidated Financial
Statements for additional discussion around
uncertain tax positions and the Liquidity and
Capital Resources section of this MD&A for a
discussion of their potential impact on
liquidity.
Balance Sheet Caption /
Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Unpaid claims and claim expenses - Cigna Based on studies of our claim experience, it is
Healthcare reasonably possible that a 100 basis point change
in the medical cost trend and a 50 basis point
Unpaid claims and claim expenses include both change in completion factors could occur in the
reported claims and estimates for losses incurred near term.
but not yet reported.
A 100 basis point increase in the medical cost
Unpaid claims and claim expenses in Cigna trend rate would increase this liability by
Healthcare are primarily impacted by assumptions approximately $60 million , resulting in a
related to completion factors and medical cost decrease in net income of approximately $50
trend. Variation of actual results from either million after-tax, and a 50 basis point decrease
assumption could impact the unpaid claims balance in completion factors would increase this
as noted below. A large number of factors may liability by approximately $125 million ,
cause the medical cost trend to vary from the resulting in a decrease in net income of
Company's estimates, including: changes in health approximately $100 million after-tax.
management practices, changes in the level and
mix of benefits offered and services utilized and
changes in medical practices. Completion factors
may be affected if actual claims submission rates
from providers differ from estimates (that can be
influenced by a number of factors, including
provider mix and electronic versus manual
submissions), or if changes to the Company's
internal claims processing patterns occur.
Unpaid claims and claim expenses for the Cigna
Healthcare segment as of December 31 were as
follows (in millions):
·2021 - gross $4,261 ; net $4,000
·2020 - gross $3,695 ; net $3,458
These liabilities are presented above both gross
and net of reinsurance and other recoverables.
See Note 9 to the Consolidated Financial
Statements for additional information regarding
assumptions and methods used to estimate this
liability.
65
-------------------------------------------------------------------------------- Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different
Assumptions Used
Valuation of debt security investments If the derived interest
rates used to calculate
fair value increased by 100 basis points, the
Most debt securities are classified as available fair value of the total debt security portfolio
for sale and are carried at fair value with of $17 billion would decrease by approximately
changes in fair value recorded in accumulated $1.3 billion , resulting in an after-tax decrease
other comprehensive income (loss) within to shareholders' equity of approximately $0.7
shareholders' equity. billion as of December 31, 2021.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. Determining fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select based on an understanding of the issuer, the structure of the security and overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. Approximately two-thirds of our debt securities are public securities and one-third are private placement securities. Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows of the instrument. Such market rates are derived by calculating the appropriate spreads over comparableU.S. Treasury securities, based on the credit quality, industry and structure of the asset. See Notes 11A. and 12 to the Consolidated Financial Statements for a discussion of our fair value measurements, the procedures performed by management to determine that the amounts represent appropriate estimates and our accounting policy regarding unrealized appreciation on debt securities. 66
--------------------------------------------------------------------------------
SEGMENT REPORTING
The following section of this MD&A discusses the results of each of our segments.
Cigna entered into a definitive agreement inOctober 2021 to sell its life, accident and supplemental benefits businesses in seven countries to Chubb for$5.75 billion cash. In connection with the pending Chubb Transaction, we revised our business reporting structure. As such, we adjusted our segment reporting effective in the fourth quarter of 2021 so that the results previously reported in the International Markets segment are now reported as follows: •The businesses to be retained by Cigna are now reported in the newly createdInternational Health operating segment that will be aggregated with our existingU.S. Commercial andU.S. Government operating segments in the renamedCigna Healthcare reporting segment (previously namedU.S. Medical).
•The businesses to be sold pursuant to the Chubb Transaction are now reported in Other Operations.
See Note 1 to the Consolidated Financial Statements for further description of our segments.
In segment discussions, we present "adjusted revenues" and "pre-tax adjusted income (loss) from operations," defined as income (loss) before income taxes excluding net realized investment results, amortization of acquired intangible assets, results of transitioning clients prior to 2020 and special items. Cigna's share of certain realized investment results of its joint ventures reported in theCigna Healthcare segment using the equity method of accounting are also excluded. Special items are matters that management believes are not representative of the underlying results of operations due to their nature or size. Ratios presented in this segment discussion exclude the same items as adjusted revenues and pre-tax adjusted income (loss) from operations. See Note 23 to the Consolidated Financial Statements for additional discussion of these metrics and a reconciliation of income before income taxes to pre-tax adjusted income from operations, as well as a reconciliation of total revenues to adjusted revenues. Note 23 to the Consolidated Financial Statements also explains that segment revenues include both external revenues and sales between segments that are eliminated in Corporate.
In these segment discussions, we also present "pre-tax adjusted margin," defined as pre-tax adjusted income (loss) from operations divided by adjusted revenues.
See the "Executive Overview" section of this MD&A for summarized financial results of each of our segments.
Evernorth Segment
Evernorth includes a broad range of coordinated and point solution health
services and capabilities, as well as those from partners across the healthcare
system, in pharmacy solutions, benefits management solutions, care delivery and
care management solutions and intelligence solutions. As described in the
introduction to Segment Reporting, Evernorth's performance is measured using
adjusted revenues and pre-tax adjusted income from operations.
The key factors that impact Evernorth's pharmacy revenues and pharmacy and other
service costs are volume, mix of claims and price. These key factors are
discussed further below. See Note 2 to the Consolidated Financial Statements
included in this Form 10-K for additional information on revenue and cost
recognition policies for this segment.
•As our clients' claim volumes increase or decrease, our resulting revenues and
cost of revenues correspondingly increase or decrease. Our gross profit could
also increase or decrease as a result of changes in purchasing discounts.
•The mix of claims generally considers the type of drug and distribution method
used for dispensing and fulfilling. Types of drugs can have an impact on our
pharmacy revenues, pharmacy and other service costs and gross profit, including
amounts payable under certain financial and performance guarantees with our
clients. In addition to the types of drugs, the mix of generic claims (i.e.,
generic fill rate) also impacts our gross profit. Generally, higher generic fill
rates reduce revenues, as generic drugs are typically priced lower than the
branded drugs they replace. However, as ingredient cost paid to pharmacies on
generic drugs is incrementally lower than the price charged to our clients,
higher generic fill rates generally have a favorable impact on our gross profit.
The home delivery generic fill rate is currently lower than the network generic
fill rate as fewer generic substitutions are available among maintenance
medications (such as therapies for chronic conditions) commonly dispensed from
home delivery pharmacies as compared to acute medications that are primarily
dispensed by pharmacies in our retail networks. Furthermore, our gross profit
differs among network, home delivery and specialty distribution methods and can
impact our profitability.
•Our client contract pricing is impacted by our ongoing ability to negotiate
favorable contracts for pharmacy network, pharmaceutical and wholesaler
purchasing and manufacturer rebates. As we seek to improve the effectiveness of
our
67
-------------------------------------------------------------------------------- integrated solutions for the benefit of our clients, we are continuously innovating and improving affordability. Our gross profit could also increase or decrease as a result of drug purchasing contract initiatives implemented. Inflation also impacts our pricing because most of our contracts provide that we bill clients and pay pharmacies based on a generally recognized price index for pharmaceuticals. Therefore, the rate of inflation for prescription drugs and our efforts to manage this inflation for our clients continues to be a significant driver of our revenues and cost of revenues in the current environment. In this MD&A, we present revenues and gross profit, as well as adjusted revenues and adjusted gross profit, consistent with our segment reporting metrics, which exclude special items and, for periods prior to 2020, contributions from transitioning clients. As ofDecember 31, 2019 , the transition of these clients was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our adjusted metrics. Additionally, for the year endedDecember 31, 2020 , we recorded an adjustment related to a former client contract that was excluded from our adjusted metrics. See the "Key Transactions and Business Developments" section of this Form 10-K MD&A for further discussion of transitioning clients and why we present this information. Results of Operations Change Favorable Change Favorable Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable) (Dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Total revenues$ 131,912 $ 116,334 $ 109,794 $ 15,578 13 %$ 6,540 6 % Less: Transitioning clients - - (13,347) - N/M 13,347 N/M Less: Contractual adjustment for a former client - (204) - 204 N/M (204) N/M Adjusted revenues (1)$ 131,912 $ 116,130 $ 96,447 $ 15,782 14 %$ 19,683 20 % Gross profit$ 8,408 $ 7,797 $ 8,908 $ 611 8 %$ (1,111) (12) % Adjusted gross profit (1)$ 8,408 $ 7,593 $ 6,984 $ 815 11 % $ 609 9 % Pre-tax adjusted income from operations$ 5,818 $ 5,363 $ 5,092 $ 455 8 % $ 271 5 % Pre-tax adjusted margin 4.4 % 4.6 % 5.3 % (20) bps (70) bps Adjusted expense ratio (2) 1.9 % 1.9 % 2.0 % - bps (10) bps Change Favorable Change Favorable For the Years Ended December 31, (Unfavorable) (Unfavorable) (Dollars and adjusted scripts in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Selected Financial Information (1) Pharmacy revenue by distribution channel Adjusted network revenues$ 64,992 $ 56,181 $ 41,483 16 % 35 % Adjusted home delivery and specialty revenues 54,391 49,886 45,836 9 % 9 % Other pharmacy revenues 6,428 5,403 4,900 19 % 10 % Total adjusted pharmacy revenues$ 125,811 $ 111,470 $ 92,219 13 % 21 % Adjusted fees and other revenues 6,084 4,628 4,168 31 % 11 % Net investment income 17 32 60 (47) % (47) % Adjusted revenues$ 131,912 $ 116,130 $ 96,447 14 % 20 % Pharmacy script volume Adjusted network scripts (3) 1,355 1,206 941 12 % 28 % Adjusted home delivery and specialty scripts (3) 283 287 283 (1) % 1 % Total adjusted scripts (3) 1,638 1,493 1,224 10 % 22 % Generic fill rate (4) Network 85.4 % 87.4 % 87.1 % (200) bps 30 bps Home delivery 85.9 % 85.2 % 84.3 % 70 bps 90 bps Overall generic fill rate 85.5 % 87.2 % 86.8 % (170) bps 40 bps (1)Amounts exclude special items and for periods prior to 2020, contributions from transition clients for the year endedDecember 31, 2019 . (2)Adjusted expense ratio is calculated as selling, general and administrative expense excluding contributions from transition clients for the year endedDecember 31, 2019 as a percentage of adjusted revenues. (3)Non-specialty network scripts filled through 90-day programs and home delivery scripts are multiplied by three. All other network and specialty scripts are counted as one script. (4)Generic fill rate is defined as the total number of generic scripts divided by the total overall scripts filled. 68 --------------------------------------------------------------------------------
2021 versus 2020
Adjusted network revenues increased, reflecting increased prices, due to inflation on branded drugs and higher claims volume, primarily due to our collaboration with Prime Therapeutics. These increases were partially offset by claims mix due to an increase in the generic fill rate after excluding the impact of COVID-19 vaccines.
Adjusted home delivery and specialty revenues increased, reflecting higher specialty claims volume due in part to our collaboration with Prime Therapeutics, as well as increased prices, primarily due to inflation on branded drugs. These increases were partially offset by slightly lower home delivery claims volume.
Other pharmacy revenues increased, reflecting higher volume from our CuraScript Specialty Distribution business.
Adjusted fees and other revenues increased, reflecting customer growth from our services supporting benefits management solutions, including customer growth from certain fee based contractual arrangements and the acquisition ofMDLIVE . Adjusted gross profit and pre-tax adjusted income from operations increased, reflecting continued contract affordability improvements and business growth. Pre-tax adjusted income from operations increase was partially offset by strategic investments in expanding partnerships, new businesses and solutions, and digital technology. The expense ratio was flat reflecting higher revenues as well as increased strategic investments in expanding partnerships, new businesses and solutions, and digital technology in the year endedDecember 31, 2021 offset by increased operating expenses due to client transitions in the year endedDecember 31, 2020 .
2020 versus 2019
In the first quarter of 2020,U.S. Government operating segment customers transitioned to Express Scripts' retail pharmacy network. In the third quarter of 2019,U.S. Commercial operating segment customers transitioned to Express Scripts' retail pharmacy network. Adjusted network revenues increased, reflecting the transition ofCigna Healthcare's customers, higher claims volume due to our collaboration with Prime Therapeutics and increased prices due to inflation on branded drugs. These favorable effects were partially offset by claims mix due to the increase in the generic fill rate. Adjusted home delivery and specialty revenues increased, reflecting higher prices, due to inflation on branded drugs and higher home delivery and specialty claims volume. These increases were partially offset by claims mix due to an increase in the generic fill rate. Adjusted gross profit and pre-tax adjusted income from operations increased, reflecting customer growth, higher adjusted pharmacy scripts volumes, continued contract affordability improvements and the favorable impact of claims mix as a result of the types of drugs dispensed, the distribution method used for dispensing and fulfilling and an increase in the generic fill rate. Pre-tax adjusted income from operations increase was partially offset by an increase in operating expenses due to client transitions.
The expense ratio was lower, reflecting higher revenues and increased operating expenses due to client transitions.
Cigna Healthcare Segment
Cigna Healthcare includes Cigna'sU.S. Commercial,U.S. Government and International Health businesses, which provide comprehensive medical and coordinated solutions to clients and customers to support whole-person health needs.U.S. Commercial products and services include medical, pharmacy, behavioral health, dental, vision, health advocacy programs and other products and services for insured and self-insured customers.U.S. Government solutions include Medicare Advantage, Medicare Supplement and Medicare Part D plans for seniors and individual health insurance plans both on and off the public exchanges.International Health solutions include health care coverage in our international markets, as well as health care benefits for globally mobile individuals and employees of multinational organization.The Cigna Healthcare segment is comprised of the previously namedU.S. Medical segment and the businesses to be retained from the previous International Markets segment. The addition ofInternational Health to theCigna Healthcare segment did not have a material impact on the business drivers which contributed to changes in results of operations when comparing 2020 to 2019. As described in the introduction to Segment Reporting, performance of theCigna Healthcare segment is measured using adjusted revenues and pre-tax adjusted income from operations. Key factors affecting results for this segment include: •customer growth; •revenue growth; •percentage of Medicare Advantage customers in plans eligible for quality bonus payments; •medical costs as a percentage of premiums (medical care ratio or "MCR") for our insured businesses; and 69 -------------------------------------------------------------------------------- •selling, general and administrative expense as a percentage of adjusted revenues (expense ratio). Results of Operations For the Years Ended Change Favorable Change Favorable Financial Summary December 31, (Unfavorable) (Unfavorable) (Dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Adjusted revenues$ 44,652 $ 41,135 $ 39,089 $ 3,517 9 %$ 2,046 5 % Pre-tax adjusted income from operations$ 3,609 $ 4,031 $ 3,963 $ (422) (10) %$ 68 2 % Pre-tax adjusted margin 8.1 % 9.8 % 10.1 % (170) bps (30) bps Medical care ratio 84.0 % 78.3 % 80.0 % (570) bps 170 bps Expense ratio 21.0 % 23.5 % 23.4 % 250 bps (10) bps 2021 versus 2020 Adjusted revenues increased, reflecting Medicare Advantage and Individual customer growth, higher premium rates due to anticipated underlying medical cost trend, higher net investment income and the absence of the 2020 premium relief programs for clients implemented in response to significantly lower than historical utilization as individuals deferred care due to the COVID-19 pandemic. Pre-tax adjusted income from operations decreased due to increased utilization of health care services by our customers, including increased direct costs of COVID-19 testing, treatment and vaccines; partially offset by higher net investment income, increased specialty contributions, the absence of the premium relief programs and the repeal of the health insurance industry tax. The impacts of COVID-19 remain uncertain and could vary significantly as discussed in the "COVID-19 Update" section of this MD&A. The medical care ratio increased due to increased utilization of health care services by our customers, including increased direct costs of COVID-19 testing, treatment and vaccines as well as the repeal of the health insurance industry tax; partially offset by the absence of the premium relief programs.
The expense ratio decreased, reflecting increased revenues, the repeal of the health insurance industry tax, favorable litigation developments and efficiencies from continued disciplined expense management.
2020 versus 2019
Adjusted revenues increased, reflecting Medicare Advantage andU.S. Commercial insured customer growth, as well as higher premium rates due to anticipated underlying medical cost trend and the resumption of the health insurance industry tax. These favorable effects were partially offset by the impact of 2020 premium relief programs for clients implemented in response to significantly lower than historical utilization as individuals deferred care due to the COVID-19 pandemic. Pre-tax adjusted income from operations increased, reflecting net favorable COVID-19 related impacts as well asU.S. Commercial insured and Medicare Advantage customer growth; partially offset by the resumption of the health insurance industry tax and less favorable prior period development. COVID-19 related impacts include deferral of care by our customers; partially offset by direct COVID-19 costs, costs of actions we have taken to support customers, providers and employees, and increased disenrollment resulting from the economic impacts of the pandemic. The medical care ratio decreased driven by COVID-19 related impacts and the pricing effect of the health insurance industry tax. COVID-19 related impacts include deferral of care by our customers; partially offset by direct COVID-19 costs and premium relief programs extended to employer clients.
The expense ratio was flat reflecting higher insured revenues as well as efficiencies from continued disciplined expense management and the resumption of the health insurance industry tax.
70
--------------------------------------------------------------------------------Medical Customers
A medical customer is defined as a person meeting any one of the following criteria:
•is covered under a medical insurance policy, managed care arrangement or
service agreement issued by us;
•has access to our provider network for covered services under their medical
plan; or
•has medical claims that are administered by us.
Change Favorable Change Favorable
As of December 31, (Unfavorable) (Unfavorable)
(In thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Cigna Healthcare Medical Customers
Insured 4,757 4,538 4,466 219 5 % 72 2 %
U.S. Commercial 2,166 2,141 2,114 25 1 % 27 1 %
U.S. Government 1,510 1,387 1,361 123 9 % 26 2 %
International Health (1) 1,081 1,010 991 71 7 % 19 2 %
Services only 12,324 12,112 12,671 212 2 % (559) (4) %
U.S. Commercial 11,688 11,485 12,073 203 2 % (588) (5) %
International Health (1) 636 627 598 9 1 % 29 5 %
Total 17,081 16,650 17,137 431 3 % (487) (3) %
(1)
2021 versus 2020
Our medical customer base increased atDecember 31, 2021 compared withDecember 31, 2020 reflecting a higher customer base in our Middle Market,Select and International Health segments as well as our Individual business and Medicare Advantage plans; partially offset by a lower customer base in our National segment.
2020 versus 2019
Our medical customer base decreased atDecember 31, 2020 compared withDecember 31, 2019 , reflecting a lower customer base in our Middle Market and National Accounts segments and increased disenrollment resulting from the economic impacts of the COVID-19 pandemic; partially offset by growth in our Select segment, Medicare Advantage plans andInternational Health .
Unpaid Claims and Claim Expenses
As of December 31, Change Increase (Decrease) Change Increase (Decrease)
(In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Unpaid claims and claim expenses
- Cigna Healthcare $ 4,261 $ 3,695 $ 3,336 $ 566 15 % $ 359 11 %
2021 versus 2020
Our unpaid claims and claim expenses liability was higher as of December 31,
2021 compared with December 31, 2020 , primarily due to Medicare Advantage and
Individual customer growth and increased claim volumes.
2020 versus 2019
Our unpaid claims and claim expenses liability was higher as ofDecember 21, 2020 compared withDecember 31, 2019 , primarily due to Medicare Advantage andU.S. Commercial insured customer growth.
Other Operations
For 2021, 2020 and 2019, Other Operations includes International businesses to be sold,Corporate Owned Life Insurance ("COLI") and the Company's run-off operations. Prior to the sale of the Group Disability and Life business onDecember 31, 2020 , Other Operations also included Cigna's Group Disability and Life business which offered group long-term and short-term disability and group life, accident, voluntary and specialty insurance products and services. Other Operations was previously named Group 71 -------------------------------------------------------------------------------- Disability and Other. As described in the introduction of Segment Reporting, performance of Other Operations is measured using adjusted revenues and pre-tax adjusted income from operations. Results of Operations Change Favorable Change Favorable Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable) (Dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Adjusted revenues$ 3,989 $ 8,446 $ 8,215 $ (4,457) (53) % $ 231 3 % Pre-tax adjusted income from operations$ 889 $ 966 $ 1,131 $ (77) (8) % $ (165) (15) % Pre-tax adjusted margin 22.3 % 11.4 % 13.8 % 1,090 bps (240) bps 2021 versus 2020
Adjusted revenues decreased due to the sale of the Group Disability and Life
business on
Pre-tax adjusted income from operations also declined due to the sale of theGroup Disability and Life Insurance business. That decrease was partially offset by an increase in earnings from the International businesses held for sale.
2020 versus 2019
Adjusted revenues increased, reflecting business growth in the International businesses held for sale and the sold Group Disability and Life business. Partially offsetting those favorable effects were lower net investment income in the sold Group Disability and Life business and unfavorable foreign currency movements in the International businesses held for sale. Pre-tax adjusted income from operations decreased due to lower earnings in the sold Group Disability and Life business reflecting unfavorable life claims experience related to the COVID-19 pandemic, unfavorable disability claim experience and lower investment income, partially offset by favorable results in the voluntary products. Those unfavorable effects were partially offset by improved earnings in the International businesses held for sale reflecting improved margin and business growth.
Other Items Related to International Businesses Subject to Definitive Purchase Agreement
For the year ended,December 31, 2021 , 86% of the segment's adjusted revenues and 89% of the segment's pre-tax adjusted income from operations was associated with International businesses held for sale.
Corporate
Corporate reflects amounts not allocated to operating segments, including net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment and other operations), certain litigation matters, expense associated with our frozen pension plans, charitable contributions, severance, certain overhead and enterprise-wide project costs and intersegment eliminations for products and services sold between segments. Financial Summary For the Years Ended December 31, Change Favorable (Unfavorable) Change Favorable (Unfavorable) (In millions) 2021 2020 2019 2021 vs. 2020
2020 vs. 2019
Pre-tax adjusted (loss) from operations$ (1,339) $ (1,552) $ (1,824) $ 213 14 %$ 272 15 % 2021 versus 2020
Pre-tax adjusted loss from operations was lower, primarily reflecting lower interest expense due to a lower average interest rate and lower levels of outstanding debt resulting from debt repayments.
2020 versus 2019
Pre-tax adjusted loss from operations was lower, primarily reflecting lower interest expense due to lower levels of debt.
INVESTMENT ASSETS
The following table presents our investment asset portfolio excluding separate account assets as ofDecember 31, 2021 andDecember 31, 2020 . Additional information regarding our investment assets is included in Notes 11, 12, 13 and 14 to the Consolidated 72 -------------------------------------------------------------------------------- Financial Statements. For comparisons of investment assets portfolio excluding separate account assets as ofDecember 31, 2020 compared withDecember 31, 2019 , please refer to the previously filed MD&A included in Part II, Item 7 of our Form 10-K for the year endedDecember 31, 2020 . December 31, December 31, (In millions) 2021 2020 Debt securities$ 16,958 $ 18,131 Equity securities 603 501 Commercial mortgage loans 1,566 1,419 Policy loans 1,338 1,351 Other long-term investments 3,574 2,832 Short-term investments 428 359 Total 24,467 Investments classified as assets of businesses held for sale (1)
(5,109)
Investments per Consolidated Balance Sheets $
19,358
(1) Investments related to the international life, accident and supplemental benefits businesses that are held for sale. See Note 5 to the Consolidated Financial Statements for additional information.
Investments in debt securities include publicly-traded and privately-placed bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor. These investments are classified as available for sale and are carried at fair value on our balance sheet. Additional information regarding valuation methodologies, key inputs and controls is included in Note 12 to the Consolidated Financial Statements. More detailed information about debt securities by type of issuer and maturity dates is included in Note 11 to the Consolidated Financial Statements.
The following table reflects our portfolio of debt securities by type of issuer
as of
December 31, December 31,
(In millions) 2021 2020
Federal government and agency $ 387 $ 456
State and local government 171 167
Foreign government 2,616 2,511
Corporate 13,266 14,562
Mortgage and other asset-backed 518 435
Total $ 16,958 $ 18,131 Our debt securities portfolio decreased during 2021, reflecting a decrease in valuations due to increasing yields and net sale activity.
As ofDecember 31, 2021 ,$14.7 billion , or 87% of the debt securities in our investment portfolio were investment grade (Baa and above, or equivalent) and the remaining$2.3 billion were below investment grade. The majority of the bonds that are below investment grade are rated at the higher end of the non-investment grade spectrum. These quality characteristics have not materially changed since the prior year and remain consistent with our investment strategy. Debt securities include private placement assets of$5.8 billion . These investments are generally less marketable than publicly-traded bonds; however, yields on these investments tend to be higher than yields on publicly-traded bonds with comparable credit risk. We perform a credit analysis of each issuer and require financial and other covenants that allow us to monitor issuers for deteriorating financial strength and pursue remedial actions, if warranted. Investments in debt securities are diversified by issuer, geography and industry. On an aggregate basis, the debt securities portfolio continues to perform according to original investment expectations. However, due to the economic impacts of the COVID-19 pandemic, there are certain issuers, particularly within the aviation, energy and hospitality sectors, that have shown signs of distress, primarily in the form of requests for temporary covenant relief. There were no material unrealized losses in any of these sectors as of the reporting date. We continue to monitor the economic environment and its effect on our portfolio and consider the impact of various factors in determining the allowance for credit losses on debt securities, which is discussed in Note 11 to the Consolidated Financial Statements. Foreign government obligations are concentrated inAsia , primarilySouth Korea andTaiwan , consistent with our risk management practice and local regulatory requirements of our international business operations. We expect the amount of these foreign government 73 --------------------------------------------------------------------------------
obligations to decrease significantly during 2022 upon the close of our sale of certain international businesses as discussed in Note 5 to the Consolidated Financial Statements.
Commercial Mortgage Loans
As ofDecember 31, 2021 , the$1.6 billion commercial mortgage loan portfolio consisted of approximately 50 loans that are in good standing. Our commercial mortgage loans are fixed rate loans, diversified by property type, location and borrower. Given the quality and diversity of the underlying real estate, positive debt service coverage and significant borrower cash invested in the property generally ranging between 30 and 40%, we remain confident that the vast majority of borrowers will continue to perform as expected under their contract terms. For further discussion of the results and changes in key loan metrics, see Note 11 to the Consolidated Financial Statements. Loans are secured by high quality commercial properties, located in strong institutional markets and are generally made at less than 65% of the property's value at origination of the loan. Property value, debt service coverage, quality, building tenancy and stability of cash flows are all important financial underwriting considerations. We hold no direct residential mortgage loans and do not originate or service securitized mortgage loans. Our annual in-depth review of our commercial mortgage loan investments is the primary mechanism for monitoring the overall quality rating of the mortgage portfolio. We completed the annual in-depth review in the second quarter of 2021 which included an analysis of each underlying property's most recent annual financial statements, rent rolls and operating plans, as well as a physical inspection of the property and a review of applicable market reports. The results of this annual review confirmed that the overall credit quality of our portfolio remains strong and was generally in line with the previous year's results. COVID-19 has negatively impacted commercial real estate fundamentals and capital market activity with concentrated weakness in hotels and regional malls. Our mortgage loan portfolio is well diversified by property type and geography with no material exposure to hotels and no exposure to regional shopping malls. We continue to monitor the long-term impacts surrounding the office sector fundamentals due to multiple headwinds that may impact future valuations: expanded work from home flexibility, shorter term leases, elevated tenant improvement allowances and corporate migration to lower cost states. Our mortgage loans secured by office properties are in good standing.
Other Long-term Investments
Other long-term investments of$3.6 billion as ofDecember 31, 2021 included investments in securities limited partnerships and real estate limited partnerships, direct investments in real estate joint ventures and other deposit activity that is required to support various insurance and health services businesses. The increase in other long-term investments of$0.7 billion sinceDecember 31, 2020 is primarily driven by net additional funding activity and value creation in the underlying investments. These limited partnership entities typically invest in mezzanine debt or equity of privately-held companies and equity real estate. Given our subordinate position in the capital structure of these underlying entities, we assume a higher level of risk for higher expected returns. To mitigate risk, these investments are diversified across approximately 210 separate partnerships and approximately 110 general partners who manage one or more of these partnerships. Also, the underlying investments are diversified by industry sector or property type and geographic region. No single partnership investment exceeded 4% of our securities and real estate limited partnership portfolio. Income from our limited partnership investments is generally reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments. Our net investment income increased significantly versus 2020 driven by the strong performance of assets underlying our limited partnership investments. The broad recovery since the beginning of the outbreak of the COVID-19 pandemic has resulted in strong corporate earnings and higher public and private asset valuations. We expect continued volatility in private equity and real estate fund performance going forward as fair market valuations are adjusted to reflect market and portfolio transactions. We participate in an insurance joint venture inChina with a 50% ownership interest. We account for this joint venture under the equity method of accounting and report our share of the net assets of$1.0 billion in Other assets. Our 50% share of the investment portfolio supporting the joint venture's liabilities is approximately$8.4 billion as ofDecember 31, 2021 . These investments were comprised of approximately 75% debt securities, including government and corporate debt diversified by issuer, industry and geography; 15% equities, including mutual funds, equity securities and private equity partnerships; and 10% long-term deposits and policy loans. Approximately 1% of the joint venture's investment assets are exposed to private real estate property developers in theChina market. We participate in the approval of the joint venture's investment strategy and continuously review its execution. There were no investments with a material unrealized loss as ofDecember 31, 2021 . 74 --------------------------------------------------------------------------------
Investment Outlook
We continue to actively monitor the economic impact of the pandemic, including supply chain, labor market and inflation dynamics, as well as fiscal and monetary responses and their potential impact on the portfolio. Future realized and unrealized investment results will be driven largely by market conditions that exist when a transaction occurs or at the reporting date. These future conditions are not reasonably predictable; however, we believe that the vast majority of our investments will continue to perform under their contractual terms. Based on our strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, we expect to hold a significant portion of these assets for the long-term. Although future declines in investment fair values resulting from interest rate movements and credit deterioration due to both investment-specific and the global economic uncertainties discussed above remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity.
MARKET RISK
Financial Instruments
Our assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. Consistent with disclosure requirements, the following items have been excluded from this consideration of market risk for financial instruments: •changes in the fair values of insurance-related assets and liabilities 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); and •changes in the fair values of other significant assets and liabilities, such as goodwill, deferred policy acquisition costs, taxes and various accrued liabilities. Because they are not financial instruments, their primary risks are other than market risk.
Excluding these items, our primary market risk exposures from financial instruments are:
•Interest-rate risk on fixed-rate, medium-term instruments. Changes in market interest rates affect the value of instruments that promise a fixed return. •Foreign currency exchange rate risk of theU.S. dollar, net of derivatives used for hedging, is primarily to the Chinese yuan renminbi and South Korean won. An unfavorable change in exchange rates reduces the carrying value of net assets denominated in foreign currencies.
Our Management of Market Risks
We predominantly rely on three techniques to manage our exposure to market risk:
•Investment/liability matching. We generally select investment assets with
characteristics (such as duration, yield, currency and liquidity) that
correspond to the underlying characteristics of our related insurance and
contractholder liabilities so that we can match the investments to our
obligations. Shorter-term investments generally support 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 payout periods such as annuities.
•Use of local currencies for foreign operations. We generally conduct our
international business through foreign operating entities that maintain assets
and liabilities in local currencies. This technique limits exchange rate risk to
our net assets.
•Use of derivatives. We use derivative financial instruments to reduce our
primary market risks. See Note 11 to the Consolidated Financial Statements for
additional information about derivative financial instruments.
75
--------------------------------------------------------------------------------Effect of Market Fluctuations
Assuming a 100 basis point increase in interest rates and 10% strengthening in theU.S. dollar to foreign currencies, the effect of hypothetical changes in market rates or prices on the fair value of certain financial instruments, subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as ofDecember 31 : Market scenario for certain non-insurance financial instruments Loss in Fair Value (in billions) 2021 2020
100 basis point increase in interest rates (excluding long-term debt)
$ 1.4 $ 1.4 10% strengthening inU.S. dollar to foreign currencies
The effect of a hypothetical increase in interest rates, primarily on debt securities and commercial mortgage loans, was determined by estimating the present value of future cash flows using various models, primarily duration modeling.
In the event of a hypothetical 100 basis point increase in interest rates, the fair value of the Company's long-term debt would decrease approximately$2.9 billion atDecember 31, 2021 and$3.0 billion atDecember 31, 2020 . Changes in the fair value of our long-term debt do not impact our financial position or operating results. See Note 7 to the Consolidated Financial Statements for additional information about the Company's debt. The effect of a hypothetical strengthening of theU.S. dollar relative to the foreign currencies of certain financial instruments held by us was estimated to be 10% of the fair value of these instruments, translated to theU.S. dollar. Our foreign operations hold investment assets, such as debt securities, cash and cash equivalents that are generally invested in the currency of the related liabilities.
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.
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