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Executive Overview 38 Liquidity and Capital Resources 44 Critical Accounting Estimates 47 Segment Reporting 47 Evernorth 47Cigna Healthcare 49 Other Operations 52 Corporate 52 Investment Assets 53 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 ofJune 30, 2022 , compared withDecember 31, 2021 and our results of operations for the three and six months endedJune 30, 2022 , compared with the same periods last year 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 I, Item 1 of this Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"). In particular, we encourage you to refer to the "Risk Factors" contained in Part I, Item 1A of the 2021 Form 10-K. Unless otherwise indicated, financial information in this MD&A is presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). See Note 2 to the Consolidated Financial Statements in our 2021 Form 10-K for additional information regarding the Company's significant accounting policies and see Note 2 to the Consolidated Financial Statements in this Form 10-Q for updates to those policies resulting from adopting new accounting guidance, if any. The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors call for caution in estimating full-year results based on interim results of operations. 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 less pre-tax income/loss attributable to noncontrolling interests for the segment metric) excluding net realized investment results, amortization of acquired intangible assets, 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. 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 and Cigna's share of certain realized investment results of its joint ventures reported in theCigna 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. 37 --------------------------------------------------------------------------------
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on Cigna's current expectations and projections about future trends, events and uncertainties. These statements are not historical facts. Forward-looking statements may include, among others, statements concerning future financial or operating performance, including our ability to deliver affordable, predictable and simple solutions for our customers and clients, including in light of the challenges presented by the COVID-19 pandemic; future growth, business strategy, and strategic or operational initiatives; economic, regulatory or competitive environments, particularly with respect to the pace and extent of change in these areas and the impact of developing inflationary pressures; the ongoingRussia -Ukraine conflict; financing or capital deployment plans and amounts available for future deployment; our prospects for growth in the coming years; strategic transactions, including the sale of our international life, accident and supplemental benefits businesses; and other statements regarding Cigna's future beliefs, expectations, plans, intentions, liquidity, cash flows, financial condition or performance. You may identify forward-looking statements by the use of words such as "believe," "expect," "project," "plan," "intend," "anticipate," "estimate," "predict," "potential," "may," "should," "will" or other words or expressions of similar meaning, although not all forward-looking statements contain such terms. Forward-looking statements are subject to risks and uncertainties, both known and unknown, that could cause actual results to differ materially from those expressed or implied in forward-looking statements. Such risks and uncertainties include, but are not limited to: our ability to achieve our strategic and operational initiatives; our ability to adapt to changes in an evolving and rapidly changing industry; our ability to compete effectively, differentiate our products and services from those of our competitors and maintain or increase market share; price competition, inflation and other pressures that could compress our margins or result in premiums that are insufficient to cover the cost of services delivered to our customers; the potential for actual claims to exceed our estimates related to expected medical claims; our ability to develop and maintain satisfactory relationships with physicians, hospitals, other health service providers and with producers and consultants; our ability to maintain relationships with one or more key pharmaceutical manufacturers or if payments made or discounts provided decline; changes in the pharmacy provider marketplace or pharmacy networks; changes in drug pricing or industry pricing benchmarks; political, legal, operational, regulatory, economic and other risks that could affect our multinational operations; the scale, scope and duration of the COVID-19 pandemic and its potential impact on our business, operating results, cash flows or financial condition; risks related to strategic transactions and realization of the expected benefits of such transactions, including with respect to the sale of our international life, accident and supplemental benefits businesses, as well as integration or separation difficulties or underperformance relative to expectations; dependence on success of relationships with third parties; risk of significant disruption within our operations or among key suppliers or third parties; our ability to invest in and properly maintain our information technology and other business systems; our ability to prevent or contain effects of a potential cyberattack or other privacy or data security incident; potential liability in connection with managing medical practices and operating pharmacies, onsite clinics and other types of medical facilities; the substantial level of government regulation over our business and the potential effects of new laws or regulations or changes in existing laws or regulations; uncertainties surrounding participation in government-sponsored programs such as Medicare; the outcome of litigation, regulatory audits and investigations; compliance with applicable privacy, security and data laws, regulations and standards; potential failure of our prevention, detection and control systems; unfavorable economic and market conditions, including the risk of a recession or other economic downturn and resulting impact on employment metrics, stock market or interest rate declines and risks related to a downgrade in financial strength ratings of our insurance subsidiaries; the impact of our significant indebtedness and the potential for further indebtedness in the future; unfavorable industry, economic or political conditions; credit risk related to our reinsurers; as well as more specific risks and uncertainties discussed in Part I, Item 1A - Risk Factors of our 2021 Form 10-K, Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Form 10-K, and as described from time to time in our future reports filed with theSecurities and Exchange Commission . You should not place undue reliance on forward-looking statements, which speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Cigna undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.
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 our 2021 Form 10-K. 38
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Financial Highlights
See Note 1 to the Consolidated Financial Statements for a description of our segments. The commentary provided below describes our results for the three and six months endedJune 30, 2022 compared with the same periods in 2021. Unless specified otherwise, commentary applies to both the three and six month periods.
Summarized below are certain key measures of our performance by segment for the
three and six months ended
Three Months EndedJune 30 , Six Months Ended June
30,
(Dollars in millions, except per share amounts) 2022 2021 % Change 2022 2021 % Change Revenues Adjusted revenues by segment Evernorth$ 34,863 $ 32,592 7 %$ 68,449 $ 63,212 8 % Cigna Healthcare 11,337 11,149 2 22,729 22,216 2 Other Operations 948 990 (4) 1,927 1,995 (3) Corporate, net of eliminations (1,717) (1,624) (6) (3,566) (3,331) (7) Adjusted revenues 45,431 43,107 5 89,539 84,092 6 Net realized investment results from certain equity method investments 49 24 104 (54) 10 N/M Total revenues$ 45,480 $ 43,131 5 %$ 89,485 $ 84,102 6 % Shareholders' net income$ 1,559 $ 1,467 6 %$ 2,742 $ 2,628 4 % Adjusted income from operations$ 1,981 $ 1,808 10 %$ 3,912 $ 3,472 13 % Earnings per share (diluted) Shareholders' net income $ 4.90$ 4.25 15 %$ 8.57 $ 7.54 14 % Adjusted income from operations $ 6.22$ 5.24 19 %$ 12.23 $ 9.96 23 % Pre-tax adjusted income (loss) from operations by segment Evernorth$ 1,475 $ 1,413 4 %$ 2,777 $ 2,636 5 % Cigna Healthcare 1,240 1,049 18 2,519 2,091 20 Other Operations 233 215 8 459 446 3 Corporate, net of eliminations (401) (344) (17) (744) (698) (7) Consolidated pre-tax adjusted income from operations 2,547 2,333 9 5,011 4,475 12 Income attributable to noncontrolling interests 15 11 36 32 23 39 Net realized investment gains (losses) (1) (46) 83 N/M (468) 70 N/M Amortization of acquired intangible assets (501) (503) - (959) (998) 4 Special items (30) (26) (15) (82) (159) 48 Income before income taxes$ 1,985 $ 1,898 5 %$ 3,534 $ 3,411 4 % (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.
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Consolidated Results of Operations (GAAP basis)
Three Months Ended Six Months Ended June 30, June 30, (Dollars in millions) 2022 2021 % Change 2022 2021 % Change Pharmacy revenues$ 31,972 $ 30,047 6 %$ 62,669 $ 58,072 8 % Premiums 10,426 10,323 1 20,782 20,537 1 Fees and other revenues 2,757 2,451 12 5,295 4,792 10 Net investment income 325 310 5 739 701 5 Total revenues 45,480 43,131 5 89,485 84,102 6 Pharmacy and other service costs 31,150 29,001 7 60,963 56,236
8
Medical costs and other benefit expenses 8,192 8,484 (3) 16,460 16,489 - Selling, general and administrative expenses 3,256 2,996 9 6,555 6,275 4 Amortization of acquired intangible assets 501 503 - 959 998 (4) Total benefits and expenses 43,099 40,984 5 84,937 79,998 6 Income from operations 2,381 2,147 11 4,548 4,104 11 Interest expense and other (301) (298) (1) (600) (612) 2 Debt extinguishment costs - (10) N/M - (141) N/M Net realized investment gains (losses) (95) 59 N/M (414) 60 N/M Income before income taxes 1,985 1,898 5 3,534 3,411 4 Total income taxes 413 422 (2) 764 764 - Net income 1,572 1,476 7 2,770 2,647 5 Less: Net income attributable to noncontrolling interests 13 9 44 28 19 47 Shareholders' net income$ 1,559 $ 1,467 6 %$ 2,742 $ 2,628 4 % Consolidated effective tax rate 20.8 % 22.2 % (140) bps 21.6 % 22.4 % (80) bps Medical customers (in thousands) 17,806 16,921
5 %
Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations Dollars in Millions Diluted Earnings Per Share Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 2022 2021 2022 2021 Shareholders' net income$ 1,559 $ 1,467 $ 2,742 $ 2,628 $ 4.90 $ 4.25 $ 8.57 $ 7.54 After-tax adjustments required to reconcile to adjusted income from operations Net realized investment (gains) losses (1) 16 (70) 371 (57) 0.05 (0.20) 1.16 (0.16) Amortization of acquired intangible assets 383 388 739 776 1.20 1.12 2.31 2.22 Special items Integration and transaction-related costs 26 14 63 36 0.08 0.04 0.20 0.10 Charge for organizational efficiency plan 17 - 17 - 0.05 - 0.05 - Charges (benefits) associated with litigation matters (20) - (20) (21) (0.06) - (0.06) (0.06) Debt extinguishment costs - 9 - 110 - 0.03 - 0.32 Total special items 23 23 60 125 0.07 0.07 0.19 0.36 Adjusted income from operations$ 1,981 $ 1,808 $ 3,912 $ 3,472 $ 6.22
(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. 40
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Recent Events
Inflation
The United States economy continues to be impacted by rising inflation. We have not experienced material impacts from inflation on our results of operations or cash flows for the three and six months endedJune 30, 2022 . We continue to monitor our operations, including vendor costs, health care provider costs and drug pricing for any inflationary impacts, and believe we are prepared to respond to inflationary pressures. For further information regarding risks we encounter in our business due to economic conditions including inflationary pressures, see "Risk Factors" contained in Part I, Item 1A of our 2021 Form 10-K.
Russian Invasion of
The war inUkraine has significantly affected individuals, economic activity and financial markets on a global scale. Cigna does not have operations or employees inUkraine orRussia and serves a limited number of customers and clients in these countries. We have not experienced significant impacts to date on our investment portfolio, financial position, or results of operations. For a more complete discussion of the risks we encounter in our business, see "Risk Factors" contained in Part I, Item 1A of our 2021 Form 10-K.
COVID-19
Cigna's commitment to the health, well-being and peace of mind of our employees and the people we serve remains our focus as the pandemic environment evolves. We continue to leverage our resources, expertise, data and actionable intelligence to assist customers, clients and care providers throughout this time. 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. For further information regarding the potential impact of COVID-19 on the Company, see "Risk Factors" contained in Part I, Item 1A of our 2021 Form 10-K.
Commentary: Three and Six Months Ended
The commentary presented below, and in the segment discussions that follow,
compare results for the three and six months ended
Shareholders' net income increased, reflecting strong growth in adjusted income from operations (as discussed below) and, for the six month period, the absence in 2022 of debt extinguishment costs incurred in 2021. These favorable effects were partially offset by higher realized investment losses primarily due to unfavorable mark-to-market adjustments on investments in 2022. Adjusted income from operations increased, primarily due to improved results inCigna Healthcare , primarily reflecting lower medical care ratios and increased specialty contributions, and in Evernorth, primarily reflecting continued contract affordability improvements and business growth. Medical customers increased, reflecting growth in our Middle Market,Select and International Health market segments. See "Cigna Healthcare segment" section of this MD&A for discussion of an update to the definitions ofU.S. Commercial's market segments. Pharmacy revenues increased, reflecting higher specialty claims volume due in part to Evernorth's collaboration with Prime Therapeutics, as well as increased prices, primarily due to inflation on branded drugs. See the "Evernorth segment" section of this MD&A for further discussion. Premiums were higher, reflecting increased specialty contributions and higher premium rates due to anticipated underlying medical cost trend, partially offset by the disposition of the Medicaid business. See "Cigna Healthcare segment" section of this MD&A for further discussion. Fees and other revenues increased, primarily reflecting customer growth from our Pharmacy Rebate Program services. See "Evernorth segment" section of this MD&A for further discussion.
Net investment income increased primarily due to strong returns on our partnership investments. See the "Investment Assets" section of this MD&A for further discussion.
41 -------------------------------------------------------------------------------- Pharmacy and other service costs increased, reflecting higher specialty claims volume due in part to Evernorth's collaboration with Prime Therapeutics, as well as increased prices, primarily due to inflation on branded drugs. Medical costs and other benefit expenses decreased for the three and six months endedJune 30, 2022 , reflecting reduced customers in ourU.S. Government business, primarily resulting from the disposition of the Medicaid business. Decreases also reflect lower direct COVID-19 costs and are partially offset by medical cost trend. See "Cigna Healthcare segment" section of this MD&A for further discussion. Selling, general and administrative expenses increased for the three months endedJune 30, 2022 , compared with the same period last year, primarily due to the absence of favorable litigation developments recorded in the second quarter of 2021 and, to a lesser extent, an increase in expenses associated with business growth. For the six months endedJune 30, 2022 , the increase was primarily driven by expenses associated with business growth.
Interest expense and other was essentially flat.
Debt extinguishment costs declined as no debt was retired early in the first six months of 2022.
Realized investment results were lower, primarily due to unfavorable mark-to-market adjustments on investments in 2022. See Note 11 to the Consolidated Financial Statements for further discussion.
The effective tax rate decreased, driven by favorable results relative to our foreign operations and for the six months endedJune 30, 2022 the favorable impact of the remeasurement of deferred taxes, partially offset by the absence of the favorable impact of non-recurring items recorded in 2021.
Developments
InApril 2022 , we entered into a five-year agreement withKaiser Permanente aimed at delivering increased convenience, affordability and expanded access to high-quality care forKaiser Permanente members. Initially, the agreement will focus on providingKaiser Permanente and its members access to: •Cigna'sPreferred Provider Organization ("PPO") provider network forKaiser Permanente members who need urgent or emergency care and are traveling outside ofKaiser Permanente's service areas, and •specialty pharmacy services through Evernorth's Accredo specialty pharmacy and Evernorth's CuraScript SD.
The agreement has the potential to extend in additional areas.
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 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 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).
As previously anticipated, during the second quarter of 2022, the Company
updated its strategic plan, primarily for severance costs, and recognized a
charge in the amount of
As a result of our Organizational Efficiency Plan, we expect to realize
annualized after-tax savings of
Sale of International Life, Accident and Supplemental Benefits Businesses in Six Countries
OnJuly 1, 2022 , we completed the sale of our life, accident and supplemental benefits businesses in six countries (Hong Kong ,Indonesia ,New Zealand ,South Korea ,Taiwan andThailand ) toChubb INA Holdings, Inc. ("Chubb") for approximately$5.4 billion in cash (the "Chubb Transaction"); as previously agreed, we excluded our interest in a joint venture in Türkiye from the Chubb Transaction. We aggregated and classified the assets and liabilities of these businesses as held for sale in our Consolidated Balance 42 -------------------------------------------------------------------------------- Sheets as ofJune 30, 2022 andDecember 31, 2021 . See Note 5 to the Consolidated Financial Statements for further information on the classification of these businesses as held for sale. The "Liquidity and Capital Resources" section of this MD&A provides further information on the impact of this transaction to liquidity. See "Other Operations" section of this MD&A for further information on the results of these businesses.
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") for$2.0 billion cash consideration. The acquisition ofMDLIVE enables Evernorth to continue expanding access to virtual care and delivering a more affordable, convenient and connected care experience for consumers.
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 85% for bonus payments to be received in 2023 based upon the mix of new and existing MA plans.
Medicare Advantage Rates
OnApril 4, 2022 , CMS released the final Calendar Year 2023 Medicare Advantage Capitation Rates and Part C and Part D Payment Policies (the "2023 Final Notice"). While the 2023 Final Notice rates are modestly higher than the advance notice rates (previously released onFebruary 2, 2022 ), we do not expect the final rates to have a material impact on our consolidated results of operations in 2023. 43 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
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 our 2021 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.
Cash flows for the six months ended
Six Months Ended June 30, (In millions) 2022 2021 Operating activities$ 3,274 $ 797 Investing activities$ (732) $ (3,024) Financing activities$ (3,087) $ (4,113) The following discussion explains variances in the various categories of cash flows for the six months endedJune 30, 2022 compared with the same period in 2021. 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.
As a result of the receipt of the delayed 2021 CMS Part D settlement, lower income tax payments and timing of payments in accounts payable and accrued liabilities in 2022 compared to 2021, cash provided by operating activities increased.
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Investing and Financing activities
The Company acquired
The Company repurchased less stock and repaid less debt, which resulted in a reduction in cash used in financing activities in 2022.
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$1.0 billion for the six months endedJune 30, 2022 and$1.3 billion for the six months endedJune 30, 2021 . Non-regulated subsidiaries also generate significant cash flow from operating activities, which is typically available immediately to the parent company for general corporate purposes.
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. As ofJune 30, 2022 , Cigna's revolving credit agreements include: a$3.0 billion five-year revolving credit and letter of credit agreement that expires inApril 2027 ; a$1.0 billion three-year revolving credit agreement that expires inApril 2025 ; and a$1.0 billion 364-day revolving credit agreement that expires inApril 2023 . As ofJune 30, 2022 , 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),$3.2 billion of remaining capacity under our commercial paper program and$4.6 billion in cash and short-term investments, approximately$0.7 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.
Our debt-to-capitalization ratio was 42.1% at
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$2.5 billion from its subsidiaries without further approvals as ofJune 30, 2022 .
Use of Capital Resources
Capital Expenditures. Capital expenditures for property, equipment and computer software were$612 million in the six months endedJune 30, 2022 compared to$500 million in the six months endedJune 30, 2021 . 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. During the first six months of 2022, Cigna declared and paid quarterly cash dividends of$1.12 per share of Cigna common stock. See Note 8 to the Consolidated Financial Statements for further information on our dividend payments. OnJuly 27, 2022 , the 45 -------------------------------------------------------------------------------- Board of Directors declared the third quarter cash dividend of$1.12 per share of Cigna common stock to be paid onSeptember 22, 2022 to shareholders of record onSeptember 7, 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. 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 (the "Exchange Act"), including through Rule 10b5-1 trading plans or privately negotiated transactions. The program may be suspended or discontinued at any time. InFebruary 2022 , the Board increased repurchase authority by an additional$6.0 billion . We repurchased 9.7 million shares for approximately$2.3 billion during the six months endedJune 30, 2022 , compared to 16.3 million shares for approximately$3.7 billion during the six months endedJune 30, 2021 . FromJuly 1, 2022 throughAugust 3, 2022 , we repurchased 10.4 million shares through the initial delivery under the accelerated share repurchase agreements ("ASR agreements") discussed below. Share repurchase authority was$5.3 billion as ofAugust 3, 2022 . OnJune 15, 2022 , as part of our existing share repurchase program, we entered into separate ASR agreements withMizuho Markets Americas LLC andMorgan Stanley & Co. LLC (collectively, the "Counterparties") to repurchase$3.5 billion of common stock in aggregate. InJuly 2022 , in accordance with the ASR agreements we remitted$3.5 billion to the Counterparties and received an initial delivery of 10.4 million shares of our common stock. We expect final settlement under the ASR agreements to occur in the fourth quarter of 2022. See Note 8 to the Consolidated Financial Statements for further information on our ASR agreements. Strategic investments. In 2022, we committed an additional$450 million (which in aggregate represents a$700 million commitment) toCigna Ventures , our strategic corporate venture fund.Cigna Ventures will use this funding to drive continuous health care transformation, innovation and growth. Sale of international life, accident and supplemental benefits businesses in six countries. OnJuly 1, 2022 , we completed the sale of our life, accident and supplemental benefits businesses in six countries (Hong Kong ,Indonesia ,New Zealand ,South Korea ,Taiwan andThailand ) to Chubb for approximately$5.4 billion in cash. Cigna estimates it will receive approximately$5.1 billion of net after-tax proceeds from this transaction and expects to utilize the after-tax proceeds primarily for share repurchases, with$3.5 billion used to fund the purchases of our common stock pursuant to the ASR agreements (as described above). 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 our 2021 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.
Supply Chain Financing Program
We facilitate a voluntary supply chain finance program (the "program") that provides suppliers the opportunity to sell their receivables due from us (i.e., our payment obligations to the suppliers) to a financial institution, on a non-recourse basis in order to be paid earlier than our payment terms provide. Cigna is not a party to the program and agrees to commercial terms with its suppliers independently of their participation in the program. A supplier's participation in the program has no impact on our payment terms and Cigna has no economic interest in a supplier's decision to participate in the program. The suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institution. No guarantees are provided by Cigna or any of our subsidiaries under the program. We have been informed by the financial institution that$133 million as ofJune 30, 2022 and$331 million as ofDecember 31, 2021 of our outstanding payment obligations were voluntarily elected by suppliers to be sold to the financial institution under the program. These amounts are reflected in Accounts payable in Cigna's Consolidated Balance Sheets.
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 18 to the Consolidated Financial Statements for discussion of various guarantees. During the six months endedJune 30, 2022 , there was no material change to the contractual obligations reported in our 2021 Form 10-K. 46 --------------------------------------------------------------------------------
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 our 2021 Form 10-K. We regularly evaluate items that may impact critical accounting estimates.
Our most critical accounting estimates, as well as the effect of hypothetical changes in material assumptions used to develop each estimate, are described in the 2021 Form 10-K. As ofJune 30, 2022 , there were no significant changes to the critical accounting estimates from what was reported in our 2021 Form 10-K.
SEGMENT REPORTING
The following section of this MD&A discusses the results of each of our segments.
OnJuly 1, 2022 , we completed the sale of our life, accident and supplemental benefits businesses in six countries (Hong Kong ,Indonesia ,New Zealand ,South Korea ,Taiwan andThailand ) to Chubb for approximately$5.4 billion in cash. During the fourth quarter of 2021, in connection with the Chubb Transaction, we revised our business reporting structure and adjusted our segment reporting accordingly. Segment results for the three and six months endedJune 30, 2021 have been restated to conform to the new segment presentation.
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 pre-tax income/loss attributable to noncontrolling interests, net realized investment results, amortization of acquired intangible assets 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 19 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 19 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.
Evernorth Segment
Evernorth includes a broad range of coordinated and point solution health services and capabilities, as well as those from partners across the health care system, in pharmacy benefits services, specialty pharmacy and care services. As described in the introduction to Segment Reporting, Evernorth's performance is measured using adjusted revenues and pre-tax adjusted income (loss) from operations. The key factors that impactEvernorth'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 our 2021 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, defined as Total Revenues less Pharmacy and other service costs, 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 47 -------------------------------------------------------------------------------- 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 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. Results of Operations Three Months Ended Six Months Ended Financial Summary June 30, Change Favorable June 30, Change Favorable (Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Total revenues$ 34,863 $ 32,592 7 %$ 68,449 $ 63,212 8 % Adjusted revenues (1)$ 34,863 $ 32,592 7 %$ 68,449 $ 63,212 8 % Gross profit$ 2,151 $ 2,075 4 %$ 4,162 $ 3,918 6 % Adjusted gross profit (1)$ 2,151 $ 2,075 4 %$ 4,162 $ 3,918 6 % Pre-tax adjusted income from operations$ 1,475 $ 1,413 4 %$ 2,777 $ 2,636 5 % Pre-tax adjusted margin 4.2 % 4.3 % (10) bps 4.1 % 4.2 % (10) bps Adjusted expense ratio (2) 1.9 % 2.0 % (10) bps 2.0 % 2.0 % - bps Three Months Ended Six Months Ended June 30, June 30, (Dollars and adjusted scripts in Change Favorable Change Favorable millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Selected Financial Information Pharmacy revenue by distribution channel Adjusted network revenues (1)$ 16,107 $ 16,166 - %$ 31,638 $ 31,304 1 % Adjusted home delivery and specialty revenues (1) 15,268 13,341 14 29,967 26,115 15 Other pharmacy revenues 1,667 1,619 3 3,379 3,007 12 Total adjusted pharmacy revenues (1)$ 33,042 $ 31,126 6 %$ 64,984 $ 60,426 8 % Adjusted fees and other revenues (1) 1,805 1,461 24 3,439 2,778 24 Net investment income 16 5 220 26 8 225 Adjusted revenues (1)$ 34,863 $ 32,592 7 %$ 68,449 $ 63,212 8 % Pharmacy script volume (3) Adjusted network scripts 323 339 (5) % 638 662 (4) % Adjusted home delivery and specialty scripts 69 71 (3) 139 141 (1) Total adjusted scripts 392 410 (4) % 777 803 (3) % Generic fill rate (4) Network 87.6 % 85.3 % 230 bps 87.4 % 86.3 % 110 bps Home delivery 85.8 % 85.7 % 10 bps 85.6 % 85.8 % (20) bps Overall generic fill rate 87.5 % 85.4 % 210 bps 87.2 % 86.2 % 100 bps (1)Total revenues and gross profit were equal to adjusted revenues and adjusted gross profit as there were no special items in the periods presented. (2)Adjusted expense ratio is calculated as selling, general and administrative expenses 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. 48 --------------------------------------------------------------------------------
Three and Six Months Ended
Adjusted network revenues increased for the six months endedJune 30, 2022 , reflecting increased prices due to inflation on branded drugs; partially offset by lower claims volume and a slight change in claims mix due to an increase in the generic fill rate. Adjusted network revenues decreased for the three months ended, reflecting lower claims volume and a slight change in claims mix due to an increase in the generic fill rate; partially offset by increased prices due to inflation on branded drugs. 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 SD business.
Adjusted fees and other revenues increased, reflecting customer growth from our Pharmacy Rebate Program services and the acquisition and subsequent growth of theMDLIVE business. Adjusted gross profit and pre-tax adjusted income from operations increased, reflecting continued contract affordability improvements and business growth. The increase was partially offset by strategic investments in expanding our services portfolio and digital capabilities as well as lower volume in our network and home delivery businesses. Pre-tax adjusted income from operations also increased due to expense favorability.
The adjusted expense ratio was flat, reflecting higher revenues as well as increased strategic investments in expanding our services portfolio and digital capabilities.
Cigna Healthcare SegmentCigna 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 organizations. 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 •selling, general and administrative expenses as a percentage of adjusted revenues (adjusted expense ratio). 49 -------------------------------------------------------------------------------- Results of Operations Financial Summary Three Months Ended June 30, Change Favorable Six Months Ended June 30, Change Favorable (Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Adjusted revenues$ 11,337 $ 11,149 2 %$ 22,729 $ 22,216 2 % Pre-tax adjusted income from operations$ 1,240 $ 1,049 18 %$ 2,519 $ 2,091 20 % Pre-tax adjusted margin 10.9 % 9.4 % 150 bps 11.1 % 9.4 % 170 bps Medical care ratio 80.7 % 84.4 % 370 bps 81.1 % 82.7 % 160 bps Adjusted expense ratio 20.6 % 18.9 % (170) bps 20.6 % 20.6 % - bps
Three and Six Months Ended
Adjusted revenues increased for the three months and six months endedJune 30, 2022 , reflecting increases inU.S. Commercial partially offset by decreases inU.S. Government . The increases inU.S. Commercial adjusted revenues reflects increased specialty contributions, higher premium rates due to anticipated underlying medical cost trend as well as customer growth. The decreases inU.S. Government adjusted revenues reflects the disposition of the Medicaid business. Pre-tax adjusted income from operations increased for the three months and six months endedJune 30, 2022 , reflecting increased contributions fromU.S. Commercial,U.S. Government and International Health . These increases were primarily due to lower medical care ratios and increased specialty contributions inU.S. Commercial; partially offset by the absence of favorable non-recurring items recorded in 2021. The medical care ratio decreased for the three months and six months endedJune 30, 2022 , primarily due to medical costs that have moderated since 2021, including lower direct COVID-19 costs and effective execution in pricing and affordability initiatives, inU.S. Commercial as well as improved Medicare Advantage risk adjustment revenues. The decrease for the six months endedJune 30, 2022 was partially offset byU.S. Government risk adjustment updates related to prior years that were recognized in the first quarter of 2022. The adjusted expense ratio increased for the three months endedJune 30, 2022 , primarily reflecting the absence of favorable litigation developments recorded in 2021. The adjusted expense ratio was flat for the six months endedJune 30, 2022 . 50
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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. Effective in the second quarter of 2022, the Company updated itsU.S. Commercial market segments as follows: the National segment comprises employers with 3,000 or more eligible employees, and the Middle Market segment comprises employers with 500 to 2,999 eligible employees, Taft-Hartley plans, and other groups. Previously, the National segment comprised multi-state employers with 5,000 or more eligible employees and the Middle Market segment comprised employers with 500 to 4,999 eligible employees, single-site employers with more than 5,000 employees, Taft-Hartley plans and other groups. There have been no updates to the Select (employers generally with 51 to 499 eligible employees) orSmall Group (employers generally with 2 to 50 eligible employees) market segments. As of June 30, (In thousands) 2022 2021 % Change
Cigna Healthcare Medical Customers
Insured 4,705 4,664 1 % U.S. Commercial 2,187 2,128 3 % U.S. Government 1,374 1,484 (7) % International Health (1) 1,144 1,052 9 % Services only 13,101 12,257 7 % U.S. Commercial 12,465 11,632 7 % U.S. Government 5 - N/M % International Health (1) 631 625 1 % Total 17,806 16,921 5 % (1)International Health excludes medical customers served by less than 100% owned subsidiaries and customers that are part of the businesses sold pursuant to the Chubb Transaction. Our medical customer base increased atJune 30, 2022 , reflecting growth in our Middle Market,Select and International Health market segments; partially offset by the disposition of the Medicaid business.
Unpaid Claims and Claim Expenses
As of June 30, As of December (In millions) 2022 31, 2021 % Change
Unpaid claims and claim expenses -
$ 4,261 5 %
Our unpaid claims and claim expenses liability was higher as of
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Other Operations
Other Operations includes the International businesses sold to Chubb onJuly 1, 2022 ,Corporate Owned Life Insurance ("COLI"), our interest in a joint venture in Türkiye and the Company's run-off operations. 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 Six Months Ended Change Financial Summary Three Months Ended June 30, Favorable June 30, Favorable (Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Adjusted revenues$ 948 $ 990 (4) %$ 1,927 $ 1,995 (3) % Pre-tax adjusted income from operations$ 233 $ 215 8 %$ 459 $ 446 3 % Pre-tax adjusted margin 24.6 % 21.7 % 290 bps 23.8 % 22.4 % 140 bps
Three and Six Months Ended
Adjusted revenues decreased primarily due to unfavorable foreign currency movements, largely offset by business growth and higher net investment income in the International businesses.
Pre-tax adjusted income from operations increased primarily due to higher earnings in the Run-off businesses and COLI.
Other Items Related to International Businesses Sold to Chubb
For the three months endedJune 30, 2022 , 84% of Other Operations' adjusted revenues and 85% of its pre-tax adjusted income from operations was associated with International businesses sold to Chubb onJuly 1, 2022 . For the six months endedJune 30, 2022 , 84% of Other Operations' adjusted revenues and 88% of its pre-tax adjusted income from operations was associated with sold International businesses; as a result of the sale, Other Operations' adjusted revenues and pre-tax adjusted income from operations will decrease in future periods.
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. Three Months Ended Financial Summary June 30, Six Months Ended June 30, (In millions) 2022 2021 Change Favorable (Unfavorable) 2022 2021 Change Favorable (Unfavorable) Pre-tax adjusted loss from operations$ (401) $ (344) (17) %$ (744) $ (698) (7) %
Three and Six Months Ended
Pre-tax adjusted loss from operations increased, reflecting an increase in operating expenses for enterprise-wide initiatives.
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INVESTMENT ASSETS
The following table presents our investment asset portfolio excluding separate account assets as ofJune 30, 2022 andDecember 31, 2021 . Additional information regarding our investment assets is included in Notes 11, 12, 13 and 14 to the Consolidated Financial Statements. June 30, December 31, (In millions) 2022 2021 Debt securities$ 13,950 $ 16,958 Equity securities 836 603 Commercial mortgage loans 1,579 1,566 Policy loans 1,325 1,338 Other long-term investments 4,107 3,574 Short-term investments 199 428 Total 21,996 24,467 Investments classified as assets of businesses held for sale (1) (4,518) (5,109) Investments per Consolidated Balance Sheets $
17,478
(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.
Investment Outlook
We continue to actively monitor current economic conditions driven by the pace of the pandemic recovery, recent geopolitical events and fiscal and monetary policy responses (including the resulting supply chain and labor market dynamics), and the portfolio impact of recent higher levels of both interest rates and inflation. Future realized and unrealized investment results will be driven largely by market conditions and these future conditions are not reasonably predictable. 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. The below discussion addresses the strategies and risks associated with our various classes of investment assets. 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 in the following discussion remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity.Debt Securities 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
June 30, December 31, (In millions) 2022 2021 Federal government and agency$ 353 $ 387 State and local government 145 171 Foreign government 2,331 2,616 Corporate 10,754 13,266 Mortgage and other asset-backed 367 518 Total$ 13,950 $ 16,958 Our debt securities portfolio decreased during the six months endedJune 30, 2022 , reflecting a decrease in valuations driven by a significant rise in treasury rates and credit spreads, and net sales activity. As ofJune 30, 2022 ,$12.0 billion , or 86% of the debt securities in our investment portfolio were investment grade (Baa and above, or equivalent) and the remaining$1.9 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. 53 -------------------------------------------------------------------------------- Debt securities include private placement assets of$4.3 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. Elevated global inflation rates experienced during 2022, as well as continuing supply chain disruptions have displaced the ongoing impacts of the COVID-19 pandemic as the primary risks that many of the issuers in our portfolio are facing. To date, most issuers have been successful in managing the cost escalation and product shortages without undue margin pressure. 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 obligations to decrease significantly upon the close of our sale of certain international businesses during the third quarter of 2022 as discussed in Note 5 to the Consolidated Financial Statements.
Commercial Mortgage Loans
As ofJune 30, 2022 , the$1.6 billion commercial mortgage loan portfolio consisted of approximately 50 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. We assess the credit quality of our commercial mortgage loan portfolio annually by reviewing each holding's most recent financial statements, rent rolls, budgets, and relevant market reports. The review performed in the second quarter of 2022 confirmed ongoing strong overall credit quality in line with the previous year's results. We continue to monitor the long-term impacts of COVID-19 on 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. Additionally, the current macroeconomic headwinds are impacting capital markets and reducing investor appetite for capital intensive assets (e.g., office and regional shopping malls). Our commercial mortgage loan portfolio has no exposure to regional shopping malls and less than 30% exposure to office properties.
Other Long-term Investments
Other long-term investments of$4.1 billion as ofJune 30, 2022 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$0.5 billion sinceDecember 31, 2021 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 200 separate partnerships and 100 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 3% 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. Accordingly, our net investment income in the second quarter largely reflects the underlying financial information from the first quarter of 2022. 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. 54 -------------------------------------------------------------------------------- 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$9.0 billion as ofJune 30, 2022 . 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 ofJune 30, 2022 .
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. Our primary market risk exposures are interest rate risk and foreign currency exchange rate risk. We encourage you to read this in conjunction with "Market Risk - Financial Instruments" included in the MD&A section of our 2021 Form 10-K. Due primarily to decreases in the fair value of our debt securities and long-term debt sinceDecember 31, 2021 , the effect of hypothetical changes in market rates or prices on the fair value of certain financial instruments has changed. In the event of a hypothetical 100 basis point increase in interest rates, the fair value of certain non-insurance financial instruments would decrease approximately$1.1 billion atJune 30, 2022 compared to$1.4 billion atDecember 31, 2021 . Further, under the same hypothetical 100 basis point increase in interest rates scenario, the fair value of the Company's long-term debt would decrease approximately$2.0 billion atJune 30, 2022 compared to approximately$2.9 billion atDecember 31, 2021 . Changes in the fair value of our long-term debt do not impact our financial position or operating results. After the Chubb Transaction we expect reductions in our risk exposures to interest rates and foreign currency exchange rates. The impact of a hypothetical 100 basis point increase in interest rates on the fair value of certain non-insurance financial instruments of a$1.1 billion decrease cited above would decline to a$0.8 billion decrease excluding the businesses held for sale as ofJune 30, 2022 . The impact of a hypothetical 10% strengthening in theU.S. dollar to foreign currencies excluding the businesses held for sale would be an insignificant amount as ofJune 30, 2022 as compared to a decrease of approximately$0.3 billion as ofDecember 31, 2021 .
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