CIGNA PAGE
Executive Overview 41 Liquidity and Capital Resources 47 Critical Accounting Estimates 50 Segment Reporting 50 Evernorth 51Cigna Healthcare 53 Other Operations 55 Corporate 55 Investment Assets 55 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 ofSeptember 30, 2022 , compared withDecember 31, 2021 and our results of operations for the three and nine months endedSeptember 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. 40 --------------------------------------------------------------------------------
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 and interest rate 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; the impact of the Inflation Reduction Act (as defined below); the impact of revised accounting rules related to accounting for long-duration contracts; expectations related to our CMS (as defined below) Star Ratings and Medicare Advantage Capitation Rates; 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, including currency exchange rates; 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, 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 changes in interest rates 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. 41
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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 nine months endedSeptember 30, 2022 compared with the same periods in 2021. Unless specified otherwise, commentary applies to both the three and nine month periods.
Summarized below are certain key measures of our performance by segment for the
three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions, except per share
amounts) 2022 2021 % Change 2022 2021 % Change
Revenues
Adjusted revenues by segment
Evernorth $ 35,698 $ 33,614 6 % $ 104,147 $ 96,826 8 %
Cigna Healthcare 11,176 11,222 - 33,905 33,438 1
Other Operations 153 1,000 (85) 2,080 2,995 (31)
Corporate, net of eliminations (1,667) (1,526) (9) (5,233) (4,857) (8)
Adjusted revenues 45,360 44,310 2 134,899 128,402 5
Net realized investment results from
certain equity method investments (80) (22) (264) (134) (12) N/M
Total revenues $ 45,280 $ 44,288 2 % $ 134,765 $ 128,390 5 %
Shareholders' net income $ 2,757 $ 1,621 70 % $ 5,499 $ 4,249 29 %
Adjusted income from operations $ 1,858 $ 1,936 (4) % $ 5,770 $ 5,408 7 %
Earnings per share (diluted)
Shareholders' net income $ 8.97 $ 4.80 87 % $ 17.42 $ 12.32 41 %
Adjusted income from operations $ 6.04 $ 5.73 5 % $ 18.28 $ 15.69 17 %
Pre-tax adjusted income (loss) from operations by segment
Evernorth $ 1,625 $ 1,548 5 % $ 4,402 $ 4,184 5 %
Cigna Healthcare 1,053 1,046 1 3,572 3,137 14
Other Operations 17 225 (92) 476 671 (29)
Corporate, net of eliminations (316) (308) (3) (1,060) (1,006) (5)
Consolidated pre-tax adjusted income from operations 2,379 2,511 (5) 7,390 6,986
6
Income attributable to noncontrolling interests 22 16 38 54 39
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Net realized investment (losses) gains (1) (161) 46 N/M (629) 116
N/M
Amortization of acquired intangible assets (460) (501) 8 (1,419) (1,499) 5 Special items 1,711 (13) N/M 1,629 (172) N/M Income before income taxes$ 3,491 $ 2,059 70 %$ 7,025 $ 5,470 28 % (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 Nine Months Ended
September 30, September 30,
(Dollars in millions) 2022 2021 % Change 2022 2021 % Change
Pharmacy revenues $ 32,762 $ 31,013 6 % $ 95,431 $ 89,085 7 %
Premiums 9,586 10,275 (7) 30,368 30,812 (1)
Fees and other revenues 2,728 2,532 8 8,023 7,324 10
Net investment income 204 468 (56) 943 1,169 (19)
Total revenues 45,280 44,288 2 134,765 128,390 5
Pharmacy and other service costs 31,777 30,070 6 92,740 86,306 7
Medical costs and other benefit expenses 7,754 8,330 (7) 24,214 24,819 (2) Selling, general and administrative expenses 3,148 3,093 2 9,703 9,368 4 Amortization of acquired intangible assets 460 501 (8) 1,419 1,499 (5) Total benefits and expenses 43,139 41,994 3 128,076 121,992 5 Income from operations 2,141 2,294 (7) 6,689 6,398 5 Interest expense and other (304) (303) - (904) (915) 1 Debt extinguishment costs - - N/M - (141) N/M Gain on sale of businesses 1,735 - N/M 1,735 - N/M Net realized investment (losses) gains (81) 68 N/M (495) 128 N/M Income before income taxes 3,491 2,059 70 7,025 5,470 28 Total income taxes 713 424 68 1,477 1,188 24 Net income 2,778 1,635 70 5,548 4,282 30 Less: Net income attributable to noncontrolling interests 21 14 50 49 33 48 Shareholders' net income$ 2,757 $ 1,621 70 %$ 5,499 $ 4,249 29 % Consolidated effective tax rate 20.4 % 20.6 % (20) bps 21.0 % 21.7 % (70) bps Medical customers (in thousands) 17,954 17,006
6 %
Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations
Dollars in Millions Diluted Earnings Per Share
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Shareholders' net income $ 2,757 $ 1,621 $ 5,499 $ 4,249 $ 8.97 $ 4.80 $ 17.42 $ 12.32
After-tax adjustments required to reconcile to adjusted income from operations
Net realized investment losses
(gains) (1) 144 (42) 515 (99) 0.47 (0.12) 1.63 (0.29)
Amortization of acquired intangible
assets 322 392 1,061 1,168 1.05 1.15 3.36 3.40
Special items
Integration and transaction-related
costs (benefits) 23 (35) 86 1 0.07 (0.10) 0.27 -
Charge for organizational efficiency
plan - - 17 - - - 0.05 -
(Benefits) associated with litigation
matters - - (20) (21) - - (0.06) (0.06)
(Gain) on sale of businesses (1,388) - (1,388) - (4.52) - (4.39) -
Debt extinguishment costs - - - 110 - - - 0.32
Total special items (1,365) (35) (1,305) 90 (4.45) (0.10) (4.13) 0.26
Adjusted income from operations $ 1,858 $ 1,936 $ 5,770 $ 5,408 $ 6.04 (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. 43
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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 nine months endedSeptember 30, 2022 . We are proactively addressing potential impacts from inflation on our workforce, third party relationships (including relationships with vendors and health care providers) and drug pricing. 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. 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 Nine Months Ended
The commentary presented below, and in the segment discussions that follow,
compare results for the three and nine months ended
Shareholders' net income increased for the three months endedSeptember 30, 2022 , reflecting the gain on the sale of our life, accident and supplemental benefits businesses in six countries (the "Chubb transaction"), partially offset by lower realized investment results due to unfavorable mark to market adjustments in 2022 and lower adjusted income from operations. For the nine months endedSeptember 30, 2022 , the increase in Shareholders' net income was due to the gain associated with the Chubb transaction, higher adjusted income from operations and the absence of debt extinguishment costs. These favorable effects were partially offset by lower realized investment results due to unfavorable mark to market adjustments in 2022. Adjusted income from operations decreased for the three months endedSeptember 30, 2022 , primarily due to the absence of earnings from the businesses sold onJuly 1, 2022 in the Chubb transaction, partially offset by increased earnings in Evernorth reflecting continued contract affordability improvements and business growth. The increase in adjusted income from operations on a per share basis for the three months reflects the favorable effect of purchases of shares under our share repurchase program. For the nine months endedSeptember 30, 2022 , the increase in adjusted income from operations reflects earnings growth inCigna Healthcare reflecting lower medical care ratios and increased specialty contributions, partially offset by lower net investment income. Increased earnings in Evernorth reflecting continued contract affordability improvements and business growth also contributed to the increase. These favorable effects were partially offset by the absence of earnings in the third quarter of 2022 from the businesses sold in the Chubb transaction. Medical customers increased, reflecting growth in our fee-based products from Middle Market and Select market segments as well asInternational Health . 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. 44 -------------------------------------------------------------------------------- Premiums declined, reflecting the impact of the Chubb transaction and the disposition of the Medicaid business inCigna Healthcare . Partially offsetting these decreases were the impact of increased specialty contributions and premiums rates inCigna Healthcare due to anticipated underlying medical cost trend. See "Cigna Healthcare segment" section of this MD&A for further discussion. Fees and other revenues increased, primarily reflecting customer growth from our continued contract affordability services. See "Evernorth segment" section of this MD&A for further discussion.
Net investment income decreased primarily reflecting lower returns on our partnership investments and the impact of the Chubb transaction. See the "Investment Assets" section of this MD&A for further discussion.
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, primarily reflecting the impact of the Chubb transaction and the disposition of the Medicaid business. Decreases also reflect lower direct COVID-19 testing, treatment and vaccine 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, primarily driven by
strategic investments in expanding our services portfolio and digital
capabilities in Evernorth, as well as higher expenses in
Interest expense and other was essentially flat.
Debt extinguishment costs declined as no debt was retired early in the first nine months of 2022.
Gain on sale of businesses reflects the Chubb transaction, which closed on
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 largely by foreign tax rate differential, including the impact of the Chubb transaction.
Developments
Risk Adjustment Data Validation ("RADV") Audit Rule
OnNovember 1, 2018 , theCenters for Medicare and Medicaid Services ("CMS") released a proposed rule titled "Medicare and Medicaid Programs; Policy and Technical Changes to the Medicare Advantage, Medicare Prescription Drug Benefit,Program for All-inclusive Care for the Elderly (PACE), Medicaid Fee-For-Service, and Medicaid Managed Care Programs for Years 2020 and 2021" that would revise its RADV audit methodology for contract year 2011 and all subsequent years by, among other things, extrapolating the error rate related to RADV audit findings without applying the Medicare Fee for Service adjuster to audit findings. InOctober 2022 , CMS delayed the timeline to finalize the proposed rule untilFebruary 1, 2023 .
Centene Corporation
InOctober 2022 ,Evernorth and Centene Corporation ("Centene") announced a multi-year agreement effectiveJanuary 2024 to manage pharmacy benefit services and make prescription medications more accessible and affordable for Centene's approximately 20 million customers. In addition to greater savings on prescription drugs, Centene customers will also have access to Express Scripts' extensive national network of retail pharmacies.
Inflation Reduction Act
The Inflation Reduction Act of 2022, which was signed into law inAugust 2022 , contains a variety of provisions that impact our business, including: •providing a one percent excise tax on repurchases of stock made afterDecember 31, 2022 ; •extending the American Rescue Plan Act of 2021's enhanced Premium Tax Credits for three years fromJanuary 2023 toJanuary 2026 ; •instituting caps on insulin cost sharing in federal Medicare Part B medical insurance ("Part B") and federal Medicare Part D prescription drug program ("Part D") beginning in 2023 and removing deductibles for insulin provided via durable medical equipment under Part B beginning inJuly 2023 ; 45 -------------------------------------------------------------------------------- •adding a requirement that drug manufacturers pay rebates beginning in 2023 if prescription drug prices for certain Part B and Part D drugs increase beyond inflation; •redesigning of the Part D benefit in 2024 and capping of annual out-of-pocket costs starting in 2025; •allowing CMS to select Part D and Part B drugs for the drug price negotiation program beginning in 2023 and 2026, respectively, with the maximum fair prices for select Part D drugs taking effect in 2026; and •delaying implementation of the 2020 Medicare drug rebate rule to 2032.
InApril 2022 , we entered into a five-year agreement withKaiser Permanente . 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. 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
As discussed in Notes 4 and 5 to the Consolidated Financial Statements, 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"). 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 prior to the divestiture.
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")
CMS uses a Star Rating system to measure how well Medicare Advantage ("MA")
plans perform. Categories of measurement include 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 89% of our MA customers were
in four star or greater plans for bonus payments to be received in 2022 and we
expect 84% to be in four star or greater plans for bonus payments to be received
in 2023. On October 7, 2022 , CMS announced Medicare Star ratings for bonus
payments to be received in 2024. Based upon the current customer mix associated
with the announced star ratings, we estimate 67% of our MA customers will be in
four star or greater plans.
Medicare Advantage Rates
On April 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
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released on
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 nine months ended
Nine Months Ended September 30,
(In millions) 2022 2021
Operating activities $ 6,557 $ 2,916
Investing activities $ 3,714 $ (3,734)
Financing activities $ (8,604) $ (5,841)
The following discussion explains variances in the various categories of cash
flows for the nine months ended September 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.
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Operating cash flows for the nine months ended September 30, 2022 include the
benefits from the early receipt of October 2022 monthly payments from CMS and
the delayed 2021 CMS Part D settlement. The remaining benefits were driven by
timing of accounts receivable and accrued liabilities as well as lower income
tax payments, partially offset by lower insurance liabilities and higher
inventories.
Investing and Financing activities
In 2022, the Company received cash proceeds from the Chubb transaction. In 2021,
the Company had cash outflows related to the acquisition of
The Company repaid more debt, partially offset by lower stock repurchases, which resulted in an increase 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$1.4 billion for the nine months endedSeptember 30, 2022 and$2.1 billion for the nine months endedSeptember 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 ofSeptember 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 ofSeptember 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),$5.0 billion of remaining capacity under our commercial paper program and$7.2 billion in cash and short-term investments, approximately$0.8 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 41.2% 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$3.5 billion from its subsidiaries without further approvals as ofSeptember 30, 2022 . 48 --------------------------------------------------------------------------------
Use of Capital Resources
Capital Expenditures. Capital expenditures for property, equipment and computer software were$950 million in the nine months endedSeptember 30, 2022 compared to$850 million in the nine months endedSeptember 30, 2021 . This increase reflects our continued strategic investment in technology for future growth. Anticipated capital expenditures will be funded primarily from operating cash flow. Dividends. During the first nine 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. OnOctober 26, 2022 , the Board of Directors declared the fourth quarter cash dividend of$1.12 per share of Cigna common stock to be paid onDecember 21, 2022 to shareholders of record onDecember 6, 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 20.1 million shares for approximately$5.8 billion during the nine months endedSeptember 30, 2022 , compared to 26.5 million shares for approximately$6.3 billion during the nine months endedSeptember 30, 2021 . FromOctober 1, 2022 , throughNovember 2, 2022 , we did not repurchase shares except for the accelerated share repurchases discussed below. Share repurchase authority was$5.3 billion as ofNovember 2, 2022 . As part of our existing share repurchase program, we entered into separate accelerated share repurchase agreements ("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. The final Volume-Weighted Average Share Price calculation dates of the ASR agreements areNovember 2, 2022 andNovember 3, 2022 . In aggregate, we expect to receive an additional 1.9 million shares of our common stock for no additional consideration as the value of this stock was held back by the Counterparties pending final settlement of the agreements. 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. Net after-tax proceeds of approximately$5.1 billion were utilized 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.
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We have been informed by the financial institution that less than $1 million as
of September 30, 2022 and $331 million as of December 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. As reported in our 2021 Form 10-K contractual obligations for insurance liabilities, we had$22.3 billion of undiscounted obligations related to contractholder deposit funds, future policy benefits and unpaid claims and claim expenses. As a result of the Chubb transaction our undiscounted obligations decreased by approximately$6.1 billion to$16.2 billion . See Note 9 to the Consolidated Financial Statements for additional information regarding insurance liabilities. There was no material change to any other obligations reported in our 2021 Form 10-K during the nine months endedSeptember 30, 2022 .
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 ofSeptember 30, 2022 , there were no significant changes to the critical accounting estimates from what was reported in our 2021 Form 10-K. Goodwill and Other intangible assets Our annual evaluations of goodwill and other intangible assets for impairments were completed during the third quarter of 2022. These evaluations were performed at the reporting unit level, based on discounted cash flow analyses or market data. The estimated fair value of each of our reporting units exceeded their carrying values by sufficient margins. 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. 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 nine months endedSeptember 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
50
-------------------------------------------------------------------------------- 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 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. 51
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Results of Operations
Three Months Ended Nine Months Ended
Financial Summary September 30, Change Favorable September 30, Change Favorable
(Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable)
Total revenues $ 35,698 $ 33,614 6 % $ 104,147 $ 96,826 8 %
Adjusted revenues (1) $ 35,698 $ 33,614 6 % $ 104,147 $ 96,826 8 %
Gross profit $ 2,360 $ 2,161 9 % $ 6,522 $ 6,079 7 %
Adjusted gross profit (1) $ 2,360 $ 2,161 9 % $ 6,522 $ 6,079 7 %
Pre-tax adjusted income from
operations $ 1,625 $ 1,548 5 % $ 4,402 $ 4,184 5 %
Pre-tax adjusted margin 4.6 % 4.6 % - bps 4.2 % 4.3 % (10) bps
Adjusted expense ratio (2) 2.0 % 1.8 % (20) bps 2.0 % 1.9 % (10) bps
Three Months Ended Nine Months Ended
September 30, September 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) $ 16,583 $ 16,488 1 % $ 48,221 $ 47,792 1 %
Adjusted home delivery and
specialty revenues (1) 15,583 13,796 13 45,550 39,911 14
Other pharmacy revenues 1,630 1,701 (4) 5,009 4,708 6
Total adjusted pharmacy revenues
(1) $ 33,796 $ 31,985 6 % $ 98,780 $ 92,411 7 %
Adjusted fees and other revenues
(1) 1,877 1,625 16 5,316 4,403 21
Net investment income 25 4 N/M 51 12 N/M
Adjusted revenues (1) $ 35,698 $ 33,614 6 % $ 104,147 $ 96,826 8 %
Pharmacy script volume (3)
Adjusted network scripts 325 340 (4) % 963 1,002 (4) %
Adjusted home delivery and
specialty scripts 71 71 - 210 212 (1)
Total adjusted scripts 396 411 (4) % 1,173 1,214 (3) %
Generic fill rate (4)
Network 86.6 % 86.3 % 30 bps 87.1 % 86.3 % 80 bps
Home delivery 84.7 % 85.9 % (120) bps 85.3 % 85.8 % (50) bps
Overall generic fill rate 86.4 % 86.3 % 10 bps 87.0 % 86.3 % 70 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.
Three and Nine Months Ended
Adjusted network revenues increased for the three months endedSeptember 30, 2022 , reflecting an increase in claims mix and increased prices due to inflation on branded drugs; partially offset by lower claims volume. Adjusted network revenues increased for the nine months endedSeptember 30, 2022 , reflecting increased prices due to inflation on branded drugs, partially offset by lower claims volume. Adjusted home delivery and specialty revenues increased for the three months endedSeptember 30, 2022 , reflecting higher specialty claims volume due in part to our collaboration with Prime Therapeutics. Adjusted home delivery and specialty revenues increased for the nine months endedSeptember 30, 2022 , reflecting higher specialty claims volume due in part to our collaboration with Prime Therapeutics, and increased prices, primarily due to inflation on branded drugs; partially offset by lower home delivery claims volume. Other pharmacy revenues decreased for the three months endedSeptember 30, 2022 , reflecting lower volume from our CuraScript SD business. Other pharmacy revenues increased for the nine months endedSeptember 30, 2022 , reflecting higher volume from our CuraScript SD business.
Adjusted fees and other revenues increased, reflecting customer growth from our continued contract affordability services and the growth of the Care Plus services.
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Adjusted gross profit and pre-tax adjusted income from operations increased,
reflecting continued contract affordability improvements and business growth,
partially offset by strategic investments in expanding our services portfolio
and digital capabilities.
The adjusted expense ratio increased, reflecting higher revenues and expense
discipline which enabled us to increase strategic investments in expanding our
services portfolio and digital capabilities.
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 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). Results of Operations Nine Months Ended September Financial Summary Three Months Ended September 30, Change Favorable 30, Change Favorable (Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Adjusted revenues$ 11,176 $ 11,222 - %$ 33,905 $ 33,438 1 % Pre-tax adjusted income from operations$ 1,053 $ 1,046 1 %$ 3,572 $ 3,137 14 % Pre-tax adjusted margin 9.4 % 9.3 % 10 bps 10.5 % 9.4 % 110 bps Medical care ratio 80.8 % 83.5 % 270 bps 81.0 % 83.0 % 200 bps Adjusted expense ratio 21.9 % 20.7 % (120) bps 21.0 % 20.6 % (40) bps
Three and Nine Months Ended
Adjusted revenues were essentially flat for the three months and nine months endedSeptember 30, 2022 , primarily reflecting increased specialty contributions, higher premium rates due to anticipated underlying medical cost trend and customer growth inU.S. Commercial, mostly offset by a decrease inU.S. Government customers, including the disposition of the Medicaid business, as well as lower net investment income. Pre-tax adjusted income from operations increased for the three months and nine months endedSeptember 30, 2022 , primarily due to lower medical care ratios inU.S. Commercial andU.S. Government and increased specialty contributions inU.S. Commercial, offset by lower net investment income. The medical care ratio decreased for the three months and nine months endedSeptember 30, 2022 , reflecting lower medical costs, primarily due to decreased direct COVID-19 testing, treatment and vaccine costs inU.S. Commercial andU.S. Government , as well as for the nine months endedSeptember 30, 2022 , effective execution in pricing and affordability initiatives. The adjusted expense ratio increased for the three months and nine months endedSeptember 30, 2022 , due to a higher expense ratio inU.S. Government reflecting a change in mix and increased costs to support future growth as well as lower net investment income. These increases were partially offset by revenue growth and expense efficiencies inU.S. Commercial and International Health . 53 --------------------------------------------------------------------------------
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 September 30, (In thousands) 2022 2021 % Change
Cigna Healthcare Medical Customers
Insured 4,760 4,726 1 % U.S. Commercial 2,205 2,135 3 % U.S. Government 1,376 1,517 (9) % International Health (1) 1,179 1,074 10 % Services only 13,194 12,280 7 % U.S. Commercial 12,556 11,653 8 % U.S. Government 5 - N/M % International Health (1) 633 627 1 % Total 17,954 17,006 6 % (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 atSeptember 30, 2022 , reflecting growth in our fee-based products from Middle Market and Select market segments as well asInternational Health , partially offset by the disposition of the Medicaid business.
Unpaid Claims and Claim Expenses
As of September As of December
(In millions) 30, 2022 31, 2021 % Change
Unpaid claims and claim expenses -
$ 4,261 - %
Our unpaid claims and claim expenses liability was slightly lower as of
54
--------------------------------------------------------------------------------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 Nine Months Ended Change Financial Summary Three Months Ended September 30, Favorable September 30, Favorable (Dollars in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Adjusted revenues$ 153 $ 1,000 (85) %$ 2,080 $ 2,995 (31) % Pre-tax adjusted income from operations$ 17 $ 225 (92) %$ 476 $ 671 (29) % Pre-tax adjusted margin 11.1 % 22.5 % (1140) bps 22.9 % 22.4 % 50 bps
Three and Nine Months Ended
Adjusted revenues and Pre-tax adjusted income from operations decreased primarily due to the absence of revenues and earnings from the businesses divested in the Chubb transaction.
Other Items Related to International Businesses Sold to Chubb
For the nine months endedSeptember 30, 2022 , 78% of Other Operations' adjusted revenues and 85% of its pre-tax adjusted income from operations was associated with sold International businesses.
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 Nine Months Ended September
Financial Summary September 30, 30,
(In millions) 2022 2021 Change Favorable (Unfavorable) 2022 2021 Change Favorable (Unfavorable)
Pre-tax adjusted loss from
operations $ (316) $ (308) (3) % $ (1,060) $ (1,006) (5) %
Three and Nine Months Ended
Pre-tax adjusted loss from operations increased, reflecting an increase in operating expenses for enterprise-wide initiatives.
INVESTMENT ASSETS
The following table presents our investment asset portfolio excluding separate account assets as ofSeptember 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. September 30, December 31, (In millions) 2022 2021 Debt securities$ 9,830 $ 16,958 Equity securities 671 603 Commercial mortgage loans 1,570 1,566 Policy loans 1,210 1,338 Other long-term investments 3,639 3,574 Short-term investments 136 428 Total 24,467 Investments classified as assets of businesses held for sale (1) (5,109) Investments per Consolidated Balance Sheets $
17,056
(1) Investments related to the international life, accident and supplemental benefits businesses that were held for sale. See Note 4 to the Consolidated Financial Statements for additional information.
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--------------------------------------------------------------------------------Investment Outlook
We continue to actively monitor current economic conditions driven by geopolitical events and fiscal and monetary policy responses (including the resulting supply chain and labor market dynamics), and the portfolio impact of ongoing 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 following discussion addresses the strategies and risks associated with our various classes of investment assets. Although future declines in investment fair values remain possible due to interest rate movements and credit deterioration due to both investment-specific uncertainties and global economic uncertainties as discussed below, we do not expect these losses to have a material adverse effect on our financial condition or liquidity.
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
September 30, December 31,
(In millions) 2022 2021
Federal government and agency $ 333 $ 387
State and local government 40 171
Foreign government 369 2,616
Corporate 8,743 13,266
Mortgage and other asset-backed 345 518
Total $ 9,830 $ 16,958
Our debt securities portfolio decreased during the nine months ended
September 30, 2022 primarily due to the completion of our transaction with Chubb
during the third quarter (see Note 4 to the Consolidated Financial Statements)
and a decrease in valuations due to a significant rise in interest rates.
As of September 30, 2022 , $7.9 billion , or 81% 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.
Debt securities include private placement assets of $4.1 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
and rising interest rates experienced during 2022, as well as continuing supply
chain disruptions are 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.
Commercial Mortgage Loans
As of September 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.
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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$3.6 billion as ofSeptember 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 balance of other long-term investments is flat withDecember 31, 2021 reflecting net additional funding activity offset by the effects of completing our transaction with Chubb during the third quarter (see Note 4 to the Consolidated Financial Statements). 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 190 separate partnerships and 90 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 third quarter largely reflects the underlying financial information from the second 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. 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$0.9 billion in Other assets. Our 50% share of the investment portfolio supporting the joint venture's liabilities is approximately$9.0 billion as ofSeptember 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. 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 ofSeptember 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. As a result of decreases in the fair value of our debt securities and long-term debt sinceDecember 31, 2021 , as well as the effect of completing the Chubb transaction as described in Note 4 to the Consolidated Financial Statements, 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$0.7 billion atSeptember 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$1.8 billion atSeptember 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 since long-term debt is not required to be recorded at fair value. In addition, the impact of a hypothetical 10% strengthening in theU.S. dollar to foreign currencies would be an insignificant amount as ofSeptember 30, 2022 as compared to a decrease of approximately$0.3 billion as ofDecember 31, 2021 . 57
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