CIGNA
Executive Overview 53
Liquidity and Capital Resources 60
Critical Accounting Estimates 65
Segment Reporting 68
Evernorth 68
U.S. Medical 70
International Markets 71
Group Disability and Other 72
Corporate 73
Investment Assets 73
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information to assist you in better
understanding and evaluating our financial condition as of December 31, 2020
compared with December 31, 2019 and our results of operations for 2020 compared
with 2019 and 2018 and is intended to help you understand the ongoing trends in
our business. We encourage you to read this MD&A in conjunction with our
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K ("Form 10-K") and the "Risk Factors" contained in Part I,
Item 1A of this Form 10-K. For comparisons of our results of operations for 2019
compared with 2018, please refer to the previously filed MD&A included in Part
II, Item 7 of our Form 10-K for the year ended December 31, 2019 .
Unless otherwise indicated, financial information in this MD&A is presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). See Note 3 to the Consolidated Financial Statements in this
Form 10-K for additional information regarding the Company's significant
accounting policies. In some of our financial tables in this MD&A, we present
either percentage changes or "N/M" when those changes are so large as to become
not meaningful. Changes in percentages are expressed in basis points ("bps").
In this MD&A, our consolidated measures "adjusted income from operations,"
earnings per share on that same basis and "adjusted revenues" are not determined
in accordance with GAAP and should not be viewed as substitutes for the most
directly comparable GAAP measures of "shareholders' net income," "earnings per
share" and "total revenues." We also use pre-tax adjusted income from operations
and adjusted revenues to measure the results of our segments.
We use adjusted income from operations as our principal financial measure of
operating performance because management believes it best reflects the
underlying results of our business operations and permits analysis of trends in
underlying revenue, expenses and profitability. We define adjusted income from
operations as shareholders' net income (or income before taxes for the segment
metric) excluding realized investment gains and losses, amortization of acquired
intangible assets, special items and prior to 2020, results of Anthem, Inc. and
Coventry Health Care Inc. ("Coventry") (collectively, the "transitioning
clients") (see the "Key Transactions and Business Developments" section of this
MD&A for further discussion of transitioning clients). Cigna's share of certain
realized investment results of its joint ventures reported in the International
Markets segment using the equity method of accounting are also excluded. Income
or expense amounts excluded from adjusted income from operations because they
are not indicative of underlying performance or the responsibility of operating
segment management include:
•Realized investment gains (losses) including changes in market values of
certain financial instruments between balance sheet dates, as well as gains and
losses associated with invested asset sales.
•Amortization of acquired intangible assets because these relate to costs
incurred for acquisitions.
•Results of transitioning clients prior to 2020, because those results are not
indicative of ongoing results.
•Special items, if any, that management believes are not representative of the
underlying results of operations due to the nature or size of these matters.
The term adjusted revenues is defined as total revenues excluding the following
adjustments: revenue contribution from transitioning clients prior to 2020,
special items and Cigna's share of certain realized investment results of its
joint ventures reported in the International Markets segment using the equity
method of accounting. We exclude these items from this measure because
management believes they are not indicative of past or future underlying
performance of the business.
52
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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. We offer a differentiated
set of pharmacy, medical, dental and related products and services offered by
our subsidiaries. For further information on our business and strategy, see Item
1, "Business" in this Form 10-K.
COVID-19 Update
The novel strain of coronavirus ("COVID-19") was declared a pandemic by the
World Health Organization in March 2020 . From the onset of the COVID-19 pandemic
we have taken actions to drive affordability, reduce uncertainty and make health
care easier. For customers, these actions include COVID-19 related cost share
waivers, expanded access to virtual care, support for access to medication and
advocating for whole person health through various behavioral health
initiatives. We have supported the medical community by simplifying processes
and donating medications for a COVID-19 clinical trial. Cigna and the Cigna
Foundation have assisted our communities through several initiatives including
the launch of the Brave of Heart Fund that provides financial assistance to
survivors of front-line U.S. health care workers who gave their lives in the
fight against COVID-19. Cigna also provides emotional support services to their
families. The Evernorth team launched ParachuteRx, a drug cost assistance
program to certain customers without health coverage due to furlough or job
loss. Cigna Medical Group was among the first in the United States to administer
antibody therapies to high-risk COVID-19 patients in a non-hospital setting.
Cigna also partnered with other organizations on digital access to vaccination
records for those who have received the COVID-19 vaccine to facilitate return to
work and daily activities.
We have continued to support our workforce by enabling remote work where
appropriate, and implemented enhanced safety protocols and programs that support
the health and mental well-being of our employees. We have continued to execute
our business continuity plans over our operations such as leveraging purchasing
volume across the pharmaceutical supply chain in order to mitigate risk
associated with prescription drug supply. We did not incur significant
disruptions to our operations during 2020 from COVID-19.
We will continue to work with our clients, customers, providers and employees to
provide support during the pandemic.
The COVID-19 pandemic has pervasively impacted the economy, financial markets
and the global health care delivery systems. The effects of the COVID-19
pandemic on the Company began to emerge in the United States at the end of the
first quarter and were not material to the Company's results of operations or
financial condition for that period.
Beginning in April, we experienced a significant deferral of care by our
customers. The deferral of care moderated over the course of the second quarter
with utilization levels eventually returning to nearly normal levels by the end
of June. In the third quarter, we experienced increased medical utilization as
we observed a reduction to the level of deferred care and our customers sought
care for COVID-19 testing and treatment.
In the fourth quarter, as COVID-19 cases increased, the costs for testing and
treatment exceeded the savings related to the deferral of care. These impacts
were most prevalent in the U.S. Medical segment where fourth quarter earnings
were adversely impacted by increased costs of COVID-19 care and decreased
contributions from our specialty products. Full year U.S. Medical results
reflect COVID-19 impacts of deferral of care by our customers partially offset
by the cost of COVID-19 care, the cost of COVID-19 related actions including
premium relief programs for employer clients, cost share waivers for customers,
customer disenrollment and actions to support providers and employees.
Our Group Disability and Other results reflect significantly elevated life
insurance claims related to the COVID-19 pandemic and its effects in the third
and fourth quarters. Quarterly and year-to-date earnings in our Evernorth
segment also reflected effects of the pandemic, specifically, a favorable mix of
claims as a result of both the type of drugs dispensed as well as the
distribution method used for dispensing and fulfilling, partially offset by
lower 30-day retail script volume. Segment results are discussed further in the
"Segment Reporting" section of this MD&A and discussion of the impact of
COVID-19 on our investment portfolio and related considerations regarding our
investment outlook can be found in Note 11 to the Consolidated Financial
Statements and in the "Investment Assets" discussion of this MD&A.
While it is difficult to predict the impact of the COVID-19 pandemic on our
results beyond 2020, we believe that such results may be impacted by, among
other things, higher medical costs to treat those affected by the virus, lower
customer volumes due to rising unemployment, lower future risk adjustment
revenue due to disrupted care impeding appropriate documentation of customer
risk profiles in our Medicare Advantage business, the return of costs for those
who had previously deferred care, vaccine costs, continued cost share waivers,
the potential for continued deferral of care, or lower investment returns.
53
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Cigna has taken actions to enhance our liquidity that, combined with our other
sources of liquidity described in the "Liquidity and Capital Resources Outlook"
section below, and our current projections for operating cash flows, we believe
are sufficient to support our operations and meet our obligations.
The situation surrounding COVID-19 remains fluid, and we are actively managing
our response and assessing impacts to our financial position and operating
results, as well as 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 this Form 10-K.
Financial Highlights
See Note 1 to the Consolidated Financial Statements for a description of our
segments. Unless otherwise specified, the commentary provided below describes
our results for the year ended December 31, 2020 compared with the year ended
December 31, 2019 . Results for 2018 only include Express Scripts for the period
following the acquisition on December 20, 2018 .
Summarized below are certain key measures of our performance by segment for the
years ended December 31 :
Financial highlights by segment
For the Years Ended December 31 , Increase (Decrease) Increase (Decrease)
(Dollars in millions, except per share
amounts) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenues
Adjusted revenues by segment
Evernorth $ 116,130 $ 96,447 $ 6,606 20 % N/M
U.S. Medical 38,451 36,519 32,791 5 11 %
International Markets 5,877 5,615 5,366 5 5
Group Disability and Other 5,264 5,182 5,061 2 2
Corporate, net of eliminations (5,655) (3,588) (1,713) (58) (109)
Adjusted revenues 160,067 140,175 48,111 14 191
Revenue contribution from transitioning
clients - 13,347 459 N/M N/M
Net realized investment results from
certain equity method investments 130 44 (43) 195 N/M
Special items 204 - 123 N/M N/M
Total revenues $ 160,401 $ 153,566 $ 48,650 4 % 216 %
Shareholders' net income $ 8,458 $ 5,104 $ 2,637 66 % 94 %
Adjusted income from operations $ 6,795 $ 6,476 $ 3,557 5 % 82 %
Earnings per share (diluted)
Shareholders' net income $ 22.96 $ 13.44 $ 10.54 71 % 28 %
Adjusted income from operations $ 18.45 $ 17.05 $ 14.22 8 % 20 %
Pre-tax adjusted income from operations by segment
Evernorth $ 5,363 $ 5,092 $ 380 5 % N/M
U.S. Medical 3,807 3,831 3,502 (1) 9 %
International Markets 900 762 735 18 4
Group Disability and Other 290 501 529 (42) (5)
Corporate, net of eliminations (1,552) (1,824) (403) 15 N/M
Consolidated pre-tax adjusted income
from operations 8,808 8,362 4,743 5 76
Adjustment for transitioning clients - 1,726 62 N/M N/M
Income attributable to noncontrolling
interests 37 20 14 85 43
Net realized investment gains (losses) 279 221 (124) 26 N/M
Amortization of acquired intangible
assets (1,982) (2,949) (235) 33 N/M
Special items 3,726 (810) (879) N/M 8
Income before income taxes $ 10,868 $ 6,570 $ 3,581 65 % 83 %
For further analysis and explanation of each segment's results, see the "Segment Reporting" section of this MD&A.
54
--------------------------------------------------------------------------------Consolidated Results of Operations (GAAP basis)
For the Years Ended December 31 , Increase (Decrease) Increase (Decrease)
(Dollars in millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Pharmacy revenues $ 107,769 $ 103,099 $ 5,479 $ 4,670 5 % $ 97,620 N/M
Premiums 42,627 39,714 36,113 2,913 7 3,601 10 %
Fees and other revenues 8,761 9,363 5,578 (602) (6) 3,785 68
Net investment income 1,244 1,390 1,480 (146) (11) (90) (6)
Total revenues 160,401 153,566 48,650 6,835 4 104,916 216
Pharmacy and other service costs 103,484 97,668 4,793 5,816 6 92,875 N/M
Medical costs and other benefit
expenses 32,710 30,819 27,528 1,891 6 3,291 12
Selling, general and administrative
expenses 14,072 14,053 11,934 19 - 2,119 18
Amortization of acquired intangible
assets 1,982 2,949 235 (967) (33) 2,714 N/M
Total benefits and expenses 152,248 145,489 44,490 6,759 5 100,999 227
Income from operations 8,153 8,077 4,160 76 1 3,917 94
Interest expense and other (1,438) (1,682) (498) 244 15 (1,184) (238)
Debt extinguishment costs (199) (2) - (197) N/M (2) N/M
Gain (loss) on sale of business 4,203 - - 4,203 N/M - N/M
Net realized investment gains
(losses) 149 177 (81) (28) (16) 258 N/M
Income before income taxes 10,868 6,570 3,581 4,298 65 2,989 83
Total income taxes 2,379 1,450 935 929 64 515 55
Net income 8,489 5,120 2,646 3,369 66 2,474 93
Less: Net income attributable to
noncontrolling interests 31 16 9 15 94 7 78
Shareholders' net income $ 8,458 $ 5,104 $ 2,637 $ 3,354 66 % $ 2,467 94 %
Consolidated effective tax rate 21.9 % 22.1 % 26.1 % (20) bps (400) bps
Medical customers (in thousands)
U.S. Medical 15,013 15,548 15,389 (535) (3) % 159 1 %
International Markets 1,660 1,597 1,572 63 4 25 2
Total 16,673 17,145 16,961 (472) (3) % 184 1 %
Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations
Dollars in Millions Diluted Earnings Per Share
For the Years Ended December 31, For the Years Ended December 31,
2020 2019 2018 2020 2019 2018
Shareholders' net income $ 8,458 $ 5,104 $ 2,637 $ 22.96 $ 13.44 $ 10.54
After-tax adjustments required to reconcile to adjusted income from
operations
Net realized investment (gains)
losses (244) (190) 104 (0.66) (0.50) 0.42
Amortization of acquired intangible
assets 1,431 2,248 177 3.88 5.92 0.71
Adjustment for transitioning
clients - (1,316) (47) - (3.46) (0.19)
Special items
Integration and transaction-related
costs 404 427 669 1.10 1.11 2.67
Debt extinguishment costs 151 - - 0.41 - -
Charge for organizational
efficiency plan 24 162 - 0.07 0.43 -
Charges associated with litigation
matters 19 41 19 0.05 0.11 0.08
Risk corridors recovery (76) - - (0.21) - -
Contractual adjustment for a former
client (155) - - (0.42) - -
(Gain) on sale of business (3,217) - - (8.73) - -
Charges (benefits) associated with
tax reform - - (2) - - (0.01)
Total special items (2,850) 630 686 (7.73) 1.65 2.74
Adjusted income from operations $ 6,795 $ 6,476 $ 3,557 $ 18.45 $ 17.05 $ 14.22
55-------------------------------------------------------------------------------- Commentary: 2020 versus 2019 Unless indicated otherwise, the commentary presented below, and in the segment discussions that follow, compare results for the year endedDecember 31, 2020 with results for the year endedDecember 31, 2019 . Shareholders' net income increase was driven by the gain on sale of the Group Disability and Life business, lower amortization charges and higher adjusted income from operations, partially offset by the absence of earnings from transitioning clients. Adjusted income from operations increased, driven in part by higher earnings in the Evernorth segment reflecting customer growth and increased script volumes, an increase in the International Markets segment results and lower interest costs in Corporate due to a lower level of outstanding debt. These favorable effects were partially offset by lower earnings in the Group Disability and Other segment reflecting significantly elevated life claims related to the effects of COVID-19. Medical customers decreased due to declines in the Middle Market and National Accounts market segments and increased disenrollment driven by the impacts of COVID-19. Those decreases were partially offset by growth in the Select, International and Medicare Advantage segments. Pharmacy revenues increased, reflecting the transition ofU.S. Medical's customers to Evernorth, higher claims volumes, driven by the Evernorth collaboration with Prime Therapeutics and an increase in pricing, primarily due to inflation on branded drugs. These factors were substantially offset by the absence of revenues from the transitioning clients and, to a lesser extent, an increase in the generic fill rate. See the "Evernorth segment" section of this MD&A for further discussion of pharmacy revenues. Premiums increased, reflecting customer growth in insured products and rate increases reflecting expected medical cost inflation and the return of the health insurance industry tax. These factors were partially offset by the impact of premium relief programs implemented in response to significantly lower than historical utilization as customers deferred care in 2020 due to the COVID-19 pandemic. Fees and other revenues decreased, primarily reflecting the transition ofU.S. Medical's commercial customers to Evernorth's retail pharmacy network beginning in the third quarter of 2019 (see Note 3(K) to the Consolidated Financial Statements for further information). Net investment income decrease was driven by lower yields, including lower income from partnership investments due to current economic conditions. These effects were partially offset by higher average assets. See the "Investment Assets" section of this MD&A for further discussion. Pharmacy and other service costs increased, reflecting the transition ofU.S. Medical's customers to Evernorth, higher claims volumes, driven by the Evernorth collaboration with Prime Therapeutics and an increase in pricing, primarily due to inflation on branded drugs. These factors were substantially offset by the impact of the absence of the transitioning clients and, to a lesser extent, effective management of supply chain and the favorable impact of the mix of claims. Medical costs and other benefit expenses increased, reflecting both customer growth and direct costs associated with COVID-19, partially offset by care deferrals in insured products inU.S. Medical and higher life claims in Group Disability and Other due to the effects of the COVID-19 pandemic. Selling, general and administrative expenses were essentially flat, primarily reflecting lower charges in 2020 for the organizational efficiency plan and the risk corridors claim recovery recognized in the third quarter of 2020 (see the "Risk Mitigation Programs - Individual ACA Business" section of this MD&A and Note 21 to the Consolidated Financial Statements for further discussion), offset by the return of the health insurance industry tax. Amortization of acquired intangible assets decreased, primarily reflecting lower amortization of customer-related intangibles associated with the transitioning clients. Income tax expense increased for 2020, largely attributable to the sale of Cigna's Group Disability and Life business. The consolidated effective tax rate decreased slightly, driven by recognition of certain incremental federal and state tax benefits, largely offset by the return of the nondeductible health insurance industry tax. 56 -------------------------------------------------------------------------------- Key Transactions and Business Developments Sale of Group Disability and Life Business As discussed in Note 5 to the Consolidated Financial Statements, Cigna sold theU.S. Group Disability and Life business to New York Life Insurance Company for$6.2 billion onDecember 31, 2020 . The "Liquidity and Capital Resources" section of this MD&A provides discussion of the use of proceeds from this divestiture. Organizational Efficiency Plan Consistent with our commitment to affordability for our customers and clients, during the fourth quarter of 2019 the Company committed to a plan to increase our organizational alignment and operational efficiency and reduce costs. As a result, we recognized a charge in Selling, general and administrative expenses of$207 million , pre-tax ($162 million , after-tax) in the fourth quarter of 2019 and an additional charge of$31 million pre-tax ($24 million , after-tax) in the first quarter of 2020. We expect to realize annualized after-tax savings of approximately$200 million . A substantial portion of the savings was realized in 2020. Merger with Express Scripts As discussed in more detail in our 2019 Form 10-K, Cigna acquired Express Scripts onDecember 20, 2018 in a cash and stock transaction valued at$52.8 billion . Costs related to this transaction are reported in "integration and transaction-related costs" as a special item and excluded from adjusted income from operations because they are not indicative of future underlying performance of the business. The integration of this acquisition has been completed. OnJanuary 30, 2019 , Anthem, a former client, exercised its early termination right and terminated its pharmacy benefit management services agreement with us, effectiveMarch 1, 2019 . There was a twelve-month transition period that endedMarch 1, 2020 . We excluded the results of Express Scripts' contract with Anthem (and also Coventry) from our non-GAAP reporting metrics adjusted revenues and adjusted income from operations for 2019 and refer to these clients as transitioning clients. As ofDecember 31, 2019 , the transition was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our reported adjusted revenues and adjusted income from operations. 57 -------------------------------------------------------------------------------- Industry Developments and Other Matters The "Business - Regulation" section of this Form 10-K provides a detailed description of The Patient Protection and Affordable Care Act ("ACA") provisions and other legislative initiatives that impact our businesses, including regulations issued by theCenters for Medicare & Medicaid Services ("CMS") and the Departments of theTreasury andHealth and Human Services . Our businesses continue to operate in a dynamic environment, and the laws and regulations applicable to us, including the ACA, continue to be subject to legislative, regulatory and judicial challenges. The following table provides information on the expected impact of these items and other matters: Item Description
Medicare Advantage Medicare Star Quality Ratings ("Star Ratings"): CMS uses a Star Rating system ("MA")
to measure how well MA plans perform and scores performance 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 77% of our MA customers were in four star or greater plans for
bonus payments received in 2020 and 87% for bonus payments to be received in
2021. In October 2020 , CMS announced the Star Ratings for bonus payments to be
received in 2022. We expect the percentage of our MA customers in four star or
greater plans will increase to 88% for bonus payments to be received in 2022.
MA Rates: Final MA reimbursement rates for 2021 were published by CMS in April
2020, and final rates for 2022 were published by CMS
in
expect the new rates to have a material impact on our consolidated results of
operations in 2021 or 2022.
Risk Adjustment: As discussed in the "Regulation" and "Risk Factors" sections
of this Form 10-K, our MA business is subject to reviews, including risk
adjustment data validation ("RADV") audits by CMS and
the
Inspector General ("OIG"). We expect that CMS, OIG and other federal agencies
will continue to closely scrutinize components of the Medicare program.
The "Regulation" section of this Form 10-K also discusses a proposed rule
issued by CMS in 2018 for RADV audits of contract year 2011 and all subsequent
years that included, among other things, extrapolation of the error rate
related to RADV audit findings without applying the adjustment for underlying
fee-for-service data errors as currently contemplated by CMS' RADV audit
methodology. RADV audits for our contract years 2011 through 2015 are currently
in process. CMS has announced its intent to use third-party auditors to audit
all Medicare Advantage contracts by either a comprehensive or a targeted RADV
review for each contract year. If the proposed rule is adopted in its current
form, it could result in some combination of degraded plan benefits, higher
monthly premiums and reduced choice for the population served by all MA
insurers. The Company, along with other MA organizations and additional
interested parties, submitted comments to CMS on the proposed rule as part of
the notice-and-comment rulemaking process. The comment period concluded on
August 28, 2019 and CMS is expected to act by
rule as proposed, there could be a material impact on the Company's future
results of operations, though we expect the rule would be subject to legal
challenges. In addition, the Company is subject to OIG RADV audits that are in
process.
Also, as described in Note 21 to the Consolidated Financial Statements, the
U.S. Department of Justice is currently conducting an
industry-wide
investigation of risk adjustment data submission practices and business
processes, which in the case of certain other MA organizations has resulted in
litigation.
58
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Item DescriptionAffordable Care Act Cost-Sharing Reduction Subsidies: The ACA provides for cost-sharing
reductions that offset the amount that qualifying customers pay for
deductibles, copays and coinsurance. The federal government stopped
funding insurers for the cost-sharing reduction ("CSR") subsidies in 2017.
Certain insurers have sued the federalgovernment for failure to pay
cost-sharing reduction subsidies and the matter remains unresolved. In the
first set of consolidated appeals, the Court of Appeals for the Federal
Circuit issued a decision on August 14, 2020 , finding that (i) the CSR
reimbursement provision of the ACA imposes anobligation on the government
to pay, but (ii) the insurers' damages must be reduced by the amount of
additional premium tax credit payments that each insurer received as a
result of the government's termination of CSR
payments. On
and October 2, 2020 , the insurers filed petitions for rehearing en banc in
the Federal Circuit. The court denied those
petitions on
December 16, 2020 , respectively. On February
19, 2021 two insurers filed a
petition seeking Supreme Court review. As described in Note 21 to the
Consolidated Financial Statements, we filed a
lawsuit in
the federal government seeking payment of these subsidies. Our case is
stayed until either the Federal Circuit's judgments in the CSR appeals
become final and non-appealable or the Supreme Court resolves any petition
for writ of certiorari. Our premium rates for the 2018, 2019 and 2020 plan
years reflected a lack of government funding for cost-sharing reduction
subsidies.
ACA Litigation: As described in the "Business - Regulation" section of
this Form 10-K, a federal district court ruled that the "individual
mandate" in the ACA is unconstitutional andthat the entire law must be
struck down. On appeal, the Court of Appeals for the Fifth Circuit agreed
that the "individual mandate" is unconstitutional but ordered the district
court to reexamine whether the other provisions of the ACA can remain in
effect, thereby leaving in doubt whether the entire ACA is
unconstitutional until there is a finaljudicial determination on appeal.
The California -led states and the U.S. House of Representatives filed
petitions seeking to appeal the Fifth Circuit's
ruling to the
Court. On March 2, 2020 , the Supreme Court agreed to hear the appeals. The
case was argued before the Supreme Court on November 10, 2020 , and a
decision is expected by the end of June 2021 .
59-------------------------------------------------------------------------------- Risk Mitigation Programs - Individual ACA Business Risk Corridors. In 2016, we recorded an allowance for the balance of our ACA risk corridors receivable based on court decisions and the large program deficit. OnApril 27, 2020 , theU.S. Supreme Court ruled that insurers are entitled to the full amount due under the risk corridors program. TheSupreme Court remanded the cases before it to the lower courts for further proceedings consistent with its opinion. We filed a lawsuit inMay 2020 seeking payment of these funds. We received$120 million in payments inSeptember 2020 , which resolved our risk corridors claim. Risk Adjustment. At the end of each program year the risk adjustment balances are subject to audit by CMS through the RADV program. RADV audits for the 2017 and 2018 benefit years have been completed, subject to the error rates appeal period. Final settlement for the 2017 and 2018 benefit years is expected in 2021 and 2022, respectively. Based on the information currently available, we have adjusted our risk adjustment balances to reflect our estimate of expected outcome as ofDecember 31, 2020 andDecember 31, 2019 . December 31, December 31, (In millions) 2020 2019 Risk Adjustment Receivables (1) $ 80 $ 47 Payables (2) (153) (213) Total risk adjustment balance $ (73)$ (166) (1)Receivables, net of allowances, are reported in Accounts receivable, net in the Consolidated Balance Sheets. (2)Payables are reported in Accrued expenses and other liabilities (current) in the Consolidated Balance Sheets. Risk adjustment program charges of$(26) million pre-tax were fully offset by RADV adjustment favorability of$26 million pre-tax for 2020, compared with net charges of$162 million pre-tax ($126 million after-tax) in 2019 and$147 million pre-tax ($116 million after-tax) in 2018.
LIQUIDITY AND CAPITAL RESOURCES
(In millions) Financial Summary 2020 2019 2018 Short-term investments$ 359 $ 423 $ 316 Cash and cash equivalents$ 10,182 $ 4,619 $ 3,855 Short-term debt$ 3,374 $ 5,514 $ 2,955 Long-term debt$ 29,545 $ 31,893 $ 39,523 Shareholders' equity$ 50,321 $ 45,338 $ 41,028 Liquidity We maintain liquidity at two levels: the subsidiary level and the parent company level. Liquidity 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. 60 -------------------------------------------------------------------------------- Liquidity 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 foreign subsidiaries are subject to regulatory restrictions. See Note 19 to the Consolidated Financial Statements for additional information regarding these restrictions. Most of Evernorth's subsidiaries are not subject to regulatory restrictions regarding dividends and therefore provide significant financial flexibility to Cigna. Cash flows for the years endedDecember 31 were as follows: (In millions) 2020 2019 2018 Net cash provided by operating activities$ 10,350
5,592 - -
Cash used to acquire Express Scripts, net of cash acquired - - (24,062)
Other acquisitions (139) (153) (393)
Net investment sales (purchases) (1,406) 480 (1,383)
Purchases of property and equipment and other (1,071) (1,061) (540)
Net investing activities 2,976 (734) (26,378) Net cash (used in) provided by financing activities: Debt (repayments) issuances
(4,736) (5,175) 24,212
Stock repurchase (4,042) (1,987) (342)
Other, net 245 (25) (355)
Net financing activities (8,533) (7,187) 23,515
Foreign currency effect on cash 41 (8) (24)
Change in cash, cash equivalents and restricted cash $ 4,834 The following discussion explains variances in the various categories of cash flows for the year endedDecember 31, 2020 compared with the same period in 2019. Operating activities Cash flows from operating activities consist principally of cash receipts and disbursements for pharmacy revenues and costs, premiums, fees, investment income, taxes, benefit costs and other expenses. Cash flows from operating activities increased, primarily driven by higher pharmacy and services costs payables due to business growth, offset by increases in accounts receivable due to business growth, higher inventory purchases and the resumption of the health insurance industry tax. Investing and Financing activities Cash flows from investing activities increased, primarily due to the net proceeds from the sale of the Group Disability and Life business, partially offset by higher net investment purchases. Cash used in finance activities increased, primarily due to stock repurchases and debt repayments, partially offset by higher debt issuance. 61 -------------------------------------------------------------------------------- We maintain a share repurchase program authorized by our Board of Directors. Under this program, we may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through open market purchases in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, including through Rule 10b5-1 trading plans or privately negotiated transactions. The program may be suspended or discontinued at any time. For the year endedDecember 31, 2020 , we repurchased 21.9 million shares for approximately$4.1 billion . FromJanuary 1, 2021 throughFebruary 24, 2021 , we repurchased 8.1 million shares for approximately$1.7 billion . Share repurchase authority was$2.1 billion as ofFebruary 24, 2021 . 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 parent. Dividends fromU.S. regulated subsidiaries were$2.3 billion in 2020 and 2019. Nonregulated subsidiaries also generate significant cash flow from operating activities, which is typically available immediately to parent 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. AtDecember 31, 2020 , our debt-to-capitalization ratio was 39.5%, a decline from 45.2% atDecember 31, 2019 . In connection with the sale of the Group Disability and Life business that closed onDecember 31, 2020 , we deployed approximately$3.0 billion to debt repayment by: (i) repaying in full our$1.4 billion 364-Day Term Loan Credit Agreement entered into onApril 1, 2020 , onDecember 31, 2020 ; (ii) redeeming in full the$1.0 billion aggregate principal amount of Cigna's Senior Floating Rate Notes due 2021 onJanuary 15, 2021 at a redemption price calculated in accordance with the terms and conditions of the indenture governing the Notes; and (iii) repaying certain of our outstanding commercial paper balances inJanuary 2021 . In 2018, Cigna entered into a$3.25 billion five-year revolving credit agreement and a$3.0 billion term loan credit agreement in financing the Express Scripts acquisition. The term loan credit agreement was repaid in full and terminated in the fourth quarter of 2019. In 2019, Cigna entered into an additional$1.0 billion 364-day revolving credit agreement that expired inOctober 2020 , at which point we replaced the revolving credit agreement with a new$1.0 billion 364-day revolving credit agreement which will expire inOctober 2021 . Our revolving credit agreements provide us the ability to borrow amounts for general corporate purposes, including for purpose of providing liquidity support if necessary under our commercial paper program discussed below. As ofDecember 31, 2020 , there were no outstanding balances under either of the revolving credit agreements. Cigna also 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$4.25 billion . The net proceeds of issuances have been and are expected to be used for general corporate purposes. The commercial paper program had approximately$1.0 billion outstanding atDecember 31, 2020 at an average interest rate of 0.2%. See Note 7 to the Consolidated Financial Statements for further information on our credit agreements and commercial paper program. 62 -------------------------------------------------------------------------------- Our capital management strategy to support the liquidity and regulatory capital requirements of our foreign operations and certain international growth initiatives is to retain overseas a significant portion of the earnings generated by our foreign operations. This strategy does not materially limit our ability to meet our liquidity and capital needs inthe United States . Liquidity and Capital Resources Outlook We maintain sufficient liquidity to meet our cash needs through our cash and cash equivalents balances, cash flows from operations, commercial paper program, credit agreements and the issuance of long-term debt and equity securities. As ofDecember 31, 2020 , we had$4.25 billion of undrawn committed capacity under our revolving credit agreements (which 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$10.5 billion in cash and short-term investments, approximately$5.2 billion of which was held by the parent company or certain nonregulated subsidiaries. We actively monitor our debt obligations and engage in issuance or redemption activities as needed in accordance with our capital management strategy. A description of our outstanding debt can be found in Note 7 to the Consolidated Financial Statements. OnJanuary 6, 2021 , Cigna initiated a quarterly cash dividend and declared the first quarterly cash dividend of$1.00 per share of Cigna common stock to be paid onMarch 25, 2021 to shareholders of record as ofMarch 10, 2021 . 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. As ofDecember 31, 2020 , our unfunded pension liability was$977 million , an increase of$104 million fromDecember 31, 2019 , primarily attributable to a decrease in discount rates of approximately 80 basis points, partially offset by investment asset returns. In 2020, we made an immaterial pension contribution as required under the Pension Protection Act of 2006. We expect the required contributions for 2021 to be immaterial. See Note 15 to the Consolidated Financial Statements for additional information. Risks to our liquidity and capital resources outlook include cash projections that may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings or we experience material adverse effects from one or more risks or uncertainties described more fully in the "Risk Factors" section of this Form 10-K. Though we believe we have adequate sources of liquidity, significant disruption or volatility in the capital and credit markets could affect our ability to access those markets for additional borrowings or increase costs. In addition to the sources of liquidity discussed above, the parent company can borrow an additional$1.7 billion from its subsidiaries without further approvals as ofDecember 31, 2020 . Guarantees and Contractual Obligations We are contingently liable for various contractual obligations entered into in the ordinary course of business. See the: "Liquidity and Capital Resources" section of this MD&A for additional information on how we manage our liquidity requirements related to these obligations. See Note 21 to the Consolidated Financial Statements for discussion of various guarantees. (In millions, on an undiscounted basis) Total 2021 2022 to 2023 2024 to 2025 Thereafter On-Balance Sheet Insurance liabilities Contractholder deposit funds$ 5,430 $ 282 $ 502 $ 462$ 4,184 Future policy benefits 12,339 338 776 900 10,325 Health Care Medical claims payable 3,041 3,041 Unpaid claims and claim expenses 1,195 1,141 11 9 34 Long-term debt (1) 48,029 3,595 8,048 6,062 30,324 Other noncurrent liabilities 623 156 104 99 264 Operating leases 705 150 288 146 121 Off-Balance Sheet Purchase Obligations 3,197 1,399 1,283 493 22 Total$ 74,559 $ 10,102 $ 11,012 $ 8,171 $ 45,274 (1)Amounts include scheduled interest payments and current maturities of long-term debt. Finance leases are included in long-term debt and primarily represent obligations for information technology network storage, servers and equipment. See Note 18 to the Consolidated Financial Statements for information regarding finance leases. See Note 7 to the Consolidated Financial Statements for information regarding our long-term debt. 63 -------------------------------------------------------------------------------- On balance sheet: •Insurance liabilities. Excluded from the table above are$4 billion of insurance liabilities ($3 billion in contractholder deposit funds;$1 billion in future policy benefits) associated with the sold retirement benefits, individual life insurance and annuity businesses, reinsured workers' compensation, as well as the group life and personal accident businesses as their related net cash flows are not expected to impact our cash flows. Excluding these amounts, the sum of the obligations presented above exceeds the corresponding insurance and contractholder liabilities of$17 billion recorded on the balance sheet. This is because some of the recorded insurance liabilities reflect discounting for interest and the recorded contractholder liabilities exclude future interest crediting, charges and fees. The timing and amount of actual future cash flows may differ from those presented above. •Contractholder deposit funds: see Note 9 to the Consolidated Financial Statements for our accounting policy for this liability. Expected future cash flows presented above also include estimated future interest crediting on current fund balances based on current investment yields less the estimated cost of insurance charges and mortality and administrative fees for universal life policies. •Future policy benefits and unpaid claims and claim expenses: see Note 9 to the Consolidated Financial Statements for our accounting policies for these liabilities. Expected future cash flows for these liabilities presented in the table above are undiscounted. The expected future cash flows for guaranteed minimum death benefit ("GMDB") reported in future policy benefits do not consider any of the related reinsurance arrangements. •Long-term debt includes scheduled interest payments and current maturities of long-term debt. See Note 7 to the Consolidated Financial Statements for information regarding long-term debt. Finance leases are included in long-term debt and primarily represent obligations for information technology network storage, servers and equipment. See Note 18 to the Consolidated Financial Statements for information regarding finance leases. •Other noncurrent liabilities include estimated payments for guaranteed minimum income benefit ("GMIB") contracts (without considering any related reinsurance arrangements), pension, other postretirement and postemployment benefit obligations, supplemental and deferred compensation plans, interest rate and foreign currency swap contracts and reinsurance liabilities. Estimated payments of$61 million for deferred compensation, non-qualified and international pension plans and other postretirement and postemployment benefit plans are expected to be paid in less than one year and are included in the table above. We expect to make immaterial contributions to the qualified domestic pension plans during 2021 and they are reflected in the above table. We expect to make payments subsequent to 2021 for these obligations; however, subsequent payments have been excluded from the table as their timing is based on plan assumptions that may materially differ from actual activities. See Note 15 to the Consolidated Financial Statements for further information on pension obligations. •Operating leases see Note 18 to the Consolidated Financial Statements for additional information. The table above excludes the liabilities for uncertain tax positions because we cannot reasonably estimate the timing of such future payments. In the event we are unable to sustain all of our$1.2 billion of uncertain tax positions it could result in future tax payments of approximately$900 million . See Note 20 to the Consolidated Financial Statements for additional information on uncertain tax positions. Off-Balance Sheet: •Purchase obligations. As ofDecember 31, 2020 , purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments and they are included in the table below. (In millions) Debt securities$ 149 Commercial mortgage loans 10 Limited liability entities (other long-term investments) (1) 2,325 Total investment commitments 2,484 Future service commitments 713 Total purchase obligations$ 3,197 (1)See Note 11 to the Consolidated Financial Statements for additional information. Our estimated future service commitments primarily represent contracts for certain outsourced business processes and information technology maintenance and support. We generally have the ability to terminate these agreements, but do not anticipate doing so at this time. Purchase obligations exclude contracts that are cancellable without penalty and those that do not contractually require minimum levels of goods or services to be purchased. 64 --------------------------------------------------------------------------------
Guarantees
We are contingently liable for various financial and other guarantees provided
in the ordinary course of business. See Note 21 to the Consolidated Financial
Statements for additional information on guarantees.
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 below. We regularly evaluate
items that may impact critical accounting estimates.
As discussed in the executive overview of this MD&A, the COVID-19 pandemic has
pervasively impacted the economy, financial markets and the global health care
delivery systems. If the impact of the COVID-19 pandemic beyond 2020 is worse
than management's current projections, these adverse effects to our business
could impact the estimated fair value of our reporting units.
In addition to the estimates presented in the following tables, there are other
accounting estimates used in preparing our Consolidated Financial Statements,
including estimates of liabilities for future policy benefits, as well as
estimates with respect to pension and postretirement benefits other than
pensions and certain compensation accruals.
Management believes the current assumptions used to estimate amounts reflected
in our Consolidated Financial Statements are appropriate. However, if actual
experience significantly differs from the assumptions used in estimating amounts
reflected in our Consolidated Financial Statements, the resulting changes could
have a material adverse effect on our consolidated results of operations and in
certain situations, could have a material adverse effect on liquidity and our
financial condition. The tables below present the adverse impacts of certain
possible changes in assumptions. The effect of assumption changes in the
opposite direction would be a positive impact to our consolidated results of
operations, liquidity or financial condition, except for assessing impairment of
goodwill.
65
--------------------------------------------------------------------------------
Balance Sheet Caption /
Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Goodwill and other intangible assets We completed our normal
annual evaluations for
impairment of goodwill and intangible assets
Goodwill represents the excess of the cost of during the third quarter of 2020. The evaluations
businesses acquired over the fair value of their indicated that the fair value estimates of our
net assets at the acquisition date. Intangible reporting units exceed their carrying values by
assets primarily reflect the value of customer significant margins. Changes in assumptions
relationships and other intangibles acquired in concerning future financial results or other
business combinations. underlying assumptions, including macroeconomic
factors, government legislation, changes in the
Fair values of reporting units are estimated competitive landscape or other market conditions
using models and assumptions that we believe a could impact our ability to achieve profitability
hypothetical market participant would use to projections. If we consistently do not achieve
determine a current transaction price. The our earnings and cash flow projections or our
significant assumptions and estimates used in cost of capital rises significantly, the
determining fair value include the discount rate assumptions and estimates underlying the goodwill
and future cash flows. A discount rate is and intangible asset impairment evaluations could
selected to correspond with each reporting unit's be adversely affected and result in future
weighted average cost of capital, consistent with impairment charges that would negatively impact
that used for investment decisions considering our operating results and financial position.
the specific and detailed operating plans and
strategies within each reporting unit.
Projections of future cash flows for each
reporting unit are consistent with our annual
planning process for revenues, pharmacy costs,
benefits expenses, operating expenses, taxes,
capital levels and long-term growth rates. In
addition to these assumptions, we consider market
data to evaluate the fair value of each reporting
unit. The fair value of intangibles and the
amortization method were determined using an
income approach that relies on projected future
cash flows including key assumptions for customer
attrition and discount rates. Management revises
amortization periods if it believes there has
been a change in the length of time that an
intangible asset will continue to have value.
The Company conducts its quantitative evaluation
for goodwill impairment at least annually during
the third quarter at the reporting unit level and
performs qualitative impairment assessments on a
quarterly basis to determine if events or changes
in circumstances indicate that it is more likely
than not that the carrying value of a reporting
unit exceeds its estimated fair value.
Goodwill and other intangibles as of December 31
were as follows (in millions):
·2020 -
See Note 17 to the Consolidated Financial Statements for additional discussion of our goodwill and other intangible assets. Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different
Assumptions Used
Income taxes - uncertain tax positions The factors that could
impact our estimates of
uncertain tax positions include the likelihood
We evaluate tax positions to determine whether of being sustained upon audit based on the
the benefits are more likely than not to be technical merits of the tax position and related
sustained on audit based on their technical assumed interest and penalties. If our positions
merits. The Company establishes a liability if are upheld upon audit, our net income would
the probability that the position will be increase.
sustained is 50% or less. For uncertain
positions that management believes are more
likely than not to be sustained, the Company
recognizes a liability based upon management's
estimate of the most likely settlement outcome
with the taxing authority. These amounts
primarily relate to federal and state uncertain
positions of the value and timing of deductions
and uncertain positions of attributing taxable
income to states
Balances that are included in the Consolidated
Balance Sheets are as follows (in millions):
·2020 - $1,210
·2019 - $1,018
See Note 20 to the Consolidated Financial
Statements for additional discussion around
uncertain tax positions and the Liquidity and
Capital Resource section of this MD&A for a
discussion of their potential impact on
liquidity.
66-------------------------------------------------------------------------------- Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different
Assumptions Used
Unpaid claims and claim expenses -
reasonably possible that a 100 basis point change
Unpaid claims and claim expenses include both in the medical cost trend and a 50 basis point
reported claims and estimates for losses incurred change in completion factors could occur in the
but not yet reported. near term.
Unpaid claims and claim expenses in U.S. Medical A 100 basis point increase in the medical cost
are primarily impacted by assumptions related to trend rate would increase this liability by
completion factors and medical cost trend. approximately $45 million , resulting in a
Variation of actual results from either decrease in net income of approximately $35
assumption could impact the unpaid claims balance million after-tax, and a 50 basis point decrease
as noted below. A large number of factors may in completion factors would increase this
cause the medical cost trend to vary from the liability by approximately $90 million , resulting
Company's estimates, including: changes in health in a decrease in net income of approximately $70
management practices, changes in the level and million after-tax.
mix of benefits offered and services utilized,
and changes in medical practices. Completion
factors may be affected if actual claims
submission rates from providers differ from
estimates (that can be influenced by a number of
factors, including provider mix and electronic
versus manual submissions), or if changes to the
Company's internal claims processing patterns
occur.
Unpaid claims and claim expenses for the U.S.
Medical segment as of December 31 were as follows
(in millions):
·2020 - gross $3,184 ; net $2,960
·2019 - gross $2,892 ; net $2,589
These liabilities are presented above both gross
and net of reinsurance and other recoverables.
See Note 9 to the Consolidated Financial
Statements for additional information regarding
assumptions and methods used to estimate this
liability.
Balance Sheet Caption /
Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Valuation of debt security investments If the derived interest
rates used to calculate
fair value increased by 100 basis points, the
Most debt securities are classified as available fair value of the total debt security portfolio
for sale and are carried at fair value with of $18 billion would decrease by approximately
changes in fair value recorded in accumulated $1.3 billion , resulting in an after-tax decrease
other comprehensive income (loss) within to shareholders' equity of approximately $0.8
shareholders' equity. billion as of December 31, 2020.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. Determining fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select based on an understanding of the issuer, the structure of the security and overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. Approximately two-thirds of our debt securities are public securities, and one-third are private placement securities. Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows of the instrument. Such market rates are derived by calculating the appropriate spreads over comparableU.S. Treasury securities, based on the credit quality, industry and structure of the asset. See Notes 11A. and 12 to the Consolidated Financial Statements for a discussion of our fair value measurements, the procedures performed by management to determine that the amounts represent appropriate estimates and our accounting policy regarding unrealized appreciation on debt securities. 67
-------------------------------------------------------------------------------- SEGMENT REPORTING The following section of this MD&A discusses the results of each of our segments. See Note 1 to the Consolidated Financial Statements for a description of our segments. In segment discussions, we present adjusted revenues and "pre-tax adjusted income from operations," defined as income before taxes excluding realized investment gains (losses), amortization of acquired intangible assets, special items and, for periods prior to 2020, results of transitioning clients. Ratios presented in this segment discussion exclude the same items as pre-tax adjusted income from operations. See Note 22 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 22 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 from operations divided by adjusted revenues. As of the third quarter 2020, the segment previously reported as Health Services is reported as Evernorth, and the segment previously reported as Integrated Medical is reported asU.S. Medical. There are no changes to the underlying business reported in either segment. See the "Executive Overview" section of this MD&A for summarized financial results of each of our segments. Evernorth Segment Evernorth includes a broad range of coordinated and point solution health services, including pharmacy solutions, benefits management solutions, care solutions and intelligence solutions. As described in the introduction to Segment Reporting, Evernorth performance is measured using the below metrics: •Adjusted gross profit and pre-tax adjusted income from operations, which exclude the impact of special items. •Adjusted pharmacy script volume is calculated by multiplying the total non-specialty network scripts filled through 90-day programs and home delivery scripts by three and counting all other network and specialty scripts as one script. •Generic fill rate is defined as the total number of generic scripts divided by the total overall scripts filled. 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. The key factors that impact Evernorth revenues and costs of revenues are volume, mix of claims and price. These key factors are discussed further below. See Note 3 to the Consolidated Financial Statements included in this Form 10-K for additional information on revenue and cost recognition policies for this segment. •As our clients' claim volumes increase or decrease, our resulting revenues and cost of revenues correspondingly increase or decrease. Our gross profit could also increase or decrease as a result of changes in purchasing discounts. •The mix of claims generally considers the type of drug and distribution method used for dispensing and fulfilling. Types of drugs can have an impact on our pharmacy revenues, pharmacy and other service costs and gross profit, including amounts payable under certain financial and performance guarantees with our clients. In addition to the types of drugs, the mix of generic claims (i.e., generic fill rate) also impacts our gross profit. 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 supply chain 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 optimizing the supply chain. Our gross profit could also increase or decrease as a result of supply chain 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 can affect our revenues and cost of revenues. 68 -------------------------------------------------------------------------------- In this MD&A, we present revenues and gross profit, as well as adjusted revenues and adjusted gross profit, consistent with our segment reporting metrics, which exclude special items and, for periods prior to 2020, contributions from transitioning clients. As ofDecember 31, 2019 , the transition of these clients was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our adjusted metrics. See the "Key Transactions and Business Developments" section of this Form 10-K MD&A for further discussion of transitioning clients and why we present this information. Results of Operations Change Favorable Change Favorable Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable) (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Total revenues$ 116,334 $ 109,794 $ 7,065 $ 6,540 6 %$ 102,729 N/M Less: Transitioning clients - (13,347) (459) 13,347 N/M (12,888) N/M Less: Contractual adjustment for a former client (204) - - (204) N/M - N/M Adjusted revenues(1)$ 116,130 $ 96,447 $ 6,606 $ 19,683 20$ 89,841 N/M Gross profit$ 7,797 $ 8,908 $ 604 $ (1,111) (12) $ 8,304 N/M Adjusted gross profit(1)$ 7,593 $ 6,984 $ 531 $ 609 9 $ 6,453 N/M Pre-tax adjusted income from operations$ 5,363 $ 5,092 $ 380 $ 271 5 % $ 4,712 N/M Pre-tax adjusted margin 4.6 % 5.3 % 5.8 % (70) bps (50) bps For the Years Ended December 31, Change Favorable (Dollars and adjusted scripts in millions) 2020 2019 (Unfavorable) Selected Financial Information(1) Pharmacy revenue by distribution channel Adjusted network revenues$ 56,181 $ 41,483 35 % Adjusted home delivery and specialty revenues 49,886 45,836 9 % Other revenues 5,403 4,900 10 % Total adjusted pharmacy revenues$ 111,470 $ 92,219 21 % Pharmacy script volume Adjusted network scripts(2) 1,206 941 28 % Adjusted home delivery and specialty scripts(2) 287 283 1 % Total adjusted scripts(2) 1,493 1,224 22 % Generic fill rate Network 87.4 % 87.1 % 30 bps Home delivery 85.2 % 84.3 % 90 bps Overall generic fill rate 87.2 % 86.8 % 40 bps (1)Amounts exclude special items and, for periods prior to 2020, contributions from transitioning clients. (2)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. 2020 versus 2019 In the first quarter of 2020,U.S. Government operating segment customers transitioned to Express Scripts' retail pharmacy network. In the third quarter of 2019,U.S. Commercial operating segment customers transitioned to Express Scripts' retail pharmacy network. Results of operations for 2018 reflected the results for the period following the acquisition of Express Scripts onDecember 20, 2018 along with the legacy Cigna home delivery business. Adjusted network revenues. The increase reflected the transition ofU.S. Medical's customers, higher claims volume, due to our collaboration with Prime Therapeutics, and increased prices due to inflation on branded drugs. These favorable effects were partially offset by claims mix due to the increase in the generic fill rate. Adjusted home delivery and specialty revenues. The increase reflected higher prices, due to inflation on branded drugs and higher home delivery and specialty claims volume. These increases were partially offset by claims mix due to an increase in the generic fill rate. Adjusted gross profit. The increase reflected customer growth, higher adjusted pharmacy script volumes, benefits from the effective management of supply chain and the favorable impact of claims mix as a result of the types of drugs dispensed, the distribution method used for dispensing and fulfilling and an increase in the generic fill rate. 69 -------------------------------------------------------------------------------- Pre-tax adjusted income from operations. The increase reflected customer growth, higher adjusted pharmacy scripts volumes, benefits from the effective management of supply chain, and the favorable impact of claims mix as a result of the types of drugs dispensed, the distribution method used for dispensing and fulfilling and an increase in the generic fill rate, partially offset by an increase in operating expenses due to client transitions.U.S. Medical SegmentU.S. Medical includes Cigna'sU.S. Commercial andU.S. Government businesses that provide comprehensive medical and coordinated solutions to clients and customers.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, Medicaid plans, and individual health insurance plans both on and off the public exchanges. As described in the introduction to Segment Reporting, performance of theU.S. Medical segment is measured using pre-tax adjusted income from operations. Key factors affecting profitability for this segment include: •customer growth; •revenues from integrated specialty products, including pharmacy services sold to clients and customers across all funding solutions; •percentage of Medicare Advantage customers in plans eligible for quality bonus payments; •benefit expenses as a percentage of premiums (medical care ratio or "MCR") for our insured commercial and government businesses; and •selling, general and administrative expense as a percentage of adjusted revenues (expense ratio). Results of Operations Change Favorable Change Favorable Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable) (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Adjusted revenues$ 38,451 $ 36,519 $ 32,791 $ 1,932 5 %$ 3,728 11 % Pre-tax adjusted income from operations$ 3,807 $ 3,831 $ 3,502 $ (24) (1) %$ 329 9 % Pre-tax adjusted margin 9.9 % 10.5 % 10.7 % (60) bps (20) bps Medical care ratio 79.4 % 80.8 % 78.9 % 140 bps (190) bps Expense ratio 22.8 % 22.9 % 24.7 % 10 bps 180 bps Change Favorable Change Favorable For the Years Ended December 31, (Unfavorable) (Unfavorable) (In thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018U.S. Medical Customers U.S. Commercial 2,141 2,114 1,911 27 1 % 203 11 % U.S. Government 1,387 1,361 1,407 26 2 % (46) (3) % Insured 3,528 3,475 3,318 53 2 % 157 5 % Service 11,485 12,073 12,071 (588) (5) % 2 - % Total 15,013 15,548 15,389 (535) (3) % 159 1 % Change Favorable Change Favorable As of December 31, (Unfavorable) (Unfavorable) (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Unpaid claims and claim expenses - U.S. Medical$ 3,184 $ 2,892 $ 2,697 $ 292 10 % $ 195 7 % 70
-------------------------------------------------------------------------------- 2020 versus 2019 Adjusted revenues. The increase for the year endedDecember 31, 2020 compared with 2019 reflects customer growth in our Medicare Advantage andU.S. Commercial insured businesses, as well as higher premium rates due to anticipated underlying medical cost trend and the resumption of the health insurance industry tax. These favorable effects were partially offset by the impact of premium relief programs for clients beginning in the second quarter of 2020 in response to significantly lower than historical utilization as individuals deferred care due to the COVID-19 pandemic. Pre-tax adjusted income from operations was essentially flat reflecting customer growth in ourU.S. Commercial insured and Medicare Advantage businesses and net favorable COVID-19 related impacts; offset by the return of the health insurance industry tax and less favorable prior period development. COVID-19 related impacts include deferral of care by our customers; partially offset by direct COVID-19 costs, costs of actions we have taken to support customers, providers and employees, and increased disenrollment resulting from the economic impacts of the pandemic. Medical care ratio. The decrease reflects COVID-19 related impacts and the pricing effect of the health insurance industry tax. COVID-19 related impacts include deferral of care by our customers; partially offset by direct COVID-19 costs and premium relief programs extended to employer clients. Expense ratio. The expense ratio was flat reflecting higher insured revenues as well as efficiencies from continued disciplined expense management and the resumption of the health insurance industry tax. Other Items AffectingU.S. Medical Results Unpaid Claims and Claim Expenses Our unpaid claims and claim expenses liability was higher as ofDecember 31, 2020 compared withDecember 31, 2019 , primarily due to customer growth in our Medicare Advantage andU.S. Commercial insured businesses. Medical Customers Our medical customer base decreased atDecember 31, 2020 compared withDecember 31, 2019 , reflecting a lower customer base in our Middle Markets and National Accounts segments and increased disenrollment resulting from the economic impacts of the COVID-19 pandemic; partially offset by growth in our Select segment and our Medicare Advantage business. 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. International Markets Segment As described in the introduction to Segment Reporting, performance of the International Markets segment is measured using pre-tax adjusted income from operations. Key factors affecting pre-tax adjusted income from operations for this segment are: •premium growth, including new business and customer retention; •benefit expenses as a percentage of premiums (loss ratio); •selling, general and administrative expense as a percentage of revenues (expense ratio and acquisition cost ratio); and •the impact of foreign currency movements. 71 --------------------------------------------------------------------------------
Results of Operations
Change Favorable Change Favorable
Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable)
(In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Adjusted revenues $ 5,877 $ 5,615 $ 5,366 $ 262 5 %$ 249 5 % Pre-tax adjusted income from operations$ 900 $ 762 $ 735 $ 138 18 %$ 27 4 % Pre-tax adjusted margin 15.3 % 13.6 % 13.7 % 170 bps (10) bps Loss ratio 56.5 % 57.3 % 57.4 % 80 bps 10 bps Acquisition cost ratio 11.3 % 12.9 % 13.1 % 160 bps 20 bps Expense ratio (excluding acquisition costs) 20.2 % 19.5 % 18.9 % (70) bps (60) bps 2020 versus 2019 Adjusted revenues increased mainly due to business growth inAsia andEurope , partially offset by premium relief programs, primarily inEurope and unfavorable foreign currency movements. Pre-tax adjusted income from operations increased reflecting lower acquisition and loss ratios and business growth, primarily inAsia , partially offset by higher expense ratios. The ratios in 2020 reflect the costs of actions to support clients; additionally, the expense ratio reflects actions to support employees and investments in the business for future growth. The segment's loss ratio decreased reflecting lower medical utilization due to the COVID-19 pandemic, partially offset by premium relief programs. The acquisition cost ratio decreased reflecting an update to our commission deferral process and lower acquisition expenses inAsia , partially offset by premium relief programs. The expense ratio (excluding acquisition costs) increased, reflecting strategic investments and the unfavorable impact of premium relief programs. Other Items Related to International Markets ResultsSouth Korea is the single largest geographic market for our International Markets segment. For the year endedDecember 31, 2020 ,South Korea generated 38% of the segment's adjusted revenues and 60% of the segment's pre-tax adjusted income from operations. Group Disability and Other Group Disability and Other included for the period presented, Cigna's Group Disability and Life business which offered group long-term and short-term disability, and group life, accident, voluntary and specialty insurance products and services. Additionally, this segment includesCorporate Owned Life Insurance ("COLI") and the Company's run-off operations. As described in the introduction of Segment Reporting, performance of Group Disability and Other is measured using pre-tax adjusted income from operations. Key factors affecting pre-tax adjusted income from operations are: •premium growth, including new business and customer retention; •net investment income; •benefit expenses as a percentage of premiums (loss ratio); and •selling, general and administrative expense as a percentage of revenues excluding net investment income (expense ratio). Results of Operations Change Favorable Change Favorable Financial Summary For the Years Ended December 31, (Unfavorable) (Unfavorable) (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Adjusted revenues$ 5,264 $ 5,182 $ 5,061 $ 82 2 %$ 121 2 % Pre-tax adjusted income from operations$ 290 $ 501 $ 529 $ (211) (42) %$ (28) (5) % Pre-tax adjusted margin 5.5 % 9.7 % 10.5 % (420) bps (80) bps 72
-------------------------------------------------------------------------------- 2020 versus 2019 Adjusted revenues increased due to growth in disability, life and voluntary products, partially offset by lower investment income. Pre-tax adjusted income from operations and margin decreased due to unfavorable life claims experience related to the COVID-19 pandemic, unfavorable disability claims experience and lower investment income, partially offset by favorable results in our voluntary products. Sale ofU.S. Group Disability and Life Business. As discussed further in the Executive Overview section of this MD&A, we sold ourU.S. Group Disability and Life business onDecember 31, 2020 . Because this business constituted the vast majority of the segment, going forward, we would expect a substantial decline in adjusted revenues and adjusted income from operations in this segment. 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 project costs and intersegment eliminations for products and services sold between segments. Financial Summary For the Years Ended December 31, Change Favorable (Unfavorable) Change Favorable (Unfavorable) (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Pre-tax adjusted loss from operations$ (1,552) $ (1,824) $ (403) $ 272 15 %$ (1,421) N/M % 2020 versus 2019 Pre-tax adjusted loss from operations was lower, reflecting lower interest expense due to lower levels of debt. INVESTMENT ASSETS The following table presents our investment asset portfolio excluding separate account assets as ofDecember 31, 2020 andDecember 31, 2019 . Additional information regarding our investment assets is included in Notes 11, 12, 13 and 14 to the Consolidated Financial Statements. December 31, December 31, (In millions) 2020 2019 Debt securities$ 18,131 $ 23,755 Equity securities 501 303 Commercial mortgage loans 1,419 1,947 Policy loans 1,351 1,357 Other long-term investments 2,832 2,403 Short-term investments 359 423 Total 30,188 Investments classified as assets of business held for sale (1) (7,709) Investments per Consolidated Balance Sheets $
24,593
(1)OnDecember 31, 2020 , Cigna completed the sale of itsU.S. Group Disability and Life business and transferred a total of$8.4 billion of investments to New York Life Insurance Company as part of this divestiture. The investment assets transferred toNew York Life were primarily debt securities and, to a lesser extent, commercial mortgage loans. The table above includes$7.7 billion as ofDecember 31, 2019 of investments associated with this business that was previously held for sale.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. 73 --------------------------------------------------------------------------------
The following table reflects our portfolio of debt securities by type of issuer
as of
December 31, December 31,
(In millions) 2020 2019
Federal government and agency $ 456 $ 733
State and local government 167 810
Foreign government 2,511 2,256
Corporate 14,562 19,420
Mortgage and other asset-backed 435 536
Total $ 18,131 $ 23,755
As a result of the U.S. Group Disability and Life business divestiture, $7.8
billion of debt securities were transferred to New York Life on December 31,
2020 , see Note 5 to the Consolidated Financial Statements for further
information. The debt securities transferred to New York Life were primarily
Corporate and State and local government sectors. This decrease in our debt
securities portfolio was partially offset by an increase in valuations due to
decreasing yields and net purchase activity during the year.
As of December 31, 2020 , $15.6 billion , or 86% of the debt securities in our
investment portfolio were investment grade (Baa and above, or equivalent) and
the remaining $2.5 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. Although our allocation to below investment grade
bonds has increased since the prior year, these quality characteristics have not
otherwise changed materially from the prior year and remain consistent with our
investment strategy.
Investments in debt securities are diversified by issuer, geography and industry
as appropriate. On an aggregate basis, the debt securities portfolio continues
to perform according to original investment expectations. However, due to the
economic impacts of the COVID-19 pandemic, there are certain issuers,
particularly within the aviation, energy and hospitality sectors, that are
showing signs of distress, primarily in the form of requests for temporary
covenant relief. There were no material unrealized losses in any of these
sectors as of the reporting date. We continue to monitor the economic
environment and its effect on our portfolio, and consider the impact of various
factors in determining the allowance for credit losses on debt securities, which
is discussed in Note 11 to the Consolidated Financial Statements.
Foreign government obligations are concentrated in Asia , primarily South Korea ,
consistent with our risk management practice and local regulatory requirements
of our international business operations. Corporate debt securities include
private placement assets of $6.0 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.
Commercial Mortgage Loans
As of December 31, 2020 , the $1.4 billion commercial mortgage loan portfolio
consisted of approximately 45 loans that are in good standing. Our commercial
mortgage loans are fixed rate loans, diversified by property type, location and
borrower. Given the quality and diversity of the underlying real estate,
positive debt service coverage and significant borrower cash invested 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.
As a result of the U.S. Group Disability and Life business divestiture, $0.6
billion of commercial mortgage loans were transferred to New York Life on
December 31, 2020 , see Note 5 to the Consolidated Financial Statements for
further information. 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.
COVID-19 has negatively impacted commercial real estate fundamentals and capital
market activity with concentrated weakness in hotels and regional malls. Our
mortgage loan portfolio is well diversified by property type and geography with
no material exposure to hotels and no exposure to regional shopping malls. We
continue to monitor the long-term impacts on the office sector due to growing
headwinds: expanded remote working flexibility, shorter term leases and
corporate migration to lower cost states. Our mortgage loans secured by office
properties are in good standing.
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Other Long-term Investments
Other long-term investments of $2.8 billion as of December 31, 2020 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 is driven by net new
funding activity. 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 175
separate partnerships and approximately 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 4% of our securities and real estate 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. We could experience losses into
future periods, but the magnitude of these losses will depend in part on the
length and extent of the economic disruption, the speed of the recovery and the
overall economic impacts.
We participate in an insurance joint venture in China with a 50% ownership
interest. We account for this joint venture on the equity method of accounting
and report our share of the net assets of $0.8 billion in Other assets. Our 50%
share of the investment portfolio supporting the joint venture's business is
approximately $5.6 billion , primarily invested in Chinese corporate and
government debt securities diversified by issuer, industry and geography, as
appropriate. To a lesser extent and consistent with its investment strategy, the
joint venture is invested in Chinese equity investments comprised of
approximately 50% equity mutual funds, with the remainder invested in equity
securities and private equity partnerships. 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 of December 31,
2020 .
Investment Outlook
The impact of COVID-19 on the economy, despite unprecedented monetary and fiscal
support, and the uncertainty as to the strength and sustainability of the
recovery prior to a widely available vaccine, continues to dominate financial
markets. The low interest rate environment continues to pressure income from
both short-term and longer-term investments. U.S. treasury rates remain near
all-time lows and the wider market credit spreads experienced during the
beginning of the second quarter of 2020 have meaningfully narrowed, resulting in
historically low yields for investment grade assets. We continue to actively
monitor the economic impact of the pandemic, as well as fiscal and monetary
responses, and their potential impact on the portfolio. Net investment income
projections into 2021 reflect continued market volatility and portfolio impacts,
particularly in certain sectors such as aviation, hospitality and energy, as
well as other areas most severely impacted by COVID-19. Future realized and
unrealized investment results will be driven largely by market conditions that
exist when a transaction occurs or at the reporting date. These future
conditions are not reasonably predictable; however, we believe that the vast
majority of our investments will continue to perform under their contractual
terms. Based on our strategy to match the duration of invested assets to the
duration of insurance and contractholder liabilities, we expect to hold a
significant portion of these assets for the long-term. Although future
impairment losses resulting from interest rate movements and credit
deterioration due to both investment-specific and the global economic
uncertainties discussed above remain possible, we do not expect these losses to
have a material adverse effect on our financial condition or liquidity.
MARKET RISK
Financial Instruments
Our assets and liabilities include financial instruments subject to the risk of
potential losses from adverse changes in market rates and prices. Consistent
with disclosure requirements, the following items have been excluded from this
consideration of market risk for financial instruments:
•changes in the fair values of insurance-related assets and liabilities because
their primary risks are insurance rather than market risk;
•changes in the fair values of investments recorded using the equity method of
accounting and liabilities for pension and other postretirement and
postemployment benefit plans (and related assets); and
•changes in the fair values of other significant assets and liabilities, such as
goodwill, deferred policy acquisition costs, taxes and various accrued
liabilities. Because they are not financial instruments, their primary risks are
other than market risk.
Excluding these items, our primary market risk exposures from financial
instruments are:
•Interest-rate risk on fixed-rate, medium-term instruments. Changes in market
interest rates affect the value of instruments that promise a fixed return.
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•Foreign currency exchange rate risk of the U.S. dollar, net of derivatives used
for hedging, is primarily to the South Korean won, Chinese yuan renminbi and New
Zealand dollar. An unfavorable change in exchange rates reduces the carrying
value of net assets denominated in foreign currencies.
Our Management of Market Risks
We predominantly rely on three techniques to manage our exposure to market risk:
•Investment/liability matching. We generally select investment assets with
characteristics (such as duration, yield, currency and liquidity) that
correspond to the underlying characteristics of our related insurance and
contractholder liabilities so that we can match the investments to our
obligations. Shorter-term investments generally support shorter-term life and
health liabilities. Medium-term, fixed-rate investments support
interest-sensitive and health liabilities. Longer-term investments generally
support products with longer payout periods such as annuities.
•Use of local currencies for foreign operations. We generally conduct our
international business through foreign operating entities that maintain assets
and liabilities in local currencies. This technique limits exchange rate risk to
our net assets.
•Use of derivatives. We use derivative financial instruments to reduce our
primary market risks. See Note 11 to the Consolidated Financial Statements for
additional information about derivative financial instruments.
Effect of Market Fluctuations
Assuming a 100 basis point increase in interest rates and 10% strengthening in
the U.S. dollar to foreign currencies, the effect of hypothetical changes in
market rates or prices on the fair value of certain financial instruments,
subject to the exclusions noted above (particularly insurance liabilities),
would have been as follows as of December 31 :
Market scenario for certain non-insurance financial instruments Loss in Fair Value
(in billions) 2020 2019
100 basis point increase in interest rates (excluding long-term debt)
$ 1.4 $ 1.6 10% strengthening inU.S. dollar to foreign currencies
The effect of a hypothetical increase in interest rates, primarily on debt securities and commercial mortgage loans, was determined by estimating the present value of future cash flows using various models, primarily duration modeling. The decrease in our sensitivity to market interest rates since the prior year is primarily due to our decreased interest sensitive investment portfolio base, due to the transfer of debt securities and commercial mortgage loans toNew York Life onDecember 31, 2020 . See Note 5 to the Consolidated Financial Statements for additional information on the divestiture of ourU.S. Group Disability and Life business. In the event of a hypothetical 100 basis point increase in interest rates, the fair value of the Company's long-term debt would decrease approximately$3.0 billion atDecember 31, 2020 and$2.5 billion atDecember 31, 2019 . Changes in the fair value of our long-term debt do not impact our financial position or operating results. See Note 7 to the Consolidated Financial Statements for additional information about the Company's debt. The effect of a hypothetical strengthening of theU.S. dollar relative to the foreign currencies of certain financial instruments held by us was estimated to be 10% of the fair value of these instruments, translated to theU.S. dollar. Our foreign operations hold investment assets, such as debt securities, cash and cash equivalents that are generally invested in the currency of the related liabilities.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained under the caption "Market Risk" in the MD&A section of this Form 10-K is incorporated by reference.
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