CIGNA 
Executive Overview 38 Liquidity and Capital Resources 44 Critical Accounting Estimates 47 Segment Reporting 48 Evernorth 48U.S. Medical 49 International Markets 51 Other Operations 52 Corporate 52 Investment Assets 52 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 ofMarch 31, 2021 compared withDecember 31, 2020 and our results of operations for the three months endedMarch 31, 2021 , compared with the same period last year and is intended to help you understand the ongoing trends in our business. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("Form 10-K"). In particular, we encourage you to refer to the "Risk Factors" contained in Part I, Item 1A of the 2020 Form 10-K. Unless otherwise indicated, financial information in this MD&A is presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). See Note 2 to the Consolidated Financial Statements in our 2020 Form 10-K for additional information regarding the Company's significant accounting policies and see Note 2 to the Consolidated Financial Statements in this Form 10-Q for updates to those policies resulting from adopting new accounting guidance, if any. The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors call for caution in estimating full-year results based on interim results of operations. In some of our financial tables in this MD&A, we present either percentage changes or "N/M" when those changes are so large as to become not meaningful. Changes in percentages are expressed in basis points ("bps"). In this MD&A, our consolidated measures "adjusted income from operations," earnings per share on that same basis and "adjusted revenues" are not determined in accordance with GAAP and should not be viewed as substitutes for the most directly comparable GAAP measures of "shareholders' net income," "earnings per share" and "total revenues." We also use pre-tax adjusted income 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 net realized investment gains and losses, amortization of acquired intangible assets and special items. 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. 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. •Amortization of acquired intangible assets because these relate to costs incurred for acquisitions. •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: 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 37 --------------------------------------------------------------------------------
accounting. We exclude these items from this measure because management believes they are not indicative of past or future underlying performance of the business.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on Cigna's current expectations and projections about future trends, events and uncertainties. These statements are not historical facts. Forward-looking statements may include, among others, statements concerning future financial or operating performance, including our ability to deliver affordable, personalized and innovative solutions for our customers and clients, including in light of the challenges presented by the COVID-19 pandemic; future growth, business strategy, strategic or operational initiatives; economic, regulatory or competitive environments, particularly with respect to the pace and extent of change in these areas; financing or capital deployment plans and amounts available for future deployment; our prospects for growth in the coming years; strategic transactions; and other statements regarding Cigna's future beliefs, expectations, plans, intentions, liquidity, cash flows, financial condition or performance. You may identify forward-looking statements by the use of words such as "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "may," "should," "will" or other words or expressions of similar meaning, although not all forward-looking statements contain such terms. Forward-looking statements are subject to risks and uncertainties, both known and unknown, that could cause actual results to differ materially from those expressed or implied in forward-looking statements. Such risks and uncertainties include, but are not limited to: our ability to achieve our strategic and operational initiatives; our ability to adapt to changes in an evolving and rapidly changing industry; the scale, scope and duration of the COVID-19 pandemic and its potential impact on our business, operating results, cash flows or financial condition, our ability to compete effectively, differentiate our products and services from those of our competitors and maintain or increase market share; price competition and other pressures that could compress our margins or result in premiums that are insufficient to cover the cost of services delivered to our customers; the potential for actual claims to exceed our estimates related to expected medical claims; our ability to develop and maintain satisfactory relationships with physicians, hospitals, other health service providers and with producers and consultants; our ability to maintain relationships with one or more key pharmaceutical manufacturers or if payments made or discounts provided decline; changes in the pharmacy provider marketplace or pharmacy networks; changes in drug pricing or industry pricing benchmarks; political, legal, operational, regulatory, economic and other risks that could affect our multinational operations; risks related to strategic transactions and realization of the expected benefits of such transactions, as well as integration difficulties or underperformance relative to expectations; dependence on success of relationships with third parties; risk of significant disruption within our operations or among key suppliers or third parties; our ability to invest in and properly maintain our information technology and other business systems; our ability to prevent or contain effects of a potential cyberattack or other privacy or data security incident; potential liability in connection with managing medical practices and operating pharmacies, onsite clinics and other types of medical facilities; the substantial level of government regulation over our business and the potential effects of new laws or regulations or changes in existing laws or regulations; uncertainties surrounding participation in government-sponsored programs such as Medicare; the outcome of litigation, regulatory audits, investigations; compliance with applicable privacy, security and data laws, regulations and standards; potential failure of our prevention, detection and control systems; unfavorable economic and market conditions, stock market or interest rate declines, risks related to a downgrade in financial strength ratings of our insurance subsidiaries; the impact of our significant indebtedness and the potential for further indebtedness in the future; unfavorable industry, economic or political conditions; credit risk related to our reinsurers; as well as more specific risks and uncertainties discussed in Part I, Item 1A - Risk Factors of our 2020 Form 10-K, Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Form 10-K, this MD&A and as described from time to time in our future reports filed with theSecurities and Exchange Commission (the "SEC"). You should not place undue reliance on forward-looking statements, which speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Cigna undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law. EXECUTIVE OVERVIEWCigna Corporation , together with its subsidiaries (either individually or collectively referred to as "Cigna," the "Company," "we," "our" or "us") is a global health services organization with a mission of helping those we serve improve their health, well-being and peace of mind by making health care simple, affordable and predictable. 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 our 2020 Form 10-K. 38 -------------------------------------------------------------------------------- Financial Highlights See Note 1 to the Consolidated Financial Statements for a description of our segments. The commentary provided below describes our results for the three months endedMarch 31, 2021 compared with the same period in 2020. Summarized below are certain key measures of our performance by segment for the three months endedMarch 31, 2021 and 2020: Financial highlights by segment Three Months Ended March 31, (Dollars in millions, except per share amounts) 2021 2020
% Change
Revenues
Adjusted revenues by segment Evernorth$ 30,620 $ 27,168 13 % U.S. Medical 10,362 9,860 5 International Markets 1,572 1,470 7 Other Operations 139 1,339 (90) Corporate, net of eliminations (1,708) (1,445) (18) Adjusted revenues 40,985 38,392 7 Net realized investment results from certain equity method investments (14) (10) (40) Special items - 87 N/M Total revenues$ 40,971 $ 38,469 7 % Shareholders' net income$ 1,161 $ 1,181 (2) % Adjusted income from operations$ 1,664 $ 1,758 (5) % Earnings per share (diluted) Shareholders' net income$ 3.30 $ 3.15 5 % Adjusted income from operations$ 4.73 $ 4.69 1 % Pre-tax adjusted income (loss) from operations by segment Evernorth$ 1,223 $ 1,082 13 % U.S. Medical 987 1,199 (18) International Markets 262 282 (7) Other Operations 24 77 (69) Corporate, net of eliminations (354) (405)
13
Consolidated pre-tax adjusted income from operations 2,142 2,235
(4)
Income attributable to noncontrolling interests 12 9
33
Net realized investment (gains) losses (1) (13) (98)
87
Amortization of acquired intangible assets (495) (498) 1 Special items (133) (251) 47 Income before income taxes$ 1,513 $ 1,397 8 % (1)Includes the Company's share of certain realized investment results of its joint ventures reported in the International Markets segment using the equity method of accounting.
For further analysis and explanation of each segment's results, see the "Segment Reporting" section of this MD&A.
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--------------------------------------------------------------------------------Consolidated Results of Operations (GAAP basis)
Three Months Ended
March 31,
(Dollars in millions) 2021 2020 % Change
Pharmacy revenues $ 28,025 $ 25,098 12 %
Premiums 10,214 10,840 (6)
Fees and other revenues 2,341 2,178 7
Net investment income 391 353 11
Total revenues 40,971 38,469 7
Pharmacy and other service costs 27,235 24,190 13
Medical costs and other benefit expenses 8,005 8,322 (4)
Selling, general and administrative expenses 3,279 3,398 (4)
Amortization of acquired intangible assets 495 498 (1)
Total benefits and expenses 39,014 36,408 7
Income from operations 1,957 2,061 (5)
Interest expense and other (314) (391) 20
Debt extinguishment costs (131) (185) 29
Net realized investment gains (losses) 1 (88) N/M
Income before income taxes 1,513 1,397 8
Total income taxes 342 208 64
Net income 1,171 1,189 (2)
Less: Net income attributable to noncontrolling
interests 10 8 25
Shareholders' net income $ 1,161 $ 1,181 (2) %
Consolidated effective tax rate 22.6 % 14.9 % 770 bps
Medical customers (in thousands)
U.S. Medical 15,016 15,552 (3) %
International Markets 1,687 1,666 1
Total 16,703 17,218 (3) %
Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations
Diluted Earnings
Dollars in Millions Per Share
Three Months
Three Months Ended Ended
March 31, March 31,
2021 2020 2021 2020
Shareholders' net income $ 1,161 $ 1,181 $ 3.30 $ 3.15 After-tax adjustments required to reconcile to adjusted income from operations Net realized investment (gains) losses (1)
13 77 0.04 0.21
Amortization of acquired intangible assets 388 309 1.10 0.82 Special items Debt extinguishment costs 101 140 0.29 0.38 Integration and transaction-related costs 22 74 0.06
0.20
Charges associated with litigation matters (21) 19 (0.06)
0.05
Charge for organizational efficiency plan - 24 -
0.06
Contractual adjustment for a former client - (66) - (0.18) Total special items 102 191 0.29 0.51 Adjusted income from operations$ 1,664 $ 1,758 $ 4.73 $
4.69
(1)Includes the Company's share of certain realized investment results of its
joint ventures reported in the International Markets segment using the equity
method of accounting.
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COVID-19 Update
From the onset of the COVID-19 pandemic in 2020, we have focused on delivering
peace of mind for the people and businesses we serve, and our employees and
their families. We've taken actions to improve affordability and predictability
for our customers and patients, and make health care easier. Cigna led the way
since the start of COVID-19 by working to remove cost as a barrier, expanding
access to care and helping employers keep their workforce safe and supported.
Most recently, we are conducting direct outreach to customers most at-risk for
COVID-19 in key communities to provide them with resources about how to get
vaccinated and help them make appointments. We also began providing
transportation to and from vaccine sites at no extra cost to customers in the
majority of our Medicare Advantage plans.
We continue to execute our business continuity plans over our operations such as
optimizing purchasing volume across the pharmaceutical supply chain in order to
mitigate risk associated with prescription drug supply and continuing to support
our workforce by enabling remote work where appropriate, and implementing
enhanced safety protocols and programs that support the health and mental
well-being of our employees. Recent employee programs include expanding
benefits-eligible employee use of emergency time off for COVID-19 related
reasons as well as offering an incentive award to those enrolled in our medical
plan for being fully vaccinated against COVID-19.
The COVID-19 pandemic has pervasively impacted the economy, financial markets
and the global health care delivery systems. For the first quarter of 2021,
COVID-19 impacts are most notable in our U.S. Medical segment with net
unfavorable COVID-19 related impacts as compared with the same period in 2020.
COVID-19 related impacts include direct costs of COVID-19 testing, treatment and
vaccines, lower risk adjusted revenues in our Medicare Advantage business,
decreased contributions from our specialty products and disenrollment resulting
from the economic impacts of the pandemic, partially offset by deferral of care
by our customers. As compared with the three months ended December 31, 2020 the
net unfavorable impacts of COVID-19 decreased reflecting lower direct costs,
partially offset by less deferral of care.
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 9
to the Consolidated Financial Statements and in the "Investment Assets"
discussion of this MD&A.
It is difficult to predict the pace, duration and extent of the COVID-19
pandemic and its related impacts including the vaccination efforts on our
results for the remainder of 2021 and beyond. We believe that such results may
continue to be impacted by, among other things, vaccine related costs, higher
medical costs to treat those affected by the virus, lower customer volumes due
to elevated unemployment, lower 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, the potential for future deferral of care, or volatility in the economic
markets.
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 our 2020 Form 10-K.
Commentary: Three Months Ended March 31, 2021 versus Three Months Ended March
31, 2020
The commentary presented below, and in the segment discussions that follow,
compare results for the three months ended March 31, 2021 with results for the
three months ended March 31, 2020 .
Shareholders' net income decreased slightly, driven by lower adjusted income
from operations (see below) and the absence of certain favorable tax benefits
reported in the first quarter of 2020. These unfavorable effects were mostly
offset by lower realized investment losses and lower net special item charges.
On a per-share basis, the increase in shareholders' net income reflects the
favorable effect of our share repurchase program.
Adjusted income from operations decreased, primarily resulting from lower
earnings in the U.S. Medical segment reflecting the unfavorable impact of
COVID-related items and the loss of earnings due to the sale of the Group
Disability and Life business. These unfavorable effects were partially offset by
increased earnings in the Evernorth segment primarily attributable to continued
business
41
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growth and lower interest costs in Corporate resulting from debt repayment and
restructuring actions in 2020 and 2021. On a per-share basis, the increase in
adjusted income from operations reflects the favorable effect of our share
repurchase program.
Medical customers declined, reflecting a lower customer base in our Middle
Markets and National Accounts market segments including disenrollment resulting
from the economic impacts of the COVID-19 pandemic; partially offset by growth
in our Select and our Medicare market segments.
Pharmacy revenues increased reflecting strong business and customer growth. See
the "Evernorth segment" section of this MD&A for further discussion of pharmacy
revenues.
Premiums were lower, primarily reflecting the effect of the sale of the Group
Disability and Life business, partially offset by an increase in U.S. Medical
premiums resulting from increased customers in our insured businesses and rate
increases in line with underlying medical trend.
Fees and other revenues increased, primarily driven by growth in Evernorth's
pharmacy and health services businesses.
Net investment income increased due to strong returns on our partnership
investments, partially offset by lower average assets due to the sale of the
Group Disability and Life business. See the "Investment Assets" section of this
MD&A for further discussion.
Pharmacy and other service costs increased, reflecting strong business and
customer growth.
Medical costs and other benefit expenses decreased, reflecting the effect of the
sale of the Group Disability and Life business, partially offset by an increase
in U.S. Medical driven by an increase in medical trend, including COVID-related
impacts, and increased customers in our insured businesses.
Selling, general and administrative expenses decreased, primarily resulting from
the sale of the Group Disability and Life business, lower special item charges
and the elimination of the health insurance industry tax.
Interest expense and other decreased due to debt restructuring and repayment
actions during 2020 and the first quarter of 2021.
Debt extinguishment costs were lower because the debt repaid in the first
quarter of 2021 had lower interest rates than the debt repaid in the first
quarter of 2020.
Realized investment results improved significantly, primarily reflecting
favorable market value adjustments on equity securities in 2021 compared with
unfavorable equity markets in the first quarter of 2020.
The effective tax rate was higher, driven by recognition of certain incremental
federal and state tax benefits in the first quarter of 2020, partially offset by
the repeal of the nondeductible health insurance industry tax in 2021.
42
--------------------------------------------------------------------------------Developments
Purchase of
In
Sale of Group Disability and Life Business
As discussed in Note 4 to the Consolidated Financial Statements, Cigna sold itsU.S. Group Disability and Life business to New York Life Insurance Company for$6.2 billion onDecember 31, 2020 . The "Liquidity and Capital Resources" section of this MD&A provides discussion of the use of proceeds from this divestiture.
Regulation
The "Business - Regulation" section of our 2020 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 the Centers for Medicare & Medicaid Services ("CMS") and
the Departments of the Treasury and Health 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.
Corporate Tax Reform. Recent proposals related to corporate tax reform propose
raising corporate tax rates, among other things. While it is unclear whether
recent proposals will be enacted in their current form, the proposed increases
in corporate tax rates could have a material impact on our future results of
operations and, in the period of enactment, both our results of operations and
financial condition. We will continue to monitor developments.
Medicare Part D Rebate Rule. As disclosed in the "Regulation" section of our
2020 Form 10-K, the United States Department of Health and Human Services
("HHS") and the HHS Office of Inspector General ("HHS-OIG") released a final
rule in November 2020 which eliminated an anti-kickback regulatory safe harbor
protection for price concessions, including rebates, that are offered by
pharmaceutical manufacturers to plan sponsors or pharmacy benefit managers under
the Medicare Part D program and created two new safe harbors. The two new safe
harbors cover (i) price reductions by manufacturers to plan sponsors under
Medicare Part D and Medicaid managed care organizations that are reflected at
the time of dispense and (ii) fixed-fee service arrangements between
manufacturers and pharmacy benefit managers. HHS previously delayed the
elimination of the aforementioned regulatory safe harbor to January 1, 2023 and,
in March 2021 , HHS-OIG delayed the effective date for the two new safe harbors
to January 1, 2023 .
43-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Liquidity We maintain liquidity at two levels: the subsidiary level and the parent company level. Cash requirements at the subsidiary level generally consist of: •pharmacy, medical costs and other benefit payments; •expense requirements, primarily for employee compensation and benefits, information technology and facilities costs; •income taxes; and •debt service. Our subsidiaries normally meet their liquidity requirements by: •maintaining appropriate levels of cash, cash equivalents and short-term investments; •using cash flows from operating activities; •matching investment durations to those estimated for the related insurance and contractholder liabilities; •selling investments; and •borrowing from affiliates, subject to applicable regulatory limits. Cash requirements at the parent company level generally consist of: •debt service; •payment of declared dividends to shareholders; •lending to subsidiaries as needed; and •pension plan funding. The parent company normally meets its liquidity requirements by: •maintaining appropriate levels of cash and various types of marketable investments; •collecting dividends from its subsidiaries; •using proceeds from issuing debt and common stock; and •borrowing from its subsidiaries, subject to applicable regulatory limits. Dividends from our insurance,Health Maintenance Organization ("HMO") and foreign subsidiaries are subject to regulatory restrictions. See Note 19 to the Consolidated Financial Statements in our 2020 Form 10-K 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 three months endedMarch 31 were as follows: Three Months Ended March 31, (In millions) 2021 2020 Operating activities $ 1,093$ 1,887 Investing activities $ (717)$ (269) Financing activities$ (4,051) $ (1,818) The following discussion explains variances in the various categories of cash flows for the three months endedMarch 31, 2021 compared with the same period in 2020. Operating activities Cash flows from operating activities consist principally of cash receipts and disbursements for pharmacy revenues and costs, premiums, fees, investment income, taxes, benefit costs and other expenses. Cash flows from operating activities decreased, primarily driven by increases in accounts receivable due to the timing of certain client billing cycles and business growth as well as the timing of payable and accrued liability payments including inventory purchases. 44 -------------------------------------------------------------------------------- Investing and Financing activities Cash flows used in investing activities increased, primarily due to lower investment sale activity. Cash used in financing activities increased, primarily due to higher stock repurchases and an increase in dividends paid. Cash used in financing activities also includes proceeds from debt issuances offset by the repayment of long-term debt and commercial paper borrowings. 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 three months endedMarch 31, 2021 , we repurchased 12.7 million shares for approximately$2.8 billion . FromApril 1, 2021 throughMay 6, 2021 , we repurchased 1.7 million shares for approximately$400 million . Share repurchase authority was$2.7 billion as ofMay 6, 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$625 million and$507 million for the three months endedMarch 31, 2021 and 2020, respectively. 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. AtMarch 31, 2021 , our debt-to-capitalization ratio was 39.9%, an increase from 39.5% atDecember 31, 2020 . Group Disability and Life Sale. In connection with the sale of this business that closed onDecember 31, 2020 , we deployed approximately$3.0 billion to debt repayment by: (i) repaying in full our$1.4 billion 364-Day Term Loan Credit Agreement entered into onApril 1, 2020 , onDecember 31, 2020 ; (ii) redeeming in full the$1.0 billion aggregate principal amount of Cigna's Senior Floating Rate Notes due 2021 onJanuary 15, 2021 at a redemption price calculated in accordance with the terms and conditions of the indenture governing the Notes; and (iii) repaying certain balances of our outstanding commercial paper inJanuary 2021 . Commercial Paper Program. 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 an immaterial outstanding balance as ofMarch 31, 2021 . Revolving Credit Agreements. Our revolving credit agreements provide us with the ability to borrow amounts for general corporate purposes, including for the purpose of providing liquidity support if necessary under our commercial paper program discussed above. InApril 2021 , we entered into new revolving credit agreements which replaced our prior revolving credit agreements, increased the total credit available to us and enhanced our liquidity position as discussed in more detail below. In 2018, Cigna entered into a$3.25 billion five-year revolving credit agreement. 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 364-day revolving credit agreement with a new$1.0 billion 364-day revolving credit agreement which was scheduled to expire inOctober 2021 . As ofMarch 31, 2021 , there were no outstanding balances under either of the revolving credit agreements. 45 -------------------------------------------------------------------------------- InApril 2021 , Cigna entered into a$3.0 billion five-year revolving credit and letter of credit agreement and a$1.0 billion three-year revolving credit agreement, which replaced the revolving credit agreement that was entered into in 2018. Also inApril 2021 , Cigna entered into an additional$1.0 billion 364-day revolving credit agreement that will expire inApril 2022 , and replaced the existing 364-day revolving credit agreement which was scheduled to expire inOctober 2021 . See Note 6 to the Consolidated Financial Statements for further information on our credit agreements and commercial paper program. 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 ofMarch 31, 2021 , we had$4.25 billion of undrawn committed capacity under our revolving credit agreements (these amounts are available for general corporate purposes, including providing liquidity support for our commercial paper program),$4.25 billion of remaining capacity under our commercial paper program and$7.0 billion in cash and short-term investments, approximately$2.5 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 6 to the Consolidated Financial Statements. Updates made to our revolving credit agreements inApril 2021 are discussed above in the Capital Resources section of this MD&A. In the first quarter of 2021 Cigna declared and paid a quarterly cash dividend of$1.00 per share of Cigna common stock. OnApril 28, 2021 the Board of Directors declared a quarterly cash dividend of$1.00 per share of Cigna common stock to be paid onJune 23, 2021 to shareholders of record onJune 8, 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. InApril 2021 , Cigna completed its acquisition ofMDLIVE, Inc. We funded this acquisition with cash on hand and commercial paper borrowings. As noted in Note 16 to the Consolidated Financial Statements in our 2020 Form 10-K, we fund our qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. We currently expect the required contributions for 2021 under the Pension Protection Act of 2006 to be immaterial. Risks to our liquidity and capital resources outlook include cash projections that may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings or we experience material adverse effects from one or more risks or uncertainties described more fully in the "Risk Factors" section of our 2020 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$1.9 billion from its subsidiaries without further approvals as ofMarch 31, 2021 . Guarantees and Contractual Obligations We are contingently liable for various contractual obligations entered into in the ordinary course of business. See Note 15 to the Consolidated Financial Statements for discussion of various guarantees. 46 -------------------------------------------------------------------------------- We have updated long-term debt obligations and purchase obligations as ofMarch 31, 2021 which were previously provided in our 2020 Form 10-K. Investment commitments are described in Note 9 to the Consolidated Financial Statements. There have been no material changes to other information presented in our table of guarantees and contractual obligations set forth in our 2020 Form 10-K. (In millions, on an undiscounted basis) Total 2021 2022 to 2023 2024 to 2025 Thereafter On-Balance Sheet Long-term debt (1)$ 49,597 $ 1,316 $ 5,898 $ 6,757 $ 35,626 Off-Balance Sheet Purchase Obligations$ 3,593 $ 1,313 $ 1,462 $ 522$ 296
(1)Amounts include scheduled interest payments, current maturities of long-term debt and finance leases.
CRITICAL ACCOUNTING ESTIMATES The preparation of Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the Consolidated Financial Statements. Management considers an accounting estimate to be critical if: •it requires assumptions to be made that were uncertain at the time the estimate was made; and •changes in the estimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition. Management has discussed how critical accounting estimates are developed and selected with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented in the 2020 Form 10-K. We regularly evaluate items that may impact critical accounting estimates. Our most critical accounting estimates, as well as the effect of hypothetical changes in material assumptions used to develop each estimate, are described in the 2020 Form 10-K. As ofMarch 31, 2021 , there were no significant changes to the critical accounting estimates from what was reported in our 2020 Form 10-K. 47 -------------------------------------------------------------------------------- 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 and special items. Ratios presented in this segment discussion exclude the same items as pre-tax adjusted income from operations. See Note 16 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 16 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. 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 our 2020 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. 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. 48 --------------------------------------------------------------------------------
Results of Operations Financial Summary Three Months Ended March 31, Change Favorable (In millions) 2021 2020 (Unfavorable) Total revenues$ 30,620 $ 27,255 12 % Less: Contractual adjustment for a former client - (87) N/M Adjusted revenues(1)$ 30,620 $ 27,168 13 Gross profit$ 1,843 $ 1,701 8 Adjusted gross profit(1)$ 1,843 $ 1,614 14 Pre-tax adjusted income from operations$ 1,223 $ 1,082 13
%
Pre-tax adjusted margin 4.0 % 4.0 %
Three Months Ended March 31, Change Favorable
(Dollars and adjusted scripts in millions) 2021 2020 (Unfavorable)
Selected Financial Information(1)
Pharmacy revenue by distribution channel
Adjusted network revenues $ 15,138 $ 12,791 18 %
Adjusted home delivery and specialty revenues 12,774 12,005 6
Other revenues 1,388 1,242 12
Total adjusted pharmacy revenues $ 29,300 $ 26,038 13 %
Pharmacy script volume
Adjusted network scripts(2) 323 288 12 %
Adjusted home delivery and specialty scripts(2) 70 72 (3)
Total adjusted scripts(2) 393 360 9 %
Generic fill rate
Network 87.3 % 88.2 % (90) bps
Home delivery 86.0 % 84.8 % 120 bps
Overall generic fill rate 87.2 % 87.9 % (70) bps
(1)Amounts exclude special items.
(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.
Three Months Ended March 31, 2021 versus Three Months Ended March 31, 2020
Adjusted network revenues. The increase reflected higher claims volume,
primarily due to our collaboration with Prime Therapeutics, increased prices due
to inflation on branded drugs and claims mix due to a decrease in the generic
fill rate as a result of the COVID-19 vaccine.
Adjusted home delivery and specialty revenues. The increase reflected higher
prices, primarily due to inflation on branded drugs, as well as higher specialty
claims volume due in part to our collaboration with Prime Therapeutics. This
increase was partially offset by lower home delivery claims volume, primarily
due to client mix and increased script volume in the first quarter of 2020 due
to customers requesting advance prescriptions related to COVID-19 supply
concerns, and claims mix due to an increase in the generic fill rate.
Adjusted gross profit. The increase reflected benefits from the effective
management of supply chain, strong performance in specialty pharmacy services,
customer growth and higher adjusted pharmacy script volumes, primarily due to
our collaboration with Prime Therapeutics.
Pre-tax adjusted income from operations. The increase reflected benefits from
the effective management of supply chain, strong performance in specialty
pharmacy services, customer growth and higher adjusted pharmacy script volumes,
primarily due to our collaboration with Prime Therapeutics.
U.S. Medical Segment
U.S. Medical includes Cigna's U.S. Commercial and U.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,
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dental, vision, health advocacy programs and other products and services for
insured and administrative services only ("ASO") clients. 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 the U.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
Three Months Ended
Financial Summary March 31, Change Favorable
(In millions) 2021 2020 (Unfavorable)
Adjusted revenues $ 10,362 $ 9,860 5 %
Pre-tax adjusted income from operations $ 987 $ 1,199 (18) %
Pre-tax adjusted margin 9.5 % 12.2 % (270) bps
Medical care ratio 81.8 % 78.3 % (350) bps
Expense ratio 21.7 % 21.8 % 10 bps
Three Months Ended March 31, 2021 versus Three Months Ended March 31, 2020
Adjusted revenues increased for the three months ended March 31, 2021 compared
with the same period in 2020 reflects customer growth in our Medicare Advantage
business, higher premium rates due to anticipated underlying medical cost trend
and higher net investment income.
Pre-tax adjusted income from operations decreased for the three months ended
March 31, 2021 compared with the same period in 2020. The decrease reflects net
unfavorable COVID-19 related impacts and the net effect of non-recurring items;
partially offset by higher net investment income and the repeal of the health
insurance industry tax. The unfavorable COVID-19 related impacts include direct
costs of COVID-19 testing, treatment and vaccines, lower risk adjusted revenues
in our Medicare Advantage business, decreased contributions from our specialty
products and increased disenrollment resulting from the economic effects of the
pandemic. These impacts were partially offset by deferral of care.
The medical care ratio increased reflecting COVID-19 related impacts and the
repeal of the health insurance industry tax; partially offset by the effect of
one less calendar day in the first quarter of 2021. COVID-19 related impacts
include direct costs of COVID-19 testing, treatment and vaccines costs and lower
risk adjusted revenues in our Medicare Advantage business; partially offset by
deferral of care.
The expense ratio was flat due to the repeal of the health insurance industry
tax offset by non-recurring items.
Medical Customers
As of March 31,
(In thousands) 2021 2020 % Change
U.S. Commercial 2,133 2,133 - %
U.S. Government 1,464 1,412 4 %
Insured 3,597 3,545 1 %
Service 11,419 12,007 (5) %
Total 15,016 15,552 (3) %
Our medical customer base decreased at March 31, 2021 compared with the same
period in 2020, reflecting a lower customer base in our Middle Markets and
National Accounts segments including disenrollment resulting from the economic
impacts of the COVID-19 pandemic; partially offset by growth in our Select
segment and our Medicare Advantage business.
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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.
Unpaid Claims and Claim Expenses
As of
As of March December 31,
(In millions) 31, 2021 2020 % Change
Unpaid claims and claim expenses - U.S. Medical $ 3,549 $ 3,184 11 %
Our unpaid claims and claim expenses liability was higher as of
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.
Results of Operations
Three Months Ended Change
Financial Summary March 31, Favorable
(In millions) 2021 2020 (Unfavorable)
Adjusted revenues $ 1,572 $ 1,470 7 %
Pre-tax adjusted income from operations $ 262 $ 282 (7) %
Pre-tax adjusted margin 16.7 % 19.2 % (250) bps
Loss ratio 59.0 % 57.8 % (120) bps
Acquisition cost ratio 11.0 % 9.1 % (190) bps
Expense ratio (excluding acquisition costs) 17.7 % 17.4 % (30) bps
Three Months EndedMarch 31, 2021 versus Three Months EndedMarch 31, 2020 Adjusted revenues increased primarily due to favorable foreign currency movements and business growth. Pre-tax adjusted income from operations decreased reflecting higher acquisition cost, loss and expense ratios, partially offset by higher net investment income, favorable foreign currency movements and business growth. The segment's loss ratio increased reflecting reserve updates and higher claims. The acquisition cost ratio increased reflecting the absence of the favorable impact from a refinement to the accounting for acquisition costs in the first quarter of 2020, partially offset by lower amortization expenses inAsia . The expense ratio (excluding acquisition costs) increased reflecting a change in business mix. Other Items Related to International Markets ResultsSouth Korea is the single largest geographic market for our International Markets segment. For the three months endedMarch 31, 2021 ,South Korea generated 39% of the segment's adjusted revenues and 59% of the segment's pre-tax adjusted income from operations. 51 -------------------------------------------------------------------------------- Other Operations Prior to the sale of the Group Disability and Life business onDecember 31, 2020 , Other Operations included Cigna's Group Disability and Life business which offered group long-term and short-term disability, and group life, accident, voluntary and specialty insurance products and services. Additionally, for 2021 and 2020, this segment includesCorporate Owned Life Insurance ("COLI") and the Company's run-off operations. As described in the introduction of Segment Reporting, performance of Other Operations is measured using pre-tax adjusted income from operations. Key factors affecting pre-tax adjusted income from operations are: •premiums; •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 Three Months Ended Change Financial Summary March 31, Favorable (In millions) 2021 2020 (Unfavorable) Adjusted revenues$ 139 $ 1,339 (90) % Pre-tax adjusted income from operations$ 24 $ 77 (69) % Pre-tax adjusted margin 17.3 % 5.8 % 1,150 bps Three Months EndedMarch 31, 2021 versus Three Months EndedMarch 31, 2020 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 expect a substantial decline in adjusted revenues and adjusted income from operations in this segment in 2021 as compared to 2020. Adjusted revenues and pre-tax adjusted income from operations decreased due to the sale of the Group Disability and Life business. 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. Three Months Ended Financial Summary March 31, (In millions) 2021 2020 Change Favorable (Unfavorable) Pre-tax adjusted income (loss) from operations$ (354) $ (405)
13 %
Three Months EndedMarch 31, 2021 versus Three Months EndedMarch 31, 2020 Pre-tax adjusted loss from operations was lower, reflecting lower interest expense due to lower levels of outstanding debt. INVESTMENT ASSETS The following table presents our investment asset portfolio excluding separate account assets as ofMarch 31, 2021 andDecember 31, 2020 . Additional information regarding our investment assets is included in Notes 9, 10, 11 and 12 to the Consolidated Financial Statements. March 31, (In millions) 2021 December 31, 2020 Debt securities$ 17,649 $ 18,131 Equity securities 550 501 Commercial mortgage loans 1,347 1,419 Policy loans 1,344 1,351 Other long-term investments 2,897 2,832 Short-term investments 511 359 Total$ 24,298 $ 24,593 52
--------------------------------------------------------------------------------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 10 to the Consolidated Financial Statements. More detailed information about debt securities by type of issuer and maturity dates is included in Note 9 to the Consolidated Financial Statements. The following table reflects our portfolio of debt securities by type of issuer as ofMarch 31, 2021 andDecember 31, 2020 . March 31, December 31, (In millions) 2021 2020 Federal government and agency$ 394 $ 456 State and local government 162 167 Foreign government 2,420 2,511 Corporate 14,214 14,562 Mortgage and other asset-backed 459 435 Total$ 17,649 $ 18,131 Our debt securities portfolio decreased during the first three months of 2021 reflecting a decrease in valuations due to increasing yields, which was partially offset by net purchases during the quarter. As ofMarch 31, 2021 ,$15.1 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. These quality characteristics have not materially changed since the prior year, and remain consistent with our investment strategy. Investments in debt securities are diversified by issuer, geography and industry. On an aggregate basis, the debt securities portfolio continues to perform according to original investment expectations. However, due to the economic impacts of the COVID-19 pandemic, there are certain issuers, particularly within the aviation, energy and hospitality sectors, that 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 9 to the Consolidated Financial Statements. Foreign government obligations are concentrated inAsia , primarilySouth Korea , consistent with our risk management practice and local regulatory requirements of our international business operations. Corporate debt securities include private placement assets of$5.9 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 ofMarch 31, 2021 , the$1.3 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 in the property generally ranging between 30 and 40%, we remain confident that the vast majority of borrowers will continue to perform as expected under their contract terms. For further discussion of the results and changes in key loan metrics, see Note 9 to the Consolidated Financial Statements. Loans are secured by high quality commercial properties, located in strong institutional markets, and are generally made at less than 65% of the property's value at origination of the loan. Property value, debt service coverage, quality, building tenancy and stability of cash flows are all important financial underwriting considerations. We hold no direct residential mortgage loans and do not originate or service securitized mortgage loans. 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 53 -------------------------------------------------------------------------------- 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. Other Long-term Investments Other long-term investments of$2.9 billion as ofMarch 31, 2021 included investments in securities limited partnerships and real estate limited partnerships, direct investments in real estate joint ventures and other deposit activity that is required to support various insurance and health services businesses. The increase in other long-term investments is primarily driven by net additional 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 180 separate partnerships and approximately 95 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. Our net investment income increased significantly versus the first three months of 2020 driven by the performance of assets underlying our limited partnership investments throughDecember 31, 2020 . We expect that income for these investments will remain volatile in the coming quarters, and it is possible that 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 inChina 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$6.0 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 ofMarch 31, 2021 . Investment Outlook Expectations regarding the impact of the vaccine rollout and the pace of relaxing restrictions continues to dominate financial markets. The general optimism for this rollout combined with unprecedented monetary and fiscal support from the government has raised expectations for improved economic growth. AlthoughU.S. treasury rates have increased during the quarter from their historic lows during 2020, they remain well below long-term historical averages. In addition, the wider market credit spreads experienced during 2020 have narrowed meaningfully, resulting in yields for investment grade assets that also remain well below historical averages, and this continues to pressure the income we earn on our fixed income investments. 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. We expect net investment income during 2021 will reflect both the improved optimism within public and private markets for economic recovery, along with the potential for additional 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 declines in investment fair values resulting from interest rate movements and credit deterioration due to both investment-specific and the global economic uncertainties discussed above remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity. MARKET RISK Financial Instruments Our assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. Our primary market risk exposures are interest rate risk and foreign currency exchange rate risk. We encourage you to read this in conjunction with "Market Risk - Financial Instruments" included in the MD&A section of our 2020 Form 10-K. As ofMarch 31, 2021 there were no material changes in our risk exposures from those reported in our 2020 Form 10-K. 54
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