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Investments, Investment Income and Gains and Losses
12 Months Ended
Dec. 31, 2019
Investments [Abstract]  
Investments

Note 11 – Investments, Investment Income and Gains and Losses

 

Cigna’s investment portfolio consists of a broad range of investments including debt securities, equity securities, commercial mortgage loans, policy loans, other long-term investments, short-term investments and derivative financial instruments. The sections below provide more detail regarding our accounting policies, investment balances, net investment income and realized investment gains and losses. See Note 12 for information about valuing the Company’s investment portfolio. Debt securities, commercial mortgage loans, derivative financial instruments and short-term investments with contractual maturities during the next twelve months are classified on the balance sheet as current investments, unless they are held as statutory deposits or restricted for other purposes and then they are classified in long-term investments. Equity securities may include exchange traded funds that are used in our cash management strategy and classified as current investments. All other investments are classified as long-term investments. The following table summarizes the Company’s investments by category and current or long-term classification.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019 (1)

 

December 31, 2018

 

(In millions)

 

Current

 

Long-term

 

Total

 

Current

 

Long-term

 

Total

 

Debt securities

$

928

$

22,827

$

23,755

$

1,320

$

21,608

$

22,928

 

Equity securities

 

-

 

303

 

303

 

377

 

171

 

548

 

Commercial mortgage loans

 

-

 

1,947

 

1,947

 

32

 

1,826

 

1,858

 

Policy loans

 

-

 

1,357

 

1,357

 

-

 

1,423

 

1,423

 

Other long-term investments

 

-

 

2,403

 

2,403

 

-

 

1,901

 

1,901

 

Short-term investments

 

423

 

-

 

423

 

316

 

-

 

316

 

Total

 

1,351

 

28,837

 

30,188

 

2,045

 

26,929

 

28,974

 

Investments classified as assets held for sale (1)

 

(414)

 

(7,295)

 

(7,709)

 

 

 

 

 

 

 

Investments per Consolidated Balance Sheets

$

937

$

21,542

$

22,479

$

2,045

$

26,929

$

28,974

 

(1) The table above includes $7.7 billion of investments associated with the Group Disability and Life business that is held for sale to New York Life. Under the terms of the definitive agreement, some of the assets currently associated with the Group Disability and Life business can be substituted for other assets. The assets that will transfer to New York Life will be primarily debt securities and to a lesser extent commercial mortgage loans and short-term investments.

 

A.Investment Portfolio

 

Debt Securities

Accounting policy. Debt securities (including bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor) are classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within shareholders’ equity. Net unrealized appreciation on debt securities supporting the Company’s run-off settlement annuity business is reported in future policy benefit liabilities rather than accumulated other comprehensive income (loss).

 

The Company records impairment losses in net income for debt securities with fair value below amortized cost that meet either of the following conditions:

 

If the Company intends to sell or determines that it is more likely than not to be required to sell these debt securities before their fair values recover, an impairment loss is recognized for the excess of the amortized cost over fair value.

If the net present value of projected future cash flows of a debt security (based on qualitative and quantitative factors, including the probability of default, and the estimated timing and amount of recovery) is below the amortized cost basis, that difference is recognized as an impairment loss. For mortgage and asset-backed securities, estimated future cash flows are also based on assumptions about the collateral attributes including prepayment speeds, default rates and changes in value.

 

Debt securities are classified as either current or long-term investments based on their contractual maturities.

The amortized cost and fair value by contractual maturity periods for debt securities were as follows at December 31, 2019:

 

Amortized

Fair

(In millions)

Cost

Value

Due in one year or less

$

920

$

932

Due after one year through five years

 

7,176

 

7,452

Due after five years through ten years

 

9,098

 

9,644

Due after ten years

 

4,209

 

5,191

Mortgage and other asset-backed securities

 

506

 

536

Total

$

21,909

$

23,755

 

Actual maturities of these securities could differ from their contractual maturities used in the table above because issuers may have the right to call or prepay obligations, with or without penalties.Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below.

 

Amortized

Unrealized

Unrealized

Fair

(In millions)

Cost

Appreciation

Depreciation

Value

December 31, 2019

 

 

 

 

 

 

 

 

Federal government and agency

$

498

$

235

$

-

$

733

State and local government

 

729

 

81

 

-

 

810

Foreign government

 

2,027

 

230

 

(1)

 

2,256

Corporate

 

18,149

 

1,299

 

(28)

 

19,420

Mortgage and other asset-backed

 

506

 

31

 

(1)

 

536

Total

$

21,909

$

1,876

$

(30)

$

23,755

Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)

$

2,229

$

740

$

(4)

$

2,965

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

Federal government and agency

$

507

$

204

$

(1)

$

710

State and local government

 

920

 

66

 

(1)

 

985

Foreign government

 

2,214

 

155

 

(7)

 

2,362

Corporate

 

18,403

 

411

 

(453)

 

18,361

Mortgage and other asset-backed

 

506

 

16

 

(12)

 

510

Total

$

22,550

$

852

$

(474)

$

22,928

Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)

$

2,264

$

479

$

(40)

$

2,703

 

 

 

 

 

 

 

 

 

(1) Net unrealized appreciation for these investments is excluded from accumulated other comprehensive income.

The Company had commitments to purchase $98 million of debt securities as of December 31, 2019, bearing interest at a fixed market rate.

Review of declines in fair value. Management reviews debt securities with a decline in fair value from cost for impairment based on criteria that include:

 

length of time and severity of decline;

financial health and specific near term prospects of the issuer;

changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and

the Company’s intent to sell or the likelihood of a required sale prior to recovery.

 

Management believes the unrealized depreciation below to be temporary based on this review, and therefore has not impaired these amounts. The table below summarizes debt securities with a decline in fair value from amortized cost by investment grade and by the length of time these securities have been in an unrealized loss position.

 

December 31, 2019

 

December 31, 2018

 

Fair

Amortized

Unrealized

Number

 

Fair

Amortized

Unrealized

Number

(Dollars in millions)

Value

Cost

Depreciation

of Issues

 

Value

Cost

Depreciation

of Issues

One year or less

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade

$

723

$

729

$

(6)

267

 

$

7,127

$

7,367

$

(240)

1,324

Below investment grade

$

340

$

348

$

(8)

355

 

$

1,185

$

1,240

$

(55)

1,190

More than one year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade

$

366

$

378

$

(12)

118

 

$

3,023

$

3,181

$

(158)

784

Below investment grade

$

84

$

88

$

(4)

93

 

$

249

$

270

$

(21)

245

 

Equity Securities

 

Accounting policy. Changes in the fair values of equity securities that have a readily determinable fair value are reported in net realized investment gains (losses). As of December 31, 2019, the fair values of these securities were $64 million and cost was $61 million, compared with fair value of $415 million and cost of $433 million as of December 31, 2018. Private equity securities of $192 million as of December 31, 2019, and $89 million as of December 31, 2018, without a readily determinable fair value are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The amount of impairments or value changes resulting from observable price changes was not material.

 

Equity securities also include hybrid investments consisting of preferred stock with call features that are carried at fair value with changes in fair value reported in net realized investment gains (losses) and dividends reported in net investment income.As of December 31, 2019, fair values of these securities were $47 million and cost was $58 million, compared with fair value of $44 million and cost of $58 million as of December 31, 2018.

Commercial Mortgage Loans

 

Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are generally issued at fixed rates of interest and are secured by high quality, primarily completed and substantially leased operating properties. Commercial mortgage loans are classified as either current or long-term investments based on their contractual maturities.

Accounting policy. Commercial mortgage loans are carried at unpaid principal balances or, if impaired, the lower of unpaid principal or fair value of the underlying collateral. A commercial mortgage loan is considered impaired when it is probable that the Company will not collect all amounts due per the terms of the promissory note. Writedowns are recorded in realized investments losses. Interest income on impaired loans is only recognized when a payment is received.

There were no impaired commercial mortgage loans as of December 31, 2019 or 2018.

 

As of December 31, 2019, virtually all of the Company’s commercial mortgage loan portfolio is scheduled to mature in 2022 or thereafter. Actual maturities could differ from contractual maturities for several reasons, including that borrowers may have the right to prepay their obligations with or without prepayment penalties, the maturity date may be extended or loans may be refinanced.

Credit quality. The Company regularly evaluates and monitors credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal credit quality rating system designed to evaluate the relative risk of the transaction at origination that is then updated each year as part of the annual portfolio loan review. The Company evaluates and monitors credit quality on a consistent and ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.

 

Quality ratings are based on our evaluation of a number of key inputs related to the loan, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the estimated amount of property cash flow available to meet annual interest and principal payments on debt, with a ratio below 1.0 indicating that there is not enough cash flow to cover the required loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property

collateralizing the loan.

 

The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios as of December 31, 2019 and 2018:

 

(Dollars in millions)

December 31, 2019

 

December 31, 2018

Loan-to-Value Ratio

 

Carrying Value

Average Debt Service Coverage Ratio

Average Loan-to-Value Ratio

 

 

Carrying Value

Average Debt Service Coverage Ratio

Average Loan-to-Value Ratio

Below 60%

$

1,136

2.19

 

 

$

1,132

2.14

 

60% to 79%

 

723

1.98

 

 

 

650

1.93

 

80% to 100%

 

88

1.62

 

 

 

76

1.49

 

Total

$

1,947

2.09

58%

 

$

1,858

2.04

58%

The Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. The Company’s investment professionals completed the annual in-depth review in the second quarter of 2019 that included an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimated the current year and future stabilized property income and fair value for each loan.

 

The Company re-evaluates a loan’s credit quality between annual reviews if new property information is received or an event such as delinquency or a borrower’s request for restructure causes management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.

Policy Loans

 

Accounting policy. Policy loans, primarily associated with our corporate-owned life insurance business, are carried at unpaid principal balances plus accumulated interest, the total of which approximates fair value. These loans are collateralized by life insurance policy cash values and therefore have minimal exposure to credit loss. Interest rates are reset annually based on a rolling average of benchmark interest rates.

 

Other Long-Term Investments

 

Accounting policy. Other long-term investments include investments in unconsolidated entities. These entities include certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company’s ownership percentage of reported income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income from these investments is 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.

 

Other long-term investments also include investment real estate carried at depreciated cost less any impairment write-downs to fair value when cash flows indicate that the carrying value may not be recoverable. Depreciation is generally recorded using the straight-line method based on the estimated useful life of each asset. Investment real estate as of December 31, 2019 and 2018 is expected to be held longer than one year and may include real estate acquired through the foreclosure of commercial mortgage loans.

 

Additionally, other long-term investments include foreign currency swaps carried at fair value. See discussion below for information on the Company’s accounting policies for these derivative financial instruments.

 

Other long-term investments and related commitments are diversified by issuer, property type and geographic regions. The following table provides unfunded commitment and carrying value information for these investments. The Company expects to disburse approximately 30% of the committed amounts in 2020.

 

 

 

 

 

 

Unfunded

 

 

Carrying value as of December 31,

 

Commitments as of

(In millions)

2019

2018

 

December 31, 2019

Real estate investments

$

788

$

679

 

$

551

Securities partnerships

 

1,409

 

1,045

 

 

1,379

Other

 

206

 

177

 

 

24

Total

$

2,403

$

1,901

 

$

1,954

Short-Term Investments and Cash EquivalentsAccounting policy. Security investments with maturities of greater than three months to one year from time of purchase are classified as short-term, available for sale and carried at fair value that approximates cost. Cash equivalents consist of short-term investments with maturities of three months or less from the time of purchase and are carried at cost that approximates fair value.Short-term investments and cash equivalents included the following types of issuers:

 

 

December 31,

 

December 31,

(In millions)

 

2019

 

2018

Corporate securities

$

1,985

$

581

Federal government securities

$

472

$

82

Foreign government securities

$

65

$

238

Money market funds

$

631

$

1,174

Derivative Financial Instruments

 

The Company uses derivative financial instruments to manage the characteristics of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contract holder liabilities. The Company also uses derivative financial instruments to hedge the risk of changes in the net assets of certain of its foreign subsidiaries due to changes in foreign currency exchange rates. The Company has written and purchased GMIB reinsurance contracts in its run-off reinsurance business that are accounted for as freestanding derivatives as discussed in Note 10. Derivatives in the Company’s separate accounts are excluded from the following discussion because associated gains and losses generally accrue directly to separate account policyholders.

 

Derivative instruments used by the Company typically include foreign currency swap contracts and foreign currency forward contracts. Foreign currency swap contracts periodically exchange cash flows between two currencies for principal and interest. Foreign currency forward contracts require the Company to purchase a foreign currency in exchange for the functional currency of its operating unit at a future date, generally within three months from the contracts’ trade dates.

 

The Company manages the credit risk of these derivative instruments by diversifying its portfolio among approved dealers of high credit quality and through routine monitoring of credit risk exposures. Certain of the Company’s over-the-counter derivative instruments require either the Company or the counterparty to post collateral or demand immediate payment depending on the amount of the net liability position of the derivative instrument and predefined financial strength or credit rating thresholds. These collateral posting requirements vary by counterparty and amounts posted were not significant as of December 31, 2019 or 2018.

Accounting policy. Derivatives are recorded on our balance sheet at fair value and are classified as current or non-current according to their contractual maturities. Further information on our policies for determining fair value are discussed in Note 12. The Company applies hedge accounting when derivatives are designated, qualified and highly effective as hedges. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income. Various qualitative or quantitative methods appropriate for each hedge are used to formally assess and document hedge effectiveness at inception and each period throughout the life of a hedge.Gross fair values of our derivative financial instruments are presented in Note 12. As of December 31, 2019 and 2018, and for the years then ended, the effects of derivative instruments on the Consolidated Financial Statements were not material, including gains or losses reclassified from accumulated other comprehensive income into shareholders’ net income, as well as amounts excluded from the assessment of hedge effectiveness. The following table summarizes the types and notional quantity of derivative instruments held by the Company.

 

 

Notional Value as of

(In millions)

 

December 31,

December 31,

Purpose

Type of Instrument

2019

2018

Fair value hedge: To hedge the foreign exchange-related changes in fair values of certain foreign-denominated bonds, primarily Euro and British pounds. The notional value of these derivatives matches the amortized cost of the hedged bonds.

Foreign currency swap contracts

$

817

$

525

Net investment hedge: To reduce the risk of changes in net assets due to changes in foreign currency spot exchange rates for certain foreign subsidiaries that conduct their business principally in Euros and Korean Won. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.

Foreign currency swap contracts and foreign currency forward contracts

$

844

$

439

Economic hedge: To hedge the foreign exchange-related changes in fair values of a U.S. dollar-denominated investment portfolio to reflect the local currency for the Company’s foreign subsidiary in South Korea. The notional value of hedging instruments generally aligns with the fair value of the hedged investment portfolio.

Foreign currency forward contracts

$

410

$

309

The Company’s derivative financial instruments are presented as follows:

 

Fair value hedges of the foreign exchange-related changes in fair values of certain foreign-denominated bonds: Swap fair values are reported in long-term investments or other non-current liabilities. Changes in fair values attributable to foreign exchange risk of the swap contracts and the hedged bonds are reported in realized investment gains and losses. The portion of the swap contracts’ changes in fair value excluded from the assessment of hedge effectiveness is recorded in accumulated other comprehensive income and recognized in net investment income as swap coupon payments are accrued, offsetting the foreign-denominated coupons received on the designated bonds. Net interest cash flows are reported in operating activities, while exchanges of notional principal amounts are reported in investing activities.

 

Net investment hedges of certain foreign subsidiaries that conduct their business principally in currencies other than the U.S. dollar: The fair values of the foreign currency swap and forward contracts are reported in other assets or other liabilities. The changes in fair values of these instruments are reported in other comprehensive income, specifically in translation of foreign currencies. The portion of the change in fair values relating to foreign exchange spot rates will be recognized in earnings upon deconsolidation of the hedged foreign subsidiaries. The remaining changes in fair value of these instruments are excluded from our effectiveness assessment and recognized in interest expense when coupon payments are accrued or ratably over the term of the instrument. The notional value of hedging instruments matches the hedged amount of subsidiary net assets. Cash flows relating to these contracts are reported in investing activities.

 

Economic hedges for derivatives not designated as accounting hedges: Fair values of forward contracts are reported in current investments or accrued expenses and other liabilities. The changes in fair values are reported in realized investment gains and losses. Cash flows relating to these contracts are reported in investing activities.

Concentration of Risk

 

The Company did not have a concentration of investments in a single issuer or borrower exceeding 10% of shareholders’ equity as of December 31, 2019 or 2018.

B.Net Investment Income

 

Accounting policy. When interest and principal payments on investments are current, the Company recognizes interest income when it is earned. The Company recognizes interest income on a cash basis when interest payments are delinquent based on contractual terms or when certain terms (interest rate or maturity date) of the investment have been restructured. For unconsolidated entities that are included in Other long-term investments, investment income is generally recognized according to the Company’s share of the reported income or loss on the underlying investments. Investment income attributed to the Company’s separate accounts is excluded from our earnings because associated gains and losses generally accrue directly to separate account policyholders.

 

The components of net investment income for the years ended December 31 were as follows:

(In millions)

2019

2018

2017

Debt Securities

$

986

$

1,009

$

946

Equity securities

 

5

 

28

 

14

Commercial mortgage loans

 

88

 

78

 

81

Policy loans

 

66

 

70

 

69

Other long-term investments

 

167

 

156

 

124

Short-term investments and cash

 

131

 

194

 

42

Total investment income

 

1,443

 

1,535

 

1,276

Less investment expenses

 

53

 

55

 

50

Net investment income

$

1,390

$

1,480

$

1,226

Real estate investments and securities partnerships with a carrying value of $192 million at December 31, 2019 and $150 million at December 31, 2018 were non-income producing during the preceding twelve months.

C. Realized Investment Gains and Losses

    

Accounting policy. Realized investment gains and losses are based on specifically identified assets and results from sales, investment asset write-downs, changes in the fair values of certain derivatives and equity securities and changes in valuation reserves on commercial mortgage loans. The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business (consistent with accounting for a premium deficiency), as well as realized gains and losses attributed to the Company’s separate accounts because those gains and losses generally accrue directly to separate account policyholders.

(In millions)

2019

2018

2017

Net realized investment gains (losses), excluding investment asset write-downs

$

189

$

(34)

$

268

Write-downs on debt securities

 

(12)

 

(43)

 

(26)

Write-downs on other invested assets

 

-

 

(4)

 

(5)

Net realized investment gains (losses), before income taxes

$

177

$

(81)

$

237

 

Net realized investment gains, excluding investment asset write-downs in 2019 and 2017 primarily represent gains on the sales of real estate partnerships and debt securities. Additionally, 2019 included mark-to-market gains and 2017 included gains on sales of equity securities. Net realized investment losses, excluding investment asset write-downs in 2018 represented mark-to-market losses on equity securities and derivatives, partially offset by gains on the sales of real estate partnerships. Realized gains or losses on equity securities still held at December 31, 2019 and 2018 were not material.

 

The following table presents sales information for available-for-sale debt securities. Gross gains on sales and gross losses on sales exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.

(In millions)

2019

2018

2017

Proceeds from sales

$

3,077

$

2,625

$

2,012

Gross gains on sales

$

72

$

28

$

103

Gross losses on sales

$

(19)

$

(47)

$

(18)