Investments

6 Months Ended

Jun. 30, 2018

Note 10 — Investments

Cigna's investment portfolio consists of a broad range of investments including fixed maturities and equity securities, commercial mortgage loans, other long-term investments and short-term investments. The sections below provide more detail regarding our investment balances, net investment income and realized investment gains and losses. See Note 9 for information about the valuation of the Company’s investment portfolio. See Note 11 to the Consolidated Financial Statements contained in the Company’s 2017 Form 10-K for accounting policies for each investment type. Updates to these policies resulting from the adoption of new accounting guidance in 2018 are provided below.

Investment Portfolio

Fixed Maturities

The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at June 30, 2018:

		Amortized		Fair
(In millions)		Cost		Value
Due in one year or less	$	1,561	$	1,569
Due after one year through five years		6,678		6,760
Due after five years through ten years		10,430		10,242
Due after ten years		3,935		4,494
Mortgage and other asset-backed securities		519		528
Total fixed maturities	$	23,123	$	23,593

Actual maturities of these securities could differ from their contractual maturities used in the table above. This could occur because issuers may have the right to call or prepay obligations, with or without penalties.

Gross unrealized appreciation (depreciation) on fixed maturities by type of issuer is shown below.

				Gross		Gross
				Unrealized		Unrealized
		Amortized		Appre-		Depre-		Fair
(In millions)		Cost		ciation		ciation		Value
As of June 30, 2018
Federal government and agency	$	575	$	209	$	(4)	$	780
State and local government		978		69		(2)		1,045
Foreign government		2,354		120		(19)		2,455
Corporate		18,697		473		(385)		18,785
Mortgage and other asset-backed		519		19		(10)		528
Total fixed maturities	$	23,123	$	890	$	(420)	$	23,593
Investments supporting liabilities of the Company's run-off settlement annuity business (included in above total)⁽¹⁾	$	2,282	$	525	$	(25)	$	2,782
As of December 31, 2017
Federal government and agency	$	541	$	239	$	(1)	$	779
State and local government		1,196		93		(2)		1,287
Foreign government		2,360		142		(15)		2,487
Corporate		17,301		868		(81)		18,088
Mortgage and other asset-backed		469		29		(1)		497
Total fixed maturities	$	21,867	$	1,371	$	(100)	$	23,138
Investments supporting liabilities of the Company's run-off settlement annuity business (included in above total)⁽¹⁾	$	2,200	$	681	$	(2)	$	2,879
(1) Net unrealized appreciation for these investments is excluded from accumulated other comprehensive income.

Review of declines in fair value. Management reviews fixed maturities 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 expected recovery.

Based on this review, management believes the unrealized depreciation below to be temporary, and therefore has not impaired these amounts. The table below summarizes fixed maturities in an unrealized loss position at June 30, 2018 by the length of time these securities have been in an unrealized loss position. These fixed maturities were primarily corporate securities with a decline in fair value that reflects an increase in market yields since purchase.

	June 30, 2018							December 31, 2017
	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	$	9,283	$	9,566	$	(283)	1,944	$	3,272	$	3,309	$	(37)	797
Below investment grade	$	1,285	$	1,318	$	(33)	1,157	$	543	$	553	$	(10)	643
More than one year
Investment grade	$	1,759	$	1,852	$	(93)	470	$	1,503	$	1,549	$	(46)	373
Below investment grade	$	147	$	158	$	(11)	55	$	155	$	162	$	(7)	42

Equity Securities

Accounting policy. Upon adopting ASU 2016-01 beginning in 2018, changes in the fair values of equity securities that have a readily determinable fair value (primarily exchange-traded funds) are reported in other realized investment gains (losses). As of June 30, 2018, the fair values of these securities were $443 million and cost was $453 million. Also beginning in 2018, private equity securities of $68 million as of June 30, 2018, that do not have 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 other realized investment gains (losses) and dividends reported in net investment income. As of June 30, 2018 and December 31, 2017, fair values of these securities were $49 million. Cost was $64 million as of June 30, 2018, compared with $61 million as of December 31, 2017.

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 a fixed rate of interest and are secured by high quality, primarily completed and substantially leased operating properties.

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 an 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 amount of property cash flow available to meet annual interest and principal payments on the 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 June 30, 2018 and December 31, 2017:

(Dollars in millions)	As of June 30, 2018				As of December 31, 2017
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%	$	1,195	2.02		$	1,109	2.03
60% to 79%		595	1.95			652	2.24
80% to 100%		76	1.49			-	-
Total	$	1,866	1.97	57%	$	1,761	2.11	57%

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 most recent review was completed by the Company’s investment professionals in the second quarter of 2018 and included an analysis of each underlying property’s December 31, 2017 annual financial statements, rent rolls, operating plans and budgets for 2018, 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 estimates the current year and future stabilized property income and fair value for each loan. Based on property values and cash flows estimated as part of this review, the average loan to value ratio at June 30, 2018 is unchanged from last year and remains very strong. The portfolio’s average debt service coverage ratio decreased slightly at June 30, 2018 compared with December 31, 2017 due to loans transitioning from interest only to amortizing payments.

The Company will reevaluate 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.

Impaired commercial mortgage loans. A commercial mortgage loan is considered impaired when it is probable that the Company will not collect all amounts due according to the terms of the original loan agreement. These loans are included in either problem or potential problem loans. The Company monitors credit risk and assesses the impairment of loans individually and on a consistent basis for all loans in the portfolio. Impaired loans are carried at the lower of unpaid principal balance or the fair value of the underlying real estate. Certain commercial mortgage loans without valuation reserves are considered impaired because the Company will not collect all interest due according to the terms of the original agreements; however, the Company expects to recover the unpaid principal because it is less than the fair value of the underlying real estate. The Company recognizes interest income on impaired mortgage loans only when payment is actually received.

As of June 30, 2018 and December 31, 2017, there were no impaired commercial mortgage loans. The average recorded investment in impaired loans and interest income on impaired loans were not material.

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 in cases where the Company has significant influence. Upon adopting ASU 2016-01 beginning in 2018, the investments are carried at fair value using NAV as a practical expedient in cases when the Company does not have significant influence.

Short-Term Investments and Cash Equivalents

Short-term investments and cash equivalents included the following types of issuers:

		June 30,		December 31,
(In millions)		2018		2017
Corporate securities	$	1,663	$	1,143
Federal government securities	$	621	$	604
Foreign government securities	$	161	$	159
Money market funds	$	10	$	12

Realized Investment Gains and Losses

Realized investment gains and losses are based on specifically identified assets and result 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.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2018		2017		2018		2017
Fixed maturities	$	(26)	$	14	$	(46)	$	16
Equity securities		(7)		1		(26)		34
Commercial mortgage loans		-		(1)		-		(1)
Other investments, including derivatives		30		37		36		48
Realized investment (losses) gains before income taxes		(3)		51		(36)		97
Less income tax (benefit) expense		(1)		17		(11)		32
Net realized investment (losses) gains	$	(2)	$	34	$	(25)	$	65

Included in the realized investment gains and losses in the above table were pre-tax asset write-downs on debt securities and other asset write-downs of $23 million for the six months ended June 30, 2018 and $13 million for the six months ended June 30, 2017. Realized losses on equity securities still held at June 30, 2018 were $7 million for the three months and $26 million for the six months ended June 30, 2018.

The following table presents sales information for available-for-sale securities (fixed maturities in 2018, and fixed maturities and equity securities in 2017). Gross gains on sales and gross losses on sales exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2018		2017		2018		2017
Proceeds from sales	$	774	$	516	$	1,273	$	930
Gross gains on sales	$	13	$	12	$	18	$	59
Gross losses on sales	$	(7)	$	(2)	$	(29)	$	(4)