Investments

9 Months Ended

Sep. 30, 2019

Investments [Abstract]

Investments

Note 9 – Investments

Cigna’s investment portfolio consists of a broad range of investments including debt and 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 investment balances, net investment income and realized investment gains and losses. See Note 10 for information about the valuation of the Company’s investment portfolio.

		September 30, 2019						December 31, 2018
(In millions)		Current		Long-term		Total		Current		Long-term		Total
Debt securities	$	1,125	$	23,036	$	24,161	$	1,320	$	21,608	$	22,928
Equity securities		-		288		288		377		171		548
Commercial mortgage loans		21		1,865		1,886		32		1,826		1,858
Policy loans		-		1,352		1,352		-		1,423		1,423
Other long-term investments		-		2,363		2,363		-		1,901		1,901
Short-term investments		225		-		225		316		-		316
Total	$	1,371	$	28,904	$	30,275	$	2,045	$	26,929	$	28,974

A. Investment Portfolio

Debt Securities

The amortized cost and fair value by contractual maturity periods for debt securities were as follows at September 30, 2019:

	Amortized		Fair
(In millions)	Cost		Value
Due in one year or less	$	1,125	$	1,132
Due after one year through five years		6,957		7,227
Due after five years through ten years		9,394		9,964
Due after ten years		4,233		5,304
Mortgage and other asset-backed securities		507		534
Total	$	22,216	$	24,161

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 debt securities by type of issuer is shown below.

	Amortized		Unrealized		Unrealized		Fair
(In millions)	Cost		Appreciation		Depreciation		Value
September 30, 2019
Federal government and agency	$	497	$	260	$	-	$	757
State and local government		777		87		-		864
Foreign government		1,961		238		(2)		2,197
Corporate		18,474		1,370		(35)		19,809
Mortgage and other asset-backed		507		29		(2)		534
Total	$	22,216	$	1,984	$	(39)	$	24,161
Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)	$	2,254	$	808	$	(5)	$	3,057
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.

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 the length of time these securities have been in an unrealized loss position.

	September 30, 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	$	506	$	513	$	(7)	165	$	7,127	$	7,367	$	(240)	1,324
Below investment grade	$	254	$	258	$	(4)	470	$	1,185	$	1,240	$	(55)	1,190
More than one year
Investment grade	$	610	$	632	$	(22)	185	$	3,023	$	3,181	$	(158)	784
Below investment grade	$	174	$	180	$	(6)	111	$	249	$	270	$	(21)	245

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.

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 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 September 30, 2019 and December 31, 2018:

(Dollars in millions)	September 30, 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%	$	1,139	2.19		$	1,132	2.14
60% to 79%		638	1.91			650	1.93
80% to 100%		109	1.57			76	1.49
Total	$	1,886	2.06	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.

Impaired commercial mortgage loans. 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. Impaired loans are carried at the lower of the unpaid principal balance or fair value of the underlying collateral. Writedowns are recorded in realized investment losses. Interest income on impaired mortgage loans is only recognized when a payment is received.

There were no impaired commercial mortgage loans as of September 30, 2019 and December 31, 2018.

Short-Term Investments and Cash EquivalentsShort-term investments and cash equivalents included the following types of issuers:

		September 30,		December 31,
(In millions)		2019		2018
Corporate securities	$	1,713	$	581
Federal government securities	$	191	$	82
Foreign government securities	$	142	$	238
Money market funds	$	176	$	1,174

B. Realized Investment Gains and LossesThe following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business, 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.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2019		2018		2019		2018
Net realized investment gains (losses), excluding investment asset write-downs	$	60	$	-	$	96	$	(13)
Write-downs on debt securities		(9)		(1)		(12)		(19)
Write-downs on other invested assets		-		1		-		(4)
Net realized investment gains (losses), before income taxes	$	51	$	-	$	84	$	(36)

Net realized investment gains, excluding investment asset write-downs, for the three and nine months ended September 30, 2019 primarily represent gains on the sales of real estate partnerships and debt securities. Net realized investment losses, excluding investment asset write-downs, for the nine months ended September 30, 2018 represent mark-to-market losses on equity securities and non-hedge accounted foreign exchange forwards and losses on the sales of debt securities, partially offset by gains on the sales of real estate partnerships. Realized gains or losses on equity securities still held at September 30, 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.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2019		2018		2019		2018
Proceeds from sales	$	591	$	657	$	2,242	$	1,930
Gross gains on sales	$	18	$	5	$	41	$	23
Gross losses on sales	$	(5)	$	(4)	$	(17)	$	(33)

C. 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 8. 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 September 30, 2019 or December 31, 2018.

Gross fair values of our derivative financial instruments are presented in Note 10. As of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and 2018, 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)		September 30,		December 31,
Type of Instrument	Purpose	2019		2018
Foreign currency swap contracts	Fair value hedge: To hedge the foreign exchange-related changes in fair values of certain foreign-denominated bonds. The notional value of these derivatives matches the amortized cost of the hedged bonds.	$	763	$	525
Foreign currency swap contracts	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. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.	$	439	$	439
Foreign currency forward contracts	Economic hedge: To hedge the foreign exchange-related changes in fair values of a U.S. dollar-denominated bond 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 bond portfolio.	$	407	$	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 other 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 investment hedges of certain foreign subsidiaries that conduct their business principally in Euros: The fair values of the swap contracts are reported in other assets or other non-current 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 swap fair values relating to foreign exchange spot rates will be recognized in earnings upon deconsolidation of the hedged foreign subsidiaries. The remaining changes in swap fair value are excluded from our effectiveness assessment and recognized in interest expense as swap coupon payments are accrued. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.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 net realized investment gains and losses.