filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
328K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Cigna Group
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Cigna Group and its subsidiaries (the "Company") as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in total equity and cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedules listed in the index appearing on page FS-1 of this Form 10-K (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - U.S. Government Reporting Unit
As described in Note 19 to the consolidated financial statements, as of December 31, 2022, goodwill in the Cigna Healthcare segment was $10.7 billion, of which a portion of the balance relates to the U.S. Government reporting unit. Management conducts its annual quantitative evaluation for goodwill impairment during the third quarter at the reporting unit level and writes it down through shareholders' net income if impaired. On a quarterly basis, management performs a qualitative impairment assessment to determine if events or changes in circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. Fair value of a reporting unit is generally estimated based on both a discounted cash flow analysis and a market approach using assumptions that management believes a hypothetical market participant would use to determine a current transaction price. The significant assumptions and estimates used in determining fair value primarily include the discount rate and future cash flows. A discount rate is selected to correspond with each reporting unit's weighted average cost of capital. Future cash flows for the U.S. Government reporting unit is primarily driven by forecasted revenues, benefit expenses, operating expenses and long-term growth rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the U.S. Government reporting unit is a critical audit matter are the significant judgment by management when developing the fair value estimate of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management's significant assumptions related to the discount rate, forecasted revenues, benefit expenses, operating expenses, and long-term growth rates (collectively referred to as the "significant assumptions"). In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's goodwill impairment assessment, including controls over management's methodology, inputs, and assumptions used in developing the fair value estimate of the U.S. Government reporting unit. These procedures also included, among others (i) testing management's process for developing the fair value estimate of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow analysis and market approach; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow analysis and market approach; and (iv) evaluating the reasonableness of the significant assumptions used by management. Evaluating the reasonableness of the significant assumptions involved consideration of (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit, as applicable. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness related to the discount rate and long-term growth rates significant assumptions.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 23, 2023
We have served as the Company's auditor since 1983.
a
| The Cigna Group Consolidated Statements of Income | |||||||||||||||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||||||||||||||
| (In millions, except per share amounts) | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Pharmacy revenues | $ | 128,566 | $ | 121,413 | $ | 107,769 | |||||||||||||||||||||||
| Premiums | 39,915 | 41,154 | 42,627 | ||||||||||||||||||||||||||
| Fees and other revenues | 10,880 | 9,962 | 8,761 | ||||||||||||||||||||||||||
| Net investment income | 1,155 | 1,549 | 1,244 | ||||||||||||||||||||||||||
| TOTAL REVENUES | 180,516 | 174,078 | 160,401 | ||||||||||||||||||||||||||
| Benefits and expenses | |||||||||||||||||||||||||||||
| Pharmacy and other service costs | 124,834 | 117,553 | 103,484 | ||||||||||||||||||||||||||
| Medical costs and other benefit expenses | 32,206 | 33,562 | 32,710 | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 13,186 | 13,030 | 14,072 | ||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 1,876 | 1,998 | 1,982 | ||||||||||||||||||||||||||
| TOTAL BENEFITS AND EXPENSES | 172,102 | 166,143 | 152,248 | ||||||||||||||||||||||||||
| Income from operations | 8,414 | 7,935 | 8,153 | ||||||||||||||||||||||||||
| Interest expense and other | (1,228) | (1,208) | (1,438) | ||||||||||||||||||||||||||
| Debt extinguishment costs | — | (141) | (199) | ||||||||||||||||||||||||||
| Gain on sale of businesses | 1,662 | — | 4,203 | ||||||||||||||||||||||||||
| Net realized investment (losses) gains | (495) | 196 | 149 | ||||||||||||||||||||||||||
| Income before income taxes | 8,353 | 6,782 | 10,868 | ||||||||||||||||||||||||||
| TOTAL INCOME TAXES | 1,607 | 1,367 | 2,379 | ||||||||||||||||||||||||||
| Net income | 6,746 | 5,415 | 8,489 | ||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 78 | 50 | 31 | ||||||||||||||||||||||||||
| SHAREHOLDERS' NET INCOME | $ | 6,668 | $ | 5,365 | $ | 8,458 | |||||||||||||||||||||||
| Shareholders' net income per share | |||||||||||||||||||||||||||||
| Basic | $ | 21.54 | $ | 15.87 | $ | 23.17 | |||||||||||||||||||||||
| Diluted | $ | 21.30 | $ | 15.73 | $ | 22.96 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
| The Cigna Group Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||
| Net income | $ | 6,746 | $ | 5,415 | $ | 8,489 | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||||||||
| Net unrealized depreciation on securities and derivatives | (1,005) | (215) | (75) | ||||||||||||||||||||||||||
| Net translation gains (losses) on foreign currencies | 72 | (232) | 252 | ||||||||||||||||||||||||||
| Postretirement benefits liability adjustment | 420 | 410 | (105) | ||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (513) | (37) | 72 | ||||||||||||||||||||||||||
| Total comprehensive income | 6,233 | 5,378 | 8,561 | ||||||||||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | |||||||||||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interests | 11 | 19 | 14 | ||||||||||||||||||||||||||
| Net income attributable to other noncontrolling interests | 67 | 31 | 17 | ||||||||||||||||||||||||||
| Other comprehensive loss attributable to redeemable noncontrolling interests | (2) | (14) | (8) | ||||||||||||||||||||||||||
| Total comprehensive income attributable to noncontrolling interests | 76 | 36 | 23 | ||||||||||||||||||||||||||
| SHAREHOLDERS' COMPREHENSIVE INCOME | $ | 6,157 | $ | 5,342 | $ | 8,538 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
| The Cigna Group Consolidated Balance Sheets | |||||||||||
| As of December 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 5,924 | $ | 5,081 | |||||||
| Investments | 905 | 920 | |||||||||
| Accounts receivable, net | 17,218 | 15,071 | |||||||||
| Inventories | 4,777 | 3,722 | |||||||||
| Other current assets | 1,296 | 1,283 | |||||||||
| Assets of businesses held for sale | — | 10,057 | |||||||||
| Total current assets | 30,120 | 36,134 | |||||||||
| Long-term investments | 16,288 | 18,438 | |||||||||
| Reinsurance recoverables | 4,743 | 4,970 | |||||||||
| Property and equipment | 3,774 | 3,692 | |||||||||
| Goodwill | 45,811 | 45,811 | |||||||||
| Other intangible assets | 32,492 | 34,102 | |||||||||
| Other assets | 3,426 | 3,405 | |||||||||
| Separate account assets | 7,278 | 8,337 | |||||||||
| TOTAL ASSETS | $ | 143,932 | $ | 154,889 | |||||||
| Liabilities | |||||||||||
| Current insurance and contractholder liabilities | $ | 5,385 | $ | 5,318 | |||||||
| Pharmacy and other service costs payable | 17,070 | 15,309 | |||||||||
| Accounts payable | 7,775 | 6,655 | |||||||||
| Accrued expenses and other liabilities | 8,006 | 7,322 | |||||||||
| Short-term debt | 2,993 | 2,545 | |||||||||
| Liabilities of businesses held for sale | — | 6,423 | |||||||||
| Total current liabilities | 41,229 | 43,572 | |||||||||
| Non-current insurance and contractholder liabilities | 11,481 | 12,563 | |||||||||
| Deferred tax liabilities, net | 7,751 | 8,346 | |||||||||
| Other non-current liabilities | 3,142 | 3,762 | |||||||||
| Long-term debt | 28,100 | 31,125 | |||||||||
| Separate account liabilities | 7,278 | 8,337 | |||||||||
| TOTAL LIABILITIES | 98,981 | 107,705 | |||||||||
| Contingencies — Note 23 | |||||||||||
| Redeemable noncontrolling interests | 66 | 54 | |||||||||
| Shareholders' equity | |||||||||||
| Common stock (1) | 4 | 4 | |||||||||
| Additional paid-in capital | 30,233 | 29,574 | |||||||||
| Accumulated other comprehensive loss | (1,395) | (884) | |||||||||
| Retained earnings | 37,874 | 32,593 | |||||||||
| Less: Treasury stock, at cost | (21,844) | (14,175) | |||||||||
| TOTAL SHAREHOLDERS' EQUITY | 44,872 | 47,112 | |||||||||
| Other noncontrolling interests | 13 | 18 | |||||||||
| Total equity | 44,885 | 47,130 | |||||||||
| Total liabilities and equity | $ | 143,932 | $ | 154,889 |
(1) Par value per share, $0.01; shares issued, 398 million as of December 31, 2022 and 394 million as of December 31, 2021; authorized shares, 600 million.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
| The Cigna Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Changes in Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) | Retained Earnings | Treasury Stock | Shareholders' Equity | Other Non- controlling Interests | Total Equity | Redeemable Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 4 | $ | 28,306 | $ | (941) | $ | 20,162 | $ | (2,193) | $ | 45,338 | $ | 6 | $ | 45,344 | $ | 35 | ||||||||||||||||||||||||||||||||||||||
| Cumulative effect of adopting new credit loss guidance (ASU 2016-13) | (30) | (30) | (30) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of issuing stock for employee benefit plans | 672 | (90) | 582 | 582 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 80 | 80 | 80 | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 8,458 | 8,458 | 17 | 8,475 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends declared (per share: $0.04) | (15) | (15) | (15) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (4,089) | (4,089) | (4,089) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other transactions impacting noncontrolling interests | (3) | (3) | (16) | (19) | 17 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 4 | $ | 28,975 | $ | (861) | $ | 28,575 | $ | (6,372) | $ | 50,321 | $ | 7 | $ | 50,328 | $ | 58 | ||||||||||||||||||||||||||||||||||||||
| Effect of issuing stock for employee benefit plans | 604 | (93) | 511 | 511 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (23) | (23) | (23) | (14) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 5,365 | 5,365 | 31 | 5,396 | 19 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends declared (per share: $4.00) | (1,347) | (1,347) | (1,347) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (7,710) | (7,710) | (7,710) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other transactions impacting noncontrolling interests | (5) | (5) | (20) | (25) | (9) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 4 | $ | 29,574 | $ | (884) | $ | 32,593 | $ | (14,175) | $ | 47,112 | $ | 18 | $ | 47,130 | $ | 54 | ||||||||||||||||||||||||||||||||||||||
| Effect of issuing stock for employee benefit plans | 659 | (76) | 583 | 583 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (511) | (511) | (511) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 6,668 | 6,668 | 67 | 6,735 | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends declared (per share: $4.48) | (1,387) | (1,387) | (1,387) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (7,593) | (7,593) | (7,593) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other transactions impacting noncontrolling interests | — | (72) | (72) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 4 | $ | 30,233 | $ | (1,395) | $ | 37,874 | $ | (21,844) | $ | 44,872 | $ | 13 | $ | 44,885 | $ | 66 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
The Cigna Group
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||
| Net income | $ | 6,746 | $ | 5,415 | $ | 8,489 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 2,937 | 2,923 | 2,802 | |||||||||||||||||
| Realized investment losses (gains), net | 495 | (196) | (149) | |||||||||||||||||
| Deferred income tax benefit | (480) | (220) | (386) | |||||||||||||||||
| Gain on sale of businesses | (1,662) | — | (4,203) | |||||||||||||||||
| Debt extinguishment costs | — | 141 | 199 | |||||||||||||||||
| Net changes in assets and liabilities, net of non-operating effects: | ||||||||||||||||||||
| Accounts receivable, net | (2,237) | (2,843) | (1,496) | |||||||||||||||||
| Inventories | (1,055) | (557) | (504) | |||||||||||||||||
| Reinsurance recoverable and Other assets | (38) | (656) | (77) | |||||||||||||||||
| Insurance liabilities | 291 | 967 | 841 | |||||||||||||||||
| Pharmacy and other service costs payable | 1,760 | 1,961 | 2,891 | |||||||||||||||||
| Accounts payable and Accrued expenses and other liabilities | 1,574 | (77) | 1,346 | |||||||||||||||||
| Other, net | 325 | 333 | 597 | |||||||||||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 8,656 | 7,191 | 10,350 | |||||||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||||||||
| Proceeds from investments sold: | ||||||||||||||||||||
| Debt securities and equity securities | 1,744 | 2,030 | 2,283 | |||||||||||||||||
| Investment maturities and repayments: | ||||||||||||||||||||
| Debt securities and equity securities | 1,327 | 1,628 | 1,519 | |||||||||||||||||
| Commercial mortgage loans | 98 | 180 | 19 | |||||||||||||||||
| Other sales, maturities and repayments (primarily short-term and other long-term investments) | 1,039 | 1,936 | 1,575 | |||||||||||||||||
| Investments purchased or originated: | ||||||||||||||||||||
| Debt securities and equity securities | (2,756) | (3,553) | (4,765) | |||||||||||||||||
| Commercial mortgage loans | (161) | (327) | (113) | |||||||||||||||||
| Other (primarily short-term and other long-term investments) | (1,563) | (2,554) | (1,924) | |||||||||||||||||
| Property and equipment purchases, net | (1,295) | (1,154) | (1,094) | |||||||||||||||||
| Acquisitions, net of cash acquired | — | (1,833) | (139) | |||||||||||||||||
| Divestitures, net of cash sold | 4,835 | (61) | 5,592 | |||||||||||||||||
| Other, net | (170) | 97 | 23 | |||||||||||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 3,098 | (3,611) | 2,976 | |||||||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||||||||
| Deposits and interest credited to contractholder deposit funds | 164 | 153 | 1,023 | |||||||||||||||||
| Withdrawals and benefit payments from contractholder deposit funds | (220) | (168) | (979) | |||||||||||||||||
| Net change in short-term debt | (2,059) | 975 | 60 | |||||||||||||||||
| Net proceeds on issuance of term loan | — | — | 1,398 | |||||||||||||||||
| Repayment of term loan | — | — | (1,400) | |||||||||||||||||
| Payments for debt extinguishment | — | (136) | (212) | |||||||||||||||||
| Repayment of long-term debt | (500) | (4,578) | (8,047) | |||||||||||||||||
| Net proceeds on issuance of long-term debt | — | 4,260 | 3,465 | |||||||||||||||||
| Repurchase of common stock | (7,607) | (7,742) | (4,042) | |||||||||||||||||
| Issuance of common stock | 389 | 326 | 376 | |||||||||||||||||
| Common stock dividend paid | (1,384) | (1,341) | (15) | |||||||||||||||||
| Other, net | (23) | 39 | (160) | |||||||||||||||||
| NET CASH USED IN FINANCING ACTIVITIES | (11,240) | (8,212) | (8,533) | |||||||||||||||||
| Effect of foreign currency rate changes on cash, cash equivalents and restricted cash | (86) | (65) | 41 | |||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 428 | (4,697) | 4,834 | |||||||||||||||||
| Cash, cash equivalents and restricted cash January 1, (1) | 5,548 | 10,245 | 5,411 | |||||||||||||||||
| Cash, cash equivalents and restricted cash, December 31, | 5,976 | 5,548 | 10,245 | |||||||||||||||||
| Cash and cash equivalents reclassified to Assets of businesses held for sale | — | (425) | — | |||||||||||||||||
| Cash, cash equivalents and restricted cash December 31, per Consolidated Balance Sheets (2) | $ | 5,976 | $ | 5,123 | $ | 10,245 | ||||||||||||||
| Supplemental Disclosure of Cash Information: | ||||||||||||||||||||
| Income taxes paid, net of refunds | $ | 1,850 | $ | 2,240 | $ | 1,837 | ||||||||||||||
| Interest paid | $ | 1,229 | $ | 1,253 | $ | 1,439 |
(1) Includes $425 million reported in Assets of businesses held for sale as of January 1, 2022.
(2) Restricted cash and cash equivalents were reported in other long-term investments.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
THE CIGNA GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Note 1 – Description of Business
The Cigna Group, together with its subsidiaries, is a global health company. On February 13, 2023, we changed our corporate name from Cigna Corporation to The Cigna Group. We will not distinguish between our prior and current corporate name and will refer to our current corporate name throughout the Financial Statements and related footnotes. As such, unless expressly indicated or the context requires otherwise, the terms "Company," "we," "us," and "our" in this document refer to The Cigna Group, a Delaware corporation, and, where appropriate, its subsidiaries. On February 13, 2023, we also changed the name of our Evernorth segment to Evernorth Health Services. We will not distinguish between our prior and current segment name and will refer to our current segment name throughout the Financial Statements and related footnotes. Our common stock continues to be listed with, and trades on, the New York Stock Exchange under the ticker symbol "CI". The Cigna Group has a mission of helping those we serve improve their health and vitality. Our subsidiaries offer a differentiated set of pharmacy, medical, behavioral, dental and supplemental products and services.
The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations. Cigna Healthcare also offers commercial health and dental insurance and Medicare products to individuals in the United States and selected international markets. In addition to these ongoing operations, The Cigna Group also has certain run-off operations.
A full description of our segments follows:
Evernorth Health Services includes a broad range of coordinated and point solution health services and capabilities, as well as those from partners across the health care system, in Pharmacy Benefits, Home Delivery Pharmacy, Specialty Pharmacy, Distribution and Care Delivery and Management Solutions, which are provided to health plans, employers, government organizations and health care providers.
Cigna Healthcare includes the U.S. Commercial, U.S. Government and International Health operating segments which provide comprehensive medical and coordinated solutions to clients and customers. U.S. Commercial products and services include medical, pharmacy, behavioral health, dental and other products and services for insured and self-insured clients. U.S. Government solutions include Medicare Advantage, Medicare Supplement and Medicare Part D plans for seniors and individual health insurance plans. International Health solutions include health care coverage in our international markets, as well as health care benefits for globally mobile individuals and employees of multinational organizations.
Other Operations comprises the remainder of our business operations, which includes ongoing businesses and exiting businesses. Our ongoing businesses include continuing business, corporate-owned life insurance ("COLI") and our run-off businesses. Our run-off businesses include (i) guaranteed minimum death benefit ("GMDB") and guaranteed minimum income benefit ("GMIB") business that was effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire") in 2013, (ii) settlement annuity business, and (iii) individual life insurance and annuity and retirement benefits businesses comprised of deferred gains from the sales of these businesses. Our exiting businesses include our interest in a joint venture in Türkiye, which was sold to our partner in December 2022, the international life, accident and supplemental benefits businesses sold on July 1, 2022, and the Group Disability and Life business sold on December 31, 2020.
On July 1, 2022, the Company completed the sale of its life, accident and supplemental benefits businesses in six countries (Hong Kong, Indonesia, New Zealand, South Korea, Taiwan and Thailand) to Chubb INA Holdings, Inc. ("Chubb") for approximately $5.4 billion in cash (the "Chubb transaction") (see Note 4).
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, operating severance, certain overhead and enterprise-wide project costs and intersegment eliminations for products and services sold between segments.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of The Cigna Group and its consolidated subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Certain amounts in prior years have been reclassified to conform to the current year presentation.
Amounts recorded in the Consolidated Financial Statements necessarily reflect management's estimates and assumptions about medical costs, investment and receivable valuations, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment.
Recent Accounting Pronouncements
There were no new accounting standards adopted during the year ended December 31, 2022 that had a material impact on our Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted
Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12) and related amendments ("LDTI")
Effective date of January 1, 2023 for The Cigna Group and requires the following key provisions (for insurance entities that issue long-duration contracts):
-
Changes to the measurement of the future policy benefits liability for traditional and limited-pay insurance contracts:
-
Assumptions used to measure cash flows (such as mortality, morbidity and lapse assumptions) to be updated at least annually with the effect of changes in those assumptions remeasured retrospectively and reflected in current period net income.
-
Discount rate assumptions to be updated quarterly based on market-level yields for low credit risk fixed income instruments ("upper-medium grade fixed-income instrument"), with any changes reflected in other comprehensive income. The upper-medium grade fixed-income instrument yield is interpreted to mean A-rated.
-
Deferred policy acquisition costs ("DAC") related to long-duration insurance contracts to be amortized on a constant-level basis over the expected term of the related contracts. Other related deferred or capitalized balances (such as unearned revenue liability and value of business acquired) may use this simplified amortization method.
-
Market risk benefits (defined as protecting the contractholder from other-than-nominal capital market risk and exposing the insurer to that risk) to be measured at fair value, with changes in fair value recognized in net income each period, except for the effect of changes in the insurance entity's credit risk to be recognized in other comprehensive income.
-
Additional disclosures, including disaggregated roll forwards for the liability for future policy benefits, market risk benefits, separate account liabilities and DAC, as well as information about significant inputs, judgments, assumptions and methods used in measurement.
-
Transition methods at adoption vary:
-
Changes to the liability for future policy benefits and DAC to use a modified retrospective approach applied to all outstanding contracts on the basis of their existing carrying amounts as of the beginning of the earliest period presented, with an option to elect a full retrospective transition under certain criteria. Remeasuring the future policy benefits liability for the discount rate to be recorded through accumulated other comprehensive loss at transition.
-
Market risk benefits to be transitioned retrospectively and measured at fair value at the beginning of the earliest period presented. The difference between this fair value and carrying value to be recognized in the opening balance of retained earnings, excluding the effect of credit risk changes that are to be recognized in accumulated other comprehensive loss.
Expected effects:
-
The new guidance applies to our long-duration insurance products predominantly within the Cigna Healthcare segment and Other Operations.
-
The Company developed a cross-functional implementation project plan and executed on the necessary changes to our systems, processes and controls.
-
The Company adopted the standard on January 1, 2023, using the modified retrospective transition method for changes to the liability for future policy benefits and DAC. The impact of adoption was not material to Shareholders' equity and did not result in a material restatement of prior periods.
-
It is possible that our income recognition pattern could change on a prospective basis for several reasons:
-
Applying periodic assumption updates, versus the current locked-in model, may change our timing of profit or loss recognition.
-
DAC amortization will be on a constant level basis over the expected term of the related contracts and no longer tied to the emergence of profit on such contracts.
-
Features, such as the Company's GMDB product, that provide market-risk benefits are not currently measured at fair value, so these liabilities and related reinsurance recoverables will become subject to market sensitivity, notably to interest rates.
In December 2022, the Financial Accounting Standards Board ("FASB") published Accounting Standards Update (ASU) 2022-05, which simplifies the retrospective adoption of LDTI. The ASU permits companies to make an accounting policy election to exclude contracts that are sold and removed from the balance sheet prior to the effective date of the standard from the retrospective adoption of LDTI. The Cigna Group made this policy election for the contracts sold in the Chubb transaction and our divested interest in a joint venture in Türkiye.
Significant Accounting Policies
The Company's accounting policies are described either in this Note or in the applicable Notes to the Consolidated Financial Statements as listed in the table of contents on page 83.
**A.**Cash and Cash Equivalents
Cash and cash equivalents are carried at cost that approximates fair value. Cash equivalents consist of short-term investments with maturities of three months or less from the time of purchase. The Company reclassifies cash overdraft positions to liabilities when the legal right of offset does not exist.
**B.**Inventories
Inventories consist of prescription drugs and medical supplies and are stated at the lower of first-in-first-out cost or net realizable value.
**C.**Deferred Policy Acquisition Costs
Costs eligible for deferral, recorded within Other assets (non-current), include incremental, direct costs of acquiring new or renewal insurance and investment contracts and other costs directly related to successful contract acquisition. Examples of deferrable costs include commissions, sales compensation and benefits, policy issuance and underwriting costs. The Company records acquisition costs differently depending on the product line. Acquisition costs for:
-
Supplemental health, life and accident insurance products** (primarily individual products) that comprise the majority of the Company's deferred policy acquisition costs and group health and accident insurance products are deferred and amortized, generally in proportion to the ratio of periodic revenue to the estimated total revenues over the contract periods.
-
Universal life products** are deferred and amortized in proportion to the present value of total estimated gross profits over the expected lives of the contracts.
-
Other products** are expensed as incurred.
Deferred policy acquisition costs also include the value of business acquired ("VOBA") for certain acquisitions with material long-duration insurance contracts. The Company recorded amortization of deferred policy acquisition costs of $319 million in 2022, $478 million in 2021 and $502 million in 2020 primarily in Selling, general and administrative expenses.
Each year, deferred policy acquisition costs are tested for recoverability. For universal life and other individual products, management estimates the present value of future revenues less expected payments. For group health and accident insurance products, management estimates the sum of unearned premiums and anticipated net investment income less future expected claims and related costs. If management's estimates of these sums are less than the deferred costs, the Company reduces deferred policy acquisition costs and records an additional expense.
**D.**Other Assets (Current and Non-Current)
Other current assets consist primarily of prepaid expenses, accrued investment income, the current portion of reinsurance recoverables and income tax receivables. Other assets (non-current) consist primarily of the carrying value of our equity-method investments in business-related joint ventures in China, India, the U.S. and other foreign jurisdictions. Earnings or losses from these equity-method investments in joint ventures are recorded in Fees and other revenues. See Note 14 for additional information on unconsolidated subsidiaries. Additionally, Other assets (non-current) include deferred policy acquisition costs, operating lease right-of-use assets, GMIB assets, overfunded pension obligations (see Note 17) and various other insurance-related assets. See Note 10 for the Company's accounting policy for GMIB assets and Note 20 for the Company's accounting policy related to leases.
**E.**Redeemable Noncontrolling Interests
Redeemable noncontrolling interests in our Consolidated Balance Sheets represents the noncontrolling shareholders' preferred and common stock interests of the Company's consolidated less than fully owned subsidiaries. Those shareholders may choose to require
the Company to purchase their equity interest. For certain entities, we may also have the right to require those shareholders to sell their equity interest to us. As these redeemable noncontrolling interests provide for redemption features not solely within our control, we classify the redeemable noncontrolling interests outside of permanent equity. The noncontrolling interest was initially recorded at fair value. In subsequent reporting periods, the values are adjusted to reflect the earnings, losses and distributions attributable to the noncontrolling interest. When a shareholder's right to require the Company to purchase its equity interest is exercisable, the redeemable noncontrolling interest is recorded at estimated redemption value. When the estimated redemption value for a redeemable noncontrolling interest exceeds its initial carrying value, an adjustment to increase or decrease the redeemable noncontrolling interest is recorded with an offsetting adjustment to Retained earnings or Additional paid-in capital in the absence of Retained earnings. When an adjustment is made to the carrying value of the redeemable noncontrolling interest, the calculation of shareholders' net income per share will be adjusted if the redemption value exceeds fair value.
**F.**Accrued Expenses and Other Current and Non-Current Liabilities
Accrued expenses and other liabilities (current) primarily includes financial and performance guarantee liabilities under pharmacy contracts (see section H), management compensation and various insurance-related liabilities, including experience-rated refunds, reinsurance contracts and the risk adjustment and minimum medical loss ratio rebate accruals under The Patient Protection and Affordable Care Act (the "ACA"). Other non-current liabilities primarily include uncertain tax positions (see Note 22), GMIB contract liabilities (see Note 10), lease liabilities (see Note 20), self-insured exposures not expected to be settled within one year and underfunded pension obligations (see Note 17).
The Company accrues for legal and regulatory matters when a loss contingency is both probable and estimable. The estimated loss is generally recorded in Selling, general and administrative expenses and represents the Company's best estimate of the loss contingency. If the loss estimate is a range, the Company accrues the minimum amount in the range if no amount is better than any other estimated amount in the range. Legal costs to defend the Company's litigation and arbitration matters are expensed as incurred in cases that the Company cannot reasonably estimate the ultimate cost to defend. If the Company can reasonably estimate the cost to defend, a liability for these costs is accrued when the claim is reported. Litigation and legal or regulatory matters that the Company has identified with a reasonable possibility of material loss are described in Note 23.
**G.**Translation of Foreign Currencies
The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies that are their functional currencies. The Company uses exchange rates as of the balance sheet date to translate assets and liabilities into U.S. dollars. Translation gains or losses on functional currencies, net of applicable taxes, are recorded in Accumulated other comprehensive loss. The Company uses average monthly exchange rates during the year to translate revenues and expenses into U.S. dollars.
**H.**Pharmacy Revenues and Costs
Pharmacy revenues**.** Pharmacy revenues are primarily derived from providing pharmacy benefit management services to clients and customers. Pharmacy revenues are recognized when control of the promised goods or services is transferred to clients and customers, in an amount that reflects the consideration the Company expects to receive for those goods or services.
The Company provides or makes available various services supporting benefit management and claims administration and is generally obligated to provide prescription drugs to clients' members using multiple distribution methods including retail networks, home delivery and specialty pharmacies. These goods and services are integrated into a single performance obligation to process claims, dispense prescription drugs and provide other services over the contract period (generally three years). This performance obligation is satisfied as the business stands ready to fulfill its obligation.
Revenues for dispensing prescription drugs through retail pharmacies are reported gross and consist of the prescription price (ingredient cost and dispensing fee) contracted with clients, including the customer copayment and any associated fees for services, because the Company acts as the principal in these arrangements. When a prescription is presented to a retail network pharmacy, the Company is solely responsible for customer eligibility, drug utilization review, drug-to-drug interaction review, any required clinical intervention, plan provision information, payment to the pharmacy and client billing. These revenues are recognized based on the full prescription price when the pharmacy claim is processed and approved for payment. The Company also provides benefit design and formulary consultation services to clients and negotiates separate contractual relationships with clients and network pharmacies. These factors indicate that the Company has control over these transactions until the prescription is processed. Revenues are billed, due and recognized at contract rates either on a periodic basis or as services are provided (such as based on volume of claims processed). This recognition pattern aligns with the benefits from services provided.
Home delivery and specialty pharmacy revenues are due and recognized as each prescription is shipped, net of reserves for discounts and contractual allowances estimated based on historical experience. Any differences between estimates and actual collections are reflected in Pharmacy revenues when payments are received. Historically, adjustments to original estimates and returns have not been material. The Company has elected the practical expedient to account for shipping and handling as a fulfillment activity.
We may also provide certain financial and performance guarantees, including a minimum level of discounts a client may receive, generic utilization rates and various service levels. Clients may be entitled to receive compensation if we fail to meet the guarantees. Actual performance is compared to the contractual guarantee for each measure throughout the period and the Company defers revenue for any estimated payouts within Accrued expenses and other liabilities (current). These estimates are adjusted and paid at the end of the annual guarantee period. Historically, adjustments to original estimates have not been material. The liability for these financial and performance guarantees was $1.3 billion as of December 31, 2022 and $1.1 billion as of December 31, 2021.
The Company administers programs through which we may receive rebates and other vendor consideration from pharmaceutical manufacturers. The amounts of such rebates or other vendor consideration shared with pharmacy benefit management services clients vary based on the contractual arrangement with the client and in some cases the type of consideration received from the pharmaceutical manufacturer. Rebates and other vendor consideration payable to pharmacy benefit management services clients are recorded as a reduction of Pharmacy revenues. Estimated amounts payable to clients are based on contractual sharing arrangements between the Company and the client and these amounts are adjusted when amounts are collected from pharmaceutical manufacturers in accordance with the contractual arrangement between the Company and the client. Historically, these adjustments have not been material.
In retail, home delivery and specialty transactions, amounts may be collected from third-party payors. These are billed and collected in accordance with the Company's standard accounts receivable collection procedures.
Other pharmacy service revenues are earned by distributing specialty pharmaceuticals and medical supplies to providers, clinics and hospitals. These revenues are billed, due and recognized at contracted rates as prescriptions and supplies are shipped and services are provided.
Pharmacy costs**.** Pharmacy costs include the cost of prescriptions sold, network pharmacy claim costs and copayments. Also included are direct costs of dispensing prescriptions including supplies, shipping and handling and direct costs associated with clinical programs, such as drug utilization management and medication adherence counseling. Home delivery and specialty pharmacy costs are recognized when the drug is shipped and retail network costs are recognized when the drug is processed and approved for payment. Rebates and other vendor consideration received when providing pharmacy benefit management services are recorded as a reduction of pharmacy costs. Rebates are recognized as prescriptions are shipped or processed and approved for payment. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected, net of contractual allowances, has not been material. The Company maintains reimbursement guarantees with certain retail network pharmacies. For each such guarantee, the Company records a pharmacy and other service costs payable or prepaid asset for applicable retail network claims based on our actual performance throughout the period against the contractual reimbursement rate. The Company's contracts with certain retail pharmacies give the Company the right to adjust reimbursement rates during the annual guarantee period.
Other**.** Incremental costs of obtaining service and pharmacy contracts for short-term arrangements are expensed as incurred.
**I.**Premiums and Related Expenses
Premiums for short-duration group health, accident and life insurance and managed care coverages are recognized as revenue on a pro rata basis over the contract period. Benefits and expenses are recognized when incurred and, for our Cigna Healthcare business, are presented net of pharmaceutical manufacturer rebates. For experience-rated contracts, premium revenue includes an adjustment for experience-rated refunds based on contract terms and calculated using the customer's experience (including estimates of incurred but not reported claims).
Premiums received for the Company's Medicare Advantage plans, Medicare Part D products and Individual and Family Plans from the Centers for Medicare and Medicaid Services ("CMS") and customers are recognized as revenue ratably over the contract period.
CMS provides risk-adjusted premium payments for Medicare Advantage Plans and Medicare Part D products based on our customer demographics and medical diagnoses, which may change from period to period based on the underlying health of our customers. The Company recognizes changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured. Revenue adjustments are generally settled semi-annually with CMS. The final revenue adjustment is generally settled with CMS in the year following the contract year.
Medicare Part D premiums include payments from CMS for risk-sharing adjustments that are estimated quarterly based on claim experience by comparing actual incurred prescription drug costs to the estimated costs submitted in the original contracts. These
adjustments may result in more or less revenue from CMS. Final revenue adjustments generally occur in the year following the contract year.
The ACA prescribed a risk-adjustment program to mitigate the risk for participating health insurance companies selling coverage on the public exchanges. The risk-adjustment program reallocates funds from insurers with lower risk populations to insurers with higher risk populations based on the relative risk scores of participants. We estimate our receivable or payable based on the risk of our customers compared to the risk of other customers in the same state and market, considering data obtained from industry studies and the United States Department of Health and Human Services ("HHS"). Receivables or payables are recorded as adjustments to premium revenue based on our year-to-date experience when the amounts are reasonably estimable and collection is reasonably assured. Final revenue adjustments are determined by HHS in the year following the policy year.
Premium revenue may also include an adjustment to reflect the estimated effect of rebates due to customers under medical loss ratio provisions of the ACA. These rebate liabilities are settled in the subsequent year.
Premiums for long-duration insurance contracts, including individual life, accident and supplemental health insurance and annuity products, and excluding universal life and investment-related products, are recognized as revenue when due. Benefits and expenses are matched with premiums.
Revenue for universal life products is recognized as follows:
-
Investment income on assets supporting universal life products is recognized in Net investment income as earned.
-
Charges for mortality, administration and policy surrender are recognized in Premiums as earned. Administrative fees are considered earned when services are provided.
Benefits and expenses for universal life products consist of benefit claims in excess of policyholder account balances and income earned by policyholders. Expenses are recognized when claims are incurred and income is credited to policyholders in accordance with contract provisions.
The unrecognized portion of premiums received is recorded as unearned premiums included in Insurance and contractholder liabilities (current and non-current) (see Note 9 for further information).
**J.**Fees and Related Expenses
The majority of the Company's service fees are derived from administrative services only ("ASO") arrangements, fee-for-service clinical solutions, Wholesale Marketplace Drug Formulary Management services, health benefit management services and administration of services to specialty pharmacy manufacturers.
ASO arrangements allow plan sponsors to self-fund claims and assume the risk of medical or other benefit costs. Most of the Company's ASO arrangements are for medical and specialty services, including pharmacy benefits. Generally, the Company's ASO arrangements are short-term. Contract modifications typically occur on renewal and are prospective in nature.
In return for fees from these clients, the Company provides access to our participating provider networks and other services supporting benefit management, including claims administration, behavioral health services, disease management, utilization management and cost containment programs. In general, the Company considers these services to be a combined performance obligation to provide cost effective administration of plan benefits over the contract period. Fees are billed, due and recognized monthly at contracted rates based on current membership or utilization. This recognition pattern aligns with the benefits from services provided to clients. These revenues are reported in Fees and other revenues in the Consolidated Statements of Income.
The Company may also provide performance guarantees that provide potential refunds to clients if certain service standards, clinical outcomes or financial metrics are not met. If these standards, outcomes and metrics are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company defers revenue by recording a liability for estimated payouts associated with these guarantees within Accrued expenses and other liabilities. The amount of revenue deferred is estimated for each type of guarantee using either a most likely amount or expected value method depending on the nature of the guarantee and the information available to estimate refunds. Estimates are refined each reporting period as additional information on the Company's performance becomes available and upon final reconciliation and settlement following the guarantee period. Amounts accrued and paid for these performance guarantees during the reporting periods were not material.
Expenses associated with administrative programs and services are recognized as incurred in Selling, general and administrative expenses.
The Company also earns revenue, as part of its integrated pharmacy benefits performance obligation, by offering fee-for-service clinical solutions to our clients, such as drug utilization management and medication adherence counseling. These clinical programs help clients to drive better health outcomes at a lower cost by identifying and addressing potentially unsafe or wasteful prescribing, dispensing and utilization of prescription drugs and communicating with, or supporting communications with physicians, pharmacies and patients. Fees are billed, due and recognized at contracted rates either on a periodic basis or as services are provided. This recognition pattern aligns with the benefits from services provided. These revenues are reported in Fees and other revenues in the Consolidated Statements of Income. Direct costs associated with these programs are recognized in Pharmacy and other service costs, and other related expenses are recorded as incurred in Selling, general and administrative expenses.
The Company earns fees from our Wholesale Marketplace Drug Formulary Management services. These services include either our drug formulary administrative service arrangements or our formulary processing arrangements. Drug formulary administrative services may include formulary consultation, administration of rebate contracts, rebate submission, collection from drug manufacturers and the distribution of rebates to clients. Services may also include facilitating audits of data submissions and reporting of rebates to clients. Clients agree to pay administrative fees that are billed, due and recognized at contracted rates as services are performed. These revenues are reported gross in Fees and other revenues and associated costs are reported in Pharmacy and other service costs in the Consolidated Statements of Income. For certain other clients in our formulary processing arrangements, the Company does not control the right to retain rebates before they are transferred to the client for services performed. Clients agree to allow the Company to retain a portion of each rebate collected in exchange for formulary processing services provided. These drug formulary service and administrative fee revenues are reported net in Fees and other revenues in the Consolidated Statements of Income. Revenue is recognized as rebates are processed.
The Company also earns fees by providing health benefit management solutions that drive cost reductions and improve quality outcomes. Clients are primarily sponsors of health benefit plans and fees may be stated as a per-member-per-month fee or as a per-claim fee. The Company considers the services to be a single performance obligation to stand ready to provide utilization management services over the contract period (generally three years). In certain arrangements, the Company assumes the financial obligation for third-party provider costs for medical services provided to the health plan's customers. Fees are recorded gross in Fees and other revenues in the Consolidated Statements of Income because the Company is acting as a principal in arranging for and controlling the services provided by third-party network providers. Contractual fees vary based on enrollment and provider costs and are billed, due and recognized monthly. Direct costs associated with these programs are recognized in Pharmacy and other service costs, and other related expenses are recorded in Selling, general and administrative expenses as incurred.
Certain health benefit management contracts require the Company to share the results of medical cost experience that differ from specified targets. This variable consideration is estimated at contract inception and adjusted through the contract period. The estimated profits and costs are recognized net in Fees and other revenues.
The Company also earns other service fees related to administrating services to specialty pharmacy manufacturers that are recorded in Fees and other revenues in the Consolidated Statements of Income. These revenues are billed, due and recognized at contracted rates as services are provided.
Note 3 – Accounts Receivable, Net
Accounting policy. We bill pharmaceutical manufacturers based on management's interpretation of contractual terms and estimate a contractual allowance based on the best information available at the time a claim is processed. Contractual allowances for certain rebates receivable from pharmaceutical manufacturers are determined by reviewing payment experience and specific known items that could be adjusted under contract terms. The Company's estimation process for contractual allowances for pharmaceutical manufacturer receivables generally results in an allowance for balances outstanding greater than 90 days.
Contractual allowances for certain receivables from third-party payors are based on their contractual terms and are estimates based on the Company's best information available at the time revenue is recognized.
Allowances, discounts and claims adjustments issued to customers in the form of client credits and other non-credit adjustments are based on the current status of each customer's receivable balance, current economic and market conditions and a variety of other factors, including the length of time the receivables are past due, the financial health of customers and our past experience.
The allowance for expected credit losses for current accounts receivable is based primarily on past collections experience relative to the length of time receivables are past due; however, when available evidence reasonably supports an assumption that counterparty credit risk over the expected payment period will differ from current and historical payment collections, a forecasting adjustment is reflected in the allowance for expected credit losses.
Receivables and any associated allowance are written off only when all collection attempts have failed and such amounts are determined unrecoverable. We regularly review the adequacy of these allowances based on a variety of factors, including age of the outstanding receivable and collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted.
The Company's accounts receivable include amounts due from pharmaceutical manufacturers, clients, third-party payors and customers, and are presented net of allowances. These balances include:
-
Pharmaceutical manufacturers receivables - amounts due from pharmaceutical manufacturers.
-
Noninsurance customer receivables - amounts due from customers for noninsurance services, primarily pharmacy benefit management and ASO contracts.
-
Insurance customer receivables - amounts due from customers under insurance and managed care contracts, primarily premiums receivable and amounts due from CMS.
-
Other receivables - all other accounts receivable not included in the categories above.
The following amounts were included within Accounts receivable, net:
| (In millions) | December 31, 2022 | December 31, 2021 | |||||||||
| Pharmaceutical manufacturers receivables | $ | 7,108 | $ | 5,463 | |||||||
| Noninsurance customer receivables | 6,899 | 6,274 | |||||||||
| Insurance customer receivables | 2,963 | 2,932 | |||||||||
| Other receivables | 248 | 456 | |||||||||
| Total | 15,125 | ||||||||||
| Accounts receivable, net classified as Assets of businesses held for sale | (54) | ||||||||||
| Accounts receivable, net per Consolidated Balance Sheets | $ | 17,218 | $ | 15,071 |
These receivables are reported net of our allowances of $1.9 billion as of December 31, 2022 and $1.4 billion as of December 31, 2021 as follows:
-
Included in our Pharmaceutical manufacturers receivables are contractual allowances for certain rebates receivable with pharmaceutical manufacturers of $1.3 billion as of December 31, 2022 and $926 million as of December 31, 2021.
-
Included in our Noninsurance customer receivables are contractual allowances from third-party payors of $336 million as of December 31, 2022 and $321 million as of December 31, 2021 based upon the contractual payment terms.
-
The remaining allowances of $226 million as of December 31, 2022 and $186 million as of December 31, 2021 include allowances, discounts and claims adjustments issued to customers in the form of client credits, an allowance for current expected credit losses and other non-credit adjustments.
The Company's allowance for current expected credit losses was $86 million as of December 31, 2022 and $60 million as of December 31, 2021.
Note 4 – Mergers, Acquisitions and Divestitures
**A.**Divestiture of International Businesses
On July 1, 2022, the Company completed the sale of its life, accident and supplemental benefits businesses in six countries (Hong Kong, Indonesia, New Zealand, South Korea, Taiwan and Thailand) to Chubb for approximately $5.4 billion in cash. The Company recognized a gain of $1.7 billion pre-tax ($1.4 billion after-tax), which includes recognition of previously unrealized capital losses on investments sold and translation loss on foreign currencies (see Note 15 for further information). Also see Note 5 for further information regarding the assets and liabilities of these divested businesses.
In December 2022, the Company also divested its ownership interest in a joint venture in Türkiye.
**B.**Divestiture of Group Disability and Life Business
On December 31, 2020, the Company completed the sale of its Group Disability and Life business to New York Life Insurance Company for cash proceeds of $6.2 billion. The Company recognized a gain of $4.2 billion pre-tax ($3.2 billion after-tax), which included recognition of previously unrealized capital gains on investments sold (see Note 15 for further information).
**C.**Integration and Transaction-related Costs
As part of our strategic plan, we incurred non-routine costs associated with the disposition and acquisition of certain businesses. In 2022 and 2021, the Company incurred costs related to the Chubb transaction, the sale of the Group Disability and Life business, acquisition of MDLIVE and the terminated merger with Elevance Health, Inc. ("Elevance"), formerly known as Anthem, Inc. In 2020, the Company incurred costs related to the acquisition and integration of Express Scripts Holding Company ("Express Scripts"), the terminated merger with Elevance, the sale of the Group Disability and Life business and other transactions. These costs were $135 million pre-tax ($103 million after-tax) for the year ended December 31, 2022, compared with $169 million pre-tax ($71 million after-tax) for the year ended December 31, 2021 and $527 million pre-tax ($404 million after-tax) for the year ended December 31, 2020. These costs consisted primarily of certain projects to separate or integrate the Company's systems, products and services, fees for legal, advisory and other professional services and certain employment-related costs. After-tax costs for the year ended December 31, 2021 included a tax benefit from the resolution of a tax matter related to the sold Group Disability and Life business.
Note 5 – Assets and Liabilities of Businesses Held for Sale
Accounting policy. The Company classifies assets and liabilities as held for sale ("disposal group") when management commits to a plan to sell the disposal group, the sale is probable within one year and the disposal group is available for immediate sale in its present condition. The Company considers various factors, particularly whether actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Assets held for sale are measured at the lower of carrying value or fair value less costs to sell. Any loss resulting from the measurement is recognized in the period the held-for-sale criteria are met. Conversely, gains are not recognized until the date of the sale. When the disposal group is classified as held for sale, depreciation and amortization for most long-lived assets ceases and the Company tests the assets for impairment. Deferred policy acquisition costs continue to be amortized.
On July 1, 2022, the Company completed the sale of its life, accident and supplemental benefits businesses in six countries to Chubb for approximately $5.4 billion in cash. Additionally, in December 2022, the Company divested its interest in a joint venture in Türkiye. See Note 4 for additional information. The Company aggregated and classified the assets and liabilities of these businesses as held for sale in our Consolidated Balance Sheets as of December 31, 2021.
The assets and liabilities of businesses held for sale were as follows:
| (In millions) | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | 406 | |||||||||
| Investments | 5,109 | ||||||||||
| Deferred policy acquisition costs | 2,755 | ||||||||||
| Separate account assets | 878 | ||||||||||
| Goodwill, other intangible assets and all other assets | 909 | ||||||||||
| Total assets of businesses held for sale | 10,057 | ||||||||||
| Insurance and contractholder liabilities | 4,644 | ||||||||||
| Accounts payable, accrued expenses and other liabilities | 452 | ||||||||||
| Deferred tax liabilities, net | 449 | ||||||||||
| Separate account liabilities | 878 | ||||||||||
| Total liabilities of businesses held for sale | $ | 6,423 |
The held for sale businesses reported Gross unrealized appreciation on securities and derivatives of $137 million and Gross cumulative translation losses on foreign currencies of $209 million within Accumulated other comprehensive loss in our Consolidated Balance Sheets as of December 31, 2021.
These amounts, as well as subsequent activity through the sale dates, were recognized within Gain on sale of businesses in our Consolidated Statements of Income as of December 31, 2022, as described in Note 4.
Note 6 – Earnings Per Share
Accounting policy. The Company computes basic earnings per share using the weighted-average number of unrestricted common and deferred shares outstanding. Diluted earnings per share also includes the dilutive effect of outstanding employee stock options and restricted stock using the treasury stock method and the effect of strategic performance shares.
Basic and diluted earnings per share were computed as follows:
| For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Shares in thousands, dollars in millions, except per share amounts) | Basic | Effect of Dilution | Diluted | Basic | Effect of Dilution | Diluted | Basic | Effect of Dilution | Diluted | ||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' net income | $ | 6,668 | $ | 6,668 | $ | 5,365 | $ | 5,365 | $ | 8,458 | $ | 8,458 | |||||||||||||||||||||||||||||||||||||||||
| Shares: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average | 309,546 | 309,546 | 337,962 | 337,962 | 364,979 | 364,979 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock equivalents | 3,519 | 3,519 | 3,004 | 3,004 | 3,410 | 3,410 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total shares | 309,546 | 3,519 | 313,065 | 337,962 | 3,004 | 340,966 | 364,979 | 3,410 | 368,389 | ||||||||||||||||||||||||||||||||||||||||||||
| Earnings per share | $ | 21.54 | $ | (0.24) | $ | 21.30 | $ | 15.87 | $ | (0.14) | $ | 15.73 | $ | 23.17 | $ | (0.21) | $ | 22.96 |
The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive:
| For the Years Ended December 31, | |||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||
| Anti-dilutive options | 1.0 | 1.5 | 4.1 |
Note 7 – Debt
The outstanding amounts of debt, net of issuance costs, discounts or premiums, and finance leases were as follows:
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Short-term debt | ||||||||||||||
| Commercial paper | $ | — | $ | 2,027 | ||||||||||
| $500 million, 3.05% Notes due November 2022 | — | 495 | ||||||||||||
| $17 million, 8.3% Notes due January 2023 | 17 | — | ||||||||||||
| $63 million, 7.65% Notes due March 2023 | 63 | — | ||||||||||||
| $700 million, Floating Rate Notes due July 2023 | 700 | — | ||||||||||||
| $1,000 million, 3.0% Notes due July 2023 | 994 | — | ||||||||||||
| $1,187 million, 3.75% Notes due July 2023 | 1,186 | — | ||||||||||||
| Other, including finance leases | 33 | 23 | ||||||||||||
| Total short-term debt | $ | 2,993 | $ | 2,545 | ||||||||||
| Long-term debt | ||||||||||||||
| $17 million, 8.3% Notes due January 2023 | $ | — | $ | 17 | ||||||||||
| $63 million, 7.65% Notes due March 2023 | — | 63 | ||||||||||||
| $700 million, Floating Rate Notes due July 2023 | — | 699 | ||||||||||||
| $1,000 million, 3% Notes due July 2023 | — | 985 | ||||||||||||
| $1,187 million, 3.75% Notes due July 2023 | — | 1,185 | ||||||||||||
| $500 million, 0.613% Notes due March 2024 | 499 | 498 | ||||||||||||
| $1,000 million, 3.5% Notes due June 2024 | 990 | 983 | ||||||||||||
| $900 million, 3.25% Notes due April 2025 (1) | 872 | 897 | ||||||||||||
| $2,200 million, 4.125% Notes due November 2025 | 2,195 | 2,193 | ||||||||||||
| $1,500 million, 4.5% Notes due February 2026 | 1,503 | 1,504 | ||||||||||||
| $800 million, 1.25% Notes due March 2026 | 797 | 796 | ||||||||||||
| $1,500 million, 3.4% Notes due March 2027 | 1,436 | 1,423 | ||||||||||||
| $259 million, 7.875% Debentures due May 2027 | 259 | 259 | ||||||||||||
| $600 million, 3.05% Notes due October 2027 | 597 | 596 | ||||||||||||
| $3,800 million, 4.375% Notes due October 2028 | 3,785 | 3,782 | ||||||||||||
| $1,500 million, 2.4% Notes due March 2030 | 1,492 | 1,490 | ||||||||||||
| $1,500 million, 2.375% Notes due March 2031 (1) | 1,380 | 1,500 | ||||||||||||
| $45 million, 8.3% Step Down Notes due January 2033 (2) | 45 | 45 | ||||||||||||
| $190 million, 6.15% Notes due November 2036 | 190 | 190 | ||||||||||||
| $2,200 million, 4.8% Notes due August 2038 | 2,192 | 2,192 | ||||||||||||
| $750 million, 3.2% Notes due March 2040 | 743 | 743 | ||||||||||||
| $121 million, 5.875% Notes due March 2041 | 119 | 119 | ||||||||||||
| $448 million, 6.125% Notes due November 2041 | 488 | 490 | ||||||||||||
| $317 million, 5.375% Notes due February 2042 | 315 | 315 | ||||||||||||
| $1,500 million, 4.8% Notes due July 2046 | 1,466 | 1,465 | ||||||||||||
| $1,000 million, 3.875% Notes due October 2047 | 989 | 988 | ||||||||||||
| $3,000 million, 4.9% Notes due December 2048 | 2,968 | 2,967 | ||||||||||||
| $1,250 million, 3.4% Notes due March 2050 | 1,236 | 1,236 | ||||||||||||
| $1,500 million, 3.4% Notes due March 2051 | 1,478 | 1,477 | ||||||||||||
| Other, including finance leases | 66 | 28 | ||||||||||||
| Total long-term debt | $ | 28,100 | $ | 31,125 |
(1) The Company has entered into interest rate swap contracts hedging a portion of these fixed-rate debt instruments. See Note 11 for further information about the Company's interest rate risk management and these derivative instruments.
(2) Interest rate step down to 8.08% effective January 15, 2023.
Short-term and Credit Facilities Debt
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 below. As of December 31, 2022, there were no outstanding balances under these revolving credit agreements.
In April 2022, The Cigna Group entered into the following revolving credit agreements (the "Credit Agreements"):
-
a $3.0 billion five-year revolving credit and letter of credit agreement that will mature in April 2027 with an option to extend the maturity date for additional one-year periods, subject to consent of the banks. The Company can borrow up to $3.0 billion under the credit agreement for general corporate purposes, with up to $500 million available for issuance of letters of credit.
-
a $1.0 billion three-year revolving credit agreement that will mature in April 2025 with an option to extend the maturity date for additional one-year periods, subject to consent of the banks. The Company can borrow up to $1.0 billion under the credit agreement for general corporate purposes.
-
a $1.0 billion 364-day revolving credit agreement that will mature in April 2023. The Company can borrow up to $1.0 billion under the credit agreement for general corporate purposes. This agreement includes the option to "term out" any revolving loans that are outstanding at maturity by converting them into a term loan maturing on the one-year anniversary of conversion.
Each of the Credit Agreements include an option to increase commitments in an aggregate amount of up to $1.5 billion across all three facilities for a maximum total commitment of $6.5 billion. The Credit Agreements allow for borrowings at either a base rate or an adjusted term Secured Overnight Funding Rate ("SOFR") plus, in each case, an applicable margin based on the Company's senior unsecured credit ratings.
Each of the three facilities is diversified among 22 banks. Each facility also contains customary covenants and restrictions, including a financial covenant that the Company's leverage ratio, as defined in the Credit Agreements, may not exceed 60%, subject to certain exceptions upon the consummation of an acquisition.
The Credit Agreements replaced a prior $3.0 billion five-year revolving credit and letter of credit agreement maturing on April 2026, a $1.0 billion three-year revolving credit agreement maturing on April 2024 and a $1.0 billion 364-day revolving credit agreement maturing in April 2022.
Commercial Paper. Under our commercial paper program, we may issue short-term, unsecured commercial paper notes privately placed on a discounted basis through certain broker-dealers at any time not to exceed an aggregate amount of $5.0 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. There was no commercial paper outstanding balance as of December 31, 2022.
Long-term debt
Debt Issuance and Redemption. The Company did not enter into any debt issuances or redemptions in 2022. During 2021, in order to decrease future interest expense, mitigate future refinancing risk and raise proceeds for general corporate purposes, the Company entered into the following transactions:
-
Debt issuance:** On March 3, 2021, the Company issued $4.3 billion of new senior notes. The proceeds of this issuance were mainly used to redeem outstanding debt securities. The remaining proceeds were used primarily for general corporate purposes.
-
Debt redemption:** During 2021, the Company completed the redemption of a total of $4.5 billion in aggregate principal amount of certain of its outstanding debt securities. The Company recorded a pre-tax loss of $141 million ($110 million after-tax), consisting primarily of premium payments.
Debt Covenants. The Company was in compliance with its debt covenants as of December 31, 2022.
Debt Maturities. Maturities of outstanding long-term debt as of December 31, 2022 are as follows:
| (In millions) | Scheduled Maturities (1) | ||||||||||
| 2023 | $ | 2,967 | |||||||||
| 2024 | $ | 1,500 | |||||||||
| 2025 | $ | 3,100 | |||||||||
| 2026 | $ | 2,300 | |||||||||
| 2027 | $ | 2,359 | |||||||||
| Maturities after 2027 | $ | 19,122 |
(1) Long-term debt maturity amounts include current maturities of long-term debt. Finance leases are excluded from this table. See Note 20 - Leases for finance lease maturity amounts.
Interest Expense
Interest expense on long-term and short-term debt was $1.3 billion in 2022 and 2021 and $1.4 billion in 2020.
Note 8 – Common and Preferred Stock
The Cigna Group has a total of 25 million shares of $1 par value preferred stock authorized for issuance. No shares of preferred stock were outstanding at December 31, 2022, 2021 or 2020.
The following table presents the share activity of The Cigna Group:
| For the Years Ended December 31, | |||||||||||||||||
| (Shares in thousands) | 2022 | 2021 | 2020 | ||||||||||||||
| Common: Par value $0.01; 600,000 shares authorized | |||||||||||||||||
| Outstanding- January 1, | 322,948 | 354,771 | 372,531 | ||||||||||||||
| Net issued for stock option exercises and other benefit plans | 3,173 | 3,375 | 4,142 | ||||||||||||||
| Repurchased common stock | (27,445) | (35,198) | (21,902) | ||||||||||||||
| Outstanding- December 31, | 298,676 | 322,948 | 354,771 | ||||||||||||||
| Treasury stock | 99,143 | 71,246 | 35,505 | ||||||||||||||
| Issued- December 31, | 397,819 | 394,194 | 390,276 |
Dividends
In 2022, The Cigna Group declared quarterly cash dividends of $1.12 per share of the Company's common stock. In 2021, The Cigna Group initiated and declared quarterly cash dividends of $1.00 per share of the Company's common stock.
The following table provides details of the Company's dividend payments:
| Record Date | Payment Date | Amount per Share | Total Amount Paid (in millions) | ||||||||
| 2022 | |||||||||||
| March 9, 2022 | March 24, 2022 | $1.12 | $357 | ||||||||
| June 8, 2022 | June 23, 2022 | $1.12 | $352 | ||||||||
| September 7, 2022 | September 22, 2022 | $1.12 | $341 | ||||||||
| December 6, 2022 | December 21, 2022 | $1.12 | $334 | ||||||||
| 2021 | |||||||||||
| March 10, 2021 | March 25, 2021 | $1.00 | $345 | ||||||||
| June 8, 2021 | June 23, 2021 | $1.00 | $342 | ||||||||
| September 8, 2021 | September 23, 2021 | $1.00 | $330 | ||||||||
| December 7, 2021 | December 22, 2021 | $1.00 | $324 | ||||||||
| 2020 | |||||||||||
| March 10, 2020 | April 9, 2020 | $0.04 | $15 | ||||||||
On February 2, 2023, the Board of Directors declared the first quarter cash dividend of $1.23 per share of The Cigna Group common stock to be paid on March 23, 2023 to shareholders of record on March 8, 2023. The Company 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 The Cigna Group 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 may deem relevant.
Accelerated Share Repurchase Agreements
In June 2022, as part of our existing share repurchase program, we entered into separate accelerated share repurchase agreements ("2022 ASR agreements") with Mizuho Markets Americas LLC and Morgan Stanley & Co. LLC (collectively, the "2022 Counterparties") to repurchase $3.5 billion of common stock in aggregate. In July 2022, we remitted $3.5 billion to the 2022 Counterparties and received an initial delivery of 10.4 million shares of our common stock representing $2.8 billion of the total remitted. Upon final settlement of the 2022 ASR agreements in November 2022, we received an additional 1.9 million shares of our common stock for no additional consideration as the value of this stock was held back by the 2022 Counterparties pending final settlement of the agreements. The total number of shares of our common stock repurchased under the 2022 ASR agreements was 12.3 million based on an average daily Volume-Weighted Average Share Price ("VWAP") of our common stock over the term of the agreements, less a discount, of $285.10 per share.
In August 2021, as part of our existing share repurchase program, we entered into separate accelerated share repurchase agreements ("2021 ASR agreements") with Morgan Stanley & Co. LLC and JP Morgan Chase Bank, N.A. (collectively, the "2021 Counterparties") to repurchase $2.0 billion of common stock in aggregate. We remitted $2.0 billion to the 2021 Counterparties and received an initial delivery of 7.7 million shares of our common stock representing $1.6 billion of the total remitted. Upon final settlement of the 2021 ASR agreements in fourth quarter of 2021, we received an additional 1.8 million shares of our common stock for no additional consideration as the value of this stock was held back by the 2021 Counterparties pending final settlement of the agreements. The total number of shares of our common stock repurchased under the 2021 ASR agreements was 9.5 million based on an average daily VWAP of our common stock over the term of the agreements, less a discount, of $209.53 per share.
Note 9 – Insurance and Contractholder Liabilities
**A.**Account Balances – Insurance and Contractholder Liabilities
The Company's insurance and contractholder liabilities were comprised of the following:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Current | Non-current | Total | Current | Non-current | Total | |||||||||||||||||||||||||||||||||||
| Contractholder deposit funds | $ | 365 | $ | 6,515 | $ | 6,880 | $ | 352 | $ | 6,702 | $ | 7,054 | |||||||||||||||||||||||||||||
| Future policy benefits | 229 | 4,708 | 4,937 | 312 | 9,194 | 9,506 | |||||||||||||||||||||||||||||||||||
| Unearned premiums | 576 | 22 | 598 | 558 | 418 | 976 | |||||||||||||||||||||||||||||||||||
| Unpaid claims and claim expenses | |||||||||||||||||||||||||||||||||||||||||
| Cigna Healthcare | 4,117 | 59 | 4,176 | 4,159 | 102 | 4,261 | |||||||||||||||||||||||||||||||||||
| Other Operations | 98 | 177 | 275 | 548 | 180 | 728 | |||||||||||||||||||||||||||||||||||
| Total | 5,929 | 16,596 | 22,525 | ||||||||||||||||||||||||||||||||||||||
| Insurance and contractholder liabilities classified as Liabilities of businesses held for sale (1) | (611) | (4,033) | (4,644) | ||||||||||||||||||||||||||||||||||||||
| Total insurance and contractholder liabilities per Consolidated Balance Sheets | $ | 5,385 | $ | 11,481 | $ | 16,866 | $ | 5,318 | $ | 12,563 | $ | 17,881 |
(1) Amounts classified as Liabilities of businesses held for sale primarily include $3.8 billion of Future policy benefits, $0.4 billion of Unpaid claims and $0.4 billion of Unearned premiums as of December 31, 2021.
Insurance and contractholder liabilities expected to be paid within one year are classified as current.
Accounting policy - Contractholder Deposit Funds. Liabilities for contractholder deposit funds primarily include deposits received from customers for investment-related and universal life products and investment earnings on their fund balances. These liabilities are adjusted to reflect administrative charges and, for universal life fund balances, mortality charges. In addition, this caption includes: 1) premium stabilization reserves under group health insurance contracts representing experience refunds left with the Company to pay future premiums; 2) deposit administration funds used to fund non-pension retiree insurance programs; 3) retained asset accounts and 4) annuities or supplementary contracts without significant life contingencies. Interest credited on these funds is accrued ratably over the contract period.
Accounting policy - Future Policy Benefits. Future policy benefits represent the present value of estimated future obligations under long-term life and supplemental health insurance policies and annuity products currently in force. These obligations are estimated using actuarial methods and consist primarily of reserves for annuity contracts, life insurance benefits, GMDB contracts (GMDB
contracts are fully reinsured, see Note 10 for additional information) and certain life and accident insurance products of our sold international businesses.
Obligations for annuities represent specified periodic benefits to be paid to an individual or groups of individuals over their remaining lives. Obligations for life insurance policies and GMDB contracts represent benefits expected to be paid to policyholders, net of future premiums expected to be received. Management estimates these obligations based on assumptions as to premiums, interest rates, mortality or morbidity, future claim adjudication expenses and surrenders, allowing for adverse deviation as appropriate. Mortality, morbidity and surrender assumptions are based on the Company's own experience and published actuarial tables. Interest rate assumptions are based on management's judgment considering the Company's experience and future expectations and range from 2% to 9%. Obligations for the direct and assumed run-off settlement annuity business include adjustments for realized and unrealized investment returns consistent with GAAP when a premium deficiency exists. As of December 31, 2022, approximately 24% of the liability for future policy benefits was supported by assets held in trust for the benefit of the ceding company under reinsurance agreements.
Accounting policy - Unearned Premium. The unrecognized portion of premiums received is recorded as unearned premiums included in Insurance and contractholder liabilities (current and non-current).
**B.**Unpaid Claims and Claim Expenses – Cigna Healthcare
This liability reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process) and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.
Accounting policy. The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.
The Company compares key assumptions used to establish the medical costs payable to actual experience for each reporting period. The unpaid claims liability is adjusted through current period shareholders' net income when actual experience differs from these assumptions. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trend.
The liability is primarily calculated using "completion factors" developed by comparing the claim incurral date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing; 2) frequency and timeliness of provider claims submissions; 3) number of customers and 4) the mix of products. The Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.
The Company relies more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations for more recent months. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of health benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior.
The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $3.9 billion at December 31, 2022 and $4.0 billion at December 31, 2021.
Activity, net of intercompany transactions, in the unpaid claims liability for the Cigna Healthcare segment was as follows:
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Beginning balance | $ | 4,261 | $ | 3,695 | $ | 3,336 | |||||||||||
| Less: Reinsurance and other amounts recoverable | 261 | 237 | 318 | ||||||||||||||
| Beginning balance, net | 4,000 | 3,458 | 3,018 | ||||||||||||||
| Incurred costs related to: | |||||||||||||||||
| Current year | 31,342 | 31,755 | 27,494 | ||||||||||||||
| Prior years | (259) | (219) | (144) | ||||||||||||||
| Total incurred | 31,083 | 31,536 | 27,350 | ||||||||||||||
| Paid costs related to: | |||||||||||||||||
| Current year | 27,583 | 27,929 | 24,187 | ||||||||||||||
| Prior years | 3,545 | 3,065 | 2,723 | ||||||||||||||
| Total paid | 31,128 | 30,994 | 26,910 | ||||||||||||||
| Ending balance, net | 3,955 | 4,000 | 3,458 | ||||||||||||||
| Add: Reinsurance and other amounts recoverable | 221 | 261 | 237 | ||||||||||||||
| Ending balance | $ | 4,176 | $ | 4,261 | $ | 3,695 |
Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims of certain business for which the Company administers the plan benefits without any right of offset. See Note 10 for additional information on reinsurance.
Variances in incurred costs related to prior years' unpaid claims and claim expenses that resulted from the differences between actual experience and the Company's key assumptions were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (Dollars in millions) | $ | % (1) | $ | % (2) | ||||||||||||||||||||||
| Actual completion factors | $ | 62 | 0.2 | % | $ | 81 | 0.3 | % | ||||||||||||||||||
| Medical cost trend | 197 | 0.6 | 138 | 0.5 | ||||||||||||||||||||||
| Total favorable variance | $ | 259 | 0.8 | % | $ | 219 | 0.8 | % |
(1) Percentage of current year incurred costs as reported for the year ended December 31, 2021.
(2) Percentage of current year incurred costs as reported for the year ended December 31, 2020.
Favorable prior year development in both years reflects lower than expected utilization of medical services as compared to our assumptions.
The following table depicts the incurred and paid claims development and unpaid claims liability as of December 31, 2022 (net of reinsurance) reported in the Cigna Healthcare segment. The information about incurred and paid claims development for the year ended December 31, 2021 is presented as supplementary information and is unaudited.
| Incurred Costs | ||||||||||||||
| Incurral Year | 2021 (Unaudited) | 2022 | Unpaid Claims & Claim Expenses | |||||||||||
| (In millions) | ||||||||||||||
| 2021 | $ | 30,735 | $ | 30,493 | 180 | |||||||||
| 2022 | 30,309 | 3,622 | ||||||||||||
| Cumulative incurred costs for the periods presented | $ | 60,802 | ||||||||||||
| Cumulative Costs Paid | ||||||||||||||
| Incurral Year | 2021 (Unaudited) | 2022 | ||||||||||||
| (In millions) | ||||||||||||||
| 2021 | $ | 27,039 | $ | 30,313 | ||||||||||
| 2022 | 26,687 | |||||||||||||
| Cumulative paid costs for the periods presented | $ | 57,000 | ||||||||||||
| Outstanding liabilities for the periods presented, net of reinsurance | $ | 3,802 | ||||||||||||
| Other long-duration liabilities not included in development table above | 153 | |||||||||||||
| Net unpaid claims and claims expenses - Cigna Healthcare | 3,955 | |||||||||||||
| Reinsurance and other amounts recoverable | 221 | |||||||||||||
| Unpaid claims and claim expenses - Cigna Healthcare | $ | 4,176 |
Incurred claims do not typically remain outstanding for multiple years; more than 95% of health claims incurred in a year are paid by the end of the following year.
There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is the number of customers for whom an insured medical claim was paid. Customers for whom no insured medical claim was paid are excluded from the calculation. Claims that did not result in a liability are not included in the frequency metric. The claim frequency for 2022 and 2021 was approximately 5 million.
**C.**Unpaid Claims and Claim Expenses – Other Operations
Accounting policy. Liabilities for unpaid claims and claim expenses are established by book of business within Other Operations including the liabilities divested in the Chubb transaction and divested through the sale of our ownership interest in a joint venture in Türkiye ("divested International businesses"). Unpaid claims and claim expenses within Other Operations consist of (1) case or claims reserves for reported claims that are unpaid as of the balance sheet date; (2) incurred but not reported reserves for claims when the insured event has occurred but has not been reported to the Company and (3) loss adjustment expense reserves for the expected costs of settling these claims. The Company consistently estimates incurred but not yet reported losses using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the expected payment period. The Company recognizes the actuarial best estimate of the ultimate liability within a level of confidence, consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions. The Company immediately records an adjustment in Medical costs and other benefit expenses when estimates of these liabilities change.
See Note 4 for a discussion of the divestiture of the Group Disability and Life business on December 31, 2020. Prior to the sale, the liabilities for unpaid claims and claim expenses in the Group Disability and Life business reflected reserves for long-term and short-term disability, life insurance and accident products. The majority of the unpaid claim liability related to disability claims that was measured as the present value of estimated future benefit payments, including expected development, for each reported claim that was receiving benefit payments over the expected disability period or pending a decision on eligibility for benefits.
Liability balance details. The liability details for unpaid claims and claim expenses are presented in the following table.
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||
| Other Operations | ||||||||
| Divested International businesses | $ | — | $ | 447 | ||||
| Other Operations | 275 | 281 | ||||||
| Unpaid claims and claim expenses - Other Operations | $ | 275 | $ | 728 |
Activity in the unpaid claims and claim expenses for the divested International and Group Disability and Life business is presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been largely reinsured.
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 (1) | 2021 | 2020 | ||||||||||||||
| Beginning balance | $ | 447 | $ | 452 | $ | 5,372 | |||||||||||
| Less: Reinsurance | 46 | 45 | 169 | ||||||||||||||
| Beginning balance, net | 401 | 407 | 5,203 | ||||||||||||||
| Incurred claims related to: | |||||||||||||||||
| Current year | 507 | 982 | 4,205 | ||||||||||||||
| Prior years: | |||||||||||||||||
| Interest accretion | — | — | 154 | ||||||||||||||
| All other incurred | 3 | 11 | 48 | ||||||||||||||
| Total incurred | 510 | 993 | 4,407 | ||||||||||||||
| Paid claims related to: | |||||||||||||||||
| Current year | 322 | 738 | 2,392 | ||||||||||||||
| Prior years | 187 | 227 | 1,690 | ||||||||||||||
| Total paid | 509 | 965 | 4,082 | ||||||||||||||
| Foreign currency | (28) | (34) | 21 | ||||||||||||||
| Divestiture of businesses(2) | (374) | — | (5,142) | ||||||||||||||
| Ending balance, net | — | 401 | 407 | ||||||||||||||
| Add: Reinsurance | — | 46 | 45 | ||||||||||||||
| Ending balance | $ | — | $ | 447 | $ | 452 |
(1) Beginning balance includes unpaid claims amounts classified as Liabilities of businesses held for sale.
(2) 2020 amounts include Group Disability and Life reserves sold or reinsured to New York Life Insurance Company as part of the sale of the Group Disability and Life business and immaterial retained balances which are now excluded from this table.
Reinsurance in the table above reflects amounts due from reinsurers related to unpaid claims liabilities. See Note 10 for additional information on reinsurance.
Note 10 – Reinsurance
The Company's insurance subsidiaries enter into agreements with other insurance companies to limit losses from large exposures and to permit recovery of a portion of incurred losses. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.
**A.**Reinsurance Recoverables
Accounting policy. Reinsurance recoverables represent amounts due from reinsurers for both paid and unpaid claims of the Company's insurance businesses. The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company. Most reinsurance recoverables are classified as non-current assets. The current portion of reinsurance recoverables is reported in Other current assets and consists primarily of recoverables on paid claims expected to be settled within one year. Reinsurance recoverables are presented net of allowances, consisting primarily of an allowance for expected credit losses which is recognized on reinsurance recoverable balances each period and adjusted through Medical costs and other benefit expenses. Estimates of the allowance for expected credit losses are based on internal and external data used to develop expected loss rates over the anticipated duration of the recoverable asset that vary by external credit rating and collateral level.
The majority of the Company's reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables.
The Company's reinsurance recoverables as of December 31, 2022 are presented in the following table by range of external credit rating and collateral level:
| (In millions) | Fair value of collateral contractually required to meet or exceed carrying value of recoverable | Collateral provisions exist that may mitigate risk of credit loss (3) | No collateral | Total | ||||||||||||||||||||||
| Ongoing Operations | ||||||||||||||||||||||||||
| A- equivalent and higher current ratings (1) | $ | — | $ | — | $ | 87 | $ | 87 | ||||||||||||||||||
| BBB- to BBB+ equivalent current credit ratings (1) | — | — | 58 | 58 | ||||||||||||||||||||||
| Not rated | 139 | 4 | 43 | 186 | ||||||||||||||||||||||
| Total recoverables related to ongoing operations (2) | 139 | 4 | 188 | 331 | ||||||||||||||||||||||
| Acquisition, disposition or run-off activities | ||||||||||||||||||||||||||
| BBB+ equivalent and higher current ratings (1) | ||||||||||||||||||||||||||
| Lincoln National Life and Lincoln Life & Annuity of New York | — | 2,795 | — | 2,795 | ||||||||||||||||||||||
| Berkshire Hathaway Life Insurance Company of Nebraska | 248 | 432 | — | 680 | ||||||||||||||||||||||
| Empower Annuity Insurance Company | — | — | 133 | 133 | ||||||||||||||||||||||
| Prudential Insurance Company of America | 375 | — | — | 375 | ||||||||||||||||||||||
| Life Insurance Company of North America | — | 387 | — | 387 | ||||||||||||||||||||||
| Other | 203 | 19 | 16 | 238 | ||||||||||||||||||||||
| Not rated | — | 12 | 3 | 15 | ||||||||||||||||||||||
| Total recoverables related to acquisition, disposition or run-off activities | 826 | 3,645 | 152 | 4,623 | ||||||||||||||||||||||
| Total | $ | 965 | $ | 3,649 | $ | 340 | $ | 4,954 | ||||||||||||||||||
| Allowance for uncollectible reinsurance | (37) | |||||||||||||||||||||||||
| Total reinsurance recoverables (2) | $ | 4,917 |
(1) Certified by a Nationally Recognized Statistical Rating Organization ("NRSRO").
(2) Includes $174 million of current reinsurance recoverables that are reported in Other current assets.
(3) Includes collateral provisions requiring the reinsurer to fully collateralize its obligation if its external credit rating is downgraded to a specified level.
Collateral levels are defined internally based on the fair value of the collateral relative to the carrying amount of the reinsurance recoverable, the frequency at which collateral is required to be replenished and the potential for volatility in the collateral's fair value.
**B.**Effects of Reinsurance
The following table presents direct, assumed and ceded premiums for both short-duration and long-duration insurance contracts. It also presents reinsurance recoveries that have been netted against Medical costs and other benefit expenses in the Company's Consolidated Statements of Income.
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Premiums | |||||||||||||||||
| Short-duration contracts | |||||||||||||||||
| Direct | $ | 36,746 | $ | 36,513 | $ | 38,425 | |||||||||||
| Assumed | 416 | 335 | 85 | ||||||||||||||
| Ceded | (265) | (148) | (230) | ||||||||||||||
| Total short-duration contract premiums | 36,897 | 36,700 | 38,280 | ||||||||||||||
| Long-duration contracts | |||||||||||||||||
| Direct | 3,219 | 4,753 | 4,517 | ||||||||||||||
| Assumed | 85 | 99 | 99 | ||||||||||||||
| Ceded | (286) | (398) | (269) | ||||||||||||||
| Total long-duration contract premiums | 3,018 | 4,454 | 4,347 | ||||||||||||||
| Total premiums | $ | 39,915 | $ | 41,154 | $ | 42,627 | |||||||||||
| Total reinsurance recoveries | $ | 702 | $ | 552 | $ | 431 |
**C.**Effective Exit of GMDB and GMIB Business
The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013. Berkshire reinsured 100% of the Company's future claim payments in this business, net of other reinsurance arrangements existing at that time. The reinsurance agreement is subject to an overall limit with approximately $3.1 billion remaining at December 31, 2022.
GMDB is accounted for as assumed and ceded reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below. GMIB assets are reported in Other current assets and Other assets and GMIB liabilities are reported in Accrued expenses and other liabilities and Other non-current liabilities.
GMDB
The GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death. The Company's exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder's death.
Accounting policy. The Company estimates the gross liability and reinsurance recoverable with an internal model based on the Company's experience and future expectations over an extended period, consistent with the long-term nature of this product. As a result of the reinsurance transaction, reserve increases have a corresponding increase in the recorded reinsurance recoverable, provided the increased recoverable remains within the overall Berkshire limit (including the GMIB asset presented below).
The following table presents the account value, net amount at risk and the number of contractholders for guarantees assumed by the Company in the event of death. The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date. As of December 31, 2022, the account value decreased primarily due to unfavorable equity market performance, which resulted in an increase to the net amount at risk. The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.
| (Dollars in millions, excludes impact of reinsurance ceded) | December 31, 2022 | December 31, 2021 | |||||||||
| Account value | $ | 7,436 | $ | 9,795 | |||||||
| Net amount at risk | $ | 2,114 | $ | 1,392 | |||||||
| Average attained age of contractholders (weighted by exposure) | 75 | 77 | |||||||||
| Number of contractholders (estimated) | 150,000 | 170,000 |
GMIB
The Company reinsured contracts with issuers of GMIB products. The Company's exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values. Payment by the Company depends on the actual account value in the related underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that can only occur within 30 days of a policy anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage ("GMIB assets") for these contracts including retrocessional coverage from Berkshire.
Accounting policy. The Company reports GMIB liabilities and assets as derivatives at fair value because cash flows of these liabilities and assets are affected by equity markets and interest rates, but are without significant life insurance risk and are settled in lump sum payments. The Company receives and pays fees periodically based on either contractholders' account values or deposits increased at a contractual rate. The Company will also pay and receive cash depending on changes in account values and interest rates when contractholders first elect to receive minimum income payments.
Assumptions used in fair value measurement. GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse and annuity election rates). The Company classifies GMIB assets and liabilities in Level 3 of the fair value hierarchy described in Note 12 because assumptions related to future annuitant behavior are largely unobservable.
The only assumption expected to impact future shareholders' net income is non-performance risk. The non-performance risk adjustment reflects a market participant's view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company and (b) the GMIB assets to be paid by the reinsurers, after considering collateral. The impact of non-performance risk was immaterial for the years ended December 31, 2022 and December 31, 2021.
GMIB liabilities totaled $404 million as of December 31, 2022 and $572 million as of December 31, 2021. The GMIB liabilities reflect the Company's credit risk, while the reinsurance recoverable reflects the credit risk of the reinsurers. There were three reinsurers covering 100% of the GMIB exposures as of December 31, 2022 and December 31, 2021 as follows:
| (In millions) | ||||||||||||||||||||||||||
| Line of Business | Reinsurer | December 31, 2022 | December 31, 2021 | Collateral and Other Terms at December 31, 2022 | ||||||||||||||||||||||
| GMIB | Berkshire | $ | 203 | $ | 283 | 100% were secured by assets in a trust. | ||||||||||||||||||||
| Sun Life Assurance Company of Canada | 119 | 167 | ||||||||||||||||||||||||
| Liberty Re (Bermuda) Ltd. | 108 | 151 | 100% were secured by assets in a trust. | |||||||||||||||||||||||
| Total GMIB recoverables reported in Other current assets and Other assets | $ | 430 | $ | 601 |
All reinsurers are rated A- equivalent and higher by an NRSRO.
Note 11 – Investments
The Cigna Group'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 investment balances and realized investment gains and losses. See Note 12 for information about the valuation of 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 funds that are used in our cash management strategy and are 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, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (In millions) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||||||||||||||||||||
| Debt securities | $ | 654 | $ | 9,218 | $ | 9,872 | $ | 796 | $ | 16,162 | $ | 16,958 | ||||||||||||||||||||||||||
| Equity securities | 45 | 577 | 622 | — | 603 | 603 | ||||||||||||||||||||||||||||||||
| Commercial mortgage loans | 67 | 1,547 | 1,614 | 40 | 1,526 | 1,566 | ||||||||||||||||||||||||||||||||
| Policy loans | — | 1,218 | 1,218 | — | 1,338 | 1,338 | ||||||||||||||||||||||||||||||||
| Other long-term investments | — | 3,728 | 3,728 | — | 3,574 | 3,574 | ||||||||||||||||||||||||||||||||
| Short-term investments | 139 | — | 139 | 428 | — | 428 | ||||||||||||||||||||||||||||||||
| Total | 1,264 | 23,203 | 24,467 | |||||||||||||||||||||||||||||||||||
| Investments classified as Assets of businesses held for sale (1) | (344) | (4,765) | (5,109) | |||||||||||||||||||||||||||||||||||
| Investments per Consolidated Balance Sheets | $ | 905 | $ | 16,288 | $ | 17,193 | $ | 920 | $ | 18,438 | $ | 19,358 |
(1) Investments related to the divested International businesses that were held for sale as of December 31, 2021. These investments were primarily comprised of debt securities and other long-term investments, and to a lesser extent, equity securities and short-term investments. See Note 4 for additional information.
**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 either in Accumulated other comprehensive loss within Shareholders' equity or in credit loss expense based on fluctuations in the allowance for credit losses, as further discussed below. Net unrealized appreciation on debt securities supporting the Company's run-off settlement annuity business is reported in Non-current insurance and contractholder liabilities rather than Accumulated other comprehensive loss. When the Company intends to sell or determines that it is more likely than not to be required to sell an impaired debt security, the excess of amortized cost over fair value is directly written down with a charge to Net realized investment (losses) gains. Certain asset-backed securities are considered variable interest entities. See Note 13 for additional information.
The Company reviews declines in fair value from a debt security's amortized cost basis to determine whether a credit loss exists, and when appropriate, recognizes a credit loss allowance with a corresponding charge to credit loss expense, presented in Net realized investment (losses) gains in the Company's Consolidated Statements of Income. The allowance for credit loss represents the excess of amortized cost over the greater of its fair value or the net present value of the debt security's projected future cash flows (based on qualitative and quantitative factors, including the probability of default and the estimated timing and amount of recovery). Each period, the allowance for credit loss is adjusted as needed through credit loss expense.
The Company does not measure an allowance for credit losses for accrued interest receivables. When interest payments are delinquent based on contractual terms or when certain terms (interest rate or maturity date) of the investment have been restructured, accrued interest, reported in Other current assets, is written off through a charge to Net investment income and interest income is recognized on a cash basis.
The amortized cost and fair value by contractual maturity periods for debt securities were as follows:
| December 31, 2022 | ||||||||||||||
| (In millions) | Amortized Cost | Fair Value | ||||||||||||
| Due in one year or less | $ | 681 | $ | 674 | ||||||||||
| Due after one year through five years | 3,817 | 3,583 | ||||||||||||
| Due after five years through ten years | 3,457 | 3,052 | ||||||||||||
| Due after ten years | 2,497 | 2,215 | ||||||||||||
| Mortgage and other asset-backed securities | 390 | 348 | ||||||||||||
| Total | $ | 10,842 | $ | 9,872 |
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.
Our allowance for credit losses on debt securities was not material as of December 31, 2022 and December 31, 2021. Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below:
| (In millions) | Amortized Cost | Allowance for Credit Loss | Unrealized Appreciation | Unrealized Depreciation | Fair Value | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Federal government and agency | $ | 292 | $ | — | $ | 32 | $ | (12) | $ | 312 | ||||||||||||||||||||||
| State and local government | 43 | — | — | (2) | 41 | |||||||||||||||||||||||||||
| Foreign government | 375 | — | 11 | (21) | 365 | |||||||||||||||||||||||||||
| Corporate | 9,742 | (44) | 89 | (981) | 8,806 | |||||||||||||||||||||||||||
| Mortgage and other asset-backed | 390 | — | 1 | (43) | 348 | |||||||||||||||||||||||||||
| Total | $ | 10,842 | $ | (44) | $ | 133 | $ | (1,059) | $ | 9,872 | ||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Federal government and agency | $ | 287 | $ | — | $ | 101 | $ | (1) | $ | 387 | ||||||||||||||||||||||
| State and local government | 154 | — | 17 | — | 171 | |||||||||||||||||||||||||||
| Foreign government | 2,468 | — | 194 | (46) | 2,616 | |||||||||||||||||||||||||||
| Corporate | 12,361 | (23) | 1,008 | (80) | 13,266 | |||||||||||||||||||||||||||
| Mortgage and other asset-backed | 505 | — | 17 | (4) | 518 | |||||||||||||||||||||||||||
| Total | $ | 15,775 | $ | (23) | $ | 1,337 | $ | (131) | $ | 16,958 | ||||||||||||||||||||||
| Investments supporting liabilities of the Company's run-off settlement annuity business (included in total above) (1) | $ | 2,262 | $ | (5) | $ | 720 | $ | (10) | $ | 2,967 |
(1) Net unrealized appreciation for these investments is excluded from Accumulated other comprehensive loss. As of December 31, 2022, net unrealized depreciation for these investments is included in Accumulated other comprehensive loss.
Review of declines in fair value. Management reviews impaired debt securities to determine whether a credit loss allowance is needed based on criteria that include:
-
severity of decline;
-
financial health and specific prospects of the issuer; and
-
changes in the regulatory, economic or general market environment of the issuer's industry or geographic region.
The table below summarizes debt securities with a decline in fair value from amortized cost for which an allowance for credit losses has not been recorded, by investment grade and the length of time these securities have been in an unrealized loss position. Unrealized depreciation on these debt securities is primarily due to declines in fair value resulting from increasing interest rates since these securities were purchased.
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Fair Value | Amortized Cost | Unrealized Depreciation | Number of Issues | Fair Value | Amortized Cost | Unrealized Depreciation | Number of Issues | ||||||||||||||||||||||||||||||||||||||||||
| One year or less | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment grade | $ | 5,533 | $ | 6,127 | $ | (594) | 1,659 | $ | 2,785 | $ | 2,861 | $ | (76) | 909 | ||||||||||||||||||||||||||||||||||||
| Below investment grade | 887 | 964 | (77) | 1,287 | 561 | 578 | (17) | 781 | ||||||||||||||||||||||||||||||||||||||||||
| More than one year | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment grade | 1,151 | 1,487 | (336) | 462 | 382 | 412 | (30) | 143 | ||||||||||||||||||||||||||||||||||||||||||
| Below investment grade | 330 | 382 | (52) | 369 | 162 | 170 | (8) | 53 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 7,901 | $ | 8,960 | $ | (1,059) | 3,777 | $ | 3,890 | $ | 4,021 | $ | (131) | 1,886 |
Equity Securities
Accounting policy. Equity securities with a readily determinable fair value consist primarily of public equity investments in the health care sector and mutual funds that invest in fixed income debt securities while those without a readily determinable fair value consist of private equity investments. Changes in the fair values of equity securities that have a readily determinable fair value are reported in Net realized investment (losses) gains. Equity securities without a readily determinable fair value are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
The following table provides the values of the Company's equity security investments. The amount of impairments or value changes resulting from observable price changes on equity securities with no readily determinable fair value still held was not material to the financial statements as of December 31, 2022 or 2021.
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| (In millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||||||||||||
| Equity securities with readily determinable fair values | $ | 673 | $ | 138 | $ | 257 | $ | 207 | ||||||||||||||||||
| Equity securities with no readily determinable fair value | 380 | 484 | 270 | 396 | ||||||||||||||||||||||
| Total | $ | 1,053 | $ | 622 | $ | 527 | $ | 603 |
As of December 31, 2022, the Company had a commitment to purchase up to $2.7 billion of preferred equity in VillageMD. We funded $2.5 billion of this commitment during January 2023. Approximately 70% of our investments in equity securities as of December 31, 2022 are in the health care sector, consistent with our strategy to invest in targeted startup and growth-stage companies in the health care industry.
Commercial Mortgage Loans
Accounting policy. Commercial mortgage loans are carried at unpaid principal balances, net of an allowance for expected credit losses, and classified as either current or long-term investments based on their contractual maturities. Changes in the allowance for expected credit losses are recognized as credit loss expense and presented in Net realized investment (losses) gains in the Company's Consolidated Statements of Income.
Each period, the Company establishes (or adjusts) its allowance for expected credit losses for commercial mortgage loans. The allowance for expected credit losses is based on a credit risk category that is assigned to each loan at origination using key credit quality indicators, including debt service coverage and loan-to-value ratios. Credit risk categories are updated as key credit quality indicators change. An expected loss rate, assigned based on the credit risk category, is applied to each loan's unpaid principal balance to develop the aggregate allowance for expected credit losses. Commercial mortgage loans are considered impaired and written off against the allowance when it is probable that the Company will not collect all amounts due per the terms of the promissory note. In the event of a foreclosure, the allowance for credit losses is based on the excess of the carrying value of the mortgage loan over the fair value of its underlying collateral.
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.
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.
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:
| (Dollars in millions) | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||
| 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% | $ | 901 | 2.12 | $ | 560 | 2.18 | |||||||||||||||||||||||||||||||||||
| 60% to 79% | 564 | 1.73 | 883 | 1.89 | |||||||||||||||||||||||||||||||||||||
| 80% to 100% | 149 | 1.17 | 123 | 1.47 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,614 | 1.89 | 60 | % | $ | 1,566 | 1.96 | 61 | % |
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, including certain limited partnerships and limited liability companies holding real estate, securities or loans and health care-related investments. These investments are carried at cost plus the Company's ownership percentage of reporting income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income or loss 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, 2022 and 2021 is expected to be held longer than one year and may include real estate acquired through the foreclosure of commercial mortgage loans.
Additionally, foreign currency swaps carried at fair value as well as statutory and other restricted deposits are reported in the table below as "Other." See discussion below for information on the Company's accounting policies for derivative financial instruments.
Other long-term investments and related commitments are diversified by issuer, property type and geographic regions. These investments are primarily unconsolidated variable interest entities (see Note 13 for additional information). 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 2023.
Our limited partnership investments are reduced as the Company receives cash distributions for returns on its investment that were previously recognized in Net investment income. The amount of these cash distributions was $487 million in 2022, $568 million in 2021 and $227 million in 2020.
| Unfunded Commitments as of | ||||||||||||||||||||
| Carrying Value as of December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | December 31, 2022 | |||||||||||||||||
| Real estate investments | $ | 1,319 | $ | 1,152 | $ | 668 | ||||||||||||||
| Securities partnerships | 2,166 | 2,272 | 1,704 | |||||||||||||||||
| Other | 243 | 150 | — | |||||||||||||||||
| Total | $ | 3,728 | $ | 3,574 | $ | 2,372 |
Short-Term Investments and Cash Equivalents
Accounting 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.
**B.**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 contractholder 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 and to hedge the interest rate risk of certain long-term debt. 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.
Accounting policy. Derivatives are recorded in our Consolidated Balance Sheets 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.
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. Offsetting changes in fair values attributable to the foreign exchange risk of the swap contracts and the hedged bonds are reported in Net realized investment (losses) gains. The portion of the swap contracts' changes in fair value excluded from the assessment of hedge effectiveness is recorded in Other comprehensive (loss) income and recognized in Net investment income as swap coupon payments are accrued, offsetting the foreign-denominated coupons received on the designated bonds. Net cash flows are reported in Operating activities, while exchanges of notional principal amounts are reported in Investing activities.
-
Fair value hedges of the interest rate exposure on the Company's long-term debt: Using fair value hedge accounting, the fair values of the swap contracts are reported in other assets or other liabilities. The critical terms of these swaps match those of the long-term debt being hedged. As a result, the carrying value of the hedged debt is adjusted to reflect changes in its fair value driven by the Secured Overnight Financing Rate ("SOFR"). The effects of those adjustments on interest expense are offset by the effects of corresponding changes in the swaps' fair value. The net impact from the hedge reported in Interest expense and other reflects interest expense on the hedged debt at the variable interest rate. Cash flows relating to these contracts are reported in Operating 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 (loss) 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 and other over the term of the instrument. 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 Investments (current) or Accrued expenses and other liabilities. The changes in fair values are reported in Net realized investment (losses) gains. Cash flows relating to these contracts are reported in Investing activities.
The gross fair values of our derivative financial instruments are presented in Note 12. Although we may incur a loss if dealers failed to perform under derivative contracts, collateral has been posted to cover substantially all of the net fair value owed to the Company. As of December 31, 2022 and December 31, 2021, the effects of derivative financial instruments used in these individual hedging strategies were not material to the Consolidated Financial Statements. The following table summarizes the types and notional quantity of derivative instruments held by the Company:
| Notional Value as of | ||||||||||||||||||||
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||||||||
| Purpose | Type of Instrument | |||||||||||||||||||
| 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. A majority of these instruments are denominated in Euros, with the remaining instruments denominated in British Pounds Sterling and Australian Dollars. | Foreign currency swap contracts | $ | 1,083 | $ | 1,081 | |||||||||||||||
| Fair value hedge: To convert a portion of the interest rate exposure on the Company's long-term debt from fixed to variable rates. This more closely aligns the Company's interest expense with the interest income received on its cash equivalent and short-term investment balances. The variable rates are benchmarked to SOFR. | Interest rate swap contracts | $ | 1,500 | $ | 750 | |||||||||||||||
| 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 currencies other than the U.S. Dollar. The notional value of hedging instruments matches the hedged amount of subsidiary net assets. Foreign currency swap contracts are denominated in Euros. | Foreign currency swap contracts | $ | 460 | $ | 526 | |||||||||||||||
Foreign currency forward contracts used in net investment hedge and economic hedge strategies with notional values of approximately $1.4 billion and $0.7 billion as of December 31, 2021, respectively, were associated with the International businesses divested to Chubb during 2022. See Note 4 to the Consolidated Financial Statements for further information.
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, 2022 or 2021.
**C.**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 were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Debt Securities | $ | 572 | $ | 689 | $ | 962 | ||||||||||||||
| Equity securities | 14 | 12 | 11 | |||||||||||||||||
| Commercial mortgage loans | 59 | 60 | 80 | |||||||||||||||||
| Policy loans | 59 | 63 | 64 | |||||||||||||||||
| Other long-term investments | 390 | 758 | 127 | |||||||||||||||||
| Short-term investments and cash | 115 | 26 | 52 | |||||||||||||||||
| Total investment income | 1,209 | 1,608 | 1,296 | |||||||||||||||||
| Less investment expenses | 54 | 59 | 52 | |||||||||||||||||
| Net investment income | $ | 1,155 | $ | 1,549 | $ | 1,244 |
**D.**Realized Investment Gains and Losses
Accounting policy. Realized investment gains and losses are based on specifically identified assets and result from sales, investment asset write-downs, change in the fair value of certain derivatives and equity securities and changes in allowances for credit losses on debt securities and commercial mortgage loan investments.
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:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Net realized investment (losses) gains, excluding credit loss expense and asset write-downs | $ | (459) | $ | 194 | $ | 186 | ||||||||||||||||||||||||||
| Credit loss (expense) recoveries | (36) | 2 | (27) | |||||||||||||||||||||||||||||
| Other investment asset write-downs | — | — | (10) | |||||||||||||||||||||||||||||
| Net realized investment (losses) gains, before income taxes | $ | (495) | $ | 196 | $ | 149 |
Net realized investment losses for the year ended December 31, 2022 were primarily due to mark-to-market losses on a strategic health care equity securities investment.
Note 12 – Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements including debt securities, certain equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value only under certain conditions, such as when impaired or when there are observable price changes for equity securities with no readily determinable fair value.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
The Company's financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset's or a liability's classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument's
fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The Company estimates fair values using prices from third parties or internal pricing methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available and other market information that a market participant would use to estimate fair value. The internal pricing methods are performed by the Company's investment professionals and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.
The Company is responsible for determining fair value and for assigning the appropriate level within the fair value hierarchy based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. The minimal exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations. An annual due-diligence review of the most significant pricing service is conducted to review their processes, methodologies and controls. This review includes a walk-through of inputs for a sample of securities held across various asset types to validate the documented pricing process.
**A.**Financial Assets and Financial Liabilities Carried at Fair Value
The following table provides information about the Company's financial assets and liabilities carried at fair value. Separate account assets are also recorded at fair value on the Company's Consolidated Balance Sheets and are reported separately in the Separate Accounts section below as gains and losses related to these assets generally accrue directly to contractholders:
| (In millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Financial assets at fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal government and agency | $ | 147 | $ | 147 | $ | 165 | $ | 240 | $ | — | $ | — | $ | 312 | $ | 387 | ||||||||||||||||||||||||||||||||||
| State and local government | — | — | 41 | 171 | — | — | 41 | 171 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign government | — | — | 365 | 2,611 | — | 5 | 365 | 2,616 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate | — | — | 8,394 | 12,606 | 412 | 660 | 8,806 | 13,266 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage and other asset-backed | — | — | 313 | 418 | 35 | 100 | 348 | 518 | ||||||||||||||||||||||||||||||||||||||||||
| Total debt securities | 147 | 147 | 9,278 | 16,046 | 447 | 765 | 9,872 | 16,958 | ||||||||||||||||||||||||||||||||||||||||||
| Equity securities (1) | 6 | 16 | 132 | 160 | — | 31 | 138 | 207 | ||||||||||||||||||||||||||||||||||||||||||
| Short-term investments | — | — | 139 | 428 | — | — | 139 | 428 | ||||||||||||||||||||||||||||||||||||||||||
| Derivative assets | — | — | 230 | 143 | 1 | — | 231 | 143 | ||||||||||||||||||||||||||||||||||||||||||
| Financial liabilities at fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | — | $ | 33 | $ | — | $ | — | $ | — | $ | 33 |
(1) Excludes certain equity securities that have no readily determinable fair value.
Level 1 Financial Assets
Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. A relatively small portion of the Company's investment assets are classified in this category given the narrow definition of Level 1 and the Company's investment asset strategy to maximize investment returns.
Level 2 Financial Assets and Financial Liabilities
Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.
Debt and equity securities. Approximately 94% of the Company's investments in debt and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics because many debt securities do not trade daily. Pricing models are used to determine these prices when recent trades are not available. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating. Nearly all of these instruments are valued using recent trades or pricing models.
Short-term investments are carried at fair value that approximates cost. The Company compares market prices for these securities to recorded amounts on a regular basis to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.
Derivative assets and liabilities classified in Level 2 represent over-the-counter instruments such as foreign currency forward and swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties and determined that no adjustments for credit risk were required as of December 31, 2022 or December 31, 2021. The nature and use of these derivative financial instruments are described in Note 11.
Level 3 Financial Assets and Financial Liabilities
Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement. Unobservable inputs reflect the Company's best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The Company classifies certain newly-issued, privately-placed, complex or illiquid securities in Level 3. Approximately 5% of debt and equity securities are priced using significant unobservable inputs and classified in this category.
Fair values of mortgage and other asset-backed securities, as well as corporate and government debt securities, are primarily determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. Inputs and assumptions for pricing may also include characteristics of the issuer, collateral attributes and prepayment speeds for mortgage and other asset-backed securities. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research in its evaluation, as well as the issuer's financial statements.
Quantitative Information about Unobservable Inputs
The significant unobservable input used to value our corporate and government debt securities and mortgage and other asset-backed securities is an adjustment for liquidity. This adjustment is needed to reflect current market conditions and issuer circumstances when there is limited trading activity for the security.
The following table summarizes the fair value and significant unobservable inputs that were developed directly by the Company and used in pricing these debt securities. The range and weighted average basis point ("bps") amounts for liquidity reflect the Company's best estimates of the unobservable adjustments a market participant would make to calculate these fair values.
| Fair Value as of | Unobservable Adjustment Range (Weighted Average by Quantity) as of | ||||||||||||||||||||||||||||||||||
| (Fair value in millions) | December 31, 2022 | December 31, 2021 | Unobservable input December 31, 2022 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||||||||
| Corporate and government debt securities | $ | 412 | $ | 664 | Liquidity | 60 - 1060 (265) | bps | 60 - 1060 (410) | bps | ||||||||||||||||||||||||||
| Mortgage and other asset-backed securities | 35 | 100 | Liquidity | 105 - 520 (310) | bps | 60 - 390 (100) | bps | ||||||||||||||||||||||||||||
| Other debt securities | — | 1 | |||||||||||||||||||||||||||||||||
| Total Level 3 debt securities | $ | 447 | $ | 765 |
A significant increase in liquidity spread adjustments would result in a lower fair value measurement, while a decrease would result in a higher fair value measurement.
Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes the changes in financial assets and financial liabilities classified in Level 3. Gains and losses reported in the table may include net changes in fair value that are attributable to both observable and unobservable inputs.
| For the Years Ended December 31, | ||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||||||||||||||
| Debt and Equity Securities | ||||||||||||||||||||||||||
| Beginning balance | $ | 796 | $ | 854 | ||||||||||||||||||||||
| Gains (losses) included in Shareholders' net income | 11 | (22) | ||||||||||||||||||||||||
| Losses included in Other comprehensive (loss) income | (59) | (6) | ||||||||||||||||||||||||
| Losses required to adjust future policy benefits for settlement annuities (1) | — | (8) | ||||||||||||||||||||||||
| Purchases, sales and settlements | ||||||||||||||||||||||||||
| Purchases | 158 | 138 | ||||||||||||||||||||||||
| Sales | — | (36) | ||||||||||||||||||||||||
| Settlements | (207) | (119) | ||||||||||||||||||||||||
| Total purchases, sales and settlements | (49) | (17) | ||||||||||||||||||||||||
| Transfers into/(out of) Level 3 | ||||||||||||||||||||||||||
| Transfers into Level 3 | 124 | 207 | ||||||||||||||||||||||||
| Transfers out of Level 3 | (376) | (212) | ||||||||||||||||||||||||
| Total transfers into/(out of) Level 3 | (252) | (5) | ||||||||||||||||||||||||
| Ending balance | $ | 447 | $ | 796 | ||||||||||||||||||||||
| Total losses included in Shareholders' net income attributable to instruments held at the reporting date | $ | (2) | $ | (17) | ||||||||||||||||||||||
| Change in unrealized gain or (loss) included in Other comprehensive (loss) income for assets held at the end of the reporting period | $ | (60) | $ | (10) |
(1) Amounts do not accrue to shareholders.
Total gains and losses included in Shareholders' net income in the tables above are reflected in the Consolidated Statements of Income as Net realized investment (losses) gains and Net investment income.
Gains and losses included in Other comprehensive (loss) income, net of tax in the tables above are reflected in Net unrealized depreciation on securities and derivatives in the Consolidated Statements of Comprehensive Income.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company's best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. Market
activity typically decreases during periods of economic uncertainty and this decrease in activity reduces the availability of market observable data. As a result, the level of unobservable judgment that must be applied to the pricing of certain instruments increases and is typically observed through the widening of liquidity spreads. Transfers between Level 2 and Level 3 during 2022 and 2021 primarily reflected changes in liquidity estimates for certain private placement issuers across several sectors. See discussion under Quantitative Information about Unobservable Inputs above for more information.
Separate Accounts
Accounting policy. Separate account assets and liabilities are contractholder funds maintained in accounts with specific investment objectives. The assets of these accounts are legally segregated and are not subject to claims that arise out of any of the Company's other businesses. These separate account assets are carried at fair value with equal amounts recorded for related separate account liabilities. The investment income and fair value gains and losses of separate account assets generally accrue directly to the contractholders and, together with their deposits and withdrawals, are excluded from the Company's Consolidated Statements of Income and Cash Flows. Fees and charges earned for mortality risks, asset management or administrative services are reported in either Premiums or Fees and other revenues. Investments that are measured using the practical expedient of net asset value ("NAV") are excluded from the fair value hierarchy.
Fair values of Separate account assets were as follows:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||
| Guaranteed separate accounts (See Note 23) | $ | 203 | $ | 227 | $ | 382 | $ | 276 | $ | — | $ | — | $ | 585 | $ | 503 | ||||||||||||||||||||||||||||||||||
| Non-guaranteed separate accounts (1) | 211 | 1,130 | 5,522 | 6,406 | 203 | 334 | 5,936 | 7,870 | ||||||||||||||||||||||||||||||||||||||||||
| Subtotal | $ | 414 | $ | 1,357 | $ | 5,904 | $ | 6,682 | $ | 203 | $ | 334 | 6,521 | 8,373 | ||||||||||||||||||||||||||||||||||||
| Non-guaranteed separate accounts priced at NAV as a practical expedient (1) | 757 | 842 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 9,215 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Separate account assets of businesses classified as held for sale (2) | (878) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Separate account assets per Consolidated Balance Sheets | $ | 7,278 | $ | 8,337 |
(1) Non-guaranteed separate accounts include $4.0 billion as of December 31, 2022 and $4.5 billion as of December 31, 2021 in assets supporting the Company's pension plans, including $0.2 billion classified in Level 3 as of December 31, 2022 and $0.3 billion as of December 31, 2021.
(2) Investments related to the divested International businesses that were held for sale as of December 31, 2021. See Note 4 for additional information.
Separate account assets classified as Level 1 primarily include exchange-listed equity securities. Level 2 assets primarily include:
-
corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and
-
actively-traded institutional and retail mutual fund investments.
Separate account assets classified in Level 3 primarily support the Company's pension plans and include certain newly-issued, privately-placed, complex or illiquid securities that are priced using methods discussed above, as well as commercial mortgage loans. Activity, including transfers into and out of Level 3, was not material for the years ended December 31, 2022 or 2021.
Separate account investments in securities partnerships, real estate and hedge funds are generally valued based on the separate account's ownership share of the equity of the investee (NAV as a practical expedient), including changes in the fair values of its underlying investments. Substantially all of these assets support the Company's pension plans. The following table provides additional information on these investments:
| Fair Value as of | Unfunded Commitment as of December 31, 2022 | Redemption Frequency (if currently eligible) | Redemption Notice Period | |||||||||||||||||||||||||||||
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| Securities partnerships | $ | 451 | $ | 513 | $ | 249 | Not applicable | Not applicable | ||||||||||||||||||||||||
| Real estate funds | 302 | 325 | — | Quarterly | 30 - 90 days | |||||||||||||||||||||||||||
| Hedge funds | 4 | 4 | — | Up to annually, varying by fund | 30 - 90 days | |||||||||||||||||||||||||||
| Total | $ | 757 | $ | 842 | $ | 249 |
As of December 31, 2022, the Company does not have plans to sell any of these assets at less than fair value. These investments are structured to satisfy longer-term investment objectives. Securities partnerships are contractually non-redeemable and the underlying investment assets are expected to be liquidated by the fund managers within ten years after inception.
**B.**Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value, such as commercial mortgage loans that are carried at unpaid principal, investment real estate that is carried at depreciated cost and equity securities with no readily determinable fair value when there are no observable market transactions. However, these financial assets and liabilities may be measured using fair value under certain conditions, such as when investments become impaired and are written down to their fair value, or when there are observable price changes from orderly market transactions of equity securities that otherwise had no readily determinable fair value.
For the years ended December 31, 2022 and 2021, impairments recognized requiring these assets to be measured at fair value were not material. Realized investment gains and losses from these observable price changes for the years ended December 31, 2022 and December 31, 2021 were not material.
**C.**Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
The following table includes the Company's financial instruments not recorded at fair value but for which fair value disclosure is required. In addition to universal life products and finance leases, financial instruments that are carried in the Company's Consolidated Balance Sheets at amounts that approximate fair value are excluded from the following table:
| Classification in Fair Value Hierarchy | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| (In millions) | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||||||||||
| Commercial mortgage loans | Level 3 | $ | 1,491 | $ | 1,614 | $ | 1,598 | $ | 1,566 | |||||||||||||||||||||||
| Long-term debt, including current maturities, excluding finance leases | Level 2 | $ | 28,653 | $ | 30,994 | $ | 35,621 | $ | 31,593 |
Note 13 – Variable Interest Entities
When the Company becomes involved with a variable interest entity and when there is a change in the Company's involvement with an entity, the Company must determine if it is the primary beneficiary and must consolidate the entity. The Company is considered the primary beneficiary if it has the power to direct the entity's most significant economic activities and has the right to receive benefits or obligation to absorb losses that could be significant to the entity. The Company evaluates the following criteria:
-
the structure and purpose of the entity;
-
the risks and rewards created by and shared through the entity; and
-
the Company's ability to direct its activities, receive its benefits and absorb its losses relative to the other parties involved with the entity including its sponsors, equity holders, guarantors, creditors and servicers.
The Company determined it was not a primary beneficiary in any material variable interest entity as of December 31, 2022 or 2021.
The Company's involvement in variable interest entities for which it is not the primary beneficiary is described below.
Securities limited partnerships and real estate limited partnerships. The Company owns interests in securities limited partnerships and real estate limited partnerships that are defined as unconsolidated variable interest entities. These partnerships invest in the equity or mezzanine debt of privately-held companies and real estate properties. General partners unaffiliated with the Company control decisions that most significantly impact the partnership's operations and the limited partners do not have substantive kick-out or participating rights. The Company has invested in approximately 175 limited partnerships that have a carrying value of $2.7 billion as of December 31, 2022 reported in other long-term investments. We have commitments to contribute an additional $2.1 billion to these entities. The Company's maximum exposure to loss from these investments is $4.8 billion, calculated as the sum of our carrying value and the additional funding commitments. Our noncontrolling interest in each of these limited partnerships is generally less than 10% of the partnership ownership interests. See Note 11 for further information on the Company's accounting policy for other long-term investments.
The Company has guaranteed debt payments to mortgage lenders for certain real estate limited partnerships should potential environmental obligations arise. No liability has been incurred related to these guarantees, and the Company's maximum exposure to these guarantees was approximately $340 million as of December 31, 2022.
Other variable interest entities. The Company is involved in other types of variable interest entities, including certain asset-backed and corporate securities, real estate joint ventures that develop properties for residential and commercial use, independent physician associations ("IPAs") that provide care management services and international health care joint ventures. The Company's maximum exposure to loss is $0.6 billion from certain asset-backed and corporate securities and $0.6 billion from real estate joint ventures, which represents the sum of our carrying value and the additional funding commitments for these entities. The carrying values and maximum exposures for the remaining unconsolidated variable interest entities were not material as of December 31, 2022.
The Company has not provided, and does not intend to provide, financial support to any of the variable interest entities in excess of its maximum exposure. We perform ongoing qualitative analyses of our involvement with these variable interest entities to determine if consolidation is required.
Note 14 – Collectively Significant Operating Unconsolidated Subsidiaries
In addition to equity method investments, including certain limited partnerships and limited liability companies holding real estate, securities or loans (as disclosed in Note 11), we maintain a portfolio of operating joint ventures accounted for as equity method investments. Operating joint ventures accounted for under the equity method had a carrying value of $1.1 billion as of December 31, 2022 and $1.2 billion as of December 31, 2021.
For the years ended December 31, 2022, 2021 and 2020, none of our unconsolidated subsidiary investments were individually significant.
Accounting policy. We record in our Consolidated Statements of Income our proportionate share of net income or loss generated by equity method operating joint ventures within Fees and other revenues. In certain instances, income or loss is reported on a one month lag due to the timing of when financial information is received.
The below summarized results of operations and financial position of the operating joint venture investments accounted for under the equity method reflects the latest available financial information and does not represent the Company's proportionate share of the assets, liabilities or earnings of such entities. The net loss for the year ended December 31, 2022 is primarily attributable to realized investment losses as a result of market volatility experienced by our joint venture in China.
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Revenues | $ | 4,208 | $ | 3,400 | $ | 2,457 | |||||||||||
| Net (loss) income | $ | (15) | $ | 200 | $ | 401 |
| (In millions) | December 31, 2022 | December 31, 2021 | |||||||||
| Total assets | $ | 20,676 | $ | 18,942 | |||||||
| Total liabilities | $ | 18,441 | $ | 16,510 |
Note 15 – Accumulated Other Comprehensive Income (Loss) ("AOCI")
AOCI includes net unrealized (depreciation) appreciation on securities and derivatives (excluding appreciation on investments supporting future policy benefit liabilities of the run-off settlement annuity business) (see Note 11), foreign currency translation and the net postretirement benefits liability adjustment. AOCI also includes the Company's share from unconsolidated entities accounted for under the equity method. Generally, tax effects in AOCI are established at the currently enacted tax rate and reclassified to Shareholders' net income in the same period that the related pre-tax AOCI reclassifications are recognized. Changes in the components of AOCI were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Securities and Derivatives | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | 685 | $ | 900 | $ | 975 | ||||||||||||||||||||||||||
| Unrealized (depreciation) appreciation on securities and derivatives | (1,528) | (230) | 776 | |||||||||||||||||||||||||||||
| Tax benefit (expense) | 310 | 31 | (150) | |||||||||||||||||||||||||||||
| Net unrealized (depreciation) appreciation on securities and derivatives | (1,218) | (199) | 626 | |||||||||||||||||||||||||||||
| Reclassification adjustment for losses (gains) included in Shareholders' net income (Gain on sale of businesses) | 172 | — | (862) | |||||||||||||||||||||||||||||
| Reclassification adjustment for losses (gains) included in Shareholders' net income (Net realized investment (losses) gains) | 52 | (21) | (26) | |||||||||||||||||||||||||||||
| Reclassification adjustment for tax (benefit) expense included in Shareholders' net income | (11) | 5 | 187 | |||||||||||||||||||||||||||||
| Net losses (gains) reclassified from AOCI to Shareholders' net income | 213 | (16) | (701) | |||||||||||||||||||||||||||||
| Other comprehensive (loss), net of tax | (1,005) | (215) | (75) | |||||||||||||||||||||||||||||
| Ending balance | $ | (320) | $ | 685 | $ | 900 | ||||||||||||||||||||||||||
| Translation of foreign currencies | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | (233) | $ | (15) | $ | (275) | ||||||||||||||||||||||||||
| Translation of foreign currencies | (282) | (213) | 232 | |||||||||||||||||||||||||||||
| Tax (expense) benefit | (33) | (19) | 12 | |||||||||||||||||||||||||||||
| Net translation of foreign currencies | (315) | (232) | 244 | |||||||||||||||||||||||||||||
| Reclassification adjustment for losses included in Net income (Gain on sale of businesses) | 358 | — | 11 | |||||||||||||||||||||||||||||
| Reclassification adjustment for tax expense (benefit) included in Net income | 29 | — | (3) | |||||||||||||||||||||||||||||
| Net translation losses reclassified from AOCI to Net income | 387 | — | 8 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 72 | (232) | 252 | |||||||||||||||||||||||||||||
| Less: Net translation (loss) on foreign currencies attributable to noncontrolling interests | (2) | (14) | (8) | |||||||||||||||||||||||||||||
| Shareholders' other comprehensive income (loss), net of tax | 74 | (218) | 260 | |||||||||||||||||||||||||||||
| Ending balance | $ | (159) | $ | (233) | $ | (15) | ||||||||||||||||||||||||||
| Postretirement benefits liability | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | (1,336) | $ | (1,746) | $ | (1,641) | ||||||||||||||||||||||||||
| Reclassification adjustment for amortization of net prior actuarial losses and prior service costs (Interest expense and other) | 65 | 85 | 70 | |||||||||||||||||||||||||||||
| Reclassification adjustment for (gains) included in Shareholders' net income (Gain on sale of businesses) | (1) | — | — | |||||||||||||||||||||||||||||
| Reclassification adjustment for settlement (Interest expense and other) | — | 4 | — | |||||||||||||||||||||||||||||
| Reclassification adjustment for tax (benefit) included in Shareholders' net income | (16) | (21) | (17) | |||||||||||||||||||||||||||||
| Net adjustments reclassified from AOCI to Shareholders' net income | 48 | 68 | 53 | |||||||||||||||||||||||||||||
| Valuation update | 487 | 448 | (206) | |||||||||||||||||||||||||||||
| Tax (expense) benefit | (115) | (106) | 48 | |||||||||||||||||||||||||||||
| Net change due to valuation update | 372 | 342 | (158) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 420 | 410 | (105) | |||||||||||||||||||||||||||||
| Ending balance | $ | (916) | $ | (1,336) | $ | (1,746) | ||||||||||||||||||||||||||
| Total Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | (884) | $ | (861) | $ | (941) | ||||||||||||||||||||||||||
| Shareholders' other comprehensive (loss) income, net of tax | (511) | (23) | 80 | |||||||||||||||||||||||||||||
| Ending balance | $ | (1,395) | $ | (884) | $ | (861) |
Note 16 – Organizational Efficiency Plan
During 2021, the Company approved a strategic plan to further leverage its ongoing growth to drive operational efficiency through enhancements to organizational structure and increased use of automation and shared services. As of December 31, 2022, the remaining accrued liability recorded in Accrued expenses and other liabilities was $39 million. We expect substantially all of the accrued liability to be paid by the end of 2023.
Note 17 – Pension
**A.**About Our Plans
The Company sponsors U.S. and non-U.S. defined benefit pension plans; future benefit accruals for the domestic plans are frozen.
Accounting policy. The Company measures the assets and liabilities of its domestic pension plans as of December 31. Benefit obligations are measured at the present value of estimated future payments based on actuarial assumptions. The Company uses the corridor method to account for changes in the benefit obligation when actual results differ from those assumed, or when assumptions change. These changes are called net unrecognized actuarial gains (losses). Under the corridor method, net unrecognized actuarial gains (losses) are initially recorded in Accumulated other comprehensive loss. When the unrecognized gain (loss) exceeds 10% of the benefit obligation, that excess is amortized to expense over the expected remaining lives of plan participants. The net plan expense is reported in Interest expense and other in the Consolidated Statements of Income.
For balance sheet purposes, we measure plan assets at fair value. When the actual return differs from the expected return, those differences are reflected in the net unrealized actuarial gain (loss) discussed above. However, to measure pension benefit costs, we use a market-related asset valuation that differs from the actual fair value for domestic pension plan assets invested in non-fixed income investments. The market-related value recognizes the difference between actual and expected long-term returns in the portfolio over five years, a method that reduces the short-term impact of market fluctuations on pension costs. The market-related asset value was approximately $3.8 billion, compared with a fair value of approximately $4.2 billion at December 31, 2022.
**B.**Funded Status and Amounts Included in Accumulated Other Comprehensive Loss
The following table summarizes the projected benefit obligations and assets related to our U.S. and non-U.S. pension plans:
| For the Years Ended December 31, | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| Change in benefit obligation | ||||||||||||||
| Benefit obligation, January 1 | $ | 5,223 | $ | 5,600 | ||||||||||
| Service cost | 2 | 2 | ||||||||||||
| Interest cost | 140 | 132 | ||||||||||||
| Actuarial (gains), net (1) | (1,094) | (189) | ||||||||||||
| Benefits paid from plan assets | (296) | (304) | ||||||||||||
| Other | (27) | (18) | ||||||||||||
| Benefit obligation, December 31 | 3,948 | 5,223 | ||||||||||||
| Change in plan assets | ||||||||||||||
| Fair value of plan assets, January 1 | 4,846 | 4,623 | ||||||||||||
| Actual return on plan assets | (366) | 522 | ||||||||||||
| Benefits paid | (296) | (304) | ||||||||||||
| Contributions | 2 | 5 | ||||||||||||
| Fair value of plan assets, December 31 | 4,186 | 4,846 | ||||||||||||
| Funded status | $ | 238 | $ | (377) | ||||||||||
| Amounts presented in Consolidated Balance Sheets | ||||||||||||||
| Other assets | $ | 238 | $ | — | ||||||||||
| Accrued expenses and other liabilities | $ | — | $ | (14) | ||||||||||
| Other non-current liabilities | $ | — | $ | (363) |
(1) 2022 and 2021 gains reflect an increase in the discount rate.
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. The Company made immaterial contributions to the qualified pension plans in 2022. For 2023, contributions to the qualified pension plans are expected to be immaterial. Future years' contributions will ultimately be based
on a wide range of factors including but not limited to asset returns, discount rates and funding targets. Non-qualified pension plans are generally funded on a pay-as-you-go basis as there are no plan assets for these plans.
Benefit payments. The following benefit payments are expected to be paid in:
| (In millions) | ||||||||
| 2023 | $ | 320 | ||||||
| 2024 | $ | 316 | ||||||
| 2025 | $ | 316 | ||||||
| 2026 | $ | 316 | ||||||
| 2027 | $ | 313 | ||||||
| 2028 - 2032 | $ | 1,508 |
Amounts reflected in the pension assets/(liabilities) shown above that have not yet been reported in Net income and, therefore, have been included in Accumulated other comprehensive loss consisted of the following:
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Unrecognized net (losses) | $ | (1,208) | $ | (1,753) | ||||||||||
| Unrecognized prior service cost | (5) | (5) | ||||||||||||
| Postretirement benefits liability adjustment | $ | (1,213) | $ | (1,758) |
**C.**Cost of Our Plans
Net pension cost was as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Service cost | $ | 2 | $ | 2 | $ | 2 | ||||||||||||||
| Interest cost | 140 | 132 | 168 | |||||||||||||||||
| Expected long-term return on plan assets | (272) | (269) | (260) | |||||||||||||||||
| Amortization of: | ||||||||||||||||||||
| Prior actuarial losses, net | 89 | 78 | 78 | |||||||||||||||||
| Settlement loss | — | 4 | — | |||||||||||||||||
| Net (benefit) cost | $ | (41) | $ | (53) | $ | (12) |
**D.**Assumptions Used for Pension
| For the Years Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Discount rate: | ||||||||||||||
| Pension benefit obligation | 5.43% | 2.82% | ||||||||||||
| Pension benefit cost | 2.82% | 2.49% | ||||||||||||
| Expected long-term return on plan assets: | ||||||||||||||
| Pension benefit cost | 6.75% | 6.75% | ||||||||||||
| Mortality table for pension obligations | White Collar mortality table with MP 2021 projection scale | White Collar mortality table with MP 2021 projection scale |
The Company develops discount rates by applying actual annualized yields for high-quality bonds by duration to the expected pension plan liability cash flows. The bond yields represent a diverse mix of actively traded high quality fixed-income securities that have an above average return at each duration as management believes this approach is representative of the yield achieved through plan asset investment strategy.
The expected long-term return on plan assets was developed considering historical long-term actual returns, expected long-term market conditions, plan asset mix and management's plan asset investment strategy.
**E.**Pension Plan Assets
As of December 31, 2022, pension assets included $4.0 billion invested in the separate accounts of Connecticut General Life Insurance Company, a subsidiary of the Company, and an additional $0.2 billion invested in funds of unaffiliated investment managers.
The fair values of pension assets by category are as follows:
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Debt securities: | ||||||||||||||
| Federal government and agency | $ | 11 | $ | 9 | ||||||||||
| Corporate | 2,349 | 1,653 | ||||||||||||
| Asset-backed | 109 | 108 | ||||||||||||
| Fund investments | 478 | 731 | ||||||||||||
| Total debt securities | 2,947 | 2,501 | ||||||||||||
| Equity securities: | ||||||||||||||
| Domestic | 89 | 789 | ||||||||||||
| International, including funds and pooled separate accounts (1) | 35 | 358 | ||||||||||||
| Total equity securities | 124 | 1,147 | ||||||||||||
| Securities partnerships | 452 | 514 | ||||||||||||
| Real estate funds, including pooled separate accounts (1) | 315 | 334 | ||||||||||||
| Commercial mortgage loans | 63 | 77 | ||||||||||||
| Hedge funds | — | — | ||||||||||||
| Guaranteed deposit account contract | 50 | 91 | ||||||||||||
| Cash equivalents and other current assets, net | 235 | 182 | ||||||||||||
| Total pension assets at fair value | $ | 4,186 | $ | 4,846 |
(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.
The Company's current target investment allocation percentages are 80% fixed income and 20% in other investments, including private equity (securities partnerships), public equity securities, and real estate, and are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. These allocation percentages were updated during 2022 to increase the allocation to fixed income investments as a result of improvements in the plan's funding status, as interest rates increased during the year. The Company will evaluate further allocation changes to equity securities, other investments and fixed income securities as funding levels change.
See Note 12 for further details regarding how fair value is determined, including the level within the fair value hierarchy and the procedures we use to validate fair value measurements. The Company classifies substantially all debt securities in Level 2 for pension plan assets. These assets are valued using recent trades of similar securities or are fund investments priced using their daily net asset value that is the exit price. Approximately one-third of equity securities are classified in Level 1 because they are priced according to unadjusted quotes from active markets, while another one-third of this balance is classified in Level 2 and priced using the daily net asset value. The remaining balance of equity securities is classified in Level 3.
Securities partnerships, real estate and hedge funds are valued using net asset value as a practical expedient and are excluded from the fair value hierarchy. See Note 12 for additional disclosures related to these assets invested in the separate accounts of the Company's subsidiary. Certain securities as described in Note 12, as well as commercial mortgage loans and guaranteed deposit account contracts, are classified in Level 3 because unobservable inputs used in their valuation are significant.
**F.**401(k) Plan
The Company sponsors a 401(k) plan. All employees are immediately eligible for the plan at hire and the Company matches a portion of employees' contributions to the plan. Participants in the plan may invest in various funds that invest in the Company's common stock, several diversified stock funds, a bond fund or stable value funds. The Company common stock fund under the plan constitutes
an "employee stock ownership plan" as defined in the Internal Revenue Code. Dividends from the Company common stock fund are reinvested in a participant's stock fund account unless the participant elects to receive the dividends in cash.
The Company may elect to increase its matching contributions if the Company's annual performance meets certain targets. The Company's annual expense for the plan was as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Expense | $ | 274 | $ | 268 | $ | 243 |
Note 18 – Employee Incentive Plans
**A.**About Our Plans
The People Resources Committee (the "Committee") of the Board of Directors awards stock options, restricted stock grants, restricted stock units, deferred stock and strategic performance shares to certain employees. The Company issues original issue shares for these awards.
The Company records compensation expense for stock and option awards over their vesting periods primarily based on the estimated fair value at the grant date. Fair value is determined differently for each type of award as discussed below.
Shares of common stock available for award were as follows:
| (In millions) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||||
| Common shares available for award | 16.6 | 19.1 | 20.6 |
**B.**Stock Options
Accounting policy. The Company awards options to purchase The Cigna Group common stock at the market price of the stock on the grant date. Options vest over periods ranging from one year to three years and expire no later than 10 years from grant date. Fair value is estimated using the Black-Scholes option-pricing model by applying the assumptions presented below. That fair value is reduced by options expected to be forfeited during the vesting period. The Company estimates forfeitures at the grant date based on our experience and adjusts the expense to reflect actual forfeitures over the vesting period. The fair value of options, net of forfeitures, is recognized in Selling, general and administrative expenses on a straight-line basis over the vesting period.
Black-Scholes option-pricing model assumptions and the resulting fair value of options are presented in the following table:
| 2022 | 2021 | 2020 | |||||||||||||||||||||
| Dividend yield | 1.98 | % | 1.85 | % | — | % | |||||||||||||||||
| Expected volatility | 30.0 | % | 30.0 | % | 30.0 | % | |||||||||||||||||
| Risk-free interest rate | 1.6 | % | 0.5 | % | 1.4 | % | |||||||||||||||||
| Expected option life | 4.5 years | 4.5 years | 4.5 years | ||||||||||||||||||||
| Weighted average fair value of options | $ | 50.61 | $ | 44.84 | $ | 52.42 |
The dividend yield reflects expected future dividends. The Company intends to continue to pay dividends for the foreseeable future. The expected volatility reflects the past daily stock price volatility of The Cigna Group stock. The Company does not consider volatility implied in the market prices of traded options to be a good indicator of future volatility because remaining traded options will expire within one year. The risk-free interest rate is derived using the four-year U.S. Treasury bond yield rate as of the award date for the primary annual grant. Expected option life reflects the Company's historical experience.
The following table shows the status of, and changes in, common stock options:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (Options in thousands) | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | ||||||||||||||||||||||||||||||||
| Outstanding - January 1 | 8,490 | $ | 169.47 | 9,742 | $ | 152.40 | 11,438 | $ | 136.19 | |||||||||||||||||||||||||||||
| Granted | 1,375 | $ | 226.95 | 1,524 | $ | 213.81 | 1,851 | $ | 191.86 | |||||||||||||||||||||||||||||
| Exercised | (2,617) | $ | 149.97 | (2,584) | $ | 129.08 | (3,289) | $ | 115.38 | |||||||||||||||||||||||||||||
| Expired or canceled | (256) | $ | 211.22 | (192) | $ | 199.10 | (258) | $ | 188.79 | |||||||||||||||||||||||||||||
| Outstanding - December 31 | 6,992 | $ | 186.54 | 8,490 | $ | 169.47 | 9,742 | $ | 152.40 | |||||||||||||||||||||||||||||
| Options exercisable at year-end | 4,410 | $ | 168.97 | 5,612 | $ | 152.92 | 6,837 | $ | 137.08 |
Compensation expense of $63 million related to unvested stock options at December 31, 2022 will be recognized over the next two years (weighted average period).
The table below summarizes information for stock options exercised:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Intrinsic value of options exercised | $ | 313 | $ | 268 | $ | 304 | ||||||||||||||
| Cash received for options exercised | $ | 389 | $ | 326 | $ | 376 | ||||||||||||||
| Tax benefit from options exercised | $ | 47 | $ | 50 | $ | 57 |
The following table summarizes information for outstanding common stock options:
| December 31, 2022 | ||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||
| Number (in thousands) | 6,992 | 4,410 | ||||||||||||
| Total intrinsic value (in millions) | $ | 1,012 | $ | 716 | ||||||||||
| Weighted average exercise price | $ | 186.54 | $ | 168.97 | ||||||||||
| Weighted average remaining contractual life | 6.2 years | 4.9 years |
**C.**Restricted Stock
The Company awards restricted stock (grants and units) to the Company's employees that vest over periods ranging from one to three years. Recipients of restricted stock awards accumulate dividends during the vesting period, but generally forfeit their awards and accumulated dividends if their employment terminates before the vesting date.
Accounting policy. Fair value of restricted stock awards is equal to the market price of The Cigna Group's common stock on the date of grant. This fair value is reduced by awards that are expected to forfeit. At the grant date, the Company estimates forfeitures based on experience and adjusts the expense to reflect actual forfeitures over the vesting period. This fair value, net of forfeitures, is recognized in Selling, general and administrative expenses over the vesting period on a straight-line basis.
The following table shows the status of, and changes in, restricted stock awards:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (Awards in thousands) | Grants/Units | Weighted Average Fair Value at Award Date | Grants/Units | Weighted Average Fair Value at Award Date | Grants/Units | Weighted Average Fair Value at Award Date | ||||||||||||||||||||||||||||||||
| Outstanding - January 1 | 1,524 | $ | 202.85 | 1,600 | $ | 186.12 | 1,945 | $ | 178.78 | |||||||||||||||||||||||||||||
| Awarded | 876 | $ | 229.60 | 899 | $ | 213.82 | 791 | $ | 191.22 | |||||||||||||||||||||||||||||
| Vested | (714) | $ | 197.83 | (866) | $ | 184.07 | (1,026) | $ | 161.58 | |||||||||||||||||||||||||||||
| Forfeited | (151) | $ | 215.02 | (109) | $ | 197.01 | (110) | $ | 186.63 | |||||||||||||||||||||||||||||
| Outstanding - December 31 | 1,535 | $ | 219.25 | 1,524 | $ | 202.85 | 1,600 | $ | 186.12 |
The fair value of vested restricted stock at the vesting date was as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Fair value of vested restricted stock | $ | 167 | $ | 183 | $ | 190 |
Approximately 10,000 employees held 1.5 million restricted stock awards at the end of 2022 with $182 million of related compensation expense to be recognized over the next two years (weighted average period).
**D.**Strategic Performance Shares ("SPS")
The Company awards SPSs to executives and certain other key employees generally with a performance period of three years. Half of these shares are subject to a market condition (total shareholder return relative to industry peer companies) and half are subject to a performance condition (cumulative adjusted net income). These targets are set by the Committee at the beginning of the performance period. Holders of these awards receive shares of The Cigna Group common stock at the end of the performance period ranging anywhere from 0 to 200% of the original awards.
Accounting policy. Compensation expense for SPSs is recorded over the performance period. Fair value is determined at the grant date for "market condition" SPSs using a Monte Carlo simulation model and not subsequently adjusted regardless of the final outcome. Expense is initially accrued for "performance condition" SPSs based on the most likely outcome, but evaluated for adjustment each period for updates in the expected outcome. Expense is adjusted to the actual outcome (number of shares awarded times the share price at the grant date) at the end of the performance period.
The following table shows the status of, and changes in, SPSs:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (Awards in thousands) | Shares | Weighted Average Fair Value at Award Date | Shares | Weighted Average Fair Value at Award Date | Shares | Weighted Average Fair Value at Award Date | ||||||||||||||||||||||||||||||||
| Outstanding - January 1 | 860 | $ | 197.07 | 808 | $ | 190.02 | 818 | $ | 177.94 | |||||||||||||||||||||||||||||
| Awarded | 294 | $ | 230.69 | 331 | $ | 213.90 | 362 | $ | 191.52 | |||||||||||||||||||||||||||||
| Vested | (261) | $ | 183.60 | (206) | $ | 196.29 | (309) | $ | 159.67 | |||||||||||||||||||||||||||||
| Forfeited | (113) | $ | 207.75 | (73) | $ | 197.38 | (63) | $ | 187.76 | |||||||||||||||||||||||||||||
| Outstanding - December 31 | 780 | $ | 212.68 | 860 | $ | 197.07 | 808 | $ | 190.02 |
The weighted average fair value per share of SPSs for expense purposes, including the Monte Carlo factor, at the award date for the years ended December 31, 2022, 2021 and 2020 was $258.37, $239.57 and $206.86, respectively.
The fair value of vested SPSs at the vesting date was as follows:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (Shares in thousands; $ in millions) | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||||||||||||||||
| Shares of The Cigna Group common stock distributed upon SPS vesting | 137 | $ | 31 | 243 | $ | 51 | 306 | $ | 55 |
Approximately 500 employees held 780,000 SPSs at the end of 2022 and $69 million of related compensation expense is expected to be recognized over the next two years. The amount of expense for "performance condition" SPSs will vary based on actual performance in 2023 and 2024.
**E.**Compensation Cost and Tax Effects of Share-based Compensation
The Company records tax benefits in Shareholders' net income during the vesting period based on the amount of expense being recognized. The difference between tax benefits based on the expense and the actual tax benefit realized are also recorded in Net income when stock options are exercised, or when restricted stock and SPSs vest.
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Total compensation cost for shared-based awards | $ | 264 | $ | 268 | $ | 289 | ||||||||||||||
| Tax benefits recognized | $ | 80 | $ | 73 | $ | 63 |
Note 19 – Goodwill, Other Intangibles and Property and Equipment
**A.**Goodwill
Accounting policy. Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. The resulting goodwill is assigned to those reporting units expected to realize cash flows from the acquisition, based on those reporting units' relative fair values. The Company's reporting units are aligned with its operating segments as described in Note 1.
The Company conducts its annual quantitative evaluation for goodwill impairment during the third quarter at the reporting unit level and writes it down through shareholders' net income if impaired. On a quarterly basis, the Company performs a qualitative impairment assessment to determine if events or changes in circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. Fair value of a reporting unit is generally estimated based on discounted cash flow analysis and market approach models using assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. The significant assumptions and estimates used in determining fair value primarily include the discount rate and future cash flows. A discount rate is selected to correspond with each reporting unit's weighted average cost of capital, consistent with that used for investment decisions considering the specific and detailed operating plans and strategies within each reporting unit. Projections of future cash flows differ by reporting unit and are consistent with our ongoing strategic projections. Future cash flows for Evernorth Health Services are primarily driven by the forecasted gross margins of the business, as well as operating expenses and long-term growth rates. Future cash flows for our other reporting units are primarily driven by forecasted revenues, benefit expenses, operating expenses and long-term growth rates.
Goodwill activity. Goodwill activity was as follows:
| (In millions) | Evernorth Health Services | Cigna Healthcare | Other Operations | Total | |||||||||||||||||||
| Balance at January 1, 2021 | $ | 33,806 | $ | 10,577 | $ | 265 | $ | 44,648 | |||||||||||||||
| Goodwill acquired | 1,322 | 116 | — | 1,438 | |||||||||||||||||||
| Goodwill disposed | — | (10) | — | (10) | |||||||||||||||||||
| Impact of foreign currency translation and other adjustments | — | — | (31) | (31) | |||||||||||||||||||
| Goodwill at December 31, 2021 (1) | 35,128 | 10,683 | 234 | 46,045 | |||||||||||||||||||
| Goodwill disposed | — | — | (234) | (234) | |||||||||||||||||||
| Impact of foreign currency translation and other adjustments | 2 | (2) | — | — | |||||||||||||||||||
| Goodwill at December 31, 2022 | $ | 35,130 | $ | 10,681 | $ | — | $ | 45,811 |
(1) Includes $234 million classified as Assets of businesses held for sale, all reported within Other Operations.
**B.**Other Intangible Assets
Accounting policy. The Company's Other intangible assets primarily include purchased customer and producer relationships, provider networks and trademarks. The fair value of purchased customer relationships and the amortization method were determined as of the dates of purchase using an income approach that relies on projected future net cash flows including key assumptions for customer attrition and discount rates. The Company's definite-lived intangible assets are amortized on an accelerated or straight-line basis, reflecting their pattern of economic benefits, over periods from three to 30 years. Management revises amortization periods if it believes there has been a change in the length of time that an intangible asset will continue to have value. Costs incurred to renew or extend the terms of these intangible assets are generally expensed as incurred.
The Company's amortized intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows generated by the underlying asset group is less than the carrying amount of the asset group, the Company recognizes an impairment charge equal to the difference between the carrying value of the asset group and its estimated fair value. The Company's indefinite-lived intangible assets are reviewed for impairment at least annually by comparing their fair value with their carrying value. If the carrying value exceeds fair value, that excess is recognized as an impairment loss.
There were no material impairments in the years ended December 31, 2022, 2021 or 2020.
Components of other assets, including other intangibles. Other intangible assets were comprised of the following:
| (In millions) | Cost | Accumulated Amortization | Net Carrying Value | |||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Customer relationships | $ | 29,974 | 6,099 | 23,875 | ||||||||||||||||
| Trade Name - Express Scripts | 8,400 | 8,400 | ||||||||||||||||||
| Other | 348 | 131 | 217 | |||||||||||||||||
| Other intangible assets | 38,722 | 6,230 | 32,492 | |||||||||||||||||
| Value of business acquired ("VOBA" reported in Other assets) | 210 | 133 | 77 | |||||||||||||||||
| Total | $ | 38,932 | 6,363 | 32,569 | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Customer relationships | $ | 29,997 | 4,539 | 25,458 | ||||||||||||||||
| Trade Name - Express Scripts | 8,400 | 8,400 | ||||||||||||||||||
| Other | 447 | 81 | 366 | |||||||||||||||||
| Other intangible assets | 38,844 | 4,620 | 34,224 | |||||||||||||||||
| Value of business acquired (reported in Other assets) | 646 | 171 | 475 | |||||||||||||||||
| Total (1) | $ | 39,490 | 4,791 | 34,699 |
(1) Includes $386 million of VOBA and $122 million of Other intangible assets intangible assets classified as Assets of businesses held for sale.
The Company has indefinite-lived intangible assets totaling $8.5 billion at December 31, 2022 and December 31, 2021, largely consisting of trade names and licenses.
**C.**Property and Equipment
Accounting policy. Property and equipment is carried at cost less accumulated depreciation. Cost includes interest, real estate taxes and other costs incurred during construction when applicable. Internal-use software that is acquired, developed or modified solely to
meet the Company's internal needs, with no plan to market externally, is also included in this category. Costs directly related to acquiring, developing or modifying internal-use software are capitalized.
The Company calculates depreciation and amortization principally using the straight-line method generally based on the estimated useful life of each asset as follows: buildings and improvements, 10 to 40 years; purchased software, three to five years; internally developed software, three to seven years and furniture and equipment (including computer equipment), three to 10 years. Improvements to leased facilities are depreciated over the lesser of the remaining lease term or the estimated life of the improvement. The Company considers events and circumstances that would indicate the carrying value of property, equipment or capitalized software might not be recoverable. An impairment charge is recorded if the Company determines the carrying value of any of these assets is not recoverable. The Company also reviews and shortens the estimated useful lives of these assets, if necessary.
Components of property and equipment. Property and equipment was comprised of the following:
| (In millions) | Cost | Accumulated Amortization | Net Carrying Value | |||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Internal-use software | $ | 8,948 | $ | 6,100 | $ | 2,848 | ||||||||||||||
| Other property and equipment | 2,256 | 1,330 | 926 | |||||||||||||||||
| Total property and equipment | $ | 11,204 | $ | 7,430 | $ | 3,774 | ||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Internal-use software | $ | 7,869 | $ | 5,060 | $ | 2,809 | ||||||||||||||
| Other property and equipment | 2,839 | 1,653 | 1,186 | |||||||||||||||||
| Total | 10,708 | 6,713 | 3,995 | |||||||||||||||||
| Property and equipment classified as Assets of businesses held for sale | (424) | (121) | (303) | |||||||||||||||||
| Total Property and equipment per Consolidated Balance Sheets | $ | 10,284 | $ | 6,592 | $ | 3,692 |
Components of depreciation and amortization. Depreciation and amortization expense was comprised of the following:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Internal-use software | $ | 1,068 | $ | 1,097 | $ | 971 | ||||||||||||||
| Other property and equipment | 251 | 253 | 276 | |||||||||||||||||
| Value of business acquired (reported in Other assets) | 12 | 25 | 28 | |||||||||||||||||
| Other intangibles | 1,606 | 1,548 | 1,527 | |||||||||||||||||
| Total depreciation and amortization | $ | 2,937 | $ | 2,923 | $ | 2,802 |
The Company estimates annual pre-tax amortization for intangible assets, including internal-use software, over the next five calendar years to be as follows:
| (In millions) | Pre-tax Amortization | |||||||
| 2023 | $ | 2,804 | ||||||
| 2024 | $ | 2,302 | ||||||
| 2025 | $ | 1,988 | ||||||
| 2026 | $ | 1,583 | ||||||
| 2027 | $ | 1,523 | ||||||
Note 20 – Leases
The Company's leases are primarily for office space and certain computer and other equipment and have terms of up to 35 years.
Accounting policy. The Company determines if an arrangement is a lease and its lease classification (operating or finance) at inception. Both operating and finance leases result in (1) a right-of-use ("ROU") asset that represents our right to use the underlying asset for the lease term and (2) a lease liability that represents our obligation to make lease payments arising from the lease. ROU
assets and lease liabilities are reflected in the following lines in the Company's Consolidated Balance Sheets:
| ROU Asset | Current Lease Liability | Non-Current Lease Liability | ||||||||||||||||||
| Operating lease | Other assets | Accrued expenses and other liabilities (current) | Other liabilities (non-current) | |||||||||||||||||
| Finance lease | Property and equipment | Short-term debt | Long-term debt |
These lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Most of the Company's leases do not provide an implicit rate, so the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset also includes any lease pre-payments made and excludes lease incentives for operating leases. The Company's expected life of a lease may consider options to extend or terminate a lease when it is reasonably certain that the Company will exercise that option.
The Company has lease agreements with lease and non-lease components that are accounted for as a single lease component. Operating lease ROU assets are amortized on a straight-line basis over the lease term, which is representative of the pattern in which benefit is expected to be derived from the right to use the underlying asset. Variable lease payments are expensed as incurred and represent amounts that are neither fixed in nature, such as maintenance and other services provided by the lessor, nor tied to an index or rate.
The components of lease expense were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating lease cost | $ | 124 | $ | 170 | $ | 190 | ||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of ROU assets | 33 | 22 | 28 | |||||||||||||||||
| Interest on lease liabilities | 2 | 2 | 3 | |||||||||||||||||
| Total finance lease cost | 35 | 24 | 31 | |||||||||||||||||
| Variable lease cost | 41 | 39 | 48 | |||||||||||||||||
| Total lease cost | $ | 200 | $ | 233 | $ | 269 |
Supplemental cash flow information related to leases was as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
| Operating cash outflows from operating leases | $ | 148 | $ | 167 | $ | 189 | ||||||||||||||
| Operating cash outflows from finance leases | $ | 2 | $ | 2 | $ | 3 | ||||||||||||||
| Financing cash outflows from finance leases | $ | 33 | $ | 22 | $ | 26 | ||||||||||||||
| ROU assets obtained in exchange for lease obligations: | ||||||||||||||||||||
| Operating leases | $ | 43 | $ | 122 | $ | 189 | ||||||||||||||
| Finance leases | $ | 84 | $ | 20 | $ | 9 |
Operating and finance lease right-of-use ("ROU") assets and lease liabilities were as follows:
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Operating leases: (1) | ||||||||||||||
| Operating lease ROU assets in Other assets | $ | 375 | $ | 478 | ||||||||||
| Accrued expenses and other liabilities | $ | 114 | $ | 159 | ||||||||||
| Other non-current liabilities | 346 | 436 | ||||||||||||
| Total operating lease liabilities | $ | 460 | $ | 595 | ||||||||||
| Finance leases: | ||||||||||||||
| Property and equipment, gross | $ | 145 | $ | 101 | ||||||||||
| Accumulated depreciation | (48) | (51) | ||||||||||||
| Property and equipment, net | $ | 97 | $ | 50 | ||||||||||
| Short-term debt | $ | 33 | $ | 23 | ||||||||||
| Long-term debt | 66 | 28 | ||||||||||||
| Total finance lease liabilities | $ | 99 | $ | 51 |
(1) Operating leases include $27 million as of December 31, 2021 classified as Assets of businesses held for sale and $28 million as of December 31, 2021 classified as Liabilities of businesses held for sale.
As of December 31, 2022, the weighted average remaining lease term was 5 years for operating leases and 3 years for finance leases, and the weighted average discount rate was 2.80% for operating leases and 3.45% for finance leases.
Maturities of lease liabilities are as follows:
| (In millions) | Operating Leases | Finance Leases | ||||||||||||
| 2023 | $ | 114 | $ | 35 | ||||||||||
| 2024 | 111 | 31 | ||||||||||||
| 2025 | 84 | 24 | ||||||||||||
| 2026 | 64 | 10 | ||||||||||||
| 2027 | 47 | 3 | ||||||||||||
| Thereafter | 74 | 2 | ||||||||||||
| Total lease payments | 494 | 105 | ||||||||||||
| Less: imputed interest | 34 | 6 | ||||||||||||
| Total | $ | 460 | $ | 99 |
Note 21 – Shareholders' Equity and Dividend Restrictions
State insurance departments and foreign jurisdictions that regulate certain of the Company's subsidiaries prescribe accounting practices (differing in some respects from GAAP) to determine statutory net income and surplus. The Company's life, accident and health insurance and Health Maintenance Organization ("HMO") subsidiaries are regulated by such statutory requirements. The statutory net income of the Company's life, accident and health insurance and HMO subsidiaries for the years ended, and their statutory surplus as of December 31 were as follows:
| (In billions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Net income | $ | 5.7 | $ | 3.4 | $ | 4.0 | ||||||||||||||
| Surplus | $ | 16.4 | $ | 13.3 | $ | 12.9 | ||||||||||||||
The Company's HMO and life, accident and health insurance subsidiaries are also subject to minimum statutory surplus requirements and may be required to maintain investments on deposit with state departments of insurance or other regulatory bodies. Additionally, these subsidiaries may be subject to regulatory restrictions on the amount of annual dividends or other distributions (such as loans or cash advances) that insurance companies may extend to their parent companies without prior approval. These amounts, including restricted GAAP net assets of the Company's subsidiaries, were as follows:
| (In billions) | December 31, 2022 | |||||||
| Minimum statutory surplus required by regulators (1) | $ | 4.2 | ||||||
| Investments on deposit with regulatory bodies | $ | 0.3 | ||||||
| Maximum dividend distributions permitted in 2023 without regulatory approval | $ | 3.2 | ||||||
| Maximum loans to the parent company permitted without regulatory approval | $ | 1.4 | ||||||
| Restricted GAAP net assets of The Cigna Group's subsidiaries | $ | 14.8 |
(1) Excludes amounts associated with foreign operated equity method joint ventures.
Permitted practices used by the Company's insurance subsidiaries in 2022 that differed from prescribed regulatory accounting had an immaterial impact on statutory surplus.
Undistributed earnings for equity method investments are $1.2 billion as of December 31, 2022.
Note 22 – Income Taxes
Accounting policy. Deferred income taxes are reflected in the Consolidated Balance Sheets for differences between the financial and income tax reporting bases of the Company's underlying assets and liabilities, and are established based upon enacted tax rates and laws. Deferred income tax assets are recognized when available evidence indicates that realization is more likely than not and a valuation allowance is established to the extent this standard is not met. The deferred income tax provision generally represents the net change in deferred income tax assets and liabilities during the reporting period excluding adjustments to Accumulated other comprehensive income (loss) or amounts recorded in connection with a business combination. The current income tax provision generally represents estimated amounts due on income tax returns for the year reported to various jurisdictions plus the effect of any uncertain tax positions. The Company recognizes a liability for uncertain tax positions if management believes the probability that the positions will be sustained is 50% or less. For uncertain positions that management believes are more likely than not to be sustained, the Company recognizes a liability based upon management's estimate of the most likely settlement outcome with the taxing authority. The liabilities for uncertain tax positions are classified as current when the position is expected to be settled within 12 months or the statute of limitation expires within 12 months.
Income taxes attributable to the Company's foreign operations are generally provided using the respective foreign jurisdictions' tax rate.
**A.**Income Tax Expense
The components of income taxes were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Current taxes | ||||||||||||||||||||
| U.S. income taxes | $ | 1,679 | $ | 1,268 | $ | 2,128 | ||||||||||||||
| Foreign income taxes | 219 | 207 | 334 | |||||||||||||||||
| State income taxes | 189 | 112 | 303 | |||||||||||||||||
| Total current taxes | 2,087 | 1,587 | 2,765 | |||||||||||||||||
| Deferred taxes (benefits) | ||||||||||||||||||||
| U.S. income tax benefits | (283) | (167) | (217) | |||||||||||||||||
| Foreign income (tax benefits) taxes | (28) | 69 | 11 | |||||||||||||||||
| State income tax benefits | (169) | (122) | (180) | |||||||||||||||||
| Total deferred tax benefits | (480) | (220) | (386) | |||||||||||||||||
| Total income taxes | $ | 1,607 | $ | 1,367 | $ | 2,379 |
Total income taxes were different from the amount computed using the nominal federal income tax rate for the following reasons:
| For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| (In millions) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Tax expense at nominal rate | $ | 1,754 | 21.0 | % | $ | 1,424 | 21.0 | % | $ | 2,282 | 21.0 | % | |||||||||||||||||||||||||||||
| Impact of sale of businesses | (37) | (0.4) | — | — | 104 | 1.0 | |||||||||||||||||||||||||||||||||||
| Effect of foreign earnings | (96) | (1.2) | (33) | (0.5) | (61) | (0.6) | |||||||||||||||||||||||||||||||||||
| Health insurance industry tax | — | — | — | — | 93 | 0.9 | |||||||||||||||||||||||||||||||||||
| State income tax (benefit), net of federal income tax benefit | 16 | 0.2 | (9) | (0.1) | 24 | 0.2 | |||||||||||||||||||||||||||||||||||
| Other | (30) | (0.4) | (15) | (0.2) | (63) | (0.6) | |||||||||||||||||||||||||||||||||||
| Total income taxes | $ | 1,607 | 19.2 | % | $ | 1,367 | 20.2 | % | $ | 2,379 | 21.9 | % |
Consolidated pre-tax income from the Company's foreign operations was approximately 46% of the Company's pre-tax income in 2022, 26% in 2021 and 14% in 2020. The increase over 2021 is primarily driven by the gain from the Chubb transaction, an increase to the Company's international pharmaceutical operations, partially offset by a reduction in earnings from the sold entities.
**B.**Deferred Income Taxes
Deferred income tax assets and liabilities were as follows:
| (In millions) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Deferred tax assets | ||||||||||||||
| Employee and retiree benefit plans | $ | 189 | $ | 304 | ||||||||||
| Other insurance and contractholder liabilities | 311 | 263 | ||||||||||||
| Loss carryforwards | 205 | 278 | ||||||||||||
| Other accrued liabilities | 265 | 412 | ||||||||||||
| Policy acquisition expenses | 41 | — | ||||||||||||
| Unrealized depreciation on investments and foreign currency translation | 156 | — | ||||||||||||
| Other | 190 | 246 | ||||||||||||
| Deferred tax assets before valuation allowance | 1,357 | 1,503 | ||||||||||||
| Valuation allowance for deferred tax assets | (208) | (246) | ||||||||||||
| Deferred tax assets, net of valuation allowance | 1,149 | 1,257 | ||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Depreciation and amortization | 512 | 698 | ||||||||||||
| Acquisition-related basis differences | 8,347 | 8,726 | ||||||||||||
| Policy acquisition expenses | — | 312 | ||||||||||||
| Unrealized appreciation on investments and foreign currency translation | — | 104 | ||||||||||||
| Other | 41 | 212 | ||||||||||||
| Total deferred tax liabilities | 8,900 | 10,052 | ||||||||||||
| Net deferred income tax liabilities | (8,795) | |||||||||||||
| Net deferred income tax liabilities classified as Liabilities of businesses held for sale | (449) | |||||||||||||
| Net deferred income tax liabilities per Consolidated Balance Sheets | $ | (7,751) | $ | (8,346) |
Management believes that future results will be sufficient to realize a majority of the Company's gross deferred tax assets. As of December 31, 2022, we had approximately $270 million in deferred tax assets ("DTAs") associated with unrealized investment losses that are primarily recorded in Accumulated other comprehensive loss. We have determined that a valuation allowance against the DTAs is not currently required based on the Company's ability to carryback losses and other known investment strategies. We will monitor and evaluate the need for any valuation allowance in the future. Valuation allowances are established against deferred tax assets when it is determined that it is more likely than not that the asset will not be recognized. Valuation allowances have been established against certain federal, state and foreign tax attributes. There are multiple expiration dates associated with these tax attributes.
**C.**Uncertain Tax Positions
Reconciliations of unrecognized tax benefits were as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Balance at January 1, | $ | 1,230 | $ | 1,210 | $ | 1,018 | ||||||||||||||
| Increase due to prior year positions | 8 | 21 | 128 | |||||||||||||||||
| Increase due to current year positions | 137 | 31 | 88 | |||||||||||||||||
| Reduction related to settlements with taxing authorities | (4) | (15) | — | |||||||||||||||||
| Reduction related to lapse of applicable statute of limitations | (28) | (17) | (24) | |||||||||||||||||
| Balance at December 31, | $ | 1,343 | $ | 1,230 | $ | 1,210 |
Substantially all unrecognized tax benefits would impact Shareholders' net income if recognized.
The Company classifies net interest expense on uncertain tax positions as a component of income tax expense and in Other non-current liabilities in the Consolidated Balance Sheets. In addition to the amounts in the table above, the liability for net interest expense on uncertain tax positions was approximately $176 million as of December 31, 2022, $148 million as of December 31, 2021 and $127 million as of December 31, 2020.
**D.**Other Tax Matters
The statutes of limitations for The Cigna Group's consolidated federal income tax returns through 2016 have closed. However, The Cigna Group filed amended returns for both the 2015 and 2016 tax years, which are under review by the Internal Revenue Service ("IRS"). Additionally, the IRS is examining The Cigna Group's returns for 2017 and 2018. The statutes of limitations for Express Scripts' consolidated federal income tax returns through 2012 has closed. However, for 2010 through 2012 tax years, there remains a significant disputed matter. The IRS is also examining Express Scripts' consolidated federal income tax returns for 2013 through 2018. The Company has established adequate reserves for these matters.
The Company conducts business in a number of state and foreign jurisdictions and may be engaged in multiple audit proceedings at any given time. Generally, no further state or foreign audit activity is expected for tax years prior to 2013 for The Cigna Group's entities and 2010 for Express Scripts' entities.
Note 23 – Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various guarantees provided in the ordinary course of business.
**A.**Financial Guarantees: Retiree and Life Insurance Benefits
The Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits. For the majority of these benefits, the sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. If employers fail to do so, the Company or an affiliate of the buyer of the retirement benefits business has the right to redirect the management of the related assets to provide for benefit payments. As of December 31, 2022, employers maintained assets that generally exceeded the benefit obligations under these arrangements of approximately $420 million. An additional liability is established if management believes that the Company will be required to make payments under the guarantees; there were no additional liabilities required for these guarantees, net of reinsurance, as of December 31, 2022. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy.
The Company does not expect that these financial guarantees will have a material effect on the Company's consolidated results of operations, liquidity or financial condition.
**B.**Certain Other Guarantees
The Company had indemnification obligations as of December 31, 2022 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, filing of tax returns, compliance with law or identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is
possible to determine the maximum potential amount due under these obligations because not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities for these indemnification obligations as of December 31, 2022.
**C.**Guaranty Fund Assessments
The Company operates in a regulatory environment that may require its participation in assessments under state insurance guaranty association laws. The Company's exposure to assessments for certain obligations of insolvent insurance companies to policyholders and claimants is based on its share of business written in the relevant jurisdictions.
There were no material charges or credits resulting from existing or new guaranty fund assessments for the year ended December 31, 2022.
**D.**Legal and Regulatory Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory inquiries and audits, government investigations, including under the federal False Claims Act and state false claims acts initiated by a government investigating body or by a qui tam relator's filing of a complaint under court seal, and other legal matters arising, for the most part, in the ordinary course of managing a global health company. Additionally, the Company has received and is cooperating with subpoenas or similar processes from various governmental agencies requesting information, all arising in the normal course of its business. Disputed tax matters arising from audits by the Internal Revenue Service or other state and foreign jurisdictions, including those resulting in litigation, are accounted for under GAAP guidance for uncertain tax positions, as described in Note 22.
Pending litigation and legal or regulatory matters that the Company has identified with a reasonably possible material loss and certain other material litigation matters are described below. For those matters that the Company has identified with a reasonably possible material loss, the Company provides disclosure in the aggregate of accruals and range of loss, or a statement that such information cannot be estimated. The Company's accruals for the matters discussed below under "Litigation Matters" and "Regulatory Matters" are not material. Due to numerous uncertain factors presented in these cases, it is not possible to estimate an aggregate range of loss (if any) for these matters at this time. In light of the uncertainties involved in these matters, there is no assurance that their ultimate resolution will not exceed the amounts currently accrued by the Company. An adverse outcome in one or more of these matters could be material to the Company's results of operations, financial condition or liquidity for any particular period. The outcomes of lawsuits are inherently unpredictable and we may be unsuccessful in these ongoing litigation matters or any future claims or litigation.
Litigation Matters
Express Scripts Litigation with Elevance. In March 2016, Elevance filed a lawsuit in the United States District Court for the Southern District of New York alleging various breach of contract claims against Express Scripts relating to the parties' rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties including allegations that Express Scripts failed to negotiate new pricing concessions in good faith, as well as various alleged service issues. Elevance also requested that the court enter declaratory judgment that Express Scripts is required to provide Elevance competitive benchmark pricing, that Elevance can terminate the agreement and that Express Scripts is required to provide Elevance with post-termination services at competitive benchmark pricing for one year following any termination by Elevance. Elevance claimed it is entitled to $13 billion in additional pricing concessions over the remaining term of the agreement, as well as $1.8 billion for one year following any contract termination by Elevance and $150 million damages for service issues ("Elevance's Allegations"). On April 19, 2016, in response to Elevance's complaint, Express Scripts filed its answer denying Elevance's Allegations in their entirety and asserting affirmative defenses and counterclaims against Elevance. The court subsequently granted Elevance's motion to dismiss two of six counts of Express Scripts' amended counterclaims. Express Scripts filed its Motion for Summary Judgment on August 27, 2021. Elevance completed filing of its Response to Express Scripts' Motion for Summary Judgment on October 16, 2021. Express Scripts filed its Reply in Support of its Motion for Summary Judgment on November 19, 2021. On March 31, 2022, the court granted summary judgment in favor of Express Scripts on all of Elevance's pricing claims for damages totaling $14.8 billion and on most of Elevance's claims relating to service issues. Elevance's only remaining service claims relate to the review or processing of prior authorizations. On June 10, 2022, Express Scripts filed a Motion for Partial Summary Judgment seeking to limit Elevance's remaining prior authorization claims and a Motion to Exclude certain opinions offered by its experts. Elevance filed its opposition to both motions, and a cross-motion to submit a supplemental expert report, on July 9, 2022. Express Scripts' pending Motions were fully briefed at the end of July 2022.
Medicare Advantage. A qui tam action that was filed by a private individual on behalf of the government in the United States District Court for the Southern District of New York in 2017 was unsealed on August 6, 2020. The action asserts claims related to risk adjustment practices arising from certain health exams conducted as part of the Company's Medicare Advantage business. In September 2021, the qui tam action was transferred to the United States District Court for the Middle District of Tennessee. On
January 11, 2022, the U.S. Department of Justice ("DOJ") (U.S. Attorney's Offices for the Southern District of New York and the Middle District of Tennessee) filed a motion to partially intervene, which was granted on August 2, 2022. On October 14, 2022, the DOJ filed its complaint-in-intervention alleging that certain diagnoses made during in-home exams were invalid for risk adjustment purposes, seeking unspecified damages and penalties under the federal False Claims Act. The Company filed motions to dismiss the DOJ's complaint and the remainder of the qui tam complaint on December 16, 2022. Briefing is ongoing.
Regulatory Matters
Civil Investigative Demand. The DOJ is conducting industry-wide investigations of Medicare Advantage organizations' risk adjustment practices. For certain Medicare Advantage organizations, including The Cigna Group, those investigations have resulted in litigation (see "Litigation Matters—Medicare Advantage" above). The Company is currently responding to information requests (civil investigative demands) from the DOJ (U.S. Attorney's Office for the Eastern District of Pennsylvania). The Company is cooperating with the DOJ and continues to respond to its requests.
Note 24 – Segment Information
See Note 1 for a description of our segments. On February 13, 2023, we changed the name of our Evernorth segment to Evernorth Health Services. We will not distinguish between our prior and current segment name and will refer to our current segment name. A description of our basis for reporting segment operating results is outlined below. Intersegment revenues primarily reflect pharmacy-related transactions between the Evernorth Health Services and Cigna Healthcare segments.
The Company uses "pre-tax adjusted income (loss) from operations" and "adjusted revenues" as its principal financial measures of segment operating performance because management believes these metrics best reflect the underlying results of business operations and permit analysis of trends in underlying revenue, expenses and profitability. We define pre-tax adjusted income from operations as income before income taxes excluding pre-tax income (loss) attributable to noncontrolling interests, net realized investment results, amortization of acquired intangible assets, and special items. The Cigna Group's share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting are also excluded. Special items are matters that management believes are not representative of the underlying results of operations due to their nature or size. Adjusted income (loss) from operations is measured on an after-tax basis for consolidated results and on a pre-tax basis for segment results.
The Company defines adjusted revenues as total revenues excluding the following adjustments: special items and The Cigna Group's share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting. Special items are matters that management believes are not representative of the underlying results of operations due to their nature or size. We exclude these items from this measure because management believes they are not indicative of past or future underlying performance of the business.
The Company does not report total assets by segment because this is not a metric used to allocate resources or evaluate segment performance.
The following table presents the special items charges (benefits) recorded by the Company, as well as the respective financial statement line items impacted:
| For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Pre-tax | After-tax | Pre-tax | After-tax | Pre-tax | After-tax | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Integration and transaction-related costs (Selling, general and administrative expenses) | $ | 135 | $ | 103 | $ | 169 | $ | 71 | $ | 527 | $ | 404 | |||||||||||||||||||||||||||||||||||||||||||||||
| Charge for organizational efficiency plan (Selling, general and administrative expenses) | 22 | 17 | 168 | 119 | 31 | 24 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Benefits) charges associated with litigation matters (Selling, general and administrative expenses) | (28) | (20) | (27) | (21) | 25 | 19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Gain) on sale of businesses | (1,662) | (1,332) | — | — | (4,203) | (3,217) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt extinguishment costs | — | — | 141 | 110 | 199 | 151 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk corridors recovery (Selling, general and administrative expenses) | — | — | — | — | (101) | (76) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contractual adjustment for a former client (Pharmacy revenues) | — | — | — | — | (204) | (155) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total impact from special items | $ | (1,533) | $ | (1,232) | $ | 451 | $ | 279 | $ | (3,726) | $ | (2,850) |
Summarized segment financial information was as follows:
| (In millions) | Evernorth Health Services | Cigna Healthcare | Other Operations | Corporate and Eliminations | Total | |||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 135,786 | $ | 41,737 | $ | 1,838 | $ | — | $ | 179,361 | ||||||||||||||||||||||
| Intersegment revenues | 4,463 | 2,535 | — | (6,998) | ||||||||||||||||||||||||||||
| Net investment income | 86 | 638 | 424 | 7 | 1,155 | |||||||||||||||||||||||||||
| Total revenues | 140,335 | 44,910 | 2,262 | (6,991) | 180,516 | |||||||||||||||||||||||||||
| Net realized investment results from certain equity method investments | — | 126 | — | — | 126 | |||||||||||||||||||||||||||
| Adjusted revenues | $ | 140,335 | $ | 45,036 | $ | 2,262 | $ | (6,991) | $ | 180,642 | ||||||||||||||||||||||
| Depreciation and amortization | $ | 2,283 | $ | 638 | $ | 6 | $ | 10 | $ | 2,937 | ||||||||||||||||||||||
| Income (loss) before income taxes | $ | 4,421 | $ | 3,443 | $ | 2,084 | $ | (1,595) | $ | 8,353 | ||||||||||||||||||||||
| Pre-tax adjustments to reconcile to adjusted income from operations | ||||||||||||||||||||||||||||||||
| (Income) attributable to noncontrolling interests | (66) | (4) | (14) | — | (84) | |||||||||||||||||||||||||||
| Net realized investment losses (1) | — | 530 | 91 | — | 621 | |||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 1,772 | 103 | 1 | — | 1,876 | |||||||||||||||||||||||||||
| Special items | ||||||||||||||||||||||||||||||||
| Integration and transaction-related costs | — | — | — | 135 | 135 | |||||||||||||||||||||||||||
| Charge for organizational efficiency plan | — | — | — | 22 | 22 | |||||||||||||||||||||||||||
| (Benefits) associated with litigation matters | — | — | — | (28) | (28) | |||||||||||||||||||||||||||
| (Gain) on sale of businesses | — | — | (1,662) | — | (1,662) | |||||||||||||||||||||||||||
| Pre-tax adjusted income (loss) from operations | $ | 6,127 | $ | 4,072 | $ | 500 | $ | (1,466) | $ | 9,233 | ||||||||||||||||||||||
| (In millions) | Evernorth Health Services | Cigna Healthcare | Other Operations | Corporate and Eliminations | Total | |||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 127,692 | $ | 41,378 | $ | 3,459 | $ | — | $ | 172,529 | ||||||||||||||||||||||
| Intersegment revenues | 4,203 | 2,271 | — | (6,474) | ||||||||||||||||||||||||||||
| Net investment income (loss) | 17 | 1,003 | 530 | (1) | 1,549 | |||||||||||||||||||||||||||
| Total revenues | 131,912 | 44,652 | 3,989 | (6,475) | 174,078 | |||||||||||||||||||||||||||
| Net realized investment results from certain equity method investments | — | — | — | — | — | |||||||||||||||||||||||||||
| Adjusted revenues | $ | 131,912 | $ | 44,652 | $ | 3,989 | $ | (6,475) | $ | 174,078 | ||||||||||||||||||||||
| Depreciation and amortization | $ | 2,316 | $ | 551 | $ | 52 | $ | 4 | $ | 2,923 | ||||||||||||||||||||||
| Income (loss) before income taxes | $ | 3,908 | $ | 3,812 | $ | 852 | $ | (1,790) | $ | 6,782 | ||||||||||||||||||||||
| Pre-tax adjustments to reconcile to adjusted income from operations | ||||||||||||||||||||||||||||||||
| (Income) attributable to noncontrolling interests | (31) | (3) | (24) | — | (58) | |||||||||||||||||||||||||||
| Net realized investment losses (gains) (1) | 4 | (247) | 47 | — | (196) | |||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 1,937 | 47 | 14 | — | 1,998 | |||||||||||||||||||||||||||
| Special items | ||||||||||||||||||||||||||||||||
| Integration and transaction-related costs | — | — | — | 169 | 169 | |||||||||||||||||||||||||||
| Charge for organizational efficiency plan | — | — | — | 168 | 168 | |||||||||||||||||||||||||||
| (Benefits) associated with litigation matters | — | — | — | (27) | (27) | |||||||||||||||||||||||||||
| Debt extinguishment costs | — | — | — | 141 | 141 | |||||||||||||||||||||||||||
| Pre-tax adjusted income (loss) from operations | $ | 5,818 | $ | 3,609 | $ | 889 | $ | (1,339) | $ | 8,977 |
(1) Includes the Company's share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting.
| (In millions) | Evernorth Health Services | Cigna Healthcare | Other Operations | Corporate and Eliminations | Total | |||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 112,647 | $ | 38,826 | $ | 7,684 | $ | — | $ | 159,157 | ||||||||||||||||||||||
| Intersegment revenues | 3,655 | 1,966 | 23 | (5,644) | ||||||||||||||||||||||||||||
| Net investment income | 32 | 473 | 739 | — | 1,244 | |||||||||||||||||||||||||||
| Total revenues | 116,334 | 41,265 | 8,446 | (5,644) | 160,401 | |||||||||||||||||||||||||||
| Net realized investment results from certain equity method investments | — | (130) | — | — | (130) | |||||||||||||||||||||||||||
| Special item related to contractual adjustment for a former client | (204) | — | — | — | (204) | |||||||||||||||||||||||||||
| Adjusted revenues | $ | 116,130 | $ | 41,135 | $ | 8,446 | $ | (5,644) | $ | 160,067 | ||||||||||||||||||||||
| Depreciation and amortization | $ | 2,248 | $ | 458 | $ | 71 | $ | 25 | $ | 2,802 | ||||||||||||||||||||||
| Income (loss) before income taxes | $ | 3,684 | $ | 4,291 | $ | 5,227 | $ | (2,334) | $ | 10,868 | ||||||||||||||||||||||
| Pre-tax adjustments to reconcile to adjusted income from operations | ||||||||||||||||||||||||||||||||
| (Income) attributable to noncontrolling interests | (17) | (1) | (19) | — | (37) | |||||||||||||||||||||||||||
| Net realized investment (gains) (1) | (17) | (202) | (60) | — | (279) | |||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 1,917 | 44 | 21 | — | 1,982 | |||||||||||||||||||||||||||
| Special items | ||||||||||||||||||||||||||||||||
| Integration and transaction-related costs | — | — | — | 527 | 527 | |||||||||||||||||||||||||||
| Charge for organizational efficiency plan | — | — | — | 31 | 31 | |||||||||||||||||||||||||||
| Charges associated with litigation matters | — | — | — | 25 | 25 | |||||||||||||||||||||||||||
| (Gain) on sale of businesses | — | — | (4,203) | — | (4,203) | |||||||||||||||||||||||||||
| Debt extinguishment costs | — | — | — | 199 | 199 | |||||||||||||||||||||||||||
| Risk corridors recovery | — | (101) | — | — | (101) | |||||||||||||||||||||||||||
| Contractual adjustment for a former client | (204) | — | — | — | (204) | |||||||||||||||||||||||||||
| Pre-tax adjusted income (loss) from operations | $ | 5,363 | $ | 4,031 | $ | 966 | $ | (1,552) | $ | 8,808 |
(1) Includes the Company's share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting.
Revenue from external customers includes Pharmacy revenues, Premiums and Fees and other revenues. The following table presents these revenues by product, premium and service type:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Products (Pharmacy revenues) (ASC 606) | ||||||||||||||||||||||||||||||||
| Network revenues | $ | 64,946 | $ | 64,992 | $ | 56,365 | ||||||||||||||||||||||||||
| Home delivery and specialty revenues | 61,283 | 54,391 | 49,906 | |||||||||||||||||||||||||||||
| Other revenues | 6,753 | 6,428 | 5,403 | |||||||||||||||||||||||||||||
| Intercompany eliminations | (4,416) | (4,398) | (3,905) | |||||||||||||||||||||||||||||
| Total pharmacy revenues | 128,566 | 121,413 | 107,769 | |||||||||||||||||||||||||||||
| Insurance premiums (ASC 944) | ||||||||||||||||||||||||||||||||
| Cigna Healthcare | ||||||||||||||||||||||||||||||||
| U.S. Commercial | ||||||||||||||||||||||||||||||||
| Insured | 15,199 | 14,315 | 13,389 | |||||||||||||||||||||||||||||
| Stop loss | 5,461 | 4,868 | 4,614 | |||||||||||||||||||||||||||||
| Other | 1,418 | 1,290 | 1,135 | |||||||||||||||||||||||||||||
| U.S. Government | ||||||||||||||||||||||||||||||||
| Medicare Advantage | 7,896 | 8,362 | 7,565 | |||||||||||||||||||||||||||||
| Medicare Part D | 1,224 | 1,499 | 1,593 | |||||||||||||||||||||||||||||
| Other | 3,990 | 4,815 | 4,301 | |||||||||||||||||||||||||||||
| International Health | 2,906 | 2,588 | 2,472 | |||||||||||||||||||||||||||||
| Total Cigna Healthcare | 38,094 | 37,737 | 35,069 | |||||||||||||||||||||||||||||
| Divested International businesses | 1,596 | 3,205 | 3,039 | |||||||||||||||||||||||||||||
| Domestic disability, life and accident | — | — | 4,423 | |||||||||||||||||||||||||||||
| Other | 224 | 221 | 124 | |||||||||||||||||||||||||||||
| Intercompany eliminations | 1 | (9) | (28) | |||||||||||||||||||||||||||||
| Total premiums | 39,915 | 41,154 | 42,627 | |||||||||||||||||||||||||||||
| Services (Fees) (ASC 606) | ||||||||||||||||||||||||||||||||
| Evernorth Health Services | 7,234 | 6,070 | 4,611 | |||||||||||||||||||||||||||||
| Cigna Healthcare | 6,053 | 5,743 | 5,491 | |||||||||||||||||||||||||||||
| Other Operations | 9 | 19 | 116 | |||||||||||||||||||||||||||||
| Other revenues | 167 | 197 | 254 | |||||||||||||||||||||||||||||
| Intercompany eliminations | (2,583) | (2,067) | (1,711) | |||||||||||||||||||||||||||||
| Total fees and other revenues | 10,880 | 9,962 | 8,761 | |||||||||||||||||||||||||||||
| Total revenues from external customers | $ | 179,361 | $ | 172,529 | $ | 159,157 |
U.S. and foreign revenues from external customers are shown below. The Company's foreign revenues are generated by its foreign operating entities. In the periods shown, no single foreign country contributed more than 2% of consolidated revenues from external customers.
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| United States | $ | 174,539 | $ | 166,626 | $ | 154,042 | ||||||||||||||
| Foreign countries (1) | 4,822 | 5,903 | 5,115 | |||||||||||||||||
| Total | $ | 179,361 | $ | 172,529 | $ | 159,157 |
(1) The divested International businesses as described in Note 4 comprised $1.6 billion, $3.2 billion and $3.1 billion in 2022, 2021 and 2020, respectively.
Revenues from U.S. Federal Government agencies, under a number of contracts, were 14% of consolidated revenues in 2022 and 2021 and 15% in 2020. These amounts were reported in the Evernorth Health Services and Cigna Healthcare segments.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE