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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the transition period from            to           

 

Commission file number 1-08323

 

Cigna Corporation

(Exact name of registrant as specified in its charter)

 

Delaware		06-1059331
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
900 Cottage Grove Road Bloomfield, Connecticut		06002
(Address of principal executive offices)		(Zip Code)
(860) 226-6000
Registrant’s telephone number, including area code
(860) 226-6741
Registrant’s facsimile number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark					YES		NO
·     whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.					R		o
·   whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).					R		o
·     whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company o		Emerging growth company   o
·     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
·     whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).					o		R

 

As of April 14, 2017,  256,014,619 shares of the issuer’s common stock were outstanding.

 

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Cigna Corporation

 

TABLE OF CONTENTS

 

 

PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income	1
	Consolidated Statements of Comprehensive Income	2
	Consolidated Balance Sheets	3
	Consolidated Statements of Changes in Total Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1.A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 4.	Mine Safety Disclosures	68
Item 6.	Exhibits	69
SIGNATURE		70
INDEX TO EXHIBITS		E-1

 

 

As used herein, “Cigna” or the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.

 

Table of Contents

 

Part I.    FINANCIAL INFORMATION

 

 

 

 

 

Item 1.    FINANCIAL STATEMENTS

 

 

Cigna Corporation

Consolidated Statements of Income

 

		Unaudited
		Three Months Ended
		March 31,
(In millions, except per share amounts)		2017			2016
Revenues
Premiums		$	8,103		$	7,746
Fees and other revenues		1,223			1,201
Net investment income		303			272
Mail order pharmacy revenues		710			697
Realized investment gains (losses):
Other-than-temporary impairments on fixed maturities		(7)			(27)
Other realized investment gains (losses), net		53			(5)
Net realized investment gains (losses)		46			(32)
TOTAL REVENUES		10,385			9,884
Benefits and Expenses
Global Health Care medical costs		4,985			4,761
Other benefit expenses		1,367			1,368
Mail order pharmacy costs		581			574
Other operating expenses		2,530			2,321
Amortization of other acquired intangible assets, net		32			41
TOTAL BENEFITS AND EXPENSES		9,495			9,065
Income before Income Taxes		890			819
Income taxes:
Current		286			294
Deferred		11			11
TOTAL INCOME TAXES		297			305
Net Income		593			514
Less: Net (Loss) Attributable to Noncontrolling Interests		(5)			(5)
SHAREHOLDERS’ NET INCOME		$	598		$	519
Shareholders’ Net Income Per Share:
Basic		$	2.34		$	2.04
Diluted		$	2.30		$	2.00
Dividends Declared Per Share		$	0.04		$	0.04

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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Cigna Corporation

Consolidated Statements of Comprehensive Income

 

		Unaudited
		Three Months Ended
		March 31,
(In millions)		2017			2016
Shareholders’ net income		$	598		$	519
Shareholders’ other comprehensive income, net of tax:
Net unrealized appreciation, securities		7			173
Net unrealized (depreciation), derivatives		(3 )			(3)
Net translation of foreign currencies		112			81
Postretirement benefits liability adjustment		14			11
Shareholders’ other comprehensive income, net of tax		130			262
Shareholders’ comprehensive income		728			781
Comprehensive income (loss) attributable to noncontrolling interests:
Net (loss) attributable to redeemable noncontrolling interests		(2 )			(1)
Net (loss) attributable to other noncontrolling interests		(3 )			(4)
Other comprehensive income (loss) attributable to redeemable noncontrolling interests		(2 )			3
Total comprehensive (loss) attributable to noncontrolling interests		(7 )			(2)
TOTAL COMPREHENSIVE INCOME		$	721		$	779

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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Cigna Corporation

Consolidated Balance Sheets

 

		Unaudited
		As of			As of
		March 31,			December 31,
(In millions, except per share amounts)		2017			2016
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $20,639; $19,942)		$	21,734		$	20,961
Equity securities, at fair value (cost, $584; $583)		574			583
Commercial mortgage loans		1,752			1,666
Policy loans		1,431			1,452
Other long-term investments		1,465			1,462
Short-term investments		303			691
Total investments		27,259			26,815
Cash and cash equivalents		4,155			3,185
Premiums, accounts and notes receivable, net		3,154			3,077
Reinsurance recoverables		6,386			6,478
Deferred policy acquisition costs		1,982			1,818
Property and equipment		1,519			1,536
Deferred tax assets, net		263			304
Goodwill		5,982			5,980
Other assets, including other intangibles		2,250			2,227
Separate account assets		8,197			7,940
TOTAL ASSETS		$	61,147		$	59,360
Liabilities
Contractholder deposit funds		$	8,415		$	8,458
Future policy benefits		9,840			9,648
Unpaid claims and claim expenses		5,006			4,917
Global Health Care medical costs payable		2,770			2,532
Unearned premiums		1,204			634
Total insurance and contractholder liabilities		27,235			26,189
Accounts payable, accrued expenses and other liabilities		6,667			6,414
Short-term debt		142			276
Long-term debt		4,621			4,756
Separate account liabilities		8,197			7,940
TOTAL LIABILITIES		46,862			45,575
Contingencies — Note 16
Redeemable noncontrolling interests		56			58
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 296; authorized, 600)		74			74
Additional paid-in capital		2,912			2,892
Accumulated other comprehensive (loss)		(1,252)			(1,382)
Retained earnings		14,356			13,855
Less treasury stock, at cost		(1,864)			(1,716)
TOTAL SHAREHOLDERS’ EQUITY		14,226			13,723
Other noncontrolling interests		3			4
Total equity		14,229			13,727
Total liabilities and equity		$	61,147		$	59,360
SHAREHOLDERS’ EQUITY PER SHARE		$	55.52		$	53.42

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

								Accumulated																		Redeemable
Unaudited					Additional			Other												Other non-						Non-
For the three months ended March 31, 2017		Common			Paid-in			Comprehensive			Retained			Treasury			Shareholders’			controlling			Total			controlling
(In millions)		Stock			Capital			Loss			Earnings			Stock			Equity			Interests			Equity			Interests
Balance at January 1, 2017		$	74		$	2,892		$	(1,382)		$	13,855		$	(1,716 )		$	13,723		$	4		$	13,727		$	58
Effect of issuing stock for employee benefit plans					23						(87 )			102			38						38
Other comprehensive income (loss)								130									130						130			(2 )
Net income (loss)											598						598			(3 )			595			(2 )
Common dividends declared (per share: $0.04)											(10 )						(10 )						(10 )
Repurchase of common stock														(250 )			(250 )						(250 )
Other transactions impacting noncontrolling interests					(3)												(3 )			2			(1 )			2
BALANCE AT MARCH 31, 2017		$	74		$	2,912		$	(1,252)		$	14,356		$	(1,864 )		$	14,226		$	3		$	14,229		$	56
For the three months ended March 31, 2016
Balance at January 1, 2016		$	74		$	2,859		$	(1,250)		$	12,121		$	(1,769)		$	12,035		$	9		$	12,044		$	69
Effect of issuing stock for employee benefit plans					21						(89)			53			(15)						(15)
Other comprehensive (loss)								262									262						262			3
Net income (loss)											519						519			(4)			515			(1)
Common dividends declared (per share: $0.04)											(10)						(10)						(10)
Repurchase of common stock														(110)			(110)						(110)
Other transactions impacting noncontrolling interests					(6)												(6)			4			(2)			2
BALANCE AT MARCH 31, 2016		$	74		$	2,874		$	(988)		$	12,541		$	(1,826 )		$	12,675		$	9		$	12,684		$	73

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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Cigna Corporation

Consolidated Statements of Cash Flows

 

 

		Unaudited
		Three Months Ended March 31,
(In millions)		2017				2016
Cash Flows from Operating Activities
Net income		$	593			$	514
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		146				158
Realized investment (gains) losses		(46)				32
Deferred income taxes		11				11
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable		(55)				(237)
Reinsurance recoverables		41				24
Deferred policy acquisition costs		(76)				(62)
Other assets		(22)				(57)
Insurance liabilities		868				507
Accounts payable, accrued expenses and other liabilities		(186)				(263)
Current income taxes		291				262
Distributions from partnership investments (1)		45				27
Other, net		(31)				5
NET CASH PROVIDED BY OPERATING ACTIVITIES (1)		1,579				921
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities and equity securities		414				361
Investment maturities and repayments:
Fixed maturities and equity securities		475				255
Commercial mortgage loans		21				18
Other sales, maturities and repayments (primarily short-term and other long-term investments) (1)		667				75
Investments purchased or originated:
Fixed maturities and equity securities		(1,240)				(758)
Commercial mortgage loans		(107)				(1)
Other (primarily short-term and other long-term investments)		(256)				(198)
Property and equipment purchases		(91)				(112)
NET CASH (USED IN) INVESTING ACTIVITIES (1)		(117)				(360)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		374				383
Withdrawals and benefit payments from contractholder deposit funds		(385)				(343)
Net change in short-term debt		(10)				(6)
Repayment of long-term debt		(250)				—
Repurchase of common stock		(239)				(139)
Issuance of common stock		38				10
Other, net		(43)				(51)
NET CASH (USED IN) FINANCING ACTIVITIES		(515)				(146)
Effect of foreign currency rate changes on cash and cash equivalents		23				18
Net increase in cash and cash equivalents		970				433
Cash and cash equivalents, January 1,			3,185				1,968
Cash and cash equivalents, March 31,		$	4,155			$	2,401
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds		$	(8)			$	37
Interest paid		$	70			$	69

 

(1) As required in adopting Accounting Standard Update (“ASU”) 2016-15, the Company retrospectively reclassified $27 million of cash distributions from partnership earnings from investing to operating activities for the first quarter of 2016.  The comparable amount reported in operating activities in 2017 was $45 million.  See Note 2 for further discussion.

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TABLE OF CONTENTS

 

Note Number	Footnote	Page
BUSINESS AND CAPITAL STRUCTURE
1	Description of Business	7
2	Significant Accounting Policies	8
3	Mergers and Acquisitions	10
4	Earnings Per Share	11
5	Debt	12
INSURANCE INFORMATION
6	Global Health Care Medical Costs Payable	13
7	Liabilities for Unpaid Claims and Claim Expenses	14
8	Reinsurance	15
INVESTMENTS
9	Fair Value Measurements	18
10	Investments	28
11	Derivatives	33
12	Variable Interest Entities	35
13	Accumulated Other Comprehensive Income (Loss)	36
WORKFORCE MANAGEMENT AND COMPENSATION
14	Pension and Other Postretirement Benefit Plans	37
COMPLIANCE, REGULATION AND CONTINGENCIES
15	Income Taxes	37
16	Contingencies and Other Matters	38
RESULTS DETAILS
17	Segment Information	43

 

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Note 1 – Description of Business

 

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”)  is a global health services organization dedicated to a mission of helping individuals improve their health, well-being and sense of security.  To execute on our mission, Cigna’s strategy is to “Go Deep”, “Go Global” and “Go Individual” with a differentiated set of medical, dental, disability, life and accident insurance and related products and services offered by our insurance and other subsidiaries.  The majority of these products are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations).  Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the U.S. and selected international markets.  In addition to its ongoing operations described above, Cigna also has certain run-off operations.

 

The financial results of the Company’s businesses are reported in the following segments:

 

Global Health Care aggregates the Commercial and Government operating segments due to their similar economic characteristics, products and services and regulatory environment:

 

·       The Commercial operating segment encompasses both the U.S. commercial and certain international health care businesses serving employers and their employees, other groups and individuals.  Products and services include medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services to insured and self-insured customers.

 

·       The Government operating segment offers Medicare Advantage and Medicare Part D plans to seniors.  This segment also offers Medicaid plans in selected markets.

 

Global Supplemental Benefits includes supplemental health, life and accident insurance products offered in selected international markets and in the U.S.

 

Group Disability and Life provides group long-term and short-term disability, group life, accident and specialty insurance products and related services.

 

Other Operations consist of:

 

·       corporate-owned life insurance (“COLI”);

 

·       run-off reinsurance business that is predominantly comprised of guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) in 2013;

 

·       deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and

 

·       run-off settlement annuity business.

 

Corporate reflects amounts not allocated to operating segments, such as net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment operations), interest on uncertain tax positions, certain litigation matters, intersegment eliminations, compensation cost for stock options, excess tax benefits on stock compensation, expense associated with frozen pension plans and certain costs for corporate projects, including overhead.

 

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Note 2 – Significant Accounting Policies

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of Cigna Corporation and its 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”).  Amounts recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment valuation, 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.  Certain reclassifications may be made to prior year amounts to conform to the current presentation.

 

These interim Consolidated Financial Statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported.  The interim Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s 2016 Annual Report on Form 10-K (“2016 Form 10-K”).  The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates.  This and certain other factors, including the seasonal nature of portions of the health care and related benefits business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.

 

Recent Accounting Pronouncements

 

The Company’s 2016 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.

 

The following tables provide information about recently adopted and recently issued or changed accounting guidance (applicable to Cigna) that have occurred since the Company filed its 2016 Form 10-K.

 

Recently Adopted Accounting Guidance

 

Accounting Standard and Adoption Date		Requirements and Effects of Adopting New Guidance
Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (Accounting Standards Update (“ASU”) 2016-15)		Specifies how certain transactions should be classified in the statement of cash flows. While the standard addresses multiple types of transactions, only a change in the treatment of distributions from equity method investments impacted the Company.
Early adopted as of December 31, 2016		Effects of adoption: using the nature of distribution approach, the Company reported $45 million of cash receipts related to distributions from partnership earnings in operating activities for the three months ended March 31, 2017. The Company reclassified $27 million for the three months ended March 31, 2016 from investing to operating activities in the Consolidated Statements of Cash Flows.

 

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Recently Issued Accounting Guidance Not Yet Adopted

 

Accounting Standard and Effective Date Applicable for Cigna		Requirements and Expected Effects of New Guidance Not Yet Adopted
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)     Required as of January 1, 2018		Requires employers to separate the service cost component from the other components of net benefit cost.  Under the new guidance, only service cost is eligible for capitalization (either deferred policy acquisition costs or capitalized software).  The change in the capitalization rule is to be applied prospectively upon adoption.  In addition, the income statement caption(s) where each component of net benefit cost is presented must be disclosed.   Expected effects: the Company expects the effect of this new guidance to be immaterial to its results of operations.
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)         Required as of January 1, 2018		Requires:   · Entities to measure equity investments at fair value in net income if they are neither consolidated nor accounted for under the equity method · Cumulative effect adjustment to the beginning balance of retained earnings at adoption     Expected effects:   · Certain limited partnership interests carried at cost of $240 million as of March 31, 2017 will be reported at fair value at adoption · An increase to retained earnings of approximately $50 million, after-tax, if implemented as of March 31, 2017.  Actual cumulative effect adjustment will depend on investments held and market conditions at adoption.
Revenue from Contracts with Customers (ASU 2014-09 and related amendments)   Required as of January 1, 2018, with early adoption permitted as of January 1, 2017		Requires:   · Companies to estimate and allocate the expected customer contract revenues among distinct goods or services based on relative standalone selling prices · Revenues to be recognized as goods or services are delivered · Extensive new disclosures including the presentation of additional categories of revenues and information about related contract assets and liabilities · Adoption through retrospective restatement with or without using certain practical expedients or adoption with a cumulative effect adjustment   Expected effects:   · Applies to the Company’s non-insurance, administrative service contracts but does not apply to certain contracts within the scope of other GAAP, such as insurance contracts · The Company currently expects to adopt the new guidance as of January 1, 2018 through retrospective restatement · The Company does not currently expect the adoption of the new guidance to have a material impact to its pattern of revenue recognition or net income · The Company is continuing to evaluate the new requirements.  Specifically, the Company is evaluating the combination of contract guidance for certain customers when the Company provides both insurance and non-insurance products, the deferral of revenue for services provided after the termination of certain administrative contracts and the Company’s status as principal or agent for certain performance obligations.

 

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Note 3 – Mergers and Acquisitions

 

Proposed Merger

 

On July 23, 2015, the Company entered into a merger agreement with Anthem, Inc. (“Anthem”) and Anthem Merger Sub Corp. (“Merger Sub”), a direct wholly-owned subsidiary of Anthem.

 

The merger agreement provides (a) for the merger of the Company and Merger Sub, with the Company continuing as the surviving corporation and (b) if certain tax opinions are delivered, immediately following the completion of the initial merger, for the surviving corporation to be merged with and into Anthem, with Anthem continuing as the surviving corporation (collectively, the “merger”).  Subject to certain terms, conditions, and customary operating covenants, each share of Cigna common stock issued and outstanding immediately prior to the effective time of the merger would be converted into the right to receive (a) $103.40 in cash, without interest, and (b) 0.5152 of a share of Anthem common stock.  The closing price of Anthem common stock on May 4, 2017 was $179.89.

 

At special shareholders’ meetings held in December 2015, Cigna shareholders approved the merger and Anthem shareholders approved the issuance of shares of Anthem common stock in connection with the merger.  Completing the merger remains subject to certain customary conditions, including the receipt of certain necessary governmental and regulatory approvals and the absence of a legal restraint prohibiting the merger.  Completing the merger is not subject to a financing condition.

 

On July 21, 2016, the U.S. Department of Justice (“DOJ”) and certain state attorneys general filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia (the “District Court”) seeking to block the merger and, on January 4, 2017, the parties concluded the District Court trial .

 

On January 18, 2017, the Company received a written notice from Anthem seeking to extend the termination date of the merger agreement from January 31, 2017 to April 30, 2017.

 

On February 8, 2017, the District Court issued an order enjoining the proposed merger.  Anthem filed a notice of appeal of the District Court’s order with the U.S. Court of Appeals for the District of Columbia Circuit (the “Appeals Court”) and requested an expedited appeal.

 

On February 14, 2017, the Company delivered a notice to Anthem terminating the merger agreement and filed suit in the Delaware Court of Chancery (the “Chancery Court”) seeking, among other things, declaratory judgment that Cigna’s termination of the merger agreement is lawful and that Anthem does not have the right to extend the merger agreement termination date.  Later that day, Anthem filed a lawsuit in the Chancery Court against the Company seeking, among other things, a temporary restraining order to enjoin Cigna from terminating the merger agreement, specific performance and damages, and, on February 15, 2017, the Chancery Court issued an order temporarily enjoining the Company from terminating the merger agreement.  This order will be subject to further review at a preliminary injunction hearing scheduled for May 8, 2017.

 

On February 17, 2017, the Appeals Court granted Anthem’s motion for an expedited appeal.  That same day, the Company filed its notice of appeal of the District Court’s order enjoining the merger with the Appeals Court.  Oral arguments were heard on March 24, 2017.  On April 28, 2017, the Appeals Court affirmed the decision of the District Court. On May 5, 2017, Anthem filed a petition for a writ of certiorari with the United States Supreme Court seeking appeal of the U.S. Court of Appeals decision affirming the District Court’s order enjoining the merger.

 

The merger agreement contains customary covenants, including covenants that Cigna conduct its business in the ordinary course during the period between entering into the merger agreement and closing.  In addition, Cigna’s ability to take certain actions prior to closing without Anthem’s consent is subject to certain limitations.  These limitations relate to, among other matters, the payment of dividends, capital expenditures, the payment or retirement of indebtedness or the incurrence of new indebtedness, settlement of material claims or proceedings, mergers or acquisitions, and certain employment-related matters.

 

The Company incurred $63 million pre-tax ($49 million after-tax) for the three months ended March 31, 2017 in costs directly related to the proposed merger.  Comparable merger-related costs for the three months ended March 31, 2016 were $40 million pre-tax ($36 million after-tax).  Since entering into this merger agreement in 2015, the Company has incurred pre-tax merger-related costs of approximately $295 million that primarily consisted of fees for legal, advisory and other professional services.  If the merger is consummated, a significant portion of these merger-related costs would not be deductible for federal income tax purposes.  If the merger is not consummated, these otherwise non-deductible costs would become tax deductible for federal income tax purposes, resulting in an incremental tax benefit of approximately $60 million.

 

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Note 4 – Earnings Per Share (“EPS”)

 

 

Basic and diluted earnings per share were computed as follows:

 

		Three Months Ended
		March 31, 2017									March 31, 2016
(Shares in thousands, dollars in millions, except per share amounts)		Basic			Effect of Dilution			Diluted			Basic			Effect of Dilution			Diluted
Shareholders’ net income		$	598					$	598		$	519					$	519
Shares:
Weighted average		255,680						255,680			254,822						254,822
Common stock equivalents					4,094			4,094						4,625			4,625
Total shares		255,680			4,094			259,774			254,822			4,625			259,447
EPS		$	2.34		$	(0.04)		$	2.30		$	2.04		$	(0.04)		$	2.00

 

The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three months ended March 31, 2017 and 2016 because their effect was anti-dilutive.

 

		Three Months Ended
(In millions)		March 31, 2017		March 31, 2016
Anti-dilutive options		2.5		1.3

 

The Company held 39,928,289 shares of common stock in Treasury as of March 31, 2017, and 39,638,264 shares as of March 31, 2016.

 

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Table of Contents

 

Note 5 — Debt

 

 

The outstanding amounts of debt and capital leases were as follows:

 

		March 31,			December 31,
(In millions)		2017			2016
Short-term:
Current maturities of long-term debt		$	1 31		$	250
Other, including capital leases		11			26
Total short-term debt		$	142		$	276
Long-term:
$131 million, 6.35% Notes due 2018		$	-		$	131
$250 million, 4.375% Notes due 2020 (1)		252			252
$300 million, 5.125% Notes due 2020 (1)		301			301
$78 million, 6.37% Notes due 2021		78			78
$300 million, 4.5% Notes due 2021 (1)		301			302
$750 million, 4% Notes due 2022		744			744
$100 million, 7.65% Notes due 2023		100			100
$17 million, 8.3% Notes due 2023		17			17
$900 million, 3.25% Notes due 2025		893			893
$300 million, 7.875% Debentures due 2027		299			299
$83 million, 8.3% Step Down Notes due 2033		82			82
$500 million, 6.15% Notes due 2036		498			498
$300 million, 5.875% Notes due 2041		296			296
$750 million, 5.375% Notes due 2042		743			743
Other, including capital leases		17			20
Total long-term debt		$	4,621		$	4,756

 

( 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.

 

The Company repaid $250 million of long-term notes that matured in the first quarter of 2017.

 

The Company has a five-year revolving credit and letter of credit agreement for $1.5 billion that permits up to $500 million to be used for letters of credit.  This agreement extends through December 12, 2019 and is diversified among 16 banks, with three banks each having 12% of the commitment and the remainder spread among 13 banks in varying amounts.  The credit agreement includes options subject to consent by the administrative agent and the committing banks to increase the commitment amount to $2 billion and to extend the term past December 12, 2019.  The credit agreement is available for general corporate purposes, including for the issuance of letters of credit.  The credit agreement contains customary covenants and restrictions, including a financial covenant that the Company may not permit its leverage ratio – which is total consolidated debt to total consolidated capitalization (each as defined in the credit agreement) – to be greater than 0.50.  The leverage ratio calculation excludes the following items that are included in accumulated other comprehensive loss on the Company’s consolidated balance sheets: net unrealized appreciation on fixed maturities and the portion of the post-retirement benefits liability adjustment attributable to pension.

 

In addition to the $4.8 billion of debt outstanding as of March 31, 2017, the Company had $10.5 billion of borrowing capacity within the maximum debt coverage covenant in the credit agreement.  This additional borrowing capacity includes the $1.5 billion available under the credit agreement.  Letters of credit outstanding as of March 31, 2017 totaled $13 million.

 

The Company was in compliance with its debt covenants as of March 31, 2017.

 

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