CIGNA CORP | 2013 | FY | 3


Note 3Acquisitions and Dispositions

 

The Company may from time to time acquire or dispose of assets, subsidiaries or lines of business.  Significant transactions are described below.

 

 

On November 9, 2012, the Company acquired 51% of the total shares of Finans Emeklilik ve Hayat A.S. (“Finans Emeklilik”), a Turkish insurance company, from Finansbank A.S. (“Finansbank”), a Turkish retail bank, for a cash purchase price of approximately $116 million. Finansbank continues to hold 49% of the total shares. Finans Emeklilik operates in life insurance, accident insurance and pension product markets. The acquisition provides Cigna opportunities to reach and serve the growing middle class market in Turkey through Finansbank's network of retail banking branches.

 

In accordance with GAAP, the total purchase price, including the redeemable noncontrolling interest of $111 million, has been allocated to the tangible and intangible net assets acquired based on management's estimates of their fair value. Accordingly, approximately $113 million was allocated to identifiable intangible assets, primarily a distribution relationship and the value of business acquired ("VOBA") that represents the present value of the estimated net cash flows from the long duration contracts in force, with the remaining $116 million allocated to goodwill. The identifiable intangible assets will be amortized over an estimated useful life of approximately 10 years. Goodwill has been allocated to the Global Supplemental Benefits segment and is not deductible for federal income tax purposes.

 

The redeemable noncontrolling interest is classified as temporary equity in the Company's Consolidated Balance Sheet because Finansbank has the right to require the Company to purchase its 49% interest for the value of its net assets and the inforce business in 15 years.

 

The condensed balance sheet at the acquisition date was as follows:

 

(In millions)  
Investments$ 23
Cash and cash equivalents  54
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet)  26
Goodwill  116
Separate account assets  99
Other assets, including other intangibles  98
Total assets acquired  416
   
   
Insurance liabilities  58
Accounts payable, accrued expenses and other liabilities   32
Separate account liabilities  99
Total liabilities acquired  189
   
Redeemable noncontrolling interest  111
   
Net assets acquired$ 116

The results of Finans Emeklilik are included in the Company's Consolidated Financial Statements from the date of acquisition. The pro forma effects on total revenues and net income assuming the acquisition had occurred as of January 1, 2011 were not material to the Company for the years ended December 31, 2012 and 2011.

 

 

 

 

On August 31, 2012, the Company acquired Great American Supplemental Benefits Group, one of the largest providers of supplemental health insurance products in the U.S. with cash from internal resources. The acquisition provides the Company with an increased presence in the Medicare supplemental benefits market. It also extends the Company's global direct-to-consumer retail channel as well as further enhances its distribution network of agents and brokers. Results of this business are reported in the Global Supplemental Benefits segment.

 

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management's estimates of their fair value. Approximately $168 million was allocated to intangible assets, primarily the VOBA asset that will be amortized in proportion to premium recognized over the life of the contracts, primarily over 15 years. Amortization is expected to be higher in early years and decline as policies lapse. Goodwill has been allocated to the Global Supplemental Benefits segment. Substantially all of the goodwill is tax deductible and will be amortized over 15 years for federal income tax purposes.

 

The condensed balance sheet at the acquisition date was as follows:

 

(In millions)  
Investments$ 211
Cash and cash equivalents  36
Reinsurance recoverables  448
Goodwill  168
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet)  144
Other assets, including other intangibles  35
Total assets acquired  1,042
   
   
Insurance liabilities  707
Accounts payable, accrued expenses and other liabilities   9
Total liabilities acquired  716
   
Net assets acquired$ 326

 

The results of this business have been included in the Company's Consolidated Financial Statements from the date of acquisition. The pro forma effects on total revenues and net income assuming the acquisition had occurred as of January 1, 2011 were not material to the Company for the years ended December 31, 2012 and 2011.

 

 

On January 31, 2012 the Company acquired the outstanding shares of HealthSpring, Inc. (“HealthSpring”) for $55 per share in cash and Cigna stock awards, representing a cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 15 states and the District of Columbia, as well as a large, national stand-alone Medicare prescription drug business. The acquisition of HealthSpring strengthens the Company's ability to serve individuals across their life stages as well as deepens its presence in a number of geographic markets. The addition of HealthSpring brings industry leading physician partnership capabilities and creates the opportunity to deepen the Company's existing client and customer relationships, as well as facilitates a broader deployment of its range of health and wellness capabilities and product offerings. The Company funded the acquisition with internal cash resources.

 

 

 

 

 

 

       

 

 

 

 

Merger consideration of $3.8 billion was determined as follows:

(Dollars in millions, except per share amounts)   
HealthSpring, Inc. common shares outstanding at January 30, 2012 (In thousands)   67,828
Less: common shares outstanding not settled in cash (In thousands)   (100)
Common shares settled in cash (In thousands)   67,728
Price per share $ 55
Cash consideration for outstanding shares $ 3,725
Fair value of share-based compensation awards   65
Additional cash and equity consideration   21
Total merger consideration $ 3,811
    

Fair value of share-based compensation awards. On the date of the acquisition, HealthSpring employees' awards of options and restricted shares of HealthSpring stock were rolled over to Cigna stock options and restricted stock. Each holder of a HealthSpring stock option or restricted stock award received 1.24 Cigna stock options or restricted stock awards. The conversion ratio of 1.24 at the date of acquisition was determined by dividing the acquisition price of HealthSpring shares of $55 per share by the price of Cigna stock on January 31, 2012 of $44.43. The Cigna stock option exercise price was determined by using this same conversion ratio. Vesting periods and the remaining life of the options rolled over with the original HealthSpring awards.

 

The Company valued the share-based compensation awards as of the acquisition date using Cigna's stock price for restricted stock and a Black-Scholes pricing model for stock options. The assumptions used were generally consistent with those disclosed in Note 20 to the Company's 2012 Consolidated Financial Statements, except the expected life assumption of these options ranged from 1.8 to 4.8 years and the exercise price did not equal the market value at the grant date. Fair value of the new stock options approximated intrinsic value because the exercise price at the acquisition date for substantially all of the options was significantly below Cigna's stock price.

 

The fair value of these options and restricted stock awards was included in the purchase price to the extent that services had been provided prior to the acquisition based on the grant date of the original HealthSpring awards and vesting periods. The remaining fair value not included in the purchase price was recorded as compensation expense subsequent to the acquisition date over the remaining vesting periods. Most of the expense was recognized in 2012 and 2013.

 

The following table summarizes the effect of these rollover awards for former HealthSpring employees.

              
             Compensation
(Awards in thousands,Number of   Average exercise/  Fair value  Included in  expense
dollars in millions, except per share amounts)awards  award price  of awards  purchase price  post-acquisition
Vested options 589 $ 14.04 $ 18 $ 18 $ -
Unvested options 1,336 $ 16.21   37   28   9
Restricted stock 786 $ 44.43   35   19   16
Total 2,711    $ 90 $ 65 $ 25

Purchase price allocation. In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management's estimates of their fair values. Goodwill has been allocated to the Government operating segment and is not deductible for federal income tax purposes. The condensed balance sheet of HealthSpring at the acquisition date was as follows:

 

(In millions)   
Investments $ 612
Cash and cash equivalents   492
Premiums, accounts and notes receivable   320
Goodwill   2,541
Intangible assets   795
Other    96
Total assets acquired   4,856
    
Insurance liabilities   505
Deferred income taxes   214
Debt   326
Total liabilities acquired   1,045
Net assets acquired $ 3,811

In accordance with debt covenants, HealthSpring's debt obligation was paid immediately following the acquisition. This repayment is reported as a financing activity in the statement of cash flows for the year ended December 31, 2012.

 

 

The estimated fair values and useful lives for intangible assets are as follows:

 

(Dollars in millions) Estimated Fair Value Estimated Useful Life (In Years)
Customer relationships$711 8
Other  84 3-10
Total other intangible assets$795  

The fair value of the customer relationship and the amortization method were determined using an income approach that relies on projected future net cash flows including key assumptions for the customer attrition rate and discount rate. The estimated weighted average useful life reflects the time period and front-loaded pattern of expected future cash flows. Amortization is recorded on a basis consistent with that pattern, and as a result amortization expense declined in 2013 from 2012, and will continue to decline in subsequent years. The Company expects more than 50% of the intangible asset value to be amortized by the end of 2014.

 

The results of HealthSpring have been included in the Company's Consolidated Financial Statements from the date of the acquisition. Revenues of HealthSpring included in the Company's results for the year ended December 31, 2012 were approximately $5.4 billion. During 2012, the Company recorded $53 million pre-tax ($40 million after-tax) of acquisition-related costs in other operating expenses.

 

Pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of HealthSpring had occurred as of January 1, 2011. This pro forma information does not purport to represent what the Company's actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

 

   
  Year Ended December 31,
(In millions, except per share amounts) 2012  2011
Total revenues$ 29,608 $ 27,461
Shareholders' net income$ 1,633 $ 1,456
Earnings per share:     
Basic$ 5.73 $ 5.11
Diluted$ 5.63 $ 5.02

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