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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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 1-8323

GRAPHIC

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
    SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  
    Title of each class       Name of each exchange on which registered    
    Common Stock, Par Value $0.25       New York Stock Exchange, Inc.    

  

 

 

 

 

 

 

 

 
    SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  
    NONE    

    Indicate by check mark     Yes     No  
           
   

if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

      þ       o    
   

if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

      o       þ    
   

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.

      þ       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).

      þ       o    
   

if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

      þ       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", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

   
    Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o       Smaller Reporting Company o    
   

whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

      o       þ    

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $32.7 billion.

As of January 31, 2017, 257,052,404 shares of the registrant's Common Stock were outstanding.

Part III of this Form 10-K incorporates by reference information from the registrant's definitive proxy statement related to the 2017 annual meeting of shareholders.



Table of Contents

FREQUENTLY REQUESTED 10-K INFORMATION

 
  Page

Risk Factors

  21

Executive Overview of Results

  36

Health Care Industry Developments

  39

Liquidity & Capital Resources

  43

Critical Accounting Estimates

  46

Segment Reporting

  49

Revenues by Product Type

  113


 
   
   
  Page
CAUTIONARY STATEMENT    
PART I    
 

Item 1.

 

Business

 

 
  .   Overview   1
  .   Global Health Care   3
  .   Global Supplemental Benefits   11
  .   Group Disability and Life   12
  .   Other Operations   14
  .   Investments and Investment Income   15
  .   Regulation   15
  .   Miscellaneous   20
Item 1A.   Risk Factors   21
Item 1B.   Unresolved Staff Comments   31
Item 2.   Properties   31
Item 3.   Legal Proceedings   31
Item 4.   Mine Safety Disclosures   31
EXECUTIVE OFFICERS OF THE REGISTRANT   32

PART II

 

 
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

33
Item 6.   Selected Financial Data   35
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   36
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   57
Item 8.   Financial Statements and Supplementary Data   58
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   115
Item 9A.   Controls and Procedures   115
Item 9B.   Other Information   115


 
   
   
  Page
PART III    
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

116
    A.   Directors of the Registrant   116
    B.   Executive Officers of the Registrant   116
    C.   Code of Ethics and Other Corporate Governance Disclosures   116
    D.   Section 16(a) Beneficial Ownership Reporting Compliance   116
Item 11.   Executive Compensation   116
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   117
Item 13.   Certain Relationships, Related Transactions and Director Independence   117
Item 14.   Principal Accountant Fees and Services   117

PART IV

 

 
 

Item 15.

 

Exhibits and Financial Statement Schedules

 

118

Item 16.

 

10-K Summary

 

118
SIGNATURES   119
INDEX TO FINANCIAL STATEMENT SCHEDULES   FS-1
INDEX TO EXHIBITS   E-1


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on Cigna's current expectations and projections about future trends, events and uncertainties. These statements are not historical facts. Forward-looking statements may include, among others, statements concerning our business strategy and strategic or operational initiatives including our ability to deliver personalized and innovative solutions for customers and clients; future growth and expansion; future financial or operating performance; economic, regulatory or competitive environments; our projected cash position, future pension funding and financing or capital deployment plans; the proposed merger between Cigna and Anthem, Inc. ("Anthem") and litigation related thereto; statements regarding the timing of resolution of the issues raised by the Centers for Medicare and Medicaid Services ("CMS"); and other statements regarding Cigna's future beliefs, expectations, plans, intentions, financial condition or performance. You may identify forward-looking statements by the use of words such as "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "may," "should," "will" or other words or expressions of similar meaning, although not all forward-looking statements contain such terms.

Forward-looking statements are subject to risks and uncertainties, both known and unknown, that could cause actual results to differ materially from those expressed or implied in forward-looking statements. Such risks and uncertainties include, but are not limited to: our ability to achieve our financial, strategic and operational plans or initiatives; our ability to predict and manage medical costs and price effectively and develop and maintain good relationships with physicians, hospitals and other health care providers; our ability to identify potential strategic acquisitions or transactions and realize the expected benefits of such strategic transactions; the substantial level of government regulation over our business and the potential effects of new laws or regulations or changes in existing laws or regulations; the outcome of litigation, regulatory audits including the CMS review and sanctions, investigations, actions and guaranty fund assessments; uncertainties surrounding participation in government-sponsored programs such as Medicare; the effectiveness and security of our information technology and other business systems; unfavorable industry, economic or political conditions including foreign currency movements; ongoing litigation with respect to the ruling of the District Court enjoining the merger, including the appeal of that ruling; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement of the ruling enjoining the merger; uncertainty as to litigation with respect to the termination of the merger agreement, the reverse termination fee, declaratory judgments with respect to the foregoing and/or contract and non-contract damages for claims filed against Anthem; the risk that a government entity or court of competent jurisdiction, in any litigation, arbitration or other forum, finds in any binding or non-binding decision that Cigna has not complied, in full or in part, with its obligations under the merger agreement or that Cigna is liable for any breach, willful or otherwise, of the merger agreement; uncertainty as to whether and, if so, when Anthem will pay the reverse termination fee; uncertainty as to litigation with respect to the suit initiated by Anthem against Cigna, including for contract and non-contract damages with respect to the transactions contemplated in the merger agreement; competitive responses to the ruling; the inability to retain key personnel; the timing and likelihood of completion of the proposed merger, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals for the proposed merger that could reduce anticipated benefits or cause the parties to abandon the transaction; if the merger is consummated, the possibility that the expected synergies and value creation from the proposed merger will not be realized or will not be realized within the expected time period; if the merger is consummated, the risk that the businesses of Cigna and Anthem will not be integrated successfully; disruption from the proposed merger making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred; the possibility that the proposed merger does not close, including a failure to satisfy the closing conditions; the risk that financing for the proposed merger may not be available on favorable terms, as well as more specific risks and uncertainties discussed in Part I, Item 1A – Risk Factors and Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K and as described from time to time in our future reports filed with the Securities and Exchange Commission (the "SEC") as well as the risks and uncertainties described in Anthem's most recent report on Form 10-K and subsequent reports filed with the SEC.

You should not place undue reliance on forward-looking statements that speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Cigna undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.



Table of Contents

PART I
ITEM 1. Business

PART I

ITEM 1. Business

Overview

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 subsidiaries.

GRAPHIC

In an increasingly retail-oriented marketplace, we focus on delivering affordable and personalized products and services to customers through employer-based, government sponsored and individual coverage arrangements. We increasingly collaborate with health care providers to continue the transition from volume-based fee for service arrangements toward a more value-based system designed to increase quality of care, lower costs and improve health outcomes. We operate a customer-centric organization enabled by keen insights regarding customer needs, localized decision-making and talented professionals committed to bringing our "Together All the Way" brand promise to life.

In particular, over the past several years, to achieve the goals of better health, affordability, localization and an improved experience for the customer, we have continued expanding our participation in collaborative care and other delivery arrangements with health care professionals across the care delivery spectrum, including large and small physician groups, specialist groups and hospitals. More recently, we have developed innovative tools and flexible provider arrangements that provide a truly personalized customer experience. These arrangements and tools are discussed in more detail in the "Global Health Care" section of this Annual Report on Form 10-K ("Form 10-K") beginning on page 3.

We present the financial results of our businesses in the following three reportable segments:

Global Health Care aggregates the Commercial and Government operating segments.

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. In this segment, we refer to employer or other groups as the "client" and the individual as the "customer." 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.
CIGNA CORPORATION - 2016 Form 10-K    1


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PART I
ITEM 1. Business

The Government operating segment offers Medicare Advantage and Medicare Part D plans to seniors and Medicaid plans.

Global Supplemental Benefits offers supplemental health, life and accident insurance products 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.

Financial Results for the year ended and as of December 31, 2016 (in billions)
   
Consolidated basis:     Consolidated basis:  

Total revenues

  $ 39.7      Shareholders' net income   $ 1.9

Operating revenues (1)

  $ 39.5      Adjusted income from operations (1)   $ 2.1

Total assets

  $ 59.4      Total shareholders' equity   $ 13.7
Reportable segments results (2):     Reportable segments results (2):  

Operating revenues (1)

  $ 39.0      Adjusted income from operations (1)   $ 2.3
(1)
See page 36 for the definition of these metrics.

(2)
Global Health Care, Global Supplemental Benefits and Group Disability and Life segments

GRAPHIC

We present the remainder of our segment results in Other Operations, consisting of the corporate-owned life insurance business ("COLI"), run-off reinsurance and settlement annuity businesses and deferred gains associated with the sales of the individual life insurance and annuity and retirement benefits businesses.

Our revenues are derived principally from premiums on insured products, fees from self-insured products and services, mail-order pharmacy sales and investment income.

Proposed Merger with Anthem, Inc. ("Anthem")

On July 23, 2015, we entered into a definitive agreement to engage in a series of transactions to merge Cigna with Anthem, subject to certain terms, conditions and customary operating covenants, with Anthem continuing as the surviving company. At special shareholders' meetings in December 2015, Cigna shareholders approved the merger with Anthem and Anthem shareholders voted to approve the issuance of shares of Anthem common stock according to the merger agreement. Upon closing, our shareholders would receive $103.40 in cash and 0.5152 of a share of Anthem common stock for each common share of the Company.

Consummation of the merger is subject to certain customary conditions, including the receipt of certain necessary governmental and regulatory approvals, and the absence of a legal restraint prohibiting the consummation of the merger. 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 February 8, 2017, the District Court issued an order enjoining the proposed merger. Anthem appealed this ruling to the U.S. Court of Appeals for the District of Columbia Circuit (the "Appeals Court"). Cigna appealed following the Chancery Court decision described below, and oral arguments for the appeal are scheduled for March 24, 2017.

On February 14, 2017, Cigna 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 us 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.

See Notes 3 and 21 to the Consolidated Financial Statements in this Form 10-K for additional information about the proposed merger. See Item 1A. - Risk Factors in this Form 10-K for risks to our business due to the proposed merger.

2    CIGNA CORPORATION - 2016 Form 10-K


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PART I
ITEM 1. Business

The Health Care Reform Act

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to throughout this Form 10-K as the "Health Care Reform Act," "ACA" or "PPACA") continues to have a significant impact on our business operations. With the outcome of the U.S. elections in 2016, and the advent of the Trump Administration in January 2017, the future of the Health Care Reform Act is uncertain. The effects of the Health Care Reform Act are discussed throughout this Form 10-K where appropriate, including in the Global Health Care business description, Regulation, Risk Factors, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), and the Notes to the Consolidated Financial Statements.

Other Information

The financial information included in this Form 10-K for the fiscal year ended December 31, 2016 is in conformity with accounting principles generally accepted in the United States of America ("GAAP") unless otherwise indicated. Industry rankings and percentages set forth herein are for the year ended December 31, 2016 unless otherwise indicated. In addition, statements set forth in this document concerning our rank or position in an industry or particular line of business have been developed internally based on publicly available information unless otherwise noted.

Cigna Corporation was incorporated in Delaware in 1981. Our annual, quarterly and current reports, proxy statements and other filings, and any amendments to these filings, are made available free of charge on our website (http://www.cigna.com, under the "Investors – Quarterly Reports and SEC Filings" captions) as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the Securities and Exchange Commission (the "SEC"). We use our website as a channel of distribution for material company information. Important information, including news releases, analyst presentations and financial information regarding Cigna is routinely posted on and accessible at www.cigna.com. See "Code of Ethics and Other Corporate Governance Disclosures" in Part III, Item 10 beginning on page 115 of this Form 10-K for additional available information.

Global Health Care

  How We Win
Products and Services   Funding Types
                           
   

Medical

Stop Loss

Dental

Vision

 

Pharmacy

Behavioral

Health Advocacy and Coaching

 

Medicare Advantage

Medicare Part D

Medicaid

         

Administrative Services Only (ASO)

Guaranteed Cost

Experience Rated

   


Physician Engagement   Customer Segments   Distribution Channels
                               
   

Collaborative Accountable Care Organizations

Independent Practice Associations

CareAllies

Delivery System Alliances

Customer Engagement

         

National

Middle Market

Select

Individual

Government

International

         

Insurance brokers and consultants

Sales representatives

Cigna private exchange

3rd party private exchanges

Public exchanges

   

We seek to differentiate ourselves in this business by providing innovative personalized and affordable health care solutions to our clients and customers. As a leader in the drive to transition the health care delivery system from volume-based reimbursements to a value orientation, our strategy is to accelerate our engagement with employers and individuals in order to: 1) increase our customers' involvement in their health care and 2) develop deep insights into customer needs. Our differentiated approach also targets selected geographies and market segments and, within those local markets, stronger relationships with health care providers that promote quality and affordability of care for our customers and clients.

Innovation is core to the way we do business. We seek new and innovative solutions through technology and physician engagement to drive efficiencies, as well as bring differentiated value to our customers. Product development in the following areas reflects our innovative approach: our industry-leading CDHP (consumer-directed health plan) offerings; the recently introduced Cigna One Guide® program that combines a state-of-the-art digital experience with a human concierge service; and the Cigna SureFit® network that allows individual family members to choose their personal care networks, consistent with their health needs and provider preferences.

CIGNA CORPORATION - 2016 Form 10-K    3


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PART I
ITEM 1. Business

Our Commercial operating segment encompasses both our U.S. commercial and certain international health care businesses serving employers and their employees, including globally-mobile individuals, and other groups (e.g., governmental and non-governmental organizations, unions and associations). In addition, our U.S. commercial health care business also serves individuals through our product offerings both on and off the public health insurance exchanges.

Principal Products and Services

Commercial Medical Health Plans – U.S. and International

The Commercial operating segment, either directly or through its partners, offers some or all of its products in all 50 states, the District of Columbia, the U.S. Virgin Islands, Canada, Europe, the Middle East, Asia, Africa and Australia. We offer a variety of medical plans including:

Managed Care Plans including HMO, Network, Network Open Access and Open Access Plus.  We offer health care services through insured and self-insured indemnity managed care benefit plans and Health Maintenance Organizations ("HMOs") that use meaningful cost-sharing incentives to encourage the use of "in-network" versus "out-of-network" health care providers and provide the option to select a primary care physician. The national provider network for Managed Care Plans is somewhat smaller than the national network used with the preferred provider ("PPO") plan product line. If a particular plan covers non-emergency services received from a non-participating health care provider, the customer's cost-sharing obligation is usually greater for the out-of-network care.

PPO Plans.  Our PPO product line features a network with broader provider access than the Managed Care Plans. The preferred provider product line may be at a higher cost than our Managed Care Plans.

Choice Fund® Suite of Consumer-Driven Products.  Our medical plans are often integrated with the Cigna Choice Fund suite of products: Health Reimbursement Accounts ("HRA"), Health Savings Accounts ("HSA") and Flexible Spending Accounts ("FSA"). These Choice Fund products are designed to encourage customers to play an active role in understanding and managing their health and associated expenses. Customers can use these tax-advantaged accounts to finance eligible health care expenses and other approved services. In most cases, these products are combined with a high deductible medical plan. Over three million customers have chosen Choice Fund product solutions.

Cigna Connect is an individual plan offered in markets within eight states. The product is comprised of a network of health care providers in local areas who have been selected with cost and quality in mind. Customers who participate in the Connect network will receive care at Cigna's lower negotiated rates to help keep out-of-pocket costs down. Out-of-network coverage is not available except for urgent and emergent care.

Cigna Focus is an individual plan offered in one market. The product is comprised of a network of health care providers in the local area where members have direct access to providers, where no referrals or PCP selection is required. Out-of-network coverage is not available except for urgent and emergent care.

Approximately 90% of our commercial medical customers are enrolled in medical plans with either Administrative Services Only or Experience-Rated funding arrangements that allow the corporate client to directly benefit from lower medical costs.

4    CIGNA CORPORATION - 2016 Form 10-K


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PART I
ITEM 1. Business

The funding arrangements available for our commercial medical and dental health plans are as follows:

    Funding Arrangements and Descriptions: Commercial

 

 

GRAPHIC

 
Administrative Services Only

Plan sponsors self-fund all claims, but may purchase stop loss insurance to limit exposure.

We collect fees from plan sponsors for providing access to our participating provider network and for other services and programs including: claims administration; behavioral health; disease management; utilization management; cost containment; dental; and pharmacy benefit management.

In some cases, we provide performance guarantees that provide potential fee refunds if certain service standards, clinical outcomes or financial metrics are not met.

   

 

  Insured – Experience Rated ("Shared Returns")

Premium charged during a policy period ("initial premium") may be adjusted following the policy period for actual claim and, in some cases, administrative cost experience of the policyholder:

When claims and expenses are less than the initial premium charged (an "experience surplus"), the policyholder may be credited for a portion of this premium.

However, if claims and expenses exceed the initial premium (an "experience deficit"), we bear these costs. In certain cases, experience deficits may be recovered through experience surpluses in a future year if the policyholder renews.

   

 

  Insured – Guaranteed Cost

We establish the cost to the policyholder at the beginning of a policy period and generally cannot subsequently adjust premiums to reflect actual claim experience until the next annual renewal.

Employers and other groups with guaranteed cost policies are generally smaller than those with experience-rated group policies. Accordingly, our claim and expense assumptions may be based in whole or in part on prior experience of the policyholder or on a pool of similar policyholders.

HMO and individual plans (medical and dental) are offered on a guaranteed cost basis only. Individual and "small employer" (employers with 50 or fewer employees) plans are required to be community-rated under federal law.

   

In most states, individual and group insurance premium rates must be approved by the applicable state regulatory agency (typically department of insurance) and state or federal laws may restrict or limit the use of rating methods. Premium rates for groups and individuals are subject to state review for reasonableness. In addition, the Health Care Reform Act subjects individual and small group policy rate increases above an identified threshold to review by the United States Department of Health and Human Services ("HHS") and requires payment of premium refunds on individual and group medical insurance products if minimum medical loss ratio ("MLR") requirements are not met. In our individual business, premiums may also be adjusted as a result of the government risk mitigation programs. The MLR represents the percentage of premiums used to pay medical claims and expenses for activities that improve the quality of care. See the "Regulation" section of this Form 10-K for additional information on the commercial MLR requirements and the risk mitigation programs of the Health Care Reform Act.

Government Health Plans

Medicare Advantage

We offer Medicare Advantage plans in 17 states and the District of Columbia through our Cigna-HealthSpring brand. Under such a plan, Medicare-eligible beneficiaries may receive health care benefits, including prescription drugs, through a managed care health plan such as our coordinated care plans. A significant portion of our Medicare Advantage customers receive medical care from our innovative plan models that focus on developing highly engaged physician networks, aligning payment incentives to improved health outcomes, and using timely and transparent data sharing. We are focused on continuing to expand these models in the future.

We receive revenue from the Centers for Medicare and Medicaid Services ("CMS") for each plan customer based on customer demographic data and actual customer health risk factors compared to the broader Medicare population. We also may earn additional revenue from CMS related to quality performance measures (known as "Star Ratings"). The Medicare Stars payment equals 5% per member risk-adjusted revenue added to the CMS payment for each contract that achieves four stars or higher. See the "Executive Overview" section of our MD&A beginning on page 36 of this Form 10-K for additional discussion of our Star ratings. Additional premiums may be received from customers, representing the difference between CMS subsidy payments and the revenue determined as part of our annual Medicare Advantage bid submissions. The Health Care Reform Act requires Medicare Advantage and Medicare Part D plans to meet a minimum MLR of 85%. If the MLR for a CMS contract

CIGNA CORPORATION - 2016 Form 10-K    5


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PART I
ITEM 1. Business

is less than 85%, we are required to pay a rebate to CMS and could be required to make additional payments if the MLR continues to be less than 85% for successive years.

Medicare Part D

Our Medicare Part D prescription drug program provides a number of plan options, as well as service and information support, to Medicare and Medicaid eligible customers. Our plans are available in all 50 states and the District of Columbia and offer the savings of Medicare combined with the flexibility to provide enhanced benefits and a drug list tailored to individuals' specific needs. Eligible beneficiaries benefit from broad network access and value-added services intended to help keep them well and save them money.

Medicaid

We offer Medicaid coverage to low income individuals in selected markets in Texas and Illinois. Our Medicaid customers benefit from many of the coordinated care aspects of our Medicare Advantage programs.

We receive revenue from the states of Texas and Illinois for our Medicaid only customers. For customers eligible for both Medicare and Medicaid ("dual eligibles") we receive revenue from both the state and CMS. All revenue is based on customer demographic data and actual customer health risk factors. Similar to Medicare Advantage, there are minimum MLR requirements in Illinois (85% for the dual product and 88% for the Medicaid only product). However, Texas utilizes an experience rebate in an effort to provide better value to consumers and increase transparency. The Texas experience rebate takes into account operating expenses and requires a rebate of dollars to the state as different profitability thresholds are met.

Specialty Products and Services

Our specialty products and services described below are designed to improve the quality of care, lower the cost and help customers achieve better health outcomes. Many of these products can be sold on a standalone basis, but we believe they are most effective when integrated with a Cigna-administered health plan. Our specialty products are focused in the areas of medical, behavioral, pharmacy management, dental and vision.

Medical Specialty

Stop Loss.  We offer stop loss insurance coverage for self-insured plans that provides reimbursement for claims in excess of a predetermined amount for individuals ("specific"), the entire group ("aggregate"), or both.

Cost-Containment Service.  We administer cost-containment programs on behalf of our clients and customers for health care services and supplies that are covered under health benefit plans. These programs may involve vendors who perform activities designed to control health costs by reducing out-of-network utilization and costs, including educating customers regarding the availability of lower cost, in-network services, negotiating discounts, reviewing provider bills, and recovering overpayments from other payers or health care providers. We charge fees for providing or arranging for these services.

Consumer Health Engagement.  We offer a wide array of medical management, disease management, and wellness services to employers and other plan sponsors to help individuals improve their health, well-being and sense of security. These services are offered to customers covered under plans that we administer, as well as plans insured or administered by competing insurers or third-party administrators. Our Medical Management programs include case management, specialty case management and utilization management including a 24-hour nurse information line. Our Health Advocacy programs and services include early intervention in the treatment of chronic conditions (such as Asthma, Diabetes, etc.). We also offer a combination of online tools and education programs to help customers manage their health and an array of health and wellness coaching to address lifestyle management issues (such as stress, weight, and tobacco cessation) and other conditions (such as Hypertension, Hyperlipidemia, Pre-Diabetes, etc.). We also administer incentives to motivate customers to engage in and improve their health.

Pharmacy Management

We offer prescription drug plans to our commercial and government customers both in conjunction with our medical products and on a stand-alone basis. With a network of over 68,000 pharmacies, Cigna Pharmacy Management is a comprehensive pharmacy benefits manager ("PBM") offering clinical programs and specialty pharmacy solutions. We also offer high quality, efficient, and cost-effective mail order, telephone and on-line pharmaceutical fulfillment services through our home delivery operation.

Our medical and pharmacy coverage can meet the needs of customers with complex medical conditions requiring specialty pharmaceuticals. These types of medications are covered under both pharmacy and medical benefits and can be expensive, often requiring associated lab work and administration by a health care professional. Therefore, coordination is critical in improving affordability and outcomes. Clients with Cigna-administered medical and pharmacy coverage may benefit from continuity of care, integrated reporting, and meaningful unit cost discounts on specialty drugs.

Behavioral Health

We arrange for behavioral health care services for customers through our network of approximately 108,700 participating behavioral health care professionals and 13,900 facilities and clinics. We offer behavioral health care case management services, employee assistance programs ("EAP"), and work/life programs to employers, government entities and other groups sponsoring health benefit plans. We focus on integrating our programs and services with medical, pharmacy and disability programs to facilitate customized, holistic care.

6    CIGNA CORPORATION - 2016 Form 10-K


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PART I
ITEM 1. Business

Dental

We offer a variety of insured and self-insured dental care products including dental health maintenance organization plans ("Dental HMO") in 36 states, dental preferred provider organization ("Dental PPO") plans in 49 states and the District of Columbia, exclusive dental provider organization plans, traditional dental indemnity plans and a dental discount program. Employers and other groups can purchase our products as stand-alone products or integrated with medical products. Additionally, individual customers can purchase Dental PPO plans in conjunction with individual medical policies.

Cigna has partnered with a healthcare technology company, to launch an online consumer engagement tool for Dental PPO customers in 2016. This enhancement allows Cigna Dental PPO customers to schedule appointments online, compare out-of-pocket costs across multiple dentists, and access information that evaluates the dentist's professional history, affordability, and service quality.

As of December 31, 2016, our dental customers totaled 15 million worldwide and approximately 65% are enrolled in plans with funding arrangements that allow the corporate client to directly benefit from lower dental costs. Our U.S. customers access care from one of the largest Dental PPO networks and Dental HMO networks, with approximately 142,700 Dental PPO and 19,800 Dental HMO health care professionals.

Vision

Cigna Vision offers flexible, cost-effective PPO coverage that includes a range of both in and out-of-network benefits for routine vision services offered in conjunction with our medical and dental product offerings. Our national vision care network, consisting of approximately 84,000 health care providers in over 26,200 locations, includes private practice ophthalmologist and optometrist offices, as well as retail eye care centers.

Service and Quality

Customer Service

For U.S.-based customers, we operate 17 service centers that together in 2016 processed approximately 163 million medical claims and handled 32.5 million calls providing our customers service 24 hours a day, 365 days a year.

In our international health care business, we have a service model dedicated to the unique needs of our 1.5 million customers around the world. We service them from nine globally deployed service centers that are also available 24 hours a day, 365 days a year.

Technology

Cigna Technology supports the Go Deep, Go Global, Go Individual strategy by focusing on strong foundational services, executing on an aligned business portfolio and targeting innovation and digital enhancements in key differentiating areas. Paramount to our global information technology strategy is supporting the imperatives of affordability, personalization and localization. Our goal is a continued focus on targeted technology investments to enable our strategic business objectives. This is accomplished by delivering innovative technology that enables more efficient operations, improves process integrity, builds stronger relationships with our key stakeholders; optimizes our economies of scale; and maximizes delivery of flexible payment arrangements, innovative products and services and intelligent analytics to support evidence-based medicine. Through continued execution of these capabilities, we are able to better and more rapidly deliver market-differentiating and innovative solutions.

Our approach to innovation is based on three major pillars: 1) organic development that creates new capabilities through internal research and development; 2) venture partnerships/early-stage investments where we are working with other external stakeholders; and 3) client-centric prototyping that develops solutions directly with clients to address specific needs. This approach to innovation has fueled our ability to rapidly innovate and bring to market solutions that differentiate us from competitors. This has resulted in an increased number of solutions that improve affordability, increase patient access and optimize the consumer experience. Examples include capabilities such as Cigna Virtual Health, first launched in the United Kingdom as the first totally digital virtual care team to Cigna One Guide® that simplifies and streamlines the entire customer experience in a highly personalized manner. Cigna has launched a growing portfolio that leverages emerging technologies such as artificial intelligence based predictive analytics, augmented reality and virtual reality, social experiences and gamification. Innovation is core to the way we do business and we continuously seek opportunities to drive efficiencies and create a superior customer experience through technology.

Data Analytics

Cigna has transformed substantial investments in analytics talent, data infrastructure, and machine learning capabilities over the past several years into a closed loop, self-learning insights system that guides our decision making and executing on our strategy. Our Insights That Matter analytics process helps our business leaders identify the questions that matter most to our customers and partners. We focus our data science experts on answering those questions with innovative methodologies and transform our insights into targeted business actions.

Cigna is using advanced analytic capabilities throughout all facets of the business to:

Identify and quantify the financial and clinical cost of discrete health opportunities and insights into how to best engage individual customers (e.g., digitally, phone, physician based). We convert these insights into a Health Matters Score that is used to connect each customer to the right clinical services and drive better clinical, financial, and quality outcomes.

Enable customized service experiences. In our pharmacy business we are proactively offering our customers value added pharmacy and medical services during inbound customer calls, realizing the value of an integrated medical and pharmacy offering. To maximize impact, we apply our proprietary Customer Segmentation models to tailor customer communications to make interactions more meaningful.
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Build a deep understanding of risk adjusted total cost and quality performance metrics at the individual physician level and aggregate market level to develop relative benchmarks. This data is being used to fuel our drive to fee for value physician reimbursements and flexible provider networks.

Leverage advanced analytic models and tools to better identify prospects that best align with Cigna's mission and value proposition for our client engagement team.

Going forward, we view insights as a strategic imperative and will continue to heavily invest in expanding and strengthening our capabilities to meet and exceed our customer and partner expectations.

Quality Health Care

Our commitment to promoting quality health care to the people we serve is reflected in a variety of activities.

Health Improvement through Engaging Providers and Customers

Cigna improves health outcomes and reduces health care costs by engaging our customers in their health, connecting them with value-oriented providers, and improving how care is delivered and reimbursed. We are focused on executing our Connected Care strategy that engages both providers and customers, optimizing their interactions to drive better health, affordability, and experience. Cigna is committed to developing innovative solutions that span the health care delivery system and can be applied to different types of providers. Currently we have numerous collaborative arrangements with our participating health care providers and are actively developing new arrangements to support our Connected Care strategy. The key principles that guide our innovative solutions include:

Improving access to care at the local market level,

Collaborating with and supporting providers in their evolution to value-based care,

Leveraging actionable patient information, enhancing the patient experience,

Improving affordability and

Shifting reimbursement mechanisms to those that reward quality medical outcomes.

We continue to increase our engagement with physicians and hospitals by rapidly developing the types of arrangements discussed below. Over two million medical customers are currently serviced by more than 95,000 health care providers in these types of arrangements.

Cigna Collaborative Care.

Independent Practice Associations are innovative physician engagement models in our Cigna-HealthSpring business that allow the physician groups to share financial outcomes with us. The Cigna-HealthSpring clinical model also includes outreach to new and at-risk patients to ensure they are accessing their primary care physician.

CareAllies.  On June 9, 2016, we announced the formation of CareAllies, the new U.S. based population health company focused on helping physicians manage the health of their patients and improve their health outcomes. CareAllies will partner with physicians, provider groups and health systems to develop customized solutions that help them meet their goals across all patients and all payers.

Delivery System Alliances.  Cigna is collaborating with select health care delivery systems to develop compelling and unique strategic relationships focused on addressing the local market's unique health care needs. This includes jointly developed products designed to improve the experience of Cigna customers by offering integrated health care and providing access to quality, value-based care in local communities.

Customer Engagement Products – Cigna One Guide®.  Cigna is also delivering a personalized experience to help our customers navigate the complex health care system and make important health care choices. Starting January 1, 2017, 1.2 million Cigna commercial health plan customers will receive Cigna One Guide® access to guided consultations via phone, mobile app and "Click-to-Chat" for choosing their benefits, building a personal health team of doctors, clinicians and coaches and reducing their health expenses through reward programs.

In the international healthcare business we use the Net Promoter Score (NPS) approach to continually gather insights from customers and healthcare professionals around the world and to guide how we proactively enhance product and service offerings.

Participating Provider Network

We provide our customers with an extensive network of participating health care professionals, hospitals, and other facilities, pharmacies and providers of health care services and supplies. In most instances, we contract with them directly; however, in some instances, we contract with third parties for access to their provider networks and care management services. In addition, we have entered into strategic alliances with

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several regional managed care organizations (e.g., Tufts Health Plan, HealthPartners, Inc., Health Alliance Plan, and MVP Health Plan) to gain access to their provider networks and discounts.

We credential physicians, hospitals and other health care professionals in our participating provider networks using quality criteria that meet or exceed the standards of external accreditation or state regulatory agencies, or both. Typically, most health care professionals are re-credentialed every three years.

The Cigna Care Network®, a benefit design option available in 74 markets across the U.S., is a subset of participating specialist physicians designated based on specific clinical quality and cost-efficiency criteria. Customers in Cigna Care Network® plans pay reduced co-payments or co-insurance when they receive care from a specialist designated as a Cigna Care Network® physician. Participating specialists are evaluated regularly for the Cigna Care Network® designation.

LocalPlus® is a locally-tailored network of select health care providers and facilities designed to provide cost-effective and quality care. It links multiple local networks across geographic markets to provide consistency for both employers and the customers. LocalPlus is available in 18 markets as of the end of 2016 and will be available in 21 markets by the end of 2017.

Cigna SureFit® is a local network built around particular health care delivery systems with a focus on the dynamics of local market care delivery. It is designed to deliver maximum value in a particular market. Cigna SureFit® is available in three U.S. Commercial markets in 2017, and will be available in 11 markets in 2018.

Medical Care and Onsite Services

Cigna Medical Group is a multi-specialty medical group practice that delivers primary care and certain specialty care services through 20 medical facilities and 156 clinicians in Phoenix, Arizona. These health care centers have received the highest accreditation (level 3) from the National Committee for Quality Assurance ("NCQA").

LivingWell Health Centers by HealthSpring®.  Medicare Advantage customers may receive care from one of our four free-standing clinics and eight "embedded" clinics that incorporate the principles and resources of stand-alone clinics while allowing the customer access to their primary care physician.

Cigna Onsite Health provides employer-based onsite or nearby health centers and health and wellness coaches with nearly 52 health centers and 142 health coaches. Care delivery services include acute, episodic care, primary care, health and wellness coaching programs and biometric screenings. Virtual Health care services are also available to help extend access to care for both coaching and treatment services.

External Validation

We continue to demonstrate our commitment to quality and have a broad scope of quality programs validated through nationally recognized external accreditation organizations. We maintained Health Plan accreditation from the NCQA in 37 of our markets. Additional NCQA recognitions include Full Accreditation for Managed Behavioral Healthcare Organization for Cigna Behavioral Health, Accreditation with Performance Reporting for Wellness & Health Promotion, Accreditation for our wellness programs and Physician & Hospital Quality Certification for our provider transparency program. We have Full Accreditation for Health Utilization Management, Case Management, Pharmacy Benefit Management and Specialty Pharmacy from URAC, an independent, nonprofit health care accrediting organization dedicated to promoting health care quality through accreditation, certification and commendation.

We participate in the NCQA's Health Plan Employer Data and Information Set ("HEDIS®") Quality Compass Report, whose Effectiveness of Care measures are a standard set of metrics to evaluate the effectiveness of managed care clinical programs.

Markets and Distribution

We offer health care and related products and services in the following customer segments or markets:

          % of Medical
Customers
 
National   Multi-state employers with 5,000 or more U.S.-based, full-time employees. We offer primarily ASO funding solutions in this market segment.   23%  
Middle Market   Employers generally with 250 to 4,999 U.S.-based, full-time employees. This segment also includes single-site employers with more than 5,000 employees and Taft-Hartley plans and other groups. We offer ASO, experience-rated and guaranteed cost insured funding solutions in this market segment.     53%  
Select   Employers generally with 51-249 eligible employees. We offer ASO (often with stop-loss insurance coverage) and guaranteed cost insured funding solutions in this market segment.   9%  
Individual   Individuals in thirteen states for 2016: Arizona, California, Colorado, Connecticut, Florida, Georgia, North Carolina, Maryland, Missouri, New Jersey, South Carolina, Tennessee and Texas. In 2016, we offered coverage on seven public health insurance exchanges (Arizona, Colorado, Georgia, Maryland, Missouri, Tennessee and Texas). In 2017, we offer plans in fifteen states. We have plans on public health insurance exchanges in seven states (Colorado, Illinois, Maryland, Missouri, North Carolina, Tennessee, and Virginia) and off-exchange in eight states (Arizona, California, Connecticut, Florida, Georgia, New Jersey, South Carolina, and Texas). Consistent with the regulations for Individual PPACA compliant plans, we offer plans only on a guaranteed cost basis in this market segment.     1%  
Government   Individuals who are post-65 retirees, as well as employer group sponsored pre- and post-65 retirees. We offer Medicare Advantage, Prescription Drug programs, and Medicaid products in this market segment including dual-eligible members who receive both Medicare and Medicaid benefits.   4%  
International   Local and multinational companies and inter-governmental organizations and their local and globally-mobile employees and dependents working or travelling in more than 190 countries and jurisdictions. We offer guaranteed cost, experience-rated insured and ASO funding solutions in this market segment.     10%  
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Cigna Guided Solutions® is Cigna's benefit administration and private exchange solution that targets clients who value fully integrated solutions and focus on engaging employees in their benefit offering. It leverages Cigna's ability to provide a fully integrated solution with our broad spectrum of products, benefit plans, services, and full suite of funding options focused on improving total cost, health, and productivity. Through Cigna Guided Solutions®, employers enjoy simplified administration and the convenience of single source purchasing while employees receive more choice via an easy-to-use shopping experience and year round engagement. Together with integrated robust decision-support tools, employees are able to make personalized decisions to select the right benefit offering and get the most value from their plans.

In addition, Cigna participates on many third party private exchanges. We actively evaluate private exchange participation opportunities as they emerge in the market, and target our participation to those models that best align with our mission and value proposition.

We employ sales representatives to distribute our products and services through insurance brokers and insurance consultants or directly to employers, unions and other groups or individuals. We also employ representatives to sell access to our national participating provider network, utilization review services, behavioral health care and pharmacy management services, and employee assistance services directly to insurance companies, HMOs and third party administrators. As of December 31, 2016, our field sales force consisted of over 1,300 sales representatives in 124 field locations. In our Government business, Medicare Advantage enrollment is generally a decision made individually by the customer, and accordingly, sales agents and representatives focus their efforts on in-person contacts with potential enrollees, as well as telephonic and group selling venues.

Competition

Our business is subject to intense competition and continuing industry consolidation that has created an even more competitive business environment. In certain geographic locations, some health care companies may have significant market share positions, but no one competitor dominates the health care market nationally. We expect a continuing trend of consolidation in the overall health care industry (including hospitals, pharmaceutical companies, and providers of medical technology and devices) given the current economic and political environment. We also expect continued vertical integration with the lines blurring between clinicians, hospitals and traditional insurers.

Competition in the health care market exists both for employers and other groups sponsoring plans and for employees in those instances where the employer offers a choice of products from more than one health care company. Most group policies are subject to annual review by the plan sponsor, who may seek competitive quotations prior to renewal. In 2017, product offerings are decreasing in certain individual markets due to volatility in the industry as some carriers have exited markets. With the results of the 2016 U.S. elections, it is likely that changes will occur in the future to the Health Care Reform Act. Given that the relatively immature individual market has not yet reached profitability for most carriers, we expect some uncertainty and competitive volatility to continue.

The primary competitive factors affecting our business are quality and cost-effectiveness of service and provider networks; effectiveness of medical care management; products that meet the needs of employers and their employees; total cost management; technology; and effectiveness of marketing and sales. Financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor. We believe that our health advocacy capabilities, holistic approach to consumer engagement, breadth of product offerings, clinical care and medical management capabilities and array of product funding options are competitive advantages in meeting the diverse needs of our customer base. We also believe that our focus on helping to improve the health, well-being and sense of security of the customers we serve will allow us to differentiate ourselves from our competitors.

Our primary competitors in our U.S.-based health care businesses include:

Other national insurance and health services companies that provide group health and life insurance products, including Aetna, Anthem, Humana, Kaiser Permanente and UnitedHealth Group;

Not for profit managed care organizations;

Other regional stand-alone managed care and specialty companies;

Managed care organizations affiliated with major insurance companies and hospitals; and

National managed pharmacy, behavioral health and utilization review services companies.

Our primary competitors in the international health care business include U.S.-based insurers such as Aetna, UnitedHealth Group and MetLife; global competitors such as BUPA and Allianz; and local insurers in a range of countries.

In addition to our traditional competitors, new competitors are emerging. Some of these newer competitors, such as hospitals and companies that offer web-based tools for employers and employees, are focused on delivering employee benefits and services through internet-enabled technology that allows consumers to take a more active role in the management of their health. This can be accomplished through financial incentives, access to enhanced quality medical data and other information sharing. The effective use of our health advocacy, customer insight and physician engagement capabilities, along with decision support tools (some of which are web-based) and enabling technology are critical to success in the health care industry, and we believe our capabilities in these areas will be competitive differentiators.

Industry Developments

The health insurance marketplace will continue to be shaped by the Health Care Reform Act over the near term; however, its future remains uncertain given the outcome of the 2016 U.S. elections. Although we anticipate changes in the regulation of the health insurance markets over the next several years as Congress and the Trump administration consider repeal and replacement of the Health Care Reform Act, the nature of those changes remains largely unknown at this time. See the "Regulation" and "Risk Factors" sections of the Form 10-K for additional discussion about these developments.

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Global Supplemental Benefits

  How We Win
Products
and Services
  Key Geographies and
Growth Markets
  Distribution
Channels
                               
   

Hospitalization

Dental

Medicare Supplement

Critical Illness

Personal Accident

Term or Variable Universal Life

         

Asia: South Korea, China, Taiwan, Indonesia and India

Europe: UK and Turkey

United States

         

Telemarketing

Home Shopping & Direct Response Television

Independent agents

Bancassurance

Internet

   

We continue to distinguish ourselves in the global supplemental health, life and accident businesses through our differentiated direct-to-consumer distribution, customer insights and marketing capabilities. We enter new markets when the opportunity to bring our product and health solutions is attractive. Over the past several years, we have continued to extend our product offerings and geographic reach.

Principal Products and Services

Supplemental Health, Life and Accident Insurance

Supplemental health, life and accident insurance products generally provide simple, affordable coverage of risks for the health and financial security of individuals. Supplemental health products provide specified payments for a variety of health risks and include personal accident, accidental death, critical illness, hospitalization, travel, dental, cancer and other dread disease coverages. We also offer customers individual private medical insurance, term and variable universal life insurance, and certain savings products.

Medicare Supplement Plans

We offer individual Medicare Supplement plans that provide retirees with federally standardized Medigap-style plans. Retirees may select among the various plans with specific plan options to meet their unique needs and may visit, without the need for a referral, any health care professional or facility that accepts Medicare throughout the United States.

Pricing and Reinsurance

Premium rates for our global supplemental benefits products are based on assumptions about mortality, morbidity, customer acquisition and retention, customer demographics, expenses and target profit margins, as well as interest rates. For variable universal life insurance products, fees consist of mortality, administrative, asset management and surrender charges assessed against the contractholder's fund balance. Mortality charges on variable universal life may be adjusted prospectively to reflect expected mortality experience. Most contracts permit premium rate changes at least annually.

Most of the businesses in this segment operate through foreign subsidiaries. We maintain a capital management strategy to retain overseas a significant portion of the earnings from these foreign operations. These undistributed earnings are deployed outside of the United States in support of the liquidity and capital requirements of our foreign operations. As a result, the effective tax rate for Global Supplemental Benefits reflects income tax expense that is generally lower than in the United States.

A global approach to underwriting risk management allows each local business to underwrite and accept risk within specified limits. Retentions are centrally managed through cost effective use of external reinsurance to limit our liability on per life, per risk, and per event (catastrophe) bases.

Markets and Distribution

Our supplemental health, life and accident insurance products sold in foreign countries are generally marketed through distribution partners with whom the individual insured has an affinity relationship. These products are sold primarily through direct marketing channels, such as outbound telemarketing, and in-branch bancassurance (when we partner with a bank and use the bank's sales channels to sell our insurance products). Marketing campaigns are conducted through these channels under a variety of arrangements with affinity partners, including banks, credit card companies and other financial and non-financial institutions. We also market directly to consumers via direct response television and the Internet. In certain countries, we market our products through captive and third party brokers and agents. Our Medicare supplement product line is distributed primarily through independent agents and telemarketing directly to the consumer.

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South Korea represents our single largest geographic market for Global Supplemental Benefits. For information on this concentration of risk for the Global Supplemental Benefits segment's business in South Korea, see "Other Items Affecting Results of Global Supplemental Benefits" in the Global Supplemental Benefits section of the MD&A beginning on page 51 of this Form 10-K.

For our supplemental health, life and accident insurance products sold in foreign markets we are increasingly exposed to geopolitical, currency and other risks inherent in foreign operations. Also, given that we bill and collect a significant portion of premiums through credit cards, a substantial contraction in consumer credit could impact our ability to retain existing policies and sell new policies. A decline in customer retention would result in both a reduction of revenue and an acceleration of the amortization of acquisition-related costs. Changes in regulation for permitted distribution channels also may impact our business or results.

Competition

We expect that the competitive environment for global supplemental benefits will continue to intensify as U.S., Europe and other regionally-based insurance and financial services providers more aggressively pursue expansion opportunities across geographies, especially in Asia. We believe competitive factors will include branding, product and distribution innovation and differentiation, efficient management of marketing processes and costs, commission levels paid to distribution partners, the quality of claims, local network coverage, customer services and talent acquisition and retention. Additionally, in most overseas markets, perception of financial strength also will likely continue to be an important competitive factor.

Our competitors are primarily locally-based insurance companies, including insurance subsidiaries of banks primarily in Asia and Europe and multi-national companies. Insurance company competitors in this segment primarily focus on traditional product distribution through captive agents, with direct marketing being secondary channels. We estimate that we have less than 3% market share of the total insurance premiums in any given market in which we operate.

In the Medicare supplement business, the principal competitive factors are underwriting and pricing, relative operating efficiency, broker relations, and the quality of claims and customer service. Our primary competitors in this business include U.S.-based health insurance companies.

Industry Developments

Pressure on social health care systems, a rapidly aging population and increased wealth and education in developing insurance markets are leading to higher demand for products providing health insurance and financial security. In the supplemental health, life and accident business, direct marketing channels continue to grow and attract new competitors with industry consolidation among financial institutions and other affinity partners.

Data privacy regulation has tightened in all markets in the wake of data privacy news scandals, impacting affinity partner and customer attitudes toward direct marketing of insurance and other financial services.

Group Disability and Life

  How We Win
Products and Services   Distribution Channels
                       
   

Short-term disability

 

Group universal life

         

Insurance brokers and consultants

   
   

Long-term disability

 

Personal and voluntary accident

         

Sales representatives

   
 
   

Leave administration

 

Business travel accident

               
   

Basic-term life

 

Critical illness, Accidental injury and Hospital care

      Customer Segments
   

Voluntary term life

                   
 
                   

National

   
                   

Middle Market

   
                   

Select

   

Our Group Disability and Life business markets its products and services in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada.

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Products and Services

Group Disability

Long-term and short-term group disability insurance products generally provide a fixed level of income to replace a portion of wages lost because of disability. Group disability coverage is typically employer-paid or a combination of employer and employee-paid, but also may include coverage paid for entirely by employees. As part of our group disability insurance products, we also provide assistance to employees in returning to work and assistance to their employers in managing the cost of employee disability. We are an industry leader in helping employees return to work quickly, resulting in higher productivity and lower cost for employers and a better quality of life for their employees.

We seek to integrate the administration of our disability insurance products with other disability benefit programs, behavioral programs, medical programs, social security advocacy, and administration of federal and state Family and Medical Leave Act ("FMLA") laws and other leave of absence programs. We believe this integration provides our customers with increased efficiency and effectiveness in disability claims management, enhances productivity and reduces overall costs to employers. This integration also provides early insight into employees at risk for future disability claims. Coordinating the administration of these disability programs with medical programs offered by our health care business provides enhanced opportunities to influence outcomes, reduce the cost of both medical and disability events and improve the return to work rate. The benefits of this integrated approach also include:

using information from the health care and disability databases to help identify, treat and manage disabilities before they become longer in duration or chronic and more costly; and

proactively reaching out to assist employees suffering from a mental health or chronic condition, either as a primary condition or as a result of another condition.

Our disability products and services are offered on a fully insured, experience-rated and ASO basis, although most are fully insured. As measured by 2016 premiums and fees, disability constituted 50% of this segment's business. Approximately 15,300 insured disability policies covering approximately 8.5 million lives were in force as of December 31, 2016.

Group Life Insurance

Group life insurance products offered include term life and universal life. Group term life insurance may be employer-paid basic life insurance, employee-paid supplemental life insurance or a combination thereof. Group universal life insurance is an employee-paid, voluntary life insurance product in which the owner may accumulate a cash value. The cash value earns interest at rates declared from time to time, subject to a minimum guaranteed contracted rate, and may be borrowed, withdrawn, or, within certain limits, used to fund future life insurance coverage.

As measured by 2016 premiums and fees, group life insurance constituted approximately 44% of this segment's business. Approximately 10,800 group life insurance policies covering over 7 million lives were in force as of December 31, 2016.

Other Products and Services

We also offer personal accident insurance coverage, consisting primarily of accidental death and dismemberment and travel accident insurance to employers. Group accident insurance may be employer-paid or employee-paid. In addition, we offer specialty insurance services that consist primarily of disability and life, accident, and hospital indemnity products to professional or trade associations and financial institutions.

We also provide a number of voluntary products and services that are typically paid by the employee and offered at the employer's worksite. Our plans provide employers with administrative solutions designed to provide employers with a complete and simple way to manage their benefits program. In recent years, we have brought to market three additional voluntary offerings – accidental injury insurance, critical illness coverage and hospital care. These products provide additional dollar payouts to employees for unexpected accidents or more serious illnesses.

Pricing and Reinsurance

Premiums charged for disability and term life insurance products are usually established in advance of the policy period and are generally guaranteed for one to three years and selectively guaranteed for up to five years; policies are generally subject to termination by the policyholder or by the insurance company annually. Premium rates reflect assumptions about future claims, expenses, credit risk, investment returns and profit margins. These assumptions may be based in whole or in part on prior experience of the account or on a pool of accounts, depending on the group size and the statistical credibility of the experience that varies by product.

Premiums for group universal life insurance products consist of mortality and administrative charges assessed against the policyholder's fund balance. Interest credited and mortality charges for group universal life may be adjusted prospectively to reflect expected interest and mortality experience. Mortality charges are subject to maximum guaranteed rates and interest credited on cash values is subject to minimum guaranteed rates as stated in the policy.

The premiums for these products are typically collected within the coverage year and then invested in assets that match the duration of the expected benefit payments that occur over many future years (primarily for disability benefits). With significant investments in longer-duration securities, net investment income is a critical element of profitability for this segment.

The effectiveness of return to work programs and morbidity levels will impact the profitability of disability insurance products. Our previous claim experience and industry data indicate a correlation between disability claim incidence levels and economic conditions, with submitted claims rising under adverse economic conditions, although this impact is not clear. For life insurance products, the degree to which future experience deviates from mortality and expense assumptions also affects profitability.

To reduce our exposure to large individual and catastrophic losses under group life, disability and accidental death policies, as well as our newer accidental injury and critical illness policies, we purchase reinsurance from a diverse group of unaffiliated reinsurers. Our comprehensive

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reinsurance program consists of excess of loss treaties and catastrophe coverage designed to mitigate earnings volatility and provide surplus protection.

Markets and Distribution

We market our group disability and life insurance products and services to employers, employees, professional and other associations and groups in the National, Middle Market and Select segments. In marketing these products, we primarily sell through insurance brokers and consultants and employ a direct sales force consisting of approximately 260 sales professionals in 27 office locations as of December 31, 2016.

Competition

The principal competitive factors that affect the Group Disability and Life segment are underwriting and pricing, the quality and effectiveness of claims management, relative operating efficiency, investment and risk management, distribution methodologies and producer relations, the breadth and variety of products and services offered, and the quality of customer service. For certain products with longer-term liabilities, such as group long-term disability insurance, the financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor.

The principal competitors of our group disability, life and accident businesses are other large and regional insurance companies that market and distribute these or similar types of products and include Aetna, Unum, The Hartford, Prudential and MetLife. As of December 31, 2016, we are one of the top five providers of group disability, life and accident insurance in the United States, based on premiums.

Industry Developments

Employers are expressing a growing interest in employee wellness, absence management and productivity and likewise are recognizing a strong link between employee health, productivity and their profitability. As this interest grows, we believe our healthy lifestyle and return-to-work programs and integrated family medical leave, disability and health care programs position us to deliver integrated solutions for employers and employees. We also believe that our strong disability management portfolio and fully integrated programs provide tools for employers and employees to improve health status. This focus on managing the employee's total absence enables us to increase the number and effectiveness of interventions and minimize disabling events.

The group insurance market remains highly competitive as the rising cost of providing medical coverage to employees has forced companies to re-evaluate their overall employee benefit spending, resulting in lower volumes of group disability and life insurance business and more competitive pricing. Demographic shifts have further driven demand for products and services that are sufficiently flexible to meet the evolving needs of employers and employees who want innovative, cost-effective solutions to their insurance needs. Employers continue to shift towards greater employee participatory coverage and voluntary purchases. With our broad suite of voluntary offerings and continued focus on developing additional voluntary products and service capabilities, we believe we are well positioned to meet the needs of both employers and employees as the market shifts to become more retail-focused.

Over the past few years, there has been heightened review by state regulators of the claims handling practices within the disability and life insurance industry. This has resulted in an increase in coordinated, multi-state examinations that target specific market practices in addition to regularly recurring examinations of an insurer's overall operations conducted by an individual state's regulators. We have recently been subject to such an examination. See Note 21 to the Consolidated Financial Statements for additional information.

The depressed level of interest rates in the United States over the last several years has constrained earnings growth in this segment due to lower yields on our fixed-income investments, and higher benefit expenses resulting from the discounting of future claim payments at lower interest rates.

Other Operations

Other Operations includes the following four businesses:

Corporate-owned Life Insurance

The principal products of the COLI business are permanent insurance contracts sold to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations. Permanent life insurance provides coverage that, when adequately funded, does not expire after a term of years. The contracts are primarily non-participating universal life policies. Fees for universal life insurance products consist primarily of mortality and administrative charges assessed against the policyholder's fund balance. Interest credited and mortality charges for universal life and mortality charges on variable universal life may be adjusted prospectively to reflect expected interest and mortality experience. To reduce our exposure to large individual and catastrophe losses, we purchase reinsurance from unaffiliated reinsurers.

Run-off Settlement Annuity Business

Our settlement annuity business is a closed, run-off block of single premium annuity contracts. These contracts are primarily liability settlements with approximately 20% of the liabilities associated with payments that are guaranteed and not contingent on survivorship. For contracts that involve non-guaranteed payments, such payments are contingent on the survival of one or more parties involved in the settlement.

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Run-off Reinsurance

Our reinsurance operations are an inactive business in run-off mode.

In February 2013, we effectively exited the guaranteed minimum death benefit ("GMDB") and guaranteed minimum income benefit ("GMIB") business by reinsuring 100% of our future exposures, net of retrocessional arrangements in place at that time, up to a specified limit. For additional information regarding this reinsurance transaction and the arrangements that secure our reinsurance recoverables, see Note 9 to the Consolidated Financial Statements.

Individual Life Insurance and Annuity and Retirement Benefits Businesses

This business includes deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business. For more information regarding the arrangements that secure our reinsurance recoverables for the retirement benefits business, see Note 9 to the Consolidated Financial Statements.

Investments and Investment Income

General Accounts

Our investment operations provide investment management and related services for our corporate invested assets and the insurance-related invested assets in our General Account ("General Account Invested Assets"). We acquire or originate, directly or through intermediaries, a broad range of investments including private placement and public securities, commercial mortgage loans, real estate, mezzanine, private equity partnerships and short-term investments. Invested assets also include policy loans that are fully collateralized by insurance policy cash values. Invested assets are managed primarily by our subsidiaries and, to a lesser extent, external managers with whom our subsidiaries contract. Net investment income is included as a component of adjusted income from operations for each of our reporting segments and Corporate. Realized investment gains (losses) are reported by segment but excluded from adjusted income from operations. For additional information about invested assets, see the "Investment Assets" section of the MD&A beginning on page 53 and Notes 10 to 12 of our Consolidated Financial Statements.

We manage our investment portfolios to reflect the underlying characteristics of related insurance and contractholder liabilities and capital requirements, as well as regulatory and tax considerations pertaining to those liabilities and state investment laws. Insurance and contractholder liabilities range from short duration health care products to longer term obligations associated with disability and life insurance products and the run-off settlement annuity business. Assets supporting these liabilities are managed in segregated investment portfolios to facilitate matching of asset durations and cash flows to those of corresponding liabilities. Investment strategy and results are affected by the amount and timing of cash available for investment, competition for investments, economic conditions, interest rates and asset allocation decisions. We routinely monitor and evaluate the status of our investments, obtaining and analyzing relevant investment-specific information and assessing current economic conditions, trends in capital markets and other factors such as industry sector, geographic and property-specific information.

Separate Accounts

Our subsidiaries or external advisors manage Separate Account invested assets on behalf of contractholders; including the Cigna Pension Plan, variable universal life products sold through our corporate-owned life insurance business, and other disability and life products. These assets are legally segregated from our other businesses and are not included in General Account Invested Assets. Income, gains and losses generally accrue directly to the contractholders.

Regulation

The laws and regulations governing our business continue to increase each year and are subject to frequent change. We are regulated by state, federal and international regulatory agencies that generally have discretion to issue regulations and interpret and enforce laws and rules. These regulations can vary significantly from jurisdiction to jurisdiction, and the interpretation of existing laws and rules also may change periodically. Domestic and international governments continue to enact and consider various legislative and regulatory proposals that could materially impact the health care system.

Our insurance and HMO subsidiaries must be licensed by the jurisdictions in which they conduct business. These subsidiaries are subject to numerous state, federal and international regulations related to their business operations, including, but not limited to:

the form and content of customer contracts including benefit mandates (including special requirements for small groups);

premium rates and medical loss ratios;

the content of agreements with participating providers of covered services;

producer appointment and compensation;

claims processing, payment and appeals;

underwriting practices;

reinsurance arrangements;

solvency and financial reporting;

unfair trade and claim practices;

market conduct;

protecting the privacy and confidentiality of the information received from customers;
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risk sharing arrangements with providers;

reimbursement or payment levels for Medicare services;

advertising; and

the operation of consumer-directed plans (including health savings accounts, health reimbursement accounts, flexible spending accounts and debit cards).

The business of administering and insuring employee benefit programs in the United States, particularly health care programs, is heavily regulated by state and federal laws and administrative agencies, such as state departments of insurance, and federal agencies including HHS, CMS, the Internal Revenue Service ("IRS") and the Departments of Labor, Treasury and Justice, as well as the courts. Health savings accounts, health reimbursement accounts and flexible spending accounts also are regulated by the Department of the Treasury and the IRS.

Our operations, accounts and other books and records are subject to examination at regular intervals by regulatory agencies, including state insurance and health and welfare departments, state boards of pharmacy, CMS and comparable international regulators to assess compliance with applicable laws and regulations. In addition, our current and past business practices are subject to review by, and from time to time we receive subpoenas and other requests of information from various state insurance and health care regulatory authorities, attorneys general, the Office of Inspector General ("OIG"), the Department of Labor and other state, federal and international authorities, including inquiries by, and testimony before committees and subcommittees of the U.S. Congress regarding certain of our business practices. These examinations, reviews, subpoenas and requests may result in changes to or clarifications of our business practices, as well as fines, penalties or other sanctions.

Our international subsidiaries are subject to regulations in international jurisdictions where foreign insurers may be faced with more onerous regulations than their domestic competitors. In addition, the expansion of our operations into foreign countries increases our exposure to certain U.S. laws, such as the Foreign Corrupt Practices Act of 1977 ("FCPA"). See page 19 for further discussion of international regulations.

The Health Care Reform Act

The Health Care Reform Act mandated broad changes affecting insured and self-insured health benefit plans that impact our current business model, including our relationship with current and future customers, producers and health care providers, products, services, processes and technology. As a result of the 2016 U.S. elections, the future of the Health Care Reform Act is uncertain. Certain provisions of the Health Care Reform Act are likely to be retained, while others are likely to be repealed or replaced.

Key Provisions of the Health Care Reform Act

Various fees, including the health insurance industry tax and the reinsurance fee, were assessed beginning in 2014. The health insurance industry assessment, totaling $11.3 billion for the industry in 2016 and increasing to $14.3 billion by 2018, is not tax deductible. In December 2015, the federal appropriations legislation imposed a one-year moratorium on the industry tax for 2017, with reinstatement expected in 2018. Our share of this industry tax is determined based on our proportion of premiums for both our commercial and government risk businesses to the industry total. The reinsurance fee is a temporary (2014-2016) fixed dollar per customer levy on all insurers, HMOs and self-insured group health plans and is tax deductible.

The health insurance exchange enrollment process began on October 1, 2013 with coverage first effective in 2014. Each state has a state-based, a state and federal partnership, or a federally-facilitated health insurance exchange for individuals and small employer groups to purchase insurance coverage. Because individuals seeking to purchase health insurance coverage either on or off the exchanges are guaranteed to be issued a policy, the Health Care Reform Act provided programs designed to reduce the risk for participating health insurance companies including: (1) a temporary (2014-2016) reinsurance program; and (2) a premium stabilization program comprised of two components: a temporary program (2014-2016) limiting insurer gains and losses ("risk corridor"), and a permanent program that adjusts premiums based on the relative health status of the customer base ("risk adjustment"). See Note 2 to the Consolidated Financial Statements and the Introduction to the MD&A contained in this Form 10-K for additional information on these programs.

MLR requirements, as prescribed by HHS, require payment of premium rebates to group and individual policyholders if certain annual MLRs are not met in our commercial business. In December 2014, the federal government enacted legislation that provides permanent relief from certain Health Care Reform Act requirements for expatriate health coverage (including the MLR requirements).

Other provisions of the Health Care Reform Act in effect include reduced Medicare Advantage premium rates, the requirement to cover preventive services with no enrollee cost-sharing, banning the use of lifetime and annual limits on the dollar amount of essential health benefits, increasing restrictions on rescinding coverage and extending coverage of dependents to the age of 26. The employer mandate, the phase in of which was complete in 2016, requires employers with 50 or more full-time employees to offer affordable health insurance that provides minimum value (each as defined under the Health Care Reform Act) to full-time employees and dependent children up to age 26 or be subject to penalties based on employer size. The Health Care Reform Act also changed certain tax laws that effectively limit tax deductions for certain employee compensation paid by health insurers.

Our Medicare Advantage and Medicare Part D prescription drug plan businesses also have been impacted by the Health Care Reform Act in a variety of additional ways, including mandated minimum reductions to risk scores, transition of Medicare Advantage "benchmark" rates to Medicare fee-for-service parity, reduced enrollment periods and limitations on disenrollment, providing "quality bonuses" for Medicare Advantage plans with a rating of four or five stars from CMS and mandated consumer discounts on brand name and generic prescription drugs for Medicare Part D plan participants in the coverage gap. The Health Care Reform Act requires Medicare Advantage and Medicare Part D plans to meet a minimum MLR of 85%. Under the finalized regulations promulgated by HHS, if the MLR for a CMS contract is less than 85%, we are required to pay a penalty to CMS and could be required to make additional payments if the MLR continues to be less than 85% for successive years. Through the Health Care Reform Act and other federal legislation, funding for Medicare Advantage plans has been and may continue to be altered.

We have implemented the provisions of the Health Care Reform Act currently in effect. Management continues to be actively engaged with regulators and policymakers with respect to rule-making. However, ongoing legislative and regulatory challenges to the Health Care Reform

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Act, pending litigation challenging aspects of the law, the change in administration and the Congress following the 2016 U.S. elections will continue to create uncertainty about the ultimate impact of the Health Care Reform Act. Additionally, the executive order signed by President Trump in January 2017, which instructs agencies to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Health Care Reform Act that would impose a fiscal burden on any state or a cost, fee, tax, penalty, or regulatory burden on individuals, providers, insurers, recipients of healthcare services, purchasers of health insurers or makers of medical devices, products or medications, will create additional uncertainty.

For the financial effects of certain Health Care Reform Act provisions, see the "Executive Overview" section of our MD&A beginning on page 36 of this Form 10-K. In addition, accounting policies around the government's risk mitigation programs are further disclosed in Note 2 to the Consolidated Financial Statements.

Regulation of Insurance Companies

Financial Reporting, Internal Control and Corporate Governance

Regulators closely monitor the financial condition of licensed insurance companies and HMOs. States regulate the form and content of statutory financial statements, the type and concentration of permitted investments, and corporate governance over financial reporting. Our insurance and HMO subsidiaries are required to file periodic financial reports and schedules with regulators in most of the jurisdictions in which they do business as well as annual financial statements audited by independent registered public accounting firms. Certain insurance and HMO subsidiaries are required to file an annual report of internal control over financial reporting with most jurisdictions in which they do business. Insurance and HMO subsidiaries' operations and accounts are subject to examination by such agencies. Many states have expanded regulations relating to corporate governance and internal control activities of insurance and HMO subsidiaries as a result of model regulations adopted by the National Association of Insurance Commissioners ("NAIC") with elements similar to corporate governance and risk oversight disclosure requirements under federal securities laws.

Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds

Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty associations or indemnity funds that are established to pay claims on behalf of insolvent insurance companies. In the United States, these associations levy assessments on member insurers licensed in a particular state to pay such claims. Certain states require HMOs to participate in guaranty funds, special risk pools and administrative funds. For additional information about guaranty fund and other assessments, see Note 21 to our Consolidated Financial Statements.

Certain states continue to require health insurers and HMOs to participate in assigned risk plans, joint underwriting authorities, pools or other residual market mechanisms to cover risks not acceptable under normal underwriting standards, although some states have eliminated these requirements as a result of the Health Care Reform Act.

Solvency and Capital Requirements

Many states have adopted some form of the NAIC model solvency-related laws and risk-based capital rules ("RBC rules") for life and health insurance companies. The RBC rules recommend a minimum level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities incurred. If the ratio of the insurer's adjusted surplus to its risk-based capital falls below statutory required minimums, the insurer could be subject to regulatory actions ranging from increased scrutiny to conservatorship.

In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. Our HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, are compliant with applicable RBC and non-U.S. surplus rules.

The Risk Management and Own Risk and Solvency Assessment Model Act ("ORSA"), adopted by the NAIC, provides requirements and principles for maintaining a group solvency assessment and a risk management framework and reflects a broader approach to U.S. insurance regulation. ORSA includes a requirement to file an annual ORSA Summary Report in the lead state of domicile. To date, an overwhelming majority of the states have adopted the same or similar versions of ORSA.

Holding Company Laws

Our domestic insurance companies and certain of our HMOs are subject to state laws regulating subsidiaries of insurance holding companies. Under such laws, certain dividends, distributions and other transactions between an insurance company or an HMO subsidiary and its affiliates may require notification to, or approval by, one or more state insurance commissioners. In addition, the holding company acts of states in which our subsidiaries are domiciled restrict the ability of any person to obtain control of an insurance company or HMO subsidiary without prior regulatory approval.

Marketing, Advertising and Products

In most states, our insurance companies and HMO subsidiaries are required to certify compliance with applicable advertising regulations on an annual basis. Our insurance companies and HMO subsidiaries are also required by most states to file and secure regulatory approval of products prior to the marketing, advertising, and sale of such products.

Licensing Requirements

Certain of our subsidiaries are pharmacies that dispense prescription drugs to participants of benefit plans administered or insured by our HMO and insurance company subsidiaries. These pharmacy-subsidiaries are subject to state licensing requirements and regulation as well as U.S. Drug Enforcement Agency registration requirements, U.S. Food and Drug Administration requirements and third party accreditation

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requirements. Other laws and regulations affecting our pharmacy-subsidiaries include federal and state laws concerning labeling, packaging, advertising, handling and adulteration of prescription drugs and dispensing of controlled substances.

Certain subsidiaries contract to provide claim administration, utilization management and other related services for the administration of self-insured benefit plans. These subsidiaries may be subject to state third-party administration and other licensing requirements and regulation, as well as third party accreditation requirements.

Our international subsidiaries are often required to be licensed when entering new markets or starting new operations in certain jurisdictions. The licensure requirements for these subsidiaries vary by country and are subject to change.

Other Federal and State Regulations

Employee Retirement Income Security Act and the Public Health Service Act

Our domestic subsidiaries sell most of their products and services to sponsors of employee benefit plans that are governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA is a complex set of federal laws and regulations enforced by the IRS and the Department of Labor, as well as the courts. Our domestic subsidiaries are subject to requirements imposed by ERISA affecting claim payment and appeals procedures for individual health insurance and insured and self-insured group health plans and for the insured dental, disability, life and accident plans we administer. Our domestic subsidiaries also may contractually agree to comply with these requirements on behalf of the self-insured dental, disability, life and accident plans they administer.

Many provisions of the Health Care Reform Act impacting insured and self-insured group health plans were incorporated into ERISA. The health insurance reform provisions under ERISA were also incorporated into the Public Health Service Act and are directly applicable to health insurance issuers (i.e., health insurers and HMOs).

Plans subject to ERISA also can be subject to state laws and the legal question of whether and to what extent ERISA preempts a state law will continue to be subject to court interpretation.

Medicare and Medicaid Regulations

Several of our subsidiaries engage in businesses that are subject to federal Medicare regulations, such as:

those offering individual and group Medicare Advantage coverage; and

those offering Medicare Pharmacy (Part D) products.

In our Medicare Advantage and Medicare Part D business, we contract with CMS to provide services to Medicare beneficiaries. As a result, our ability to obtain payment (and the determination of the amount of such payments), enroll and retain members and expand into new service areas is subject to compliance with CMS' numerous and complex regulations and requirements that are frequently modified and subject to administrative discretion. Marketing and sales activities (including those of third-party brokers and agents) are also heavily regulated by CMS and other governmental agencies, including applicable state departments of insurance. We will continue to allocate significant resources to our compliance, ethics and fraud and waste and abuse programs to comply with the laws and regulations governing Medicare Advantage and Medicare Part D programs.

The Health Care Reform Act ties a portion of each Medicare Advantage plan's and Medicare Part D plan's reimbursement to the plan's "Star Rating" by CMS, with those plans receiving a rating of four or more stars eligible for quality-based bonus payments. The Star Rating system considers various measures adopted by CMS, including, for example, quality of care, preventative services, chronic illness management, coverage appeals and customer satisfaction.

Our Medicaid and dual eligible products are also regulated by CMS and state Medicaid agencies that audit our performance to determine compliance with contracts and regulations. We continue to work in collaboration with applicable state agencies regarding our Medicaid plans in Texas and Illinois to ensure ongoing compliance and sustainability.

Several of our subsidiaries are also subject to reporting requirements pursuant to Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007, that requires us to report specific information regarding claimants and claim settlements involving Medicare participants so CMS can recover Medicare funds expended to provide healthcare treatment to the claimant. Strict sanctions, including fines and penalties, exclusion from the Medicare and Medicaid programs and criminal penalties may be imposed for non-compliance with these reporting obligations.

Federal and State Audits of Government Sponsored Health Care Programs

Participation in government sponsored health care programs subjects us to a variety of federal and state laws and regulations and risks associated with audits conducted under these programs. These audits may occur in years subsequent to our providing the relevant services. These risks may include reimbursement claims as well as potential fines and penalties, such as restrictions on our ability to participate or expand our presence in certain programs. For example, with respect to our Medicare Advantage business, CMS and the OIG perform audits to determine a health plan's compliance with federal regulations and contractual obligations, including compliance with proper coding practices (sometimes referred to as "Risk Adjustment Data Validation Audits" or "RADV audits") and compliance with fraud and abuse enforcement practices through Recovery Audit Contractor ("RAC") audits in which third-party contractors conduct post-payment reviews on a contingency fee basis to detect and correct improper payments. In addition, negative performance points may be accumulated if we do not perform satisfactorily during an audit that could restrict our ability to expand our Medicare Advantage business geographically.

In January 2016, following an audit, CMS issued a Notice of Imposition of Immediate Intermediate Sanctions (the "Notice") to the Company. The Notice required us to suspend certain enrollment and marketing activities for Medicare Advantage-Prescription Drug and Medicare Part D Plans. The sanctions do not impact the right of current enrollees to remain covered by our Medicare Advantage-Prescription Drug or Medicare Part D Plans. We are working with CMS to address the audit findings as quickly as possible. See "Business – Global Health Care" beginning on page 3 of this Form 10-K for additional information about our participation in government health-related programs.

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The federal government has made investigating and prosecuting health care fraud, waste and abuse a priority. Fraud, waste and abuse prohibitions encompass a wide range of activities, including kickbacks for inducement to refer customers, billing for unnecessary medical services, coding, network adequacy, improper marketing, and violation of patient privacy rights. The regulations and contractual requirements in this area are complex, are frequently modified, and are subject to administrative discretion and judicial interpretation. We expect to continue to allocate significant resources to comply with these regulations and requirements and to maintain audit readiness.

Privacy, Security and Data Standards Regulations

The federal Health Insurance Portability and Accountability Act of 1996 and its implementing regulations ("HIPAA") imposes minimum standards on health insurers, HMOs, health plans, health care providers and clearinghouses for the privacy and security of protected health information. HIPAA also established rules that standardize the format and content of certain electronic transactions, including, but not limited to, eligibility and claims.

HIPAA's privacy and security requirements were expanded by the Health Information Technology for Economic and Clinical Health Act ("HITECH") through additional contracting requirements for covered entities, the extension of privacy and security provisions to business associates, the requirement to provide notification to various parties in the event of a data breach of protected health information, and enhanced financial penalties for HIPAA violations, including potential criminal penalties for individuals.

The federal Gramm-Leach-Bliley Act generally places restrictions on the disclosure of non-public information to non-affiliated third parties, and requires financial institutions, including insurers, to provide customers with notice regarding how their non-public personal information is used, including an opportunity to "opt out" of certain disclosures. State departments of insurance and certain federal agencies adopted implementing regulations as required by federal law.

A number of states have adopted data security laws and regulations regulating data security and requiring security breach notification that may apply to us in certain circumstances. Neither HIPAA nor the Gramm-Leach-Bliley privacy regulations preempt more stringent state laws and regulations. In addition, international laws, rules and regulations governing the use and disclosure of personal information are generally more stringent than in the United States, and they vary from jurisdiction to jurisdiction.

Consumer Protection Laws

We engage in direct-to-consumer activities and are increasingly offering mobile and web-based solutions to our customers. We are therefore subject to federal and state regulations applicable to electronic communications and other consumer protection laws and regulations, such as the Telephone Consumer Protection Act and the CAN-SPAM Act. In particular, the Federal Trade Commission is increasingly exercising its enforcement authority in the areas of consumer privacy and data security, with a focus on web-based, mobile data and "big data."

Dodd-Frank Act and Investment-Related Regulations

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") provides for a number of reforms and regulations in the corporate governance, financial reporting and disclosure, investments, tax and enforcement areas. The Dodd-Frank Act established a Federal Insurance Office (the "FIO") to develop federal policy on insurance matters. While the FIO does not have authority over health insurance, it may have authority over other parts of our business, such as life insurance. Additional rulemaking by the SEC and other regulatory authorities continues. In February 2017, President Trump signed an executive order directing the Secretary of the Treasury to conduct a review of the Dodd-Frank Act. We continue to monitor how these regulations might impact us.

Depending upon their nature, our investment management activities are subject to U.S. federal securities laws, ERISA and other federal and state laws governing investment related activities. In many cases, the investment management activities and investments of individual insurance companies are subject to regulation by multiple jurisdictions.

Office of Foreign Assets Control Sanctions and Anti-Money Laundering

We also are subject to regulation by the Office of Foreign Assets Control of the Department of the Treasury that administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes.

Certain of our products are subject to Department of the Treasury anti-money laundering regulations under the Bank Secrecy Act.

In addition, we may be subject to similar regulations in non-U.S. jurisdictions in which we operate.

Antitrust Regulations

Federal and state antitrust regulators, such as the Department of Justice and certain state attorneys general, have opposed the proposed merger with Anthem. See Notes 3 and 21 to the Consolidated Financial Statements in this Form 10-K for additional information about the proposed merger. In addition, our subsidiaries also engage in activities that may be scrutinized under federal and state antitrust laws and regulations. These activities include the administration of strategic alliances with competitors, information sharing with competitors and provider contracting.

International Regulations

Our operations outside the United States expose us to laws of multiple jurisdictions and the rules and regulations of various governing bodies and regulators, including those related to financial and other disclosures, corporate governance, privacy, data protection, data mining, data transfer, intellectual property, labor and employment, consumer protection, direct-to-consumer communications activities, anti-corruption and anti-money laundering. Foreign laws and rules may include requirements that are different from or more stringent than similar requirements in the United States.

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Our operations in countries outside the United States:

are subject to local regulations of the jurisdictions where customers reside,

in some cases, are subject to regulations in the locations of customers, and

in all cases, are subject to the FCPA.

The FCPA prohibits offering, promising, providing or authorizing others to give anything of value to a foreign government official or employee to obtain or retain business or otherwise secure a business advantage. Outside of the United States, we may interact with government officials in several different capacities: as regulators of our insurance business; as clients or partners who are state-owned or partially state-owned; as health care professionals who are employed by the government; and as hospitals that are state-owned. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties, and the SEC and Department of Justice have increased their enforcement activities with respect to FCPA. The UK Bribery Act of 2010 applies to all companies with a nexus to the United Kingdom. Under this act, any voluntary disclosures of FCPA violations may be shared with United Kingdom authorities, thus potentially exposing companies to liability and potential penalties in multiple jurisdictions.

If our employees or agents fail to comply with applicable laws governing our international operations, we may face investigations, prosecutions and other legal proceedings and actions that could result in civil penalties, administrative remedies and criminal sanctions. See the Risk Factors section beginning on page 21 for a discussion of risks related to our global operations.

Miscellaneous

Premiums and fees from CMS represented 20% of our total consolidated revenues for the year ended December 31, 2016 under a number of contracts. We are not dependent on business from one or a few customers. Other than CMS, no one customer accounted for 10% or more of our consolidated revenues in 2016. We are not dependent on business from one or a few brokers or agents. In addition, our insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to approval and acceptance.

We had approximately 41,000 employees as of December 31, 2016; 39,300 employees as of December 31, 2015; and 37,200 employees as of December 31, 2014.

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ITEM 1A. Risk Factors

As a large company operating in a complex industry, we encounter a variety of risks and uncertainties that could have a material adverse effect on our business, liquidity, results of operations, financial condition or the trading price of our securities. You should carefully consider each of the risks and uncertainties discussed below, together with other information contained in this Annual Report on Form 10-K, including Management's Discussion and Analysis of Results of Operations and Financial Condition and information. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect us. The following risk factors have been organized by category for ease of use; however many of the risks may have impacts in more than one category. These categories, therefore, should be viewed as a starting point for understanding the significant risks facing us and not as a limitation on the potential impact of the matters discussed. Risk factors are not necessarily listed in order of importance.

Strategic and Operational Risks

Future performance of our business will depend on our ability to execute our strategic and operational initiatives effectively.

The future performance of our business will depend in large part on our ability to effectively implement and execute our strategic and operational initiatives including: (1) driving growth in targeted geographies, product lines, customer buying segments and distribution channels; (2) improving our strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets. Successfully executing on these initiatives depends on a number of factors, including our ability to:

differentiate our products and services from those of our competitors;

develop and introduce new products or programs, particularly in response to government regulation and the increased focus on consumer-directed products;

grow our commercial product portfolio, including managing the uncertainties associated with mix and volume of business on public health insurance exchanges;

identify and introduce the proper mix or integration of products that will be accepted by the marketplace;

attract and retain sufficient numbers of qualified employees;

attract, develop and maintain collaborative relationships with a sufficient number of qualified partners, including physicians and other health care providers in an environment of growing shortages of primary care professionals and consolidation within the provider industry;

attract new and maintain existing customer relationships;

transition health care providers from volume-based fee-for-service arrangements to a value-based system;

improve medical cost competitiveness in targeted markets;

manage our medical and administrative costs effectively;

manage our balance sheet exposures effectively, including our pension funding obligations; and

manage our Global Health Care operating expense ratio effectively.

If these initiatives fail or are not executed on effectively, our consolidated financial position and results of operations could be negatively affected. For example, efforts to reduce operating expenses while maintaining the necessary resources and talent pool are important and, if not managed effectively, could have long-term effects on our business by negatively impacting our ability to drive improvements in the quality of our products and/or services. For our strategic initiatives to succeed, we must effectively integrate our operations, including our acquired businesses, actively work to ensure consistency throughout the organization, and promote a global mind-set along with a focus on individual customers. If we fail to do so, our business may be unable to grow as planned, or the result of expansion may be unsatisfactory. In addition, the current competitive, economic and regulatory environment requires our organization to adapt rapidly and nimbly to new opportunities and challenges. We will be unable to do so if we do not make important decisions quickly, define our appetite for risk specifically, implement new governance, managerial and organizational processes smoothly and communicate roles and responsibilities clearly.

We face price competition and other pressures that could result in premiums that are insufficient to cover the cost of the health care services delivered to our customers.

While health plans compete on the basis of many service and quality-related factors, we expect that price will continue to be a significant basis of competition. Our client and customer contracts are subject to negotiation as clients and customers seek to contain their costs, including by reducing benefits offered or elected. Increasingly, our clients seek to negotiate performance guarantees that require us to pay penalties if the guaranteed performance standard is not met. As brokers and benefit consultants seek to enhance their revenue streams, they look to take on services that we typically provide. Alternatively, our clients and customers may purchase different types of products that are less profitable, or move to a competitor to obtain more favorable pricing. Each of these events would likely negatively impact our financial results.

Further, federal and state regulatory agencies may restrict our ability to implement changes in premium rates. For example, the Health Care Reform Act includes an annual rate review requirement to prohibit unreasonable rate increases in the individual and small group health insurance markets and established minimum medical loss ratios for certain plans. Fiscal concerns regarding the continued viability of programs such as Medicare may cause decreasing reimbursement rates, delays in premium payments or insufficient increases in reimbursement rates for government sponsored programs in which we participate. Any limitation on our ability to maintain or increase our premium or reimbursement

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levels, or a significant loss of customers resulting from our need to increase or maintain premium or reimbursement levels, could adversely affect our business, cash flows, financial condition and results of operations.

In addition, factors such as business consolidations, strategic alliances, legislation and marketing practices will likely continue to create pressure to contain or otherwise restrict premium price increases, despite increasing medical costs. For example, the Gramm-Leach-Bliley Act gives banks and other financial institutions the ability to be affiliated with insurance companies. This may lead to new competitors with significant financial resources. Our product margins and growth depend, in part, on our ability to compete effectively in our markets, set rates appropriately in highly competitive markets to keep or increase our market share, increase customers as planned, and avoid losing accounts with favorable medical cost experience while retaining or increasing our customer base in accounts with unfavorable medical cost experience.

Premiums in the health care business are generally set for one-year periods and are priced well in advance of the date on which the contract commences. Our revenue on Medicare policies is based on bids submitted mid-year in the year before the contract year. Although we base the premiums we charge and our Medicare bids on our estimate of future health care costs over the contract period, actual costs may exceed what we estimate and charge in premiums due to factors such as medical cost inflation, higher than expected utilization of medical services, new or costly drugs, treatments and technology, and customer mix. Our health care costs also are affected by external events that we cannot forecast or project and over which we have little or no control, such as influenza-related health care costs, epidemics, pandemics, terrorist attacks or other man-made disasters, natural disasters or other events that materially increase utilization of medical and/or other covered services, as well as changes in customers' health care utilization patterns and provider billing practices. Our profitability depends, in part, on our ability to accurately predict, price for and effectively manage future health care costs through disciplined underwriting, provider contracting, utilization management and product design.

The reserves we hold for expected medical claims are based on estimates that involve an extensive degree of judgment and are inherently variable. If actual claims exceed our estimates, our operating results could be materially adversely affected, and our ability to take timely corrective actions to limit future costs may be limited.

We maintain and record medical claims reserves on our balance sheet for estimated future payments. Our estimates of health care costs payable are based on a number of factors, including historical claim experience, but this estimation process requires extensive judgment. Considerable variability is inherent in such estimates, and the accuracy of the estimates is highly sensitive to changes in medical claims submission and processing patterns and/or procedures, changes in customer base and product mix, changes in the utilization of medical and/or other covered services, changes in medical cost trends, changes in our medical management practices and the introduction of new benefits and products. Furthermore, if we are not able to accurately and promptly anticipate and detect medical cost trends, our ability to take timely corrective actions to limit future costs and reflect our current benefit cost experience in our pricing process may be limited. In addition, while we continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make adjustments to our reserves, the actual health care costs may exceed the reserves we have recorded.

If we fail to develop and maintain satisfactory relationships with physicians, hospitals and other health care providers, our business and results of operations may be adversely affected.

We directly and indirectly contract with physicians, hospitals and other health care professionals and facilities to provide health care services to our customers. Our results of operations are substantially dependent on our ability to contract for these services at competitive prices. In any particular market, physicians, hospitals and health care providers could refuse to contract, demand higher payments or take other actions that could result in higher medical costs or less desirable products for our customers. In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant or controlling market positions that could result in a diminished bargaining position for us. If providers refuse to contract with us, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected. The formation and success of collaborative arrangements with physician groups, specialist groups, hospital arrangements and delivery system joint ventures are key to our strategic focus to transition from volume-based fee-for-service arrangements to a value-based health care system. If such arrangements do not result in the lower medical costs that we project or if we fail to attract health care providers to such arrangements, or are less successful at implementing such arrangements than our competitors, our medical costs may not be competitive and may be higher than we project, our attractiveness to customers may be reduced, we may lose or be unable to grow our customer base, and our ability to profitably grow our business and/or our operating results may be adversely affected.

Our ability to develop and maintain satisfactory relationships with health care providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement levels, increasing revenue and other pressures on health care providers and consolidation activity among hospitals, physician groups and health care providers. For example, ongoing reductions by CMS and state governments in amounts payable to providers, particularly hospitals, for services provided to Medicare and Medicaid enrollees may exacerbate the cost shift to private payors, thereby adversely impacting our ability to maintain or develop new cost-effective health care provider contracts or result in a loss of revenues or customers.

Recent and continuing consolidation among physicians, hospitals and other health care providers, emergence of accountable care organizations and other changes in the organizational structures chosen by physicians, hospitals and health care providers may change the way these providers interact with us and may change the competitive landscape in which we operate. In some instances, these organizations may compete directly with us, potentially affecting the way that we price our products or causing us to incur increased costs if we change our operations to be more competitive. Our focus on developing collaborative accountable care organizations and independent practice associations or similar business arrangements with physicians and other health care providers may not achieve intended benefits and adversely affect our strategy or prospects.

Out-of-network providers are not limited in the amount they bill by any agreement with us. While benefit plans place limits on the amount of charges that will be considered for reimbursement, out-of-network providers have become increasingly sophisticated and aggressive and such

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ITEM 1A. Risk Factors

limitations can be difficult to enforce. As a result, the outcome of disputes where we do not have a provider contract may cause us to pay higher medical or other benefit costs than we projected.

As a global company, we face political, legal, operational, regulatory, economic and other risks that present challenges and could negatively affect our multinational operations and/or our long-term growth.

As a global company, our business is increasingly exposed to risks inherent in foreign operations. These risks can vary substantially by market, and include political, legal, operational, regulatory, economic and other risks, including government intervention that we do not face in our U.S. operations. The global nature of our business and operations may present challenges including, but not limited to, those arising from:

varying regional and geopolitical business conditions and demands;

regulation that may discriminate against U.S. companies, favor nationalization or expropriate assets;

price controls or other pricing issues and exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which we operate or converting local currencies that our foreign operations hold into U.S. dollars or other currencies;

foreign currency exchange rates and fluctuations that may have an impact on the future costs or on future sales and cash flows from our international operations, and any measures that we may implement may not be effective in reducing the effect of volatile currencies and other risks of our international operations;

our reliance on local sales forces for some operations in countries that may have labor problems and/or less flexible employee relationships that can be difficult and expensive to terminate, or where changes in local regulation or law may disrupt business operations;

effectively managing our partner relationships in countries outside of the United States;

managing more geographically diverse operations and projects;

operating in new foreign markets that may require considerable management time before operations generate any significant revenues and earnings;

providing data protection on a global basis and sufficient levels of technical support in different locations;

the global trend for companies to enact local data residency requirements;

political change, including the June 2016 referendum in the United Kingdom to leave the European Union and the results of the November 2016 U.S. elections;

acts of war, terrorism, natural disasters or pandemics in locations where we operate; and

general economic and political conditions.

These factors may increase in significance as we continue to expand globally, and any one of these challenges could negatively affect our operations or long-term growth. For example, due to the concentration of our international business in South Korea, the Global Supplemental Benefits segment is exposed to potential losses resulting from economic, regulatory and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, that could have a significant impact on the segment's results and our consolidated financial results.

International operations also require us to devote significant resources to implement controls and systems in new markets to comply, and to ensure that our vendors and partners comply, with U.S. and foreign laws prohibiting bribery, corruption and money laundering, in addition to other regulations regarding, among other things, our products, direct-to-consumer communications, customer privacy, data protection and data residency. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or employees, restrictions or outright prohibitions on the conduct of our business, and significant reputational harm. We must regularly reassess the size, capability and location of our global infrastructure and make appropriate changes, and must have effective change management processes and internal controls in place to address changes in our business and operations. Our success depends, in part, on our ability to anticipate these risks and manage these challenges. Our failure to comply with laws and regulations governing our conduct outside the United States or to establish constructive relations with non-U.S. regulators could have a material adverse effect on our business, results of operations, financial condition, liquidity and long-term growth.

We are dependent on the success of our relationships with third parties for various services and functions, including, but not limited to, certain pharmacy benefit management services.

To improve operating costs, productivity and efficiencies, we contract with third parties for the provision of specific services, such as certain pharmacy benefit management services, information technology, medical management services, call center and claim services. Our operations may be adversely affected if these third parties fail to satisfy their obligations to us or if the arrangement is terminated in whole or in part or if there is a contractual dispute between us and these third parties. Even though contracts are intended to provide certain protections, we have limited control over the actions of third parties. For example, noncompliance with any privacy or security laws and regulations or any security breach involving one of our third-party vendors or a dispute between us and a third party vendor related to our arrangement could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation. In addition, with respect to services or functions outsourced to third parties in foreign jurisdictions, we also are exposed to risks inherent in conducting business outside of the United States.

Outsourcing also may require us to change our existing operations, adopt new processes for managing these service providers and/or redistribute responsibilities to realize the potential productivity and operational efficiencies. If there are delays or difficulties in changing

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ITEM 1A. Risk Factors

business processes or our third party vendors do not perform as expected, we may not realize, or not realize on a timely basis, the anticipated economic and other benefits of these relationships. This could result in substantial costs or regulatory compliance issues, divert management's attention from other strategic activities, negatively affect employee morale or create other operational or financial problems for us. Terminating or transitioning in whole or in part arrangements with key vendors could result in additional costs or penalties, risks of operational delays or potential errors and control issues during the termination or transition phase. We may not be able to find an alternative vendor in a timely manner or on acceptable terms. If there is an interruption in business or loss of access to data resulting from a termination or transition in services, we may not be able to meet the demands of our customers and, in turn, our business and results of operations could be adversely impacted.

Acquisitions, joint ventures and other transactions involve risks and we may not realize the expected benefits because of integration difficulties, underperformance relative to our expectations and other challenges.

As part of our growth strategy, we regularly consider and enter into strategic transactions, including mergers, acquisitions, joint ventures, licensing arrangements and other relationships (collectively referred to as "transactions"), with the expectation that these transactions will result in various benefits. Our ability to achieve the anticipated benefits of these transactions is subject to numerous uncertainties and risks, including our ability to integrate operations, resources and systems in an efficient and effective manner. We could also face challenges in implementing business plans; changes in laws and regulations or conditions imposed by regulations applicable to the business; retaining key employees; and general competitive factors in the marketplace. These events could result in increased costs, decreases in expected revenues, earnings or cash flow, and goodwill or other intangible asset impairment charges. Further, we may finance transactions by issuing common stock for some or all of the purchase price that could dilute the ownership interests of our shareholders, or by incurring additional debt that could impact our ability to access capital in the future.

In addition, effective internal controls are necessary to provide reliable and accurate financial reports and to mitigate the risk of fraud. The integration of businesses is likely to cause increasing complexity in our systems and internal controls and make them more difficult to manage. Any difficulties in assimilating businesses into our control system could cause us to fail to meet our financial reporting obligations. Ineffective internal controls also could cause investors to lose confidence in our reported financial information that could negatively impact the trading price of our stock and our access to capital.

Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.

Our business is highly dependent on maintaining both effective information systems and the integrity and timeliness of the data we use to serve our customers and health care professionals and to operate our business. If our data were found to be inaccurate or unreliable due to fraud or other error, or if we or our third-party service providers were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our customers and health care professionals and hinder our ability to establish appropriate pricing for products and services, retain and attract customers, establish reserves and report financial results timely and accurately and maintain regulatory compliance, among other things.

Our information technology strategy and execution are critical to our continued success. Increasing regulatory and legislative mandated changes will place additional demands on our information technology infrastructure that could have a direct impact on available resources for projects more directly tied to strategic initiatives. In addition, recent trends toward greater consumer engagement in health care require new and enhanced technologies including more sophisticated applications for mobile devices. We must continue to invest in long-term solutions that will enable us to anticipate customer needs and expectations, enhance the customer experience, act as a differentiator in the market and protect against cybersecurity risks and threats. Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. Connectivity among technologies is becoming increasingly important. The failure of our health care technologies to operate seamlessly with other products could adversely affect our results of operations, financial position and cash flows. We must also develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and customer needs. Failure to do so may present compliance challenges and impede our ability to deliver services at a competitive cost. Further, because system development projects are long-term in nature, they may be more costly than expected to complete and may not deliver the expected benefits upon completion.

In addition, our business is highly dependent upon our ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as claims processing and payment, internet support and customer call centers, and processing new and renewal business. Unavailability, cyber-attack or other failure of one or more of our information technology or other systems could cause slower response times, resulting in claims not being processed as quickly as clients or customers desire, decreased levels of client or customer service and satisfaction, and harm to our reputation. Because our information technology and other systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such business interruptions, systems failures or service denials could have material adverse effects on our business, results of operations, financial condition and liquidity.

As a large health services company, we are subject to cyber-attacks. If we are unable to prevent or contain the effects of any such attacks, we may suffer exposure to substantial liability, reputational harm, loss of revenue or other damages.

Our business depends on our clients' and customers' willingness to entrust us with their health-related and other sensitive personal information. Computer systems may be vulnerable to physical break-ins, computer viruses or malware, programming errors, attacks by third

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ITEM 1A. Risk Factors

parties or similar disruptive problems. We have been, and will likely continue to be, the target of computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. As we increase the amount of personal information that we store and share digitally, our exposure to data security and related cybersecurity risks increases including the risk of undetected attacks, damage, loss or unauthorized access or misappropriation of proprietary or personal information, and the cost of attempting to protect against these risks also increases. We have implemented security technologies, processes and procedures to protect consumer identity; however, there are no assurances that such measures will be effective against all types of breaches. The techniques used change frequently or are often not recognized until launched, because cyber-attacks can originate from a wide variety of sources including third parties such as external service providers. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers. In addition, while we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach as a result of their failure to perform in accordance with contractual arrangements.

The costs to eliminate or address security threats and vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service and loss of existing or potential customers.

In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about us, our customers or other third-parties could expose our customers' private information and our customers to the risk of financial or medical identity theft. Unauthorized dissemination of confidential and proprietary information about our business and strategy also could negatively affect the achievement of our strategic initiatives. Such events would also negatively affect our ability to compete, others' trust in us, our reputation, customer base and revenues and expose us to mandatory disclosure to the media, litigation and other enforcement proceedings, material fines, penalties and/or remediation costs, and compensatory, special, punitive and statutory damages, consent orders and other adverse actions, any of which could adversely affect our business, results of operations, financial condition or liquidity.

Our pharmacy benefit management business and related operations are subject to a number of risks and uncertainties that are in addition to those we face in our health care business.

Notwithstanding our arrangement with a third-party vendor for certain pharmacy benefit management services, we remain responsible to regulators and our clients and customers for the delivery of those pharmacy benefit management services that we contract to provide. This business is subject to federal and state regulation, including without limitation, federal and state anti-remuneration laws, ERISA, HIPAA and laws related to the operation of Internet and mail-service pharmacies. In addition, certain of our subsidiaries are pharmacies subject to state licensing and U.S. Drug Enforcement Agency registration requirements and state and federal laws concerning labeling, packaging, advertising, handling and adulteration of prescription drugs and dispensing of controlled substances. Noncompliance with applicable regulations by us or our third-party vendor(s) could have material adverse effects on our business, results of operations, financial condition, liquidity and reputation.

Our pharmacy benefit management business also would be adversely affected by an inability to contract on favorable terms with pharmaceutical manufacturers and we could suffer liability exposure and reputational harm in connection with purported errors by mail order or retail pharmacy businesses.

In operating onsite clinics and other types of medical facilities, we may be subject to additional liability that could result in significant time and expense.

In addition to contracting with physicians and other health care providers for services, we employ physicians and other health care professionals at onsite low acuity and primary care clinics that we operate for our customers, as well as certain clinics for our employees. In addition, our Government business operates LivingWell health centers and we own and operate multispecialty health care centers, low acuity clinics and other types of centers in the Phoenix, Arizona metropolitan area that employ physicians and other health care professionals. As a direct employer of health care professionals and as an owner or operator of medical facilities, we are subject to liability for negligent acts, omissions, or injuries occurring at one of these clinics or caused by one of our employees. Even if any claims brought against us are unsuccessful or without merit, we still have to defend against such claims. The defense of any actions may result in significant expenses that could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation.

Legal and Compliance Risks

Our business is subject to substantial government regulation, as well as new laws or regulations or changes in existing laws or regulations that could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Our business is regulated at the federal, state, local and international levels. The laws and rules governing our business and related interpretations, including, among others, those associated with the Health Care Reform Act, are increasing in number and complexity, are subject to frequent change and can be inconsistent or in conflict with each other. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, such as those related to financial and other disclosures, corporate governance, privacy, data protection, labor and employment, consumer protection, tax and anti-corruption.

We must identify, assess and respond to new trends in the legislative and regulatory environment, as well as comply with the various existing regulations applicable to our business. Existing or future laws, rules, regulatory interpretations or judgments could force us to change how we conduct our business, restrict revenue and enrollment growth, increase health care, technology and administrative costs including capital requirements, and require enhancements to our compliance infrastructure and internal controls environment. Existing or future laws and rules also could require us to take other actions such as changing our business practices, thereby increasing our liability in federal and state courts for coverage determinations, contract interpretation and other actions.

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ITEM 1A. Risk Factors

In the foreseeable future, the impact of existing regulations and future regulatory and legislative changes could materially adversely affect our business, results of operations, financial condition and cash flows by, among other things:

reducing the potential for growth in revenues and clients by disrupting the employer-based market (currently the primary market for our Commercial operating segment) if employers cease to offer health care coverage for their employees;

restricting revenue, premium and customer growth in certain products and markets or expansion into new markets;

increasing health care or other benefit costs through enhanced or guaranteed coverage requirements;

increasing operating costs through the imposition of reporting or administrative requirements;

increasing operating costs through the imposition of new regulatory requirements, increased taxes and other financial assessments;

restricting our ability to increase premium rates to meet costs (including denial or delays in approval and implementation of those rates);

limiting the level of margin we can earn on premiums through mandated minimum medical loss ratios and required rebates in the event we do not meet mandated minimum ratios;

restricting our ability to participate in and derive revenue from government sponsored programs; and

significantly reducing the level of Medicare program payments.

Specifically, in the United States, significant changes have occurred in the health care system as a result of the Health Care Reform Act. Substantially all of the key provisions of the Health Care Reform Act are now effective. While federal agencies have published interim and final regulations with respect to certain requirements, many issues remain uncertain.

The new Trump Administration and the U.S. Congress may seek to modify, repeal or replace all or part of this health care reform legislation. These efforts began when President Trump signed an executive order in January 2017 that instructs agencies to waive, defer, grant exemptions from, or delay the implementation of any provision of the Health Care Reform Act that poses a financial burden. As a result, it is difficult to predict the continuing impact of the Health Care Reform Act on our business. In addition, the continuing development of implementing regulations and interpretive guidance and legal challenges has contributed to this uncertainty. We are unable to predict how these events will develop and what impact they will have on the Health Care Reform Act, and in turn, on our business including, but not limited to, our products, services, processes and technology and on our relationships with current and future customers, producers and health care providers.

Further, if we fail to effectively implement or adjust our strategic and operational initiatives, such as by reducing operating costs, adjusting premium pricing or benefit design or transforming our business model in response to the Health Care Reform Act and any other future legislative or regulatory changes, this failure may have a material adverse effect on our results of operations, financial condition and cash flows, including, but not limited to, our ability to maintain the value of our goodwill and other intangible assets.

Our insurance and HMO subsidiaries must be licensed by and are subject to the regulations of the jurisdictions in which they conduct business. For example, health maintenance organizations and insurance companies are regulated under specific state laws and regulations and indirectly affected by other health care-related laws and regulations. State regulations mandate minimum capital or restricted cash reserve requirements. In addition, state guaranty fund laws and related regulations subject us to assessments for certain obligations to policyholders and claimants of impaired or insolvent insurance companies (including state insurance cooperatives). Any such assessment could expose our insurance entities and other insurers to the risk of paying a portion of an impaired or insolvent insurance company's claims through state guaranty association assessments. We also participate in the private exchange marketplace. Whether and the extent to which states may issue regulations that apply to private exchanges remains uncertain.

In addition to the regulations discussed above, we are required to obtain and maintain insurance and other regulatory approvals to market many of our products, increase prices for certain regulated products and consummate some of our acquisitions and dispositions. Delays in obtaining or failure to obtain or maintain these approvals could reduce our revenue or increase our costs.

The health care industry is also regularly subject to negative media attention, including as a result of the political environment and the ongoing debate concerning the Health Care Reform Act. Such publicity may adversely affect our stock price and reputation in certain markets.

For more information on regulation, see "Business — Regulation" in Part I, Item 1 of this Form 10-K. See also the description of the Health Care Reform Act's minimum medical loss ratio and customer rebate requirements in the "Business — Global Health Care" section beginning on page 3 of this Form 10-K.

There are various risks associated with participating in government sponsored programs, such as Medicare, including dependence upon government funding, changes occurring as a result of the Health Care Reform Act, compliance with government contracts and increased regulatory oversight.

Through our Government business, we contract with CMS and various state governmental agencies to provide managed health care services including Medicare Advantage plans and Medicare-approved prescription drug plans. Revenues from Medicare programs are dependent, in whole or in part, upon annual funding from the federal government through CMS and/or applicable state or local governments. Funding for these programs is dependent on many factors outside our control including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal or applicable state or local level and general political issues and priorities. These entities generally have the right to not renew or cancel their contracts with us on short notice without cause or if funds are not available. Unanticipated changes in funding, such as the application of sequestration by the federal or state governments, could substantially reduce our revenues and profitability.

The Medicare program has been the subject of regulatory reform initiatives, including the Health Care Reform Act. The premium rates paid to Medicare Advantage plans and Medicare Part D plans are established by contract, although the rates differ depending on a combination of

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ITEM 1A. Risk Factors

factors, many of which are outside our control. The Health Care Reform Act ties a portion of each Medicare Advantage plan's and Medicare Part D plan's reimbursement to the plan's "Star Rating" by CMS, with those plans receiving a rating of four or more stars eligible for quality-based bonus payments. The Star Rating system considers various measures adopted by CMS, including, for example, quality of care, preventative services, chronic illness management, coverage appeals and customer satisfaction. Our Medicare Advantage plans' and Medicare Part D plans' operating results, premium revenue and benefit offerings are likely to continue to be significantly determined by their Star Ratings. In October 2016, CMS announced 2017 Star Ratings and the projected Star Ratings for plans offered by certain subsidiaries of the Company included certain reductions that are primarily attributable to our CMS audit. There is no financial impact in 2017 because these ratings apply to plans for the 2018 payment year. However, if we are unsuccessful in restoring at least some of our downgraded Star Ratings measures, the effect in 2018 could be material to shareholders' net income. See Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Information — Health Care Industry Developments and Other Matters Affecting our Global Health Care Segment for additional information on the impact of the downgraded 2018 Star Rating measures.

Contracts with CMS and the various state governmental agencies contain certain provisions regarding data submission, provider network maintenance, quality measures, claims payment, continuity of care, call center performance and other requirements. If we fail to comply with these requirements, we may be subject to administrative actions, fines or other penalties that could impact our profitability.

The Health Care Reform Act required establishing health insurance exchanges for individuals and small employers. Insurers participating on the health insurance exchanges are required to offer a minimum level of benefits and comply with requirements with respect to premium rates and coverage limitations. Our participation in these exchanges involves uncertainties associated with mix and volume of business and could adversely affect our results of operations, financial position and cash flows.

In addition, any failure to comply with various state and federal health care laws and regulations, including those directed at preventing fraud and abuse in government funded programs, could result in investigations or litigation, such as actions under the federal False Claims Act and similar whistleblower statutes under state laws. This could subject us to fines, limits on expansion, restrictions or exclusions from programs or other agreements with federal or state governmental agencies that could adversely impact our business, cash flows, financial condition and results of operations.

In addition, our Medicare Advantage and Medicare Part D businesses face a number of other risks including potential uncollectible receivables resulting from processing and/or verifying enrollment, inadequate underwriting assumptions, inability to receive and process correct information or increased medical or pharmaceutical costs. Actual results may be materially different than our assumptions and estimates regarding these complex and wide-ranging programs that could have a material adverse effect on our business, financial condition and results of operations.

We face risks related to litigation, regulatory audits and investigations.

We are routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other legal matters arising in the ordinary course of business, including that of administering and insuring employee benefit programs. These legal matters could include benefit claims, breach of contract actions, tort claims, claims arising from consumer protection laws, claims disputes under federal or state laws and disputes regarding reinsurance arrangements, employment and employment discrimination-related suits, antitrust claims, employee benefit claims, wage and hour claims, tax, privacy, intellectual property and whistle blower claims and real estate disputes. In addition, we have incurred and likely will continue to incur liability for practices and claims related to our health care business, such as marketing misconduct, failure to timely or appropriately pay for or provide health care, provider network structure, poor outcomes for care delivered or arranged, provider disputes including disputes over compensation or contractual provisions, and claims related to our administration of self-funded business. There are currently, and may be in the future, attempts to bring class action lawsuits against the industry; or individual plaintiffs also may bring multiple claims regarding the same subject matter against us and other companies in our industry.

With respect to our global operations, contractual rights, laws and regulations may be subject to interpretation or uncertainty to a greater degree than in the U.S., and therefore subject us to disputes by customers, governmental authorities or others.

Court decisions and legislative activity may increase our exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. We seek to procure insurance coverage to cover some of these potential liabilities. However, certain potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may be insufficient to cover the entire damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. It is possible that the resolution of current or future legal matters and claims could result in losses material to our results of operations, financial condition and liquidity.

We are frequently the subject of regulatory market conduct and other reviews, audits and investigations by state insurance and health and welfare departments, attorneys general, CMS and the OIG and comparable authorities in foreign jurisdictions. With respect to our Medicare Advantage business, CMS and OIG perform audits to determine a health plan's compliance with federal regulations and contractual obligations, including compliance with proper coding practices and fraud and abuse enforcement practices through audits designed to detect and correct improper payments, and the DOJ has requested information regarding these practices. There also continues to be heightened review by federal and state regulators of business and reporting practices within the health care and disability insurance industry and increased scrutiny by other state and federal governmental agencies (such as state attorneys general) empowered to bring criminal actions in circumstances that could have previously given rise only to civil or administrative proceedings. These regulatory audits or reviews or actions by other governmental agencies could result in changes to our business practices, retroactive adjustments to certain premiums, significant fines, penalties, civil liabilities, criminal liabilities or other sanctions, including restrictions on our ability to market certain products or engage in business-related activities, that could have a material adverse effect on our business, results of operation, financial condition and liquidity. In addition, disclosure of an adverse investigation or audit or the imposition of fines or other sanctions in addition to the CMS sanctions discussed below could negatively affect our reputation in certain markets and make it more difficult for us to sell our products and services.

In January 2016, CMS issued to the Company a Notice of Imposition of Immediate Intermediate Sanctions (the "Notice"). The Notice requires the Company to suspend certain enrollment and marketing activities for its Medicare Advantage-Prescription Drug and Medicare Part D Plans.

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The Company is working to resolve these matters as quickly as possible. However, these matters were not resolved in time to participate in the 2017 Medicare Advantage and Part D annual enrollment period for 2017. See Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Information — Health Care Industry Developments and Other Matters Affecting our Global Health Care Segment for additional information on the impact of the downgraded 2018 Star Rating measures.

A description of material pending legal actions and other legal and regulatory matters is included in Note 21 to our Consolidated Financial Statements included in this Form 10-K. The outcome of litigation and other legal or regulatory matters is always uncertain, and outcomes that are not justified by the evidence or existing law can occur.

If we fail to comply with applicable privacy, security, and data laws, regulations and standards, our business and reputation could be materially and adversely affected.

The collection, maintenance, protection, use, transmission, disclosure and disposal of sensitive personal information are regulated at the federal, state, international and industry levels and requirements are imposed on us by contracts with clients. In some cases, such laws, rules, regulations and contractual requirements also apply to our vendors and require us to obtain written assurances of their compliance with such requirements or may hold us liable for any violations by our vendors. International laws, rules and regulations governing the use and disclosure of such information are generally more stringent than in the United States, and they vary from jurisdiction to jurisdiction. We also are subject to various other consumer protection laws that regulate our communications with customers.

These laws, rules, and contractual requirements are subject to change. Compliance with new privacy, security and data laws, regulations and requirements may result in increased operating costs, and may constrain or require us to alter our business model or operations. For example, the HITECH amendments to HIPAA may further restrict our ability to collect, disclose and use sensitive personal information and may impose additional compliance requirements on our business.

HIPAA requires covered entities to comply with the HIPAA privacy, security and breach rules. In addition, business associates must comply with the HIPPA security and breach requirements. While we provide for appropriate protections through our contracts with our third-party service providers and in certain cases assess their security controls, we have limited oversight or control over their actions and practices. Several of our businesses act as business associates to their covered entity customers and, as a result, collect, use, disclose and maintain sensitive personal information in order to provide services to these customers. HHS has continued its audit program to assess HIPAA compliance efforts by covered entities and has expanded it to include business associates. In addition, HHS has increased its enforcement efforts. These efforts result in enforcement actions that are the result of investigations brought on by the notification to HHS of a breach. An audit resulting in findings or allegations of noncompliance or the implementation of an enforcement action could have an adverse effect on our results of operations, financial position and cash flows.

Effective prevention, detection and control systems are critical to maintain regulatory compliance and prevent fraud and failure of these systems could adversely affect us.

Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities including kickbacks for referral of customers, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights. The regulations and contractual requirements applicable to us are complex and subject to change. In addition, ongoing vigorous law enforcement, a highly technical regulatory scheme and the Dodd-Frank Act legislation and related regulations enhance regulators' enforcement powers and whistleblower incentives and protections. Our compliance efforts in this area will continue to require significant resources. Failure of our prevention, detection or control systems related to regulatory compliance or the failure of employees to comply with our internal policies including data systems security or unethical conduct by managers and employees, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and penalties.

In addition, provider or customer fraud that is not prevented or detected could impact our medical costs or those of our self-insured clients. Further, during an economic downturn, we may experience increased fraudulent claims volume that may lead to additional costs due to an increase in disputed claims and litigation.

Economic Risks

Significant stock market or interest rate declines could result in additional unfunded pension obligations resulting in the need for additional plan funding by us and increased pension expenses.

We currently have unfunded obligations in our frozen pension plans. A significant decline in the value of the plans' equity and fixed income investments or unfavorable changes in applicable laws or regulations could materially increase our expenses and change the timing and amount of required plan funding. This could reduce the cash available to us, including our subsidiaries. We also are exposed to interest rate and equity risk associated with our pension and other post-retirement obligations. Sustained declines in interest rates could have an adverse impact on the funded status of our pension plans and our reinvestment yield on new investments. See Note 15 to our Consolidated Financial Statements for more information on our obligations under the pension plan.

Significant changes in market interest rates affect the value of our financial instruments that promise a fixed return or benefit and the value of particular assets and liabilities.

As an insurer, we have substantial investment assets that support insurance and contractholder deposit liabilities. Generally low levels of interest rates on investments, such as those experienced in U.S. and foreign financial markets during recent years, have negatively impacted our level of investment income earned in recent periods.

A substantial portion of our investment assets are in fixed interest-yielding debt securities of varying maturities, fixed redeemable preferred securities and commercial mortgage loans. The value of these investment assets can fluctuate significantly with changes in market conditions.

28    CIGNA CORPORATION - 2016 Form 10-K


Back to Contents

PART I
ITEM 1A. Risk Factors

A rise in interest rates would likely reduce the value of our investment portfolio and increase interest expense if we were to access our available lines of credit.

A downgrade in the financial strength ratings of our insurance subsidiaries could adversely affect new sales and retention of current business, and a downgrade in our debt ratings would increase the cost of borrowed funds and negatively affect our ability to access capital.

Financial strength, claims paying ability and debt ratings by recognized rating organizations are each important factors in establishing the competitive position of insurance and health benefits companies. Ratings information by nationally recognized ratings agencies is broadly disseminated and generally used throughout the industry. We believe that the claims paying ability and financial strength ratings of our principal insurance subsidiaries are important factors in marketing our products to certain customers. Our debt ratings impact both the cost and availability of future borrowings, and accordingly, our cost of capital. Each of the rating agencies reviews ratings periodically and there can be no assurance that current ratings will be maintained in the future. A downgrade of these ratings in the future could make it more difficult to either market our products successfully or raise capital to support business growth within our insurance subsidiaries.

Global market, economic and geopolitical conditions may cause fluctuations in equity market prices, interest rates and credit spreads that could impact our ability to raise or deploy capital and affect our overall liquidity.

If the equity and credit markets experience extreme volatility and disruption, there could be downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers' underlying financial strength. Extreme disruption in the credit markets could adversely impact our availability and cost of credit in the future. In addition, unpredictable or unstable market conditions or continued pressure in the global or U.S. economy could result in reduced opportunities to find suitable opportunities to raise capital.

As of December 31, 2016, our outstanding long-term debt totaled $4.8 billion. In the event of adverse economic and industry conditions, we may be required to dedicate a greater percentage of our cash flow from operations to the payment of principal and interest on our debt, thereby reducing the funds we have available for other purposes, such as investments in ongoing businesses, acquisitions, dividends and stock repurchases. In these circumstances, our ability to execute our strategy may be limited, our flexibility in planning for or reacting to changes in business and market conditions may be reduced, or our access to capital markets may be limited such that additional capital may not be available or may be available only on unfavorable terms.

Unfavorable developments in economic conditions may adversely affect our business, results of operations and financial condition.

Global economic conditions continue to be challenging. Many factors, including geopolitical issues, confidence in any economic recoveries and any future economic downturns, availability and cost of credit and other capital and consumer spending can negatively impact expectations for the U.S. and global economies. Our results of operations could be materially and adversely affected by the impact of unfavorable economic conditions on our customers (both employers and individuals), health care providers and third-party vendors. For example:

Employers may take action to reduce their operating costs by modifying, delaying or canceling plans to purchase our products or making changes in the mix of products purchased that are unfavorable to us.

Higher unemployment rates and workforce reductions could result in lower enrollment in our employer-based plans (including an increase in the number of employees who opt out of employer-based plans) or our individual plans.

Because of unfavorable economic conditions or the Health Care Reform Act, employers may stop offering health care coverage to employees or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs.

Our historical disability claim experience and industry data indicate that submitted disability claims rise under adverse economic conditions.

If customers are not successful in generating sufficient funds or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us.

Our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business.

A prolonged unfavorable economic environment could adversely impact the financial position of hospitals and other health care providers, potentially increasing our medical costs as these providers attempt to maintain revenue levels in their efforts to adjust to their own economic challenges.

Our third-party vendors could significantly and quickly increase their prices or reduce their output to reduce their operating costs. Our business depends on our ability to perform necessary business functions in an efficient and uninterrupted fashion.

These factors could lead to a decrease in our customer base, revenues or margins and/or an increase in our operating costs.

In addition, during a prolonged unfavorable economic environment, state and federal budgets could be materially and adversely affected, resulting in reduced reimbursements or payments in state and federal government programs such as Medicare and Social Security. These state and federal budgetary pressures also could cause the government to impose new or a higher level of taxes or assessments on us, such as premium taxes on insurance companies and HMOs and surcharges or fees on select fee-for-service and capitated medical claims. Although we could attempt to mitigate or cover our exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover all of such costs, which may have a material adverse effect on our business, results of operations, financial condition and liquidity.

CIGNA CORPORATION - 2016 Form 10-K    29


Back to Contents

PART I
ITEM 1A. Risk Factors

We are subject to the credit risk of our reinsurers.

We enter into reinsurance arrangements with other insurance companies, primarily to limit losses from large exposures or to permit recovery of a portion of direct losses. We also may enter into reinsurance arrangements in connection with acquisition or divestiture transactions when the underwriting company is not being acquired or sold.

Under all reinsurance arrangements, reinsurers assume insured losses, subject to certain limitations or exceptions that may include a loss limit. These arrangements also subject us to various obligations, representations and warranties with the reinsurers. Reinsurance does not relieve us of liability as the originating insurer. We remain liable to the underlying policyholders if a reinsurer defaults on obligations under the reinsurance arrangement. Although we regularly evaluate the financial condition of reinsurers to minimize exposure to significant losses from reinsurer insolvencies, reinsurers may become financially unsound. If a reinsurer fails to meet its obligations under the reinsurance contract or if the liabilities exceed any applicable loss limit, we will be forced to cover the claims on the reinsured policies.

The collectability of amounts due from reinsurers is subject to uncertainty arising from a number of factors, including whether the insured losses meet the qualifying conditions of the reinsurance contract, whether reinsurers or their affiliates have the financial capacity and willingness to make payments under the terms of the reinsurance contract, and the magnitude and type of collateral supporting our reinsurance recoverable, such as holding sufficient qualifying assets in trusts or letters of credit issued. Although a portion of our reinsurance exposures are secured, the inability to collect a material recovery from a reinsurer could have a material adverse effect on our results of operations, financial condition and liquidity.

Other Risks

The pendency of and uncertainty surrounding the proposed merger with Anthem, Inc. could adversely affect our business.

On February 8, 2017, the U.S. District Court for the District of Columbia (the "District Court") issued an order enjoining the proposed merger with Anthem. An appeal of the District Court's order is now pending before the Appeals Court. Cigna entered into the merger agreement in order to create a combined company that would expand choice, improve affordability and quality, and further accelerate value-based care. If the merger is not consummated as originally proposed, we will not realize any potential benefits of the merger. In addition, as discussed below under "– The ongoing litigation related to the merger agreement could adversely affect our business, financial results and operations," we and Anthem are involved in pending litigation against each other. Cigna believes that, after the ruling by the District Court to enjoin the merger, terminating the merger agreement is in the best interest of our shareholders. Our inability to terminate the merger agreement could create uncertainty and disruptions to our business, delay or prevent us from pursuing other strategic opportunities or otherwise adversely affect our business, financial results and operations. It is uncertain whether the merger will be consummated or when or if we will be able to terminate the merger agreement, as further discussed below under "– The ongoing litigation related to the merger agreement could adversely affect our business, financial results and operations".

The pendency of the merger, and the uncertainty surrounding whether the merger will be consummated or terminated, may cause disruptions to our business, which could adversely affect our relationships with our clients, customers, providers, lenders, vendors and/or employees. As a result of this uncertainty, we could also potentially lose or fail to attract new key employees, clients, vendors and our provider arrangements could be disrupted. In addition, we have diverted, and will continue to divert, management resources towards the proposed merger. The proposed merger will continue to divert management's attention and our resources from ongoing business and operations and other business opportunities. Any disruption to our workforce, business relationships or leadership could adversely affect our business, financial results and operations.

The merger agreement provides for ongoing restrictions on the conduct of our business including, among other things, certain restrictions on our ability to acquire other businesses, sell, transfer or license our assets, repurchase outstanding common stock, make capital expenditures, amend our organizational documents and incur indebtedness. We remain subject to these restrictions pursuant to the temporary restraining order from the Chancery Court, as further discussed below under "– The ongoing litigation related to the merger agreement could adversely affect our business, financial results and operations". These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities.

Furthermore, we have incurred and will continue to incur significant transaction costs with respect to the proposed merger, including legal and other costs. The incurrence of these costs could adversely affect our business, financial results and operations.

The ongoing litigation related to the merger agreement could adversely affect our business, financial results and operations.

On February 14, 2017, we notified Anthem that we had terminated the merger agreement and filed suit in the Delaware Court of Chancery (the "Chancery Court") seeking, among other things, declaratory judgments that the Company's termination of the merger agreement is lawful and that Anthem is not permitted to extend the termination date to April 30, 2017. In the filed suit, we are also seeking payment by Anthem of the $1.85 billion reverse termination fee contemplated in the merger agreement, as well as additional damages. Later that day, Anthem filed suit against us seeking a temporary restraining order preventing the termination of the merger agreement, specific performance and damages. On February 15, 2017, the Chancery Court issued an order temporarily enjoining Cigna from terminating the merger agreement. Such litigation could be costly, create uncertainty with respect to the future of our business or otherwise adversely affect our business, financial results and operations.

While we believe in the merits of our claims and dispute Anthem's claims, the outcomes of lawsuits are inherently unpredictable, and we may be unsuccessful in the ongoing litigation or any future claims or litigation. The Chancery Court may find that we have not complied, in full or in part, with our obligations under the merger agreement, that we are liable for a breach, willful or otherwise, of the merger agreement, that we do not have a right to terminate the merger agreement, that we are not entitled to the reverse termination fee or other adverse findings. Failure to collect all or some of the reverse termination fee would adversely affect our business, financial results and operations. Anthem has claimed money damages in an amount to be proven at trial, including for actual damages, incidental damages, consequential damages, lost profits, lost goodwill, and other costs and damages incurred by Anthem by reason of Cigna's alleged breaches of the merger agreement. If Anthem prevails on any of these claims for damages, Cigna's liability could be substantial, and any such ruling could adversely affect our business, financial results and operations. Finally, any binding or non-binding decision that delays or eliminates our ability to terminate the merger agreement could create uncertainty and disruptions to our business, delay or prevent us from pursuing other strategic opportunities or otherwise adversely affect our business, financial results and operations.

30    CIGNA CORPORATION - 2016 Form 10-K


Table of Contents

PART I
ITEM 1B. Unresolved Staff Comments

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Our global real estate portfolio consists of approximately 7.8 million square feet of owned and leased properties. Our domestic portfolio has approximately 5.8 million square feet in 38 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Our International properties contain approximately 2.0 million square feet located throughout the following countries: Australia, Bahrain, Belgium, Canada, China, Hong Kong, India, Indonesia, Kenya, Malaysia, New Zealand, Singapore, South Korea, Spain, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom.

Our principal, domestic office locations, including various support operations, along with Group Disability and Life Insurance, Health Services, Core Medical and Service Operations and the domestic office of our Global Supplemental Benefits business are the Wilde Building located at 900 Cottage Grove Road in Bloomfield, Connecticut (our corporate headquarters) and Two Liberty Place located at 1601 Chestnut Street in Philadelphia, Pennsylvania. The Wilde Building measures approximately 893,000 square feet and is owned, while Two Liberty Place measures approximately 322,000 square feet and is leased office space.

We believe our properties are adequate and suitable for our business as presently conducted. The foregoing does not include information on investment properties.

ITEM 3. Legal Proceedings

The information contained under "Litigation Matters", "Regulatory Matters" and "Other Legal Matters" in Note 21 to our Financial Statements beginning on page 106 of this Form 10-K, is incorporated herein by reference.

ITEM 4. Mine Safety Disclosures

Not applicable.

CIGNA CORPORATION - 2016 Form 10-K    31


Table of Contents

PART I
EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed below.

LISA R. BACUS, 52, Executive Vice President and Global Chief Marketing Officer of Cigna beginning May 2013 and Chief Customer Officer beginning February 2017; Executive Vice President and Chief Marketer at American Family Insurance from February 2008 until May 2013.

MARK L. BOXER, 57, Executive Vice President and Global Chief Information Officer of Cigna beginning April 2011; Deputy Chief Information Officer, Xerox Corporation; and Group President, Government Health Care, for Xerox Corporation/Affiliated Computer Services from March 2009 until April 2011.

DAVID M. CORDANI, 51, Chief Executive Officer of Cigna beginning December 2009; Director since October 2009; President beginning June 2008; and Chief Operating Officer from June 2008 until December 2009.

CHRISTOPHER HOCEVAR, 43, President, Strategy, Segments and Solutions beginning February 2017; President, Pharmacy and Select Business from June 2013 to February 2017; President, Select Business beginning February 2011.

NICOLE S. JONES, 46, Executive Vice President and General Counsel of Cigna beginning June 2011; Senior Vice President and General Counsel of Lincoln Financial Group from May 2010 until June 2011; Vice President and Deputy General Counsel of Cigna from April 2008 until May 2010; and Corporate Secretary of Cigna from September 2006 until April 2010.

MATTHEW G. MANDERS, 55, President, Government & Individual Programs and Group Insurance beginning February 2017; President, U.S. Markets from June 2014 until February 2017; President, Regional and Operations from November 2011 until June 2014; President, U.S. Service, Clinical and Specialty from January 2010 until November 2011; and President of Cigna HealthCare, Total Health, Productivity, Network & Middle Market from June 2009 until January 2010.

THOMAS A. McCARTHY, 60, Executive Vice President and Chief Financial Officer of Cigna beginning July 2013; Vice President of Finance with responsibility for treasury, tax, strategy and corporate development, and management of run-off reinsurance from February 2003 until July 2013; Acting Chief Financial Officer from September 2010 until June 2011, and Treasurer from July 2008 until June 2011.

ALAN M. MUNEY, MD, MHA, 63, Executive Vice President, Total Health & Network and Chief Medical Officer beginning February 2017; joined Cigna as Senior Vice President, Total Health & Network in 2010 and named Chief Medical Officer in 2011.

JOHN M. MURABITO, 58, Executive Vice President, Human Resources and Services of Cigna beginning August 2003.

JASON D. SADLER, 48, President, International Markets beginning June 2014; President, Global Individual Health, Life and Accident from July 2010 until June 2014, and Managing Director Insurance Business Hong Kong, HSBC Insurance Asia Limited from January 2007 until July 2010.

MICHAEL TRIPLETT, 55, President, U.S. Markets beginning February 2017; Regional Segment Lead from June 2009 to February 2017.

32    CIGNA CORPORATION - 2016 Form 10-K


Table of Contents

PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PART II

ITEM 5.       Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information under the caption "Quarterly Financial Data – Stock and Dividend Data" appears on page 113 of this Form 10-K. As of December 31, 2016, the number of shareholders of record was 6,029. Cigna's common stock is listed with, and trades on, the New York Stock Exchange under the symbol "CI".

Issuer Purchases of Equity Securities

The following table provides information about Cigna's share repurchase activity for the quarter ended December 31, 2016:

Period
  Total # of
shares
purchased (1)

  Average
price paid
per share

  Total # of shares
purchased as
part of publicly
announced
program (2)

  Approximate dollar value
of shares that may yet
be purchased as part of
publicly announced
program (3)

October 1-31, 2016

  235   $123.45     $725,000,122

November 1-30, 2016

  21,463   $132.60     $725,000,122

December 1-31, 2016

  1,952   $136.21     $725,000,122

Total

  23,650   $132.81     N/A
(1)
Represents shares tendered by employees as payment of taxes withheld on vesting of restricted stock and strategic performance shares granted under the Company's equity compensation plans.

(2)
Additionally, the Company maintains a share repurchase program, authorized by the Board of Directors. Under this program, the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through open market purchases or privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, including through Rule 10b5-1 trading plans. The program may be suspended or discontinued at any time. In 2016, the Company repurchased approximately 0.8 million shares for $110 million. Remaining authorization under the program was approximately $725 million as of December 31, 2016. In February 2017, the Board increased repurchase authority to $3.7 billion, however management has determined that it is prudent to cap the amount of repurchase to $250 million per quarter until there is more clarity with respect to the litigation with Anthem. From January 1, 2017 through February 22, 2017, the Company repurchased 0.7 million shares for $106 million. Remaining authorization under the program was $3.7 billion as of February 22, 2017.

(3)
Approximate dollar value of shares is as of the last date of the applicable month.
CIGNA CORPORATION - 2016 Form 10-K    33


Back to Contents

PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Five Year Cumulative Total Shareholder Return*
December 31, 2011 – December 31, 2016

GRAPHIC

 
  12/31/2011
  12/31/2012
  12/31/2013
  12/31/2014
  12/31/2015
  12/31/2016

Cigna

  $ 100   $ 127   $ 209   $ 245   $ 349   $ 318

S&P 500

  $ 100   $ 116   $ 154   $ 175   $ 177   $ 198

S&P Managed Health Care, Life & Health Ins. Indexes**

  $ 100   $ 108   $ 164   $ 205   $ 236   $ 285
*
Assumes that the value of the investment in Cigna common stock and each index was $100 on December 31, 2011 and that all dividends were reinvested.

**
Weighted average of S&P Managed Health Care (75%) and Life and Health Insurance (25%) Indexes.
34    CIGNA CORPORATION - 2016 Form 10-K


Table of Contents

PART II
ITEM 6. Selected Financial Data

ITEM 6.     Selected Financial Data

The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.

Highlights

(Dollars in millions, except per share amounts)
  2016
  2015
  2014
  2013
  2012
Total revenues   $ 39,668   $ 37,876   $ 34,914   $ 32,380   $ 29,119
Shareholders' net income   $ 1,867   $ 2,094   $ 2,102   $ 1,476   $ 1,623
Net income   $ 1,843   $ 2,077   $ 2,094   $ 1,478   $ 1,624
Shareholders' net income per share:                              

Basic

  $ 7.31   $ 8.17   $ 7.97   $ 5.28   $ 5.70

Diluted

  $ 7.19   $ 8.04   $ 7.83   $ 5.18   $ 5.61
Common dividends declared per share   $ 0.04   $ 0.04   $ 0.04   $ 0.04   $ 0.04
Cash and investments   $ 30,000   $ 26,681   $ 25,762   $ 25,160   $ 26,638
Total assets   $ 59,360   $ 57,088   $ 55,870   $ 54,306   $ 53,700
Long-term debt   $ 4,756   $ 5,020   $ 4,979   $ 4,984   $ 4,952
Total liabilities   $ 45,575   $ 44,975   $ 44,991   $ 43,629   $ 43,817
Shareholders' equity   $ 13,723   $ 12,035   $ 10,774   $ 10,567   $ 9,769
Employees   41,000   39,300   37,200   36,500   35,800
CIGNA CORPORATION - 2016 Form 10-K    35


Table of Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7.          Management's Discussion and Analysis of Financial Condition and Results of Operations

Index

Executive Overview

  36

Consolidated Results of Operations

  41

Liquidity and Capital Resources

  43

Critical Accounting Estimates

  46

Segment Reporting

  49

Global Health Care

  49

Global Supplemental Benefits

  50

Group Disability and Life

  51

Other Operations

  52

Corporate

  53

Investment Assets

  53

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K ("Form 10-K") and the "Risk Factors" contained in Part I, Item 1A of this Form 10-K.

Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's significant accounting policies. In some of our financial tables in this MD&A, we present either percentage changes or "N/M" when those changes are so large as to become not meaningful. Changes in percentages are expressed in basis points ("bps").

In this MD&A, our consolidated measures "operating revenues" and "adjusted income from operations" are not determined in accordance with GAAP and should not be viewed as substitutes for the most directly comparable GAAP measures "total revenues" and "shareholders' net income."

We define operating revenues as total revenues excluding realized investment results. We exclude realized investment results from this measure because our portfolio managers may sell investments based on factors largely unrelated to the underlying business purposes of each segment. As a result, gains or losses created in this process may not be indicative of past or future underlying performance of our businesses.

We use adjusted income (loss) from operations as our principal financial measure of operating performance because management believes it best reflects the underlying results of our business operations and permits analysis of trends in underlying revenue, expenses and profitability. We define adjusted income from operations as shareholders' net income (loss) excluding after-tax realized investment gains and losses, net amortization of other acquired intangible assets and special items. Income or expense amounts are excluded from adjusted income from operations for the following reasons:

Realized investment results are excluded because, as noted above, our portfolio managers may sell investments based on factors largely unrelated to the underlying business purposes of each segment.

Net amortization of other intangible assets is excluded because it relates to costs incurred for acquisitions and, as a result, it does not relate to the core performance of the Company's business operations. In 2015, the amortization amount was net of a bargain purchase gain on an acquisition.

Special items are excluded because management believes they are not representative of the underlying results of operations. See Note 22 to the Consolidated Financial Statements for descriptions of special items.

Executive Overview

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 subsidiaries. In addition to these ongoing operations, we also have certain run-off operations.

For further information on our business and strategy, please see Item 1, "Business" in this Form 10-K.

36    CIGNA CORPORATION - 2016 Form 10-K


Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Summary

Summarized below are certain key measures of our performance for the years ended December 31:

 
  For the Years Ended
December 31,

  Increase
(Decrease)

  Increase
(Decrease)

(Dollars in millions, except per share amounts)

    2016     2015     2014     2016 vs. 2015     2015 vs. 2014

Total revenues (1)

  $ 39,668   $ 37,876   $ 34,914   5%   8%
         

Operating revenues (1)

                             

Global Health Care

  $ 31,199   $ 29,929   $ 27,290   4%   10%

Global Supplemental Benefits

    3,385     3,149     3,005     7     5

Group Disability and Life

  4,443   4,271   3,970   4   8

Other Operations

    472     485     510     (3)     (5)

Corporate

    (15)   (15)   100  
         

Total operating revenues (1)

  $ 39,499   $ 37,819   $ 34,760     4%     9%

Shareholders' net income (1)

  $ 1,867   $ 2,094   $ 2,102   (11)%   –%
         

Adjusted Income (Loss) From Operations (1)

                             

Global Health Care

  $ 1,852   $ 1,848   $ 1,752   –%   5%

Global Supplemental Benefits

    294     262     243     12     8

Group Disability and Life

  125   324   317   (61)   2

Other Operations

    70     75     68     (7)     10

Corporate

  (237)   (253)   (265)   6   5
         

Total adjusted income from operations (1)

  $ 2,104   $ 2,256   $ 2,115     (7)%     7%

Earnings per share (diluted):

                   

Shareholders' net income (1)

  $ 7.19   $ 8.04   $ 7.83     (11)%     3%

Adjusted income from operations (1)

  $ 8.10   $ 8.66   $ 7.87   (6)%   10%
         

Global medical customers (in thousands)

    15,197     14,999     14,456     1%     4%
(1)
See Consolidated Results of Operations beginning on page 41 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.
GRAPHIC


GRAPHIC


 


2016 and 2015
both increased, primarily reflecting higher operating revenues driven by business growth across the Company as discussed further below.

GRAPHIC


GRAPHIC


 


2016 and 2015
both reflected business growth in each of our ongoing reportable segments. Rate actions for certain products within our Commercial segment to recover medical cost trend also contributed to these increases.

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2016 vs. 2015
 – Decrease was due to lower adjusted income from operations, primarily in the Group Disability and Life segment. Increased special item charges in 2016 (primarily higher merger costs and the 2016 risk corridor allowance) also contributed to the decline.

2015 vs. 2014 – The slight increase primarily reflected higher adjusted income from operations and, to a lesser extent, the impact of share repurchase. These favorable effects were partially offset by lower realized investment results and 2015 charges for merger and debt extinguishment costs reported as special items.

(1)
See Consolidated results of operations starting on page 41 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.
CIGNA CORPORATION - 2016 Form 10-K    37


Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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2016 vs. 2015
 – Decrease was driven by significantly lower earnings in Group Disability and Life and costs related to the Government segment's CMS audit response. Increased earnings contributions in Global Supplemental Benefits and the Commercial segment partially offset those unfavorable impacts.

2015 vs. 2014 – Increase was due to higher earnings in each of our ongoing reportable segments, reflecting continued customer growth in all of our reportable segments, including improved contributions from our specialty health care businesses. Share repurchase also contributed to the increase.

(1)
See Consolidated results of operations starting on page 41 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.


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2016 and 2015
both increased, including growth in the middle market, select and international market segments. The 2015 increase also reflected the acquisition of QualCare Alliance Networks, Inc. as well as growth in the government market segment.

Further discussion of detailed components of revenues and expenses can be found in the "Consolidated Results of Operations" section of this MD&A beginning on page 41. For further analysis and explanation of individual segment results, see the "Segment Reporting" section of this MD&A beginning on page 49.

Key Transactions

Proposed Merger with Anthem, Inc. ("Anthem")

On July 23, 2015, we entered into a definitive agreement to merge with Anthem, subject to certain terms, conditions and customary operating covenants, with Anthem continuing as the surviving company. At special shareholders' meetings in December 2015, Cigna shareholders approved the merger with Anthem and Anthem shareholders voted to approve the issuance of shares of Anthem common stock according to the merger agreement. Upon closing, our shareholders would receive $103.40 in cash and 0.5152 of a share of Anthem common stock for each common share of the Company. The closing price of Anthem stock on February 22, 2017 was $163.27.

Consummation of the merger is subject to certain customary conditions, including the receipt of certain necessary governmental and regulatory approvals, and the absence of a legal restraint prohibiting the consummation of the merger. 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 February 8, 2017, the District Court issued an order enjoining the proposed merger. Anthem appealed this ruling to the U.S. Court of Appeals for the District of Columbia Circuit (the "Appeals Court"). Additionally, Cigna appealed the District Court ruling following the Chancery Court ruling described below.

On February 14, 2017, Cigna 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 us 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 us from terminating the merger agreement. This order will be subject to further review at a preliminary injunction hearing.

See Notes 3 and 21 to the Consolidated Financial Statements in this Form 10-K for additional information about the proposed merger. See Item 1A. – Risk Factors in this Form 10-K for risks to our business due to the proposed merger.

38    CIGNA CORPORATION - 2016 Form 10-K


Table of Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Health Care Industry Developments And Other Matters Affecting Our Global Health Care Segment

The "Regulation" section of this Form 10-K provides a detailed description of The Patient Protection and Affordable Care Act (the "Health Care Reform Act" or "ACA") provisions and other legislative initiatives that impact our health care business, including regulations issued by the Centers for Medicare and Medicaid Services ("CMS") and the Departments of the Treasury and Health and Human Services ("HHS"). The table presented below provides further details related to the impact of key ACA-related items and certain other regulatory matters affecting our Global Health Care segment.

 

 

Item


  Description

 

 

Medicare Advantage ("MA")

      CMS actions: In January 2016, CMS issued a Notice of Imposition of Immediate Intermediate Sanctions (the "Notice") to the Company. The Notice required us to suspend certain enrollment and marketing activities for Medicare Advantage-Prescription Drug and Medicare Part D Plans. The sanctions do not impact the right of current enrollees to remain covered by our Medicare Advantage-Prescription Drug or Medicare Part D Plans. Although we continue to devote resources to our remediation efforts, we expect remediation costs in 2017 to be significantly lower than 2016. For 2016, costs related to our CMS audit response were approximately $100 million after-tax. See Note 21 to the Consolidated Financial Statements for additional information.    

 

 

     

While these matters were not resolved in time to participate in the 2017 Medicare Advantage and Part D annual enrollment period, we continue to work with CMS to address the audit findings and have the sanctions lifted as quickly as possible. We expect to have these sanctions lifted in time to participate in the 2018 annual enrollment period. The impact of disenrollment was not material to 2016 consolidated revenues and earnings. In 2017, Medicare enrollment and consolidated revenues will be materially impacted due to our inability to participate in 2017 annual enrollment. However, management does not anticipate that 2017 shareholders' net income will be materially affected because we expect to offset the margin impact of the revenue loss with several factors including significantly lower costs to remediate the sanctions and other operational efficiencies.

   

 

 

     

On October 12, 2016, CMS announced Medicare Star Quality Ratings ("Star Ratings") for 2017 (see Item 1 — Business and Item 1A. — Risk Factors in this Form 10-K for additional discussion of Star Ratings programs). While Star Ratings are based on a number of plan performance measures that are evaluated each year, the projected Star Ratings for our plans included certain reductions that are primarily attributable to our CMS audit discussed above. Under these revised Star Ratings, approximately 20% of our Medicare Advantage customers are expected to be in a 4 Stars or greater plan. We do not believe that these Star Ratings reflect the quality offerings Cigna-HealthSpring provides to beneficiaries.

   

 

 

     

We filed a Reconsideration request with CMS, which was denied, and will work fully with CMS through their process as well as consider additional alternatives with the objective that the final Star Ratings more accurately reflect our performance under the Star Ratings measures. We remain committed to our partnership with CMS and to delivering quality products and services to seniors, while working to mitigate the impact these Star Ratings could have on our offerings in 2018. There is no financial impact in 2016 or 2017 because these ratings apply to plans for the 2018 payment year. However, if we are unsuccessful in restoring at least some of the Star Ratings, the effect in 2018 could be material to shareholders' net income. The actual impact on earnings in 2018 could potentially be offset in part by our ability to restore some or all of our downgraded 2018 Star Rating measures, modify our product offerings and implement operational efficiencies in the government business.

   

 

 

     

2017 and 2018 MA Rates: Final MA reimbursement rates for 2017 were published by CMS in April 2016. Preliminary MA reimbursement rates for 2018 were published by CMS in February 2017. We do not expect the new rates to have a material impact on our consolidated results of operations in 2017 and 2018.

   

 

  Health Care Reform Act Taxes and Fees

Industry Tax

      Health Insurance Industry Tax: This non-deductible tax is being levied based on a ratio of an insurer's net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total. The industry assessment was $11.3 billion in both 2016 and 2015 and $8 billion in 2014. We recognized approximately $310 million in operating expenses for both 2016 and 2015 and $240 million in 2014. Because this tax is not deductible for federal income tax purposes, it negatively impacts our effective tax rate. Of the full year 2016 tax, $170 million relates to our Commercial business and $140 million to our Government business.    

 

 

     

For our Commercial business, we incorporated the industry tax into target pricing actions. For our Medicare business, although we have partially mitigated the effect of the tax through benefit changes and customer premium increases, the combination of the tax and lower MA rates reduced margins in the Government operating segment in both 2016 and 2015.

   

 

 

     

In December 2015, federal appropriations legislation imposed a one-year moratorium on the industry tax for 2017, with reinstatement expected in 2018. Our target pricing actions related to 2017 and 2018 plan years will consider the impacts of this legislation. The moratorium in 2017 is expected to lower our effective tax rate.

   

 

 

Reinsurance Fee

     

Reinsurance Fee: This fee, applicable only for 2014-2016, was a fixed dollar per customer levy that applied to both insured and self-insured major medical plans excluding certain products such as Medicare Advantage and Medicare Part D. Proceeds from the fee were used to fund the reinsurance program for non-grandfathered individual business sold either on or off the public exchanges. For our insured business, the amount of the tax-deductible fee was approximately $45 million in 2016, $70 million in 2015 and $110 million in 2014. The declines from 2014 to 2016 reflect annual per-customer levies of $27 in 2016, $44 in 2015 and $63 in 2014.

   

 

 

Public Health Exchanges

      Public Health Exchanges: For 2016, we offered individual coverage on seven public health insurance exchanges in the following states: Arizona, Colorado, Georgia, Maryland, Missouri, Tennessee and Texas. For 2017, we are offering individual coverage on seven public health insurance exchanges in the following states: Colorado, Illinois, Maryland, Missouri, North Carolina, Tennessee and Virginia.    
CIGNA CORPORATION - 2016 Form 10-K    39


Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Risk Mitigation Programs

See Note 2 (K) to the Consolidated Financial Statements for a description of and our accounting policy for these programs that commenced in 2014.

The following table presents the after-tax benefits to shareholders' net income from these programs for the years ended December 31, 2016, 2015 and 2014 and our net receivable balances as of December 31, 2016 and 2015.

      Net Receivable Balance (2)
As of December 31,
    After-tax Impact on Shareholders' Net Income
For the Years Ended December 31,
(In millions)     2016     2015     2016     2015     2014
Risk Corridor (1)                    
Risk corridor (gross)   $ 124   $ 134   $ (6)   $ 49   $ 40
Risk corridor allowance   (124)     (80)    
         
Net risk corridor         134     (86)     49     40
Reinsurance   63   158   30   125   109
Risk adjustment     1     118     25     92     49
         
Total   $ 64   $ 410   $ (31)   $ 266   $ 198
(1)
Starting in fourth quarter 2016, we did not record amounts due to us under the risk corridor program and recorded an allowance for previously due amounts. See discussion below.

(2)
For the reinsurance program, receivables are reported in reinsurance recoverables. Receivables, net of allowances, for the risk adjustment and risk corridor programs are reported in premiums, accounts and notes receivable. Payables for the risk adjustment program as of December 31, 2016 of $51 million are netted in the receivable balance presented above, but are reported in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets.

As of September 30, 2016, the Company's risk corridor receivable was $124 million pre-tax. An unfavorable court decision was issued during the fourth quarter rejecting another insurer's statutory, contractual and constitutional claims for payment of risk corridor receivables (Land of Lincoln Mutual Health Insurance Company v. United States). Based on this decision, as well as the large risk corridor program deficit, under applicable accounting rules, the Company determined it was required to establish an allowance for all of the $124 million of receivables associated with the risk corridor program. In addition, the Company was unable to recognize $25 million pre-tax income for incremental fourth quarter risk corridor receivables. This court case is under appeal and notwithstanding the accounting reflected, management continues to believe that the government has a binding obligation to satisfy the risk corridor receivable. We expect full payment of the remaining reinsurance and risk adjustment receivables.

40    CIGNA CORPORATION - 2016 Form 10-K


Table of Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations

Financial Summary

Summarized below are our results of operations on a GAAP basis.

      For the Years Ended
December 31,
    Increase
(Decrease)
    Increase
(Decrease)
   
(In millions)     2016     2015     2014     2016 vs. 2015     2015 vs. 2014    
Premiums   $ 30,626   $ 29,642   $ 27,214   $ 984   3 % $ 2,428   9 %
Fees and other revenues     4,760     4,488     4,141     272     6     347     8    
Net investment income   1,147   1,153   1,166   (6)   (1 ) (13 ) (1 )
Mail order pharmacy revenues     2,966     2,536     2,239     430     17     297     13    
Operating revenues   39,499   37,819   34,760   1,680   4   3,059   9  
Net realized investment gains     169     57     154     112     196     (97 )   (63 )  
Total revenues   39,668   37,876   34,914   1,792   5   2,962   8  
Global Health Care medical costs     19,009     18,354     16,694     655     4     1,660     10    
Other benefit expenses   5,477   4,936   4,640   541   11   296   6  
Mail order pharmacy costs     2,468     2,134     1,907     334     16     227     12