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CIGNA : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/23/2017 | 11:37pm CET

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:

º •

º 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.

º •

º 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.

º •

º 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

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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             Increase           Increase
                                   December 31,               (Decrease)         (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%



   º (1)
   º 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.

                            [[Image Removed: GRAPHIC]]
[[Image Removed: GRAPHIC]]   2016 and 2015 both increased, primarily reflecting
                             higher operating revenues driven by business growth
                             across the Company as discussed further below.
                            [[Image Removed: GRAPHIC]]
[[Image Removed: 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.
                            [[Image Removed: GRAPHIC]]
[[Image Removed: GRAPHIC]]   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.


   º (1)
   º 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

                            [[Image Removed: GRAPHIC]]
[[Image Removed: GRAPHIC]]   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.


   º (1)
   º 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.


                            [[Image Removed: GRAPHIC]]
[[Image Removed: GRAPHIC]]   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           CMS actions: In January 2016, CMS issued a Notice of
    Advantage          Imposition of Immediate Intermediate Sanctions (the "Notice")
    ("MA")             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        Health Insurance Industry Tax: This non-deductible tax is
    Reform Act         being levied based on a ratio of an insurer's net health
    Taxes and          insurance premiums written for the previous calendar year
    Fees               compared to the U.S. health insurance industry total. The
    •                  industry assessment was $11.3 billion in both 2016 and 2015
    Industry Tax       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: This fee, applicable only for 2014-2016, was
    Reinsurance        a fixed dollar per customer levy that applied to both insured
    Fee                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             Public Health Exchanges: For 2016, we offered individual
    Health             coverage on seven public health insurance exchanges in the
    Exchanges          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


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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           After-tax Impact on Shareholders' Net
                                Balance (2)                            Income
                             As of December 31,           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



   º (1)

º 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.

   º (2)
   º 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              Increase              Increase
                                   December 31,                (Decrease)            (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
Other operating
expenses                    9,584      8,982      8,174         602        7         808        10
Amortization of other
acquired intangible
assets, net                   151        143        195           8        6         (52 )     (27 )

Benefits and expenses 36,689 34,549 31,610 2,140 6 2,939 9


Income before income
taxes                       2,979      3,327      3,304       (348)      (10 )        23         1
Income taxes                1,136      1,250      1,210       (114)       (9 )        40         3

Net income                  1,843      2,077      2,094       (234)      (11 )       (17 )      (1 )
Less: net (loss)
attributable to
noncontrolling
interests                    (24)       (17)        (8)         (7)      (41 )        (9 )    (113 )

Shareholders' net
income                   $  1,867   $  2,094   $  2,102   $   (227)      (11 )% $     (8 )       - %



A reconciliation of shareholders' net income to adjusted income from operations
follows:

                                   For the Years Ended            Increase              Increase
                                      December 31,               (Decrease)            (Decrease)

(In millions)                    2016      2015      2014      2016 vs. 2015         2015 vs. 2014

Shareholders' net income      $ 1,867   $ 2,094   $ 2,102   $    (227 )    (11 )% $     (8)       -%
After-tax adjustments
required to reconcile to
adjusted income from
operations:
- Net realized investment
(gains)                         (109)      (40)     (106)         (69 )                  66
- Amortization of other
acquired intangible assets,
net                                94        80       119          14                  (39)
Special items:
- Risk corridor allowance
(See Note 22 to the
Consolidated Financial
Statements)                        80         -         -          80                     -
- Merger-related
transaction costs (See
Note 3 to the Consolidated
Financial Statements)             147        57         -          90                    57
- Charges associated with
litigation matters
discussed in Note 21 to the
Consolidated Financial
Statements                         25         -         -          25                     -
- Debt extinguishment costs
(See Note 5 to the
Consolidated Financial
Statements)                         -        65         -         (65 )                  65

Adjusted income from
operations                    $ 2,104   $ 2,256   $ 2,115   $    (152 )     (7 )% $     141       7%




                                                                  Change               Change
                                  For the Years Ended            Favorable            Favorable
                                     December 31,             

(Unfavorable) (Unfavorable)

Other Key Consolidated
Financial Data                  2016      2015      2014       2016 vs. 2015        2015 vs. 2014

Earnings per share
(diluted):
Shareholders' net income     $  7.19   $  8.04   $  7.83   $ (0.85 )     (11)%   $  0.21        3%
Per share impact of
after-tax adjustments to
shareholders' net income
Net realized investment
(gains)                        (0.42 )   (0.15 )   (0.40 )   (0.27 )                0.25
Amortization of other
acquired intangible
assets, net                     0.36      0.30      0.44      0.06                 (0.14 )
Special items - see
Note 22 for details             0.97      0.47         -      0.50                  0.47

Adjusted income from
operations                   $  8.10   $  8.66   $  7.87   $ (0.56 )      (6)%   $  0.79       10%

Effective tax rate              38.1 %    37.6 %    36.6 %     (50 ) bps            (100 ) bps



      CIGNA CORPORATION - 2016 Form 10-K  41


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Back to Contents


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

Consolidated Results of Operations: 2016 Compared to 2015 and 2015 Compared to 2014

º •

   º Revenues. The components of revenue changes are discussed further below:

             º •
             º Premiums. The increases in both 2016 and 2015, compared with each
               prior year, reflected premium growth in each of our ongoing
               reporting segments: Global Health Care, Global Supplemental
               Benefits and Group Disability and Life. These results were
               primarily attributable to customer growth in our targeted market
               segments within Global Health Care, as well as growth in Global
               Supplemental Benefits and Group Disability and Life. Rate actions
               in our commercial health care businesses consistent with medical
               cost trend also contributed to these increases.

             º •
             º Fees and other revenues. The increases in both 2016 and 2015,
               compared with each prior year, largely reflected growth from
               specialty products offered through our Global Health Care segment
               and an increased customer base for our administrative services
               only business.

             º •
             º Net investment income decreased slightly in both 2016 and 2015,
               compared with each prior year, as lower investment yields in the
               continued low interest rate environment were partially offset by
               higher average invested assets. Unfavorable foreign currency
               effects also contributed to these declines.

             º •
             º Mail order pharmacy revenues increased in both 2016 and 2015,
               compared with each prior year, driven by greater volume,
               primarily for specialty medications (e.g., certain injectables)
               due to our higher customer base and increased utilization.

             º •
             º Realized investment results increased in 2016 compared with 2015
               due to significantly lower impairment losses. In 2015, realized
               investment results decreased compared with 2014, primarily due to
               higher impairment losses on certain externally managed fixed
               maturities, particularly within the energy sector. These
               impairments were driven by increased market yields. See Note 11
               to the Consolidated Financial Statements for additional
               information.

   º •

º Global Health Care medical costs. The increase in 2016 compared with 2015

resulted primarily from medical cost trend and customer growth in our

commercial health care businesses. The 2015 increase compared with 2014 was

     primarily due to customer growth in our government business and, to a
     lesser extent, medical cost trend.

   º •

º Other benefit expenses. The increase in 2016 compared with 2015 was driven

by unfavorable disability and life claim experience due primarily to

changes in the disability claims management process in 2016 and elevated

life claims during the second quarter of 2016. Business growth in our Group

     Disability and Life and Global Supplemental Benefits segments also
     contributed to the increase. In 2015, the increase compared with 2014
     primarily reflected business growth in our Group Disability and Life and
     Global Supplemental Benefits segments.

º •

º Mail order pharmacy costs. The increases in both 2016 and 2015 compared

with each prior year were primarily due to increased volume, primarily for

specialty medications (e.g., certain injectables) due to our higher

customer base and increased utilization. In 2015, higher unit costs also

contributed to the increase.

º •

º Other operating expenses. The increases in both 2016 and 2015 compared with

each prior year were due to business growth, strategic investment across

our segments and special items described in Note 22 to the Consolidated

Financial Statements. In 2016, the increase also reflected costs associated

with our CMS audit response as discussed in the Executive Overview section

of this MD&A beginning on page 36.

º •

º Amortization of other acquired intangible assets, net. The increase in 2016

compared with 2015 was driven by the absence of the $23 million bargain

purchase gain recorded in 2015 for an acquisition. This factor was

partially offset by the expected continuing decline in amortization from

our 2012 acquisition of HealthSpring, Inc. The decrease in 2015 compared

with 2014 reflects the impact of both the $23 million bargain purchase gain

and the decline in HealthSpring amortization.

º •

º Special items. Special item charges were higher in 2016 compared with 2015

primarily due to higher merger costs and the 2016 risk corridor allowance.

Special items charges were higher in 2015 compared with 2014 due to merger

costs and losses on the early extinguishment of debt in 2015 and the

absence of special items in 2014. See Note 22 to the Consolidated Financial

Statements for additional details about special items.

º •

º Consolidated effective tax rate. The increase in our effective tax rate

in 2016 compared with 2015 was largely driven by an increase in certain

merger-related transaction costs reported in 2016 that are not tax

deductible, partially offset by the tax benefits associated with adopting

     Accounting Standard Update ("ASU") 2016-09 as discussed in Note 2 to the
     Consolidated Financial Statements. The increase in the consolidated
     effective tax rate in 2015 was primarily driven by merger-related

transaction costs in 2015 and the non-deductible health insurance industry

tax assessed under the Health Care Reform Act. This tax was first assessed

in 2014 and increased in 2015. See Note 20 to the Consolidated Financial

Statements for additional information about income taxes.

We expect our effective tax rate to decline in 2017 as a result of the moratorium on the health insurance industry tax.

42 CIGNA CORPORATION - 2016 Form 10-K

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Table of Contents

PART II

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

                                                                   of 

Operations

Liquidity And Capital Resources


               Financial Summary
               (In millions)                   2016       2015       2014

               Short-term investments      $    691   $    381   $    163
               Cash and cash equivalents   $  3,185   $  1,968   $  1,420
               Short-term debt             $    276   $    149   $    147
               Long-term debt              $  4,756   $  5,020   $  4,979
               Shareholders' equity        $ 13,723   $ 12,035   $ 10,774


Consolidated short-term investments increased in both 2016 and 2015 as a result of investing excess cash balances at the parent company level.

Liquidity

We maintain liquidity at two levels: the subsidiary level and the parent company level.

Liquidity requirements at the subsidiary level generally consist of:

             º •
             º medical costs and benefit payments to policyholders;
             º •
             º expense requirements, primarily for employee compensation and
               benefits, information technology and facilities costs; and
             º •
             º income taxes.

Our subsidiaries normally meet their operating requirements by:

             º •
             º maintaining appropriate levels of cash, cash equivalents and
               short-term investments;
             º •
             º using cash flows from operating activities;
             º •
             º matching investment durations to those estimated for the related
               insurance and contractholder liabilities;
             º •
             º selling investments; and
             º •
             º borrowing from affiliates, subject to applicable regulatory
               limits.

Liquidity requirements at the parent company level generally consist of:

             º •
             º debt service and dividend payments to shareholders;
             º •
             º pension plan funding; and
             º •
             º repurchases of common stock.

The parent company normally meets its liquidity requirements by:

             º •
             º maintaining appropriate levels of cash and various types of
               marketable investments;
             º •
             º collecting dividends from its subsidiaries;
             º •
             º using proceeds from issuance of debt and equity securities; and
             º •
             º borrowing from its subsidiaries.

Cash flows for the years ended December 31, were as follows:


  (In millions)                                           2016        2015  

2014

Net cash provided by operating activities (1)(2) $ 4,026 $ 2,933

$ 2,158

Net cash (used in) investing activities (2) $ (2,574) $ (1,736)

$ (1,866)

Net cash (used in) financing activities (1) $ (225) $ (609)

 $ (1,635)



   º (1)

º As required in adopting ASU 2016-09, we retrospectively reclassified

$79 million in 2015 and $53 million in 2014 of cash payments from operating

to financing activities. These payments were related to employee tax

obligations associated with stock compensation. The comparable amount

reported in financing activities in 2016 was $72 million. See Note 2 to the

     Consolidated Financial Statements for further discussion.

   º (2)
   º As required in adopting ASU 2016-15, the Company retrospectively

reclassified from investing to operating activities $137 million in 2015

and $111 million in 2014 of cash distributions from partnership earnings.

The comparable amount reported in operating activities in 2016 was

$144 million. See Note 2 to the Consolidated Financial Statements for

further discussion.


Cash flows from operating activities consist of cash receipts and disbursements
for premiums and fees, mail order pharmacy, other revenues, investment income,
taxes, benefits and expenses. Because certain income and expense transactions do
not generate cash, and because cash transactions related to revenues and
expenses may occur in periods different from when those revenues and expenses
are recognized in shareholders' net income, cash flows from operating activities
can be significantly different from shareholders' net income.

Cash flows from investing activities generally consist of net investment purchases or sales and net purchases of property and equipment including capitalized software, as well as cash used to acquire businesses.


Cash flows from financing activities are generally comprised of issuances and
re-payment of debt at the parent company level, proceeds on the issuance of
common stock resulting from stock option exercises, and stock repurchases. In
addition, the subsidiaries report deposits to and withdrawals from investment
contract liabilities (including universal life insurance liabilities) because
such liabilities are considered financing activities with policyholders.

Operating activities

Cash flows from operating activities increased in 2016 compared with 2015 due to higher receipts from Medicare Part D and Medicare Advantage programs.

Cash flows from operating activities increased in 2015 compared with 2014 primarily driven by the volume and timing of government reimbursements and pharmacy considerations.

CIGNA CORPORATION - 2016 Form 10-K 43

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

Investing activities

Cash used in investing activities increased in 2016 compared with 2015, due to
higher purchases of fixed maturity investments. Net cash used in investing
activities decreased in 2015 compared with 2014 due to lower net purchases of
fixed maturities.

Financing activities

Cash used in financing activities decreased in 2016 compared with 2015, primarily due to lower share repurchases offset by lower proceeds from employees' exercise of stock options. Cash used in financing activities decreased in 2015 compared with the same period in 2014, primarily reflecting lower share repurchases.


Share repurchase

We maintain a share repurchase program, authorized by our Board of Directors.
Under this program, we 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, we repurchased 0.8 million shares for $110 million. In February 2017,
the Board of Directors 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 we
repurchased 0.7 million shares for $106 million. The total remaining share
repurchase authorization as of February 22, 2017 was $3.7 billion. We
repurchased 5.5 million shares for $683 million in 2015 and 18.5 million shares
for $1.6 billion in 2014.

Interest Expense


Interest expense on long-term debt, short-term debt and capital leases was as
follows:

                        (In millions)       2016    2015    2014

                        Interest expense   $ 251   $ 252   $ 265


Interest expense reported above for the year ended 2015 excluded losses on the early extinguishment of debt.


The weighted average interest rate for outstanding short-term debt (primarily
commercial paper) was 0.69% at December 31, 2015. There was no commercial paper
outstanding as of December 31, 2016.

Capital Resources

Our capital resources (primarily retained earnings and proceeds from the issuance of debt and equity securities) provide protection for policyholders, furnish the financial strength to underwrite insurance risks and facilitate continued business growth.

Management, guided by regulatory requirements and rating agency capital guidelines, determines the amount of capital resources that we maintain. Management allocates resources to new long-term business commitments when returns, considering the risks, look promising and when the resources available to support existing business are adequate.

We prioritize our use of capital resources to:

º •

º provide the capital necessary to support growth and maintain or improve the

financial strength ratings of subsidiaries and to fund pension obligations;

º •

º consider acquisitions that are strategically and economically advantageous;

     and

   º •
   º return capital to investors through share repurchase.

See Note 3 to the Consolidated Financial Statements for information regarding
capital restrictions imposed by our merger agreement with Anthem. The
availability of capital resources will be impacted by equity and credit market
conditions. Extreme volatility in credit or equity market conditions may reduce
our ability to issue debt or equity securities.

Liquidity and Capital Resources Outlook

At December 31, 2016, there was approximately $2.8 billion in cash and marketable investments available at the parent company level. In 2017, the parent company's combined cash obligations are expected to approximate $660 million for repayment of debt, interest, pension contributions and dividends.

We expect, based on the parent company's current cash position and current projections for subsidiary dividends, to have sufficient liquidity to meet the obligations discussed above.


Our cash projections may not be realized and the demand for funds could exceed
available cash if our ongoing businesses experience unexpected shortfalls in
earnings, or we experience material adverse effects from one or more risks or
uncertainties described more fully in the Risk Factors section of this
Form 10-K. In those cases, we expect to have the flexibility to satisfy
liquidity needs through a variety of measures, including intercompany borrowings
and sales of liquid investments. The parent company may borrow up to
$1.3 billion from its insurance subsidiaries without additional state approval.
As of December 31, 2016, the parent company had $277 million of net intercompany
loans

44 CIGNA CORPORATION - 2016 Form 10-K

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PART II

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

                                                                   of 

Operations


payable to its insurance subsidiaries. Alternatively, to satisfy parent company
liquidity requirements we may use short-term borrowings, such as the commercial
paper program, the committed revolving credit and letter of credit agreement of
up to $1.5 billion subject to the maximum debt leverage covenant in its line of
credit agreement. As of December 31, 2016, $1.5 billion of short-term borrowing
capacity under the credit agreement was available to us. Within the maximum debt
leverage covenant in the line of credit agreement as described in Note 5 to the
Consolidated Financial Statements, we have $9.7 billion of borrowing capacity in
addition to the $5 billion of debt outstanding. This additional borrowing
capacity includes the $1.5 billion available under the credit agreement.

Though we believe we have adequate sources of liquidity, significant disruption
or volatility in the capital and credit markets could affect our ability to
access those markets for additional borrowings or increase costs associated with
borrowing funds.

We maintain a capital management strategy to retain overseas a significant
portion of the earnings from our foreign operations. As of December 31, 2016,
undistributed earnings were approximately $2.5 billion. These undistributed
earnings are deployed outside of the U.S. predominantly in support of the
liquidity and regulatory capital requirements of our foreign operations.
Approximately $305 million of cash and cash equivalents held overseas would be
subject to additional tax expense representing the difference between the U.S.
and foreign tax rates, if repatriated. We continue to expect most of the
undistributed earnings and future earnings to be reinvested to support growth
initiatives overseas. This strategy does not materially limit our ability to
meet our liquidity and capital needs in the U.S.

Unfunded Pension Plan Liability.  As of December 31, 2016, our unfunded pension
liability was $911 million, reflecting a decrease of $42 million from
December 31, 2015. The decrease in the unfunded liability reflected strong asset
returns in line with our expectations and changes to our mortality assumptions
based on an updated pension mortality improvement scale published in the fourth
quarter of 2016. These factors were partially offset by a decrease of
approximately 20 basis points in the weighted average assumed discount rate. In
February 2017, we made a voluntary pension contribution of $150 million. We do
not expect to make any additional pension contributions for the remainder of
2017, as there are no contributions required under the Pension Protection Act of
2006. See Note 15 to the Consolidated Financial Statements for additional
information regarding our pension plans.

Solvency II.  Beginning in 2016, our businesses in the European Union became
subject to the directive on insurance regulation, solvency and governance
requirements known as Solvency II. This directive imposes economic risk-based
solvency and governance requirements and supervisory rules. Our European
insurance companies are capitalized at levels consistent with projected Solvency
II requirements and in compliance with anticipated governance and technical
capability requirements.

Guarantees and Contractual Obligations



We are contingently liable for various contractual obligations entered into in
the ordinary course of business. The maturities of our primary contractual cash
obligations, as of December 31, 2016, are estimated to be as follows:

(In millions, on an                           Less than                                  After
undiscounted basis)                 Total        1 year     1-3 years     4-5 years    5 years

On-Balance Sheet:
Insurance liabilities:
Contractholder deposit funds     $  6,680   $       786   $     1,006   $       807   $  4,081
Future policy benefits             11,319           553         1,390         1,163      8,213
Global Health Care medical
costs payable                       2,554         2,458            39            12         45
Unpaid claims and claim
expenses                            5,354         1,678         1,035           695      1,946
Short-term debt                       276           276             -             -          -
Long-term debt                      7,886           247           617         1,350      5,672
Other long-term liabilities           879           306           116            88        369
Off-Balance Sheet:
Purchase obligations                1,443           542           573           230         98
Operating leases                      661           135           215           147        164

Total                            $ 37,052   $     6,981   $     4,991   $     4,492   $ 20,588



On balance sheet:


   º •

º Insurance liabilities. Contractual cash obligations for insurance

liabilities, excluding unearned premiums, represent estimated net benefit

payments for health, life and disability insurance policies and annuity

contracts. Recorded contractholder deposit funds reflect current fund

balances primarily from universal life insurance customers. Contractual

cash obligations for these universal life contracts are estimated by

projecting future payments using assumptions for lapse, withdrawal and

mortality. These projected future payments include estimated future

interest crediting on current fund balances based on current investment

yields less the estimated cost of insurance charges and mortality and

administrative fees. Actual obligations in any single year will vary based

on actual morbidity, mortality, lapse, withdrawal, investment and premium

experience. The sum of the obligations presented above exceeds the

corresponding insurance and contractholder liabilities of $21 billion

recorded on the balance sheet because the recorded insurance liabilities

reflect discounting for interest and the recorded contractholder

liabilities exclude future interest crediting, charges and fees. We manage

our investment portfolios to generate cash flows needed to satisfy

contractual obligations. Any shortfall from expected investment yields

could result in increases to recorded reserves and adversely impact results

of operations. The amounts associated with the sold retirement benefits and

individual life insurance and annuity businesses, as well as the reinsured

workers' compensation, personal accident and supplemental benefits

businesses, are excluded from the table above as their related net cash

flows associated with them are not expected to impact our cash flows. The

total amount of these reinsured reserves excluded is approximately

$5 billion. The expected future cash flows for guaranteed minimum death

benefit ("GMDB") and guaranteed minimum income benefit ("GMIB") contracts

     included in the table above (within future policy benefits and other
     long-term liabilities) do not consider any of the related reinsurance
     arrangements.

   º •
   º Short-term debt represents current maturities of long-term debt, and
     current obligations under capital leases.

      CIGNA CORPORATION - 2016 Form 10-K  45

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

º •

º Long-term debt includes scheduled interest payments. Capital leases are

     included in long-term debt and primarily represent obligations for IT
     network storage, servers and equipment.

   º •

º Other long-term liabilities. This table includes estimated payments for

GMIB contracts, pension and other postretirement and postemployment benefit

obligations, supplemental and deferred compensation plans, interest rate

and foreign currency swap contracts, and reinsurance liabilities. These

items are presented in accounts payable, accrued expenses and other

liabilities in our Consolidated Balance Sheets.


Estimated payments of $75 million for deferred compensation, qualified,
non-qualified and international pension plans and other postretirement and
postemployment benefit plans are expected to be paid in less than one year,
including a voluntary contribution to the qualified pension plan of $150 million
made in February 2017. We do not expect to make any additional contributions to
the qualified domestic pension plans during 2017. We expect to make payments
subsequent to 2017 for these obligations, however subsequent payments have been
excluded from the table as their timing is based on plan assumptions that may
materially differ from actual activities. See Note 15 to the Consolidated
Financial Statements for further information on pension and other postretirement
benefit obligations.

Off-Balance Sheet:

Purchase obligations. As of December 31, 2016, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:

        (In millions)

        Fixed maturities                                           $    26
        Commercial mortgage loans                                       69
        Limited liability entities (other long-term investments)     1,073

        Total investment commitments                                 1,168
        Future service commitments                                     275

        Total purchase obligations                                 $ 1,443


See Note 11 to the Consolidated Financial Statements for additional information.


Our estimated future service commitments primarily represent contracts for
certain outsourced business processes and IT maintenance and support. We
generally have the ability to terminate these agreements, but do not anticipate
doing so at this time. Purchase obligations exclude contracts that are
cancelable without penalty and those that do not contractually require minimum
levels of goods or services to be purchased.

Operating leases. For additional information, see Note 18 to the Consolidated Financial Statements.


Guarantees


We are contingently liable for various financial and other guarantees provided
in the ordinary course of business. See Note 21 to the Consolidated Financial
Statements for additional information on guarantees.

Critical Accounting Estimates

The preparation of Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the Consolidated Financial Statements. Management considers an accounting estimate to be critical if:

º •

º it requires assumptions to be made that were uncertain at the time the

     estimate was made; and

   º •
   º changes in the estimate or different estimates that could have been
     selected could have a material effect on our consolidated results of
     operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented below.


In addition to the estimates presented in the following table, there are other
accounting estimates used in the preparation of our Consolidated Financial
Statements, including estimates of liabilities for future policy benefits, as
well as estimates with respect to postemployment and postretirement benefits
other than pensions, certain compensation accruals, and income taxes.

Management believes the current assumptions used to estimate amounts reflected
in our Consolidated Financial Statements are appropriate. However, if actual
experience differs from the assumptions used in estimating amounts reflected in
our Consolidated Financial Statements, the resulting changes could have a
material adverse effect on our consolidated results of operations and, in
certain situations, could have a material adverse effect on our liquidity and
financial condition. The table below presents the adverse impacts of certain
changes in assumptions. Except as noted, the effect of an assumption change in
the opposite direction would be a positive impact to our consolidated results of
operations, liquidity or financial condition.

46 CIGNA CORPORATION - 2016 Form 10-K

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Table of Contents

PART II

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

                                                                   of 

Operations

See Note 2 to the Consolidated Financial Statements for further information on significant accounting policies.


Balance Sheet Caption / Nature of
Critical Accounting Estimate                 Effect if Different 

Assumptions Used

Goodwill

At the acquisition date, goodwill           If we do not achieve our 

earnings

represents the excess of the cost of objectives or the cost of capital businesses acquired over the fair

           rises significantly, the 

assumptions

value of their net assets.                  and estimates underlying these

We completed our annual evaluations of impairment evaluations could be goodwill for impairment during the adversely affected and result in third quarter of 2016. These

                future impairment charges that 

would

evaluations were performed at the           negatively impact our operating
reporting unit level, based on              results.
discounted cash flow analyses and           Based on our most recent 

evaluations,

market data. The evaluations indicated the fair value estimates of our that no impairment was required.

            reporting units exceed their 

carrying

During the fourth quarter, we updated values by adequate margins. our analysis of the Government

              Changes in the funding for our
reporting unit, reflecting an increase      Medicare programs by the federal
in market interest rates. The updated       government, or our inability to
analysis for the Government reporting       resolve the matters arising from the
unit continued to indicate that no          CMS Notice in a timely and
impairment was required.                    satisfactory manner, could 

materially

Fair value of a reporting unit was          reduce revenues and profitability in
estimated using models and assumptions      our Government reporting unit and have
that we believe a hypothetical market       a significant impact on its fair
participant would use to determine a        value.
current transaction price. The
significant assumptions and estimates
used in determining fair value include
the discount rate and future cash
flows. A range of discount rates was
used, corresponding with the reporting
unit's weighted average cost of
capital, consistent with that used for
investment decisions considering the
specific and detailed operating plans
and strategies within the reporting
unit. Projections of future cash flows
were consistent with our annual
planning process for revenues, claims,
operating expenses, taxes, capital
levels and long-term growth rates. In
addition to these assumptions, we
considered market data to evaluate the
fair value of each reporting unit.
In our Government operating segment
(which is a reporting unit) 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. Estimated future cash flows for
this business incorporated the
potential effects of Medicare
Advantage reimbursement rates for 2017
and beyond as discussed in the
"Executive Overview" section of this
MD&A. Revenues from the Medicare
programs are dependent, in whole or in
part, upon annual funding from the
federal government through CMS. This
evaluation also considered
management's assessment of the impact
of the CMS sanctions and updated Star
Ratings discussed in Note 21 to the
Consolidated Financial Statements.
Funding for these programs is
dependent on many factors including
general economic conditions,
continuing government efforts to
contain health care costs and
budgetary constraints at the federal
level and general political issues and
priorities.
Goodwill as of December 31 was as
follows (in millions):
•
2016 - $5,980
•
2015 - $6,019
See Note 17 to the Consolidated
Financial Statements for additional
discussion of our goodwill.

Accounts payable, accrued expenses and
other liabilities - pension
liabilities

These liabilities are estimates of the      The discount rate is typically the
present value of the qualified and          most significant assumption in
nonqualified pension benefits to be         measuring the pension liability. We
paid (attributed to employee service        develop the discount rate by applying
to date) net of the fair value of plan      actual annualized yields at various
assets. The accrued pension benefit         durations from a discount rate curve
liability as of December 31 was as          constructed from high quality
follows (in millions):                      corporate bonds.
•                                           If discount rates for the qualified
2016 - $911                                 and nonqualified pension plans
•                                           decreased by 50 basis points, the
2015 - $953                                 accrued pension benefit liability
See Note 15 to the Consolidated             would increase by approximately
Financial Statements for assumptions        $195 million as of December 31, 2016
and methods used to estimate pension        resulting in an after-tax decrease to
liabilities.                                shareholders' equity of approximately
                                            $125 million.
                                            If the December 31, 2016 fair values
                                            of domestic qualified plan assets
                                            decreased by 10%, the accrued pension
                                            benefit liability would increase by
                                            approximately $395 million as of
                                            December 31, 2016 resulting in an
                                            after-tax decrease to shareholders'
                                            equity of approximately $255 million.




      CIGNA CORPORATION - 2016 Form 10-K  47


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

Balance Sheet Caption / Nature of
Critical Accounting Estimate                 Effect if Different 

Assumptions Used


Global Health Care medical costs
payable

Medical costs payable for the Global As described in Note 7, Global Health Health Care segment include both

            Care medical costs payable are
reported claims and estimates for           primarily impacted by 

assumptions

losses incurred but not yet reported.       related to completion factors and
Liabilities for medical costs payable       medical cost trend. Changes in either
as of December 31 were as follows (in       assumption from actual results could
millions):                                  impact the Global Health Care medical
•                                           costs payable balance as noted below.
2016 - gross $2,532; net $2,257             A large number of factors may 

cause

•                                           the medical cost trend to vary from
2015 - gross $2,355; net $2,112             the Company's estimates, 

including:

These liabilities are presented above changes in medical management both gross and net of reinsurance and practices, changes in the level and other recoverables and generally

            mix of benefits offered and 

services

exclude amounts for administrative utilized, and changes in medical services only business.

                     practices. Completion factors may be
See Note 7 to the Consolidated              affected if actual claims 

submission

Financial Statements for additional         rates from providers differ from
information regarding assumptions and       estimates (that can be influenced by a
methods used to estimate this               number of factors, including provider
liability.                                  mix, and electronic versus manual
                                            submissions), or if changes to the
                                            Company's internal claims processing
                                            patterns occur. Based on studies of
                                            our claim experience, it is reasonably
                                            possible that a 100 basis point change
                                            in the medical cost trend and a 50
                                            basis point change in completion
                                            factors could occur in the near term.
                                            A 100 basis point increase in the
                                            medical cost trend rate would increase
                                            this liability by approximately
                                            $30 million, resulting in a decrease
                                            in net income of approximately
                                            $20 million after-tax, and a 50 basis
                                            point decrease in completion factors
                                            would increase this liability by
                                            approximately $70 million, resulting
                                            in a decrease in net income of
                                            approximately $45 million after-tax.

Unpaid claims and claim expenses -
long-term disability reserves
The liability for long-term disability      As described in Note 8, key
reserves is the present value of            assumptions in the calculation 

of

estimated future benefits payments          long-term disability reserves include
over the expected disability period         the discount rate and claim resolution
and includes estimates for both             rates, both of which are 

reviewed

reported claims and for claims              annually and updated when 

experience

incurred but not yet reported.              or future expectations would 

indicate

Long-term disability reserves as of a necessary change. Based on recent December 31 were as follows (in

             and historical resolution rate
millions):                                  patterns and changes in 

investment

•                                           portfolio yields, it is 

reasonably

2016 - gross $3,708; net $3,622             possible that a 5 percent change in
•                                           claim resolution rates and a 25 basis
2015 - gross $3,481; net $3,403             point change in the discount 

rate

See Note 8 to the Consolidated              could occur.
Financial Statements for additional         The discount rate is the interest rate
information regarding assumptions and       used to discount the projected future
methods used to estimate this               benefit payments to their present
liability.                                  value. The discount rate assumption is
                                            based on the projected investment
                                            yield of the assets supporting the
                                            reserves. A 25 basis point decrease in
                                            the discount rate would increase
                                            long-term disability reserves by
                                            approximately $45 million and decrease
                                            net income by approximately
                                            $30 million after-tax.
                                            Claim resolution rate assumptions
                                            involve many factors including
                                            claimant demographics, the type of
                                            contractual benefit provided and the
                                            time since initially becoming
                                            disabled. The Company uses its own
                                            historical experience to develop its
                                            claim resolution rates. A 5 percent
                                            decrease in the claim resolution rate
                                            would increase long-term disability
                                            reserves by approximately $90 million
                                            and decrease net income by
                                            approximately $60 million after-tax.

Valuation of fixed maturity
investments
Most fixed maturities are classified        Typically, the most significant input
as available for sale and are carried       in the measurement of fair value is
at fair value with changes in fair          the market interest rate used to
value recorded in accumulated other         discount the estimated future cash
comprehensive income (loss) within          flows of the instrument. Such market
shareholders' equity.                       rates are derived by calculating the
Fair value is defined as the price at       appropriate spreads over comparable
which an asset could be exchanged in        U.S. Treasury securities, based on the
an orderly transaction between market       credit quality, industry and structure
participants at the balance sheet           of the asset.
date.                                       If the interest rates used to

Determining fair value for a financial calculate fair value increased by 100 instrument requires management

              basis points, the fair value of 

the

judgment. The degree of judgment            total fixed maturity portfolio 

of

involved generally correlates to the        $21 billion would decrease by
level of pricing readily observable in      approximately $1.2 billion, resulting
the markets. Financial instruments          in an after-tax decrease to
with quoted prices in active markets        shareholders' equity of approximately
or with market observable inputs to         $0.8 billion.
determine fair value, such as public
securities, generally require less
judgment. Conversely, private
placements including more complex
securities that are traded
infrequently are typically measured
using pricing models that require more
judgment as to the inputs and
assumptions used to estimate fair
value. There may be a number of
alternative inputs to select based on
an understanding of the issuer, the
structure of the security and overall
market conditions. In addition, these
factors are inherently variable in
nature as they change frequently in
response to market conditions.
Approximately two-thirds of our fixed
maturities are public securities, and
one-third are private placement
securities.
See Note 10 to the Consolidated
Financial Statements for a discussion
of our fair value measurements and the
procedures performed by management to
determine that the amounts represent
appropriate estimates.



  48  CIGNA CORPORATION - 2016 Form 10-K

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PART II

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

                                                                   of 

Operations


Balance Sheet Caption / Nature of
Critical Accounting Estimate                 Effect if Different 

Assumptions Used


Assessment of "other-than-temporary"
impairments on fixed maturities
To determine whether a fixed                For all fixed maturities with cost in
maturity's decline in fair value below      excess of their fair value, if this
its amortized cost is other than            excess was determined to be
temporary, we must evaluate the             other-than-temporary, 

shareholders'

expected recovery in value and our net income for the year ended intent to sell or the likelihood of a December 31, 2016 would have decreased required sale of the fixed maturity by approximately $115 million prior to an expected recovery. To make after-tax. this determination, we consider a

           Unlike impairments, there is no 

impact

number of general and specific factors      to shareholders' net income for
including the regulatory, economic and      holding fixed maturities with a fair
market environments, length of time         value in excess of cost because we
and severity of the decline, and the        classify our fixed maturities as
financial health and specific near          available for sale.
term prospects of the issuer.
See Note 11 to the Consolidated
Financial Statements for additional
discussion of our review of declines
in fair value, including information
regarding our accounting policies for
fixed maturities.



SEGMENT REPORTING


The following section of this MD&A discusses the results of each of our
reporting segments. In these segment discussions, we present "operating
revenues," defined as total revenues excluding realized investment results and
"adjusted income from operations," defined as shareholders' net income (loss)
excluding after-tax realized investment results, net amortization of other
acquired intangible assets and special items. Ratios presented in this segment
discussion exclude the same items as adjusted income from operations. See
Note 22 to the Consolidated Financial Statements for additional discussion of
these metrics.

In these segment discussions, we also present "adjusted margin," defined as adjusted income from operations divided by operating revenues.

See the MD&A Executive Overview beginning on page 36 for summarized financial results of each of our reporting segments.

Global Health Care Segment



As described in the Segment Reporting introduction above, the performance of the
Global Health Care segment is measured using adjusted income from operations.
The key factors affecting adjusted income from operations for this segment are:

   º •
   º customer growth;

   º •
   º sales of specialty products;

   º •

º operating expense as a percentage of operating revenues (operating expense

ratio); and

º •

º medical costs as a percentage of premiums (medical care ratio or "MCR") for

our commercial and government businesses.

Results of Operations

Financial Summary


                                                                   Change               Change
                                    For the Years                Favorable            Favorable
                                  Ended December 31,          

(Unfavorable) (Unfavorable)

(In millions)                  2016       2015       2014      2016 vs. 2015        2015 vs. 2014

Operating revenues         $ 31,199   $ 29,929   $ 27,290   $  1,270         4 % $  2,639        10 %

Adjusted income from
operations                 $  1,852   $  1,848   $  1,752   $      4         - % $     96         5 %

Adjusted margin                 5.9 %      6.2 %      6.4 %      (30 )bps             (20 )bps
Medical Care Ratios:
Commercial                     79.3 %     78.1 %     78.5 %     (120 )bps              40 bps
Government                     85.3 %     85.2 %     84.3 %      (10 )bps             (90 )bps
Consolidated Global
Health Care                    81.6 %     80.9 %     80.6 %      (70 )bps             (30 )bps
Operating expense ratio        21.5 %     21.4 %     21.4 %      (10 )bps               - bps




                                                                   Increase             Increase
                                   As of December 31,             (Decrease)           (Decrease)

(Dollars in millions,
customers in thousands)         2016       2015       2014      2016 vs. 2015        2015 vs. 2014

Global Health Care
medical costs payable       $  2,532   $  2,355   $  2,180   $     177        8 % $    175        8%
Customers:
Total commercial risk          2,576      2,502      2,534          74        3 %      (32 )    (1)%
Total government                 566        567        518          (1 )      -         49       9

Total risk                     3,142      3,069      3,052          73        2         17       1
Service                       12,055     11,930     11,404         125        1        526       5

Total medical customers       15,197     14,999     14,456         198        1 %      543        4%



      CIGNA CORPORATION - 2016 Form 10-K  49


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

Adjusted income from operations was essentially flat in 2016 compared with 2015,
reflecting earnings growth in our Commercial segment, primarily due to increased
contributions from specialty products partially offset by lower margins in our
U.S. Individual business. This increase was offset by lower earnings in our
Government segment primarily driven by costs related to our CMS audit response.

Adjusted income from operations increased in 2015 compared with 2014, reflecting
U.S. Commercial business growth, including increased contributions from
pharmacy, stop loss and other specialty products. Results in 2015 also reflect
the impact of increased investments in business initiatives.

Operating revenues.  The increase in operating revenues in 2016 compared with
2015 was due to growth in our Commercial segment primarily from increased
specialty revenues. Growth in Medicare Advantage customer volumes and higher
premium rates for most products in our U.S. health care businesses primarily to
recover underlying medical cost trend also contributed to the increase. These
increases were partially offset by lower customer volumes in our Medicare Part D
and U.S. Individual businesses. Operating revenues include amounts related to
the Risk Mitigation Programs under the Health Care Reform Act. See the Risk
Mitigation section on page 40 for further discussion of the Risk Corridor
program.

The increase in operating revenues in 2015, compared with 2014 was primarily due
to a higher customer base in our Government segment, as well as revenue growth
in specialty businesses and higher premiums in the U.S. Commercial segment
reflecting rate actions on most risk products primarily to recover underlying
medical cost trends.

Medical care ratios.  The Commercial medical care ratio increased in 2016
compared with 2015 reflecting a less favorable medical care ratio in our stop
loss business as expected, lower premium due to the anticipated reduction of the
Health Care Reform Act mandated fees in 2017, and less favorable prior year
reserve development. The Commercial medical care ratio decreased slightly in
2015 compared with 2014 primarily due to a lower medical care ratio in our stop
loss business.

The Government medical care ratio increased slightly in 2016 compared with 2015
reflecting higher medical costs in our Medicaid business and less favorable
prior year development, mostly offset by improvements in the Medicare Part D
business. The Government medical care ratio increased in 2015 compared with 2014
due to an increase in Medicare Part D utilization.

As discussed in the Regulation section of this Form 10-K, both the Commercial
and Government segments are subject to minimum medical loss ratio requirements
under the Health Care Reform Act. As of December 31, 2016 and 2015, liabilities
under these requirements were not material.

Operating expense ratio.  The operating expense ratio increased slightly in 2016
compared with 2015, reflecting costs related to our CMS audit response.
Excluding those costs, the operating expense ratio decreased, reflecting higher
revenue and operating efficiencies, partially offset by business initiative
investments to enhance our capabilities. The operating expense ratio was flat in
2015 compared with 2014, reflecting business-initiative investments offset by
higher revenue and disciplined expense management.

Other Items Affecting Health Care Results

Global Health Care Medical Costs Payable


Medical costs payable was higher as of December 31, 2016 compared with 2015,
primarily due to medical cost trend across all businesses and customer growth in
our Commercial group business. Medical costs payable increased in 2015 compared
with 2014, primarily driven by growth in the stop loss book of business and the
Government segment. See Note 7 to the Consolidated Financial Statements for
additional information.

Medical Customers

A medical customer is defined as a person meeting any one of the following criteria:

º •

º is covered under an insurance policy or service agreement issued by us;

º •

º has access to the Company's provider network for covered services under

     their medical plan; or

   º •
   º has medical claims that are administered by us.

Our medical customer base as of December 31, 2016 was higher than 2015,
primarily driven by growth in our middle market, select, and international
market segments. Our medical customer base as of December 31, 2015 was higher
than 2014, driven by strong overall retention and sales in our targeted market
segments, as well as the acquisition of QualCare Alliance Networks, Inc. on
February 28, 2015.

Global Supplemental Benefits Segment



As described in the Segment Reporting introduction on page 49, the performance
of the Global Supplemental Benefits segment is measured using adjusted income
from operations. The key factors affecting adjusted income from operations for
this segment are:

   º •
   º premium growth, including new business and customer retention;

   º •
   º benefit expenses as a percentage of premiums (loss ratio);

   º •

º operating expense and acquisition expense as a percentage of operating

     revenues (expense ratio and acquisition cost ratio); and

   º •
   º the impact of foreign currency movements.

Throughout this discussion and the table presented below, prior period currency
adjusted income from operations and operating revenues are calculated by
applying the current period's exchange rates to reported results in the prior
period. A strengthening U.S. Dollar against foreign currencies decreases these
measures, while a weakening U.S. Dollar produces the opposite effect.

50 CIGNA CORPORATION - 2016 Form 10-K

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PART II

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

Results of Operations

Financial Summary


                                                                   Change               Change
                                      For the Years              Favorable            Favorable
                                   Ended December 31,         

(Unfavorable) (Unfavorable)

(In millions)                    2016      2015      2014        2016 vs. 2015        2015 vs. 2014

Operating revenues            $ 3,385   $ 3,149   $ 3,005   $   236          7 % $   144          5 %

Adjusted income from
operations                    $   294   $   262   $   243   $    32         12 % $    19          8 %

Operating revenues, using
actual 2016 currency
exchange rates                $ 3,385   $ 3,069   $ 2,738   $   316         10 % $   331         12 %
Adjusted income from
operations, using actual
2016 currency exchange
rates                         $   294   $   255   $   219   $    39         15 % $    36         16 %

Adjusted margin                   8.7 %     8.3 %     8.1 %      40 bps               20 bps
Loss ratio                       55.3 %    55.3 %    54.3 %       - bps             (100 )bps
Acquisition cost ratio           18.6 %    19.3 %    21.0 %      70 bps              170 bps
Expense ratio (excluding
acquisition costs)               17.9 %    18.3 %    17.7 %      40 bps              (60 )bps



Adjusted income from operations increased in 2016 compared with 2015 primarily
due to business growth, largely in South Korea, and lower acquisition and
operating cost ratios. These factors were partially offset by higher income
taxes and the unfavorable impact of foreign currency movements, primarily in
South Korea. The increase in adjusted income from operations in 2015 compared
with 2014 was primarily due to business growth and lower acquisition costs,
partially offset by the unfavorable impact of foreign currency movements and
higher expense ratios as discussed below.

Operating revenues were higher in 2016 compared with 2015 primarily due to new
sales, particularly in South Korea and the U.S., reflecting both customer growth
and sales of higher premium products. These higher premiums were partially
offset by lower persistency in the U.K. and the unfavorable impact of foreign
currency movements, primarily in South Korea and the U.K.

Operating revenues were higher in 2015 compared with 2014, primarily
attributable to new sales, particularly in South Korea and the U.S., reflecting
both customer growth and sales of higher premium products, partially offset by
the unfavorable impact of foreign currency movements.

Loss ratios were flat in 2016 compared with 2015 reflecting favorable claims in
South Korea, largely offset by higher claims in the U.S. Loss ratios increased
in 2015 compared with 2014, primarily due to a business mix shift toward
products with higher expected loss ratios in South Korea and the U.S.

Acquisition cost ratios decreased in both 2016 and 2015 compared with each prior
year. The decline in each year's ratio largely represents a shift toward higher
premium products with lower acquisition costs primarily in South Korea and the
U.S.

The expense ratio (excluding acquisition costs) decreased in 2016 compared with
2015 primarily driven by operating efficiencies. The expense ratio (excluding
acquisition costs) increased in 2015 compared with 2014 reflecting strategic
business investments partially offset by operating efficiencies.

Other Items Affecting Global Supplemental Benefits Results


South Korea is the single largest geographic market for our Global Supplemental
Benefits segment. South Korea generated 51% of the segment's operating revenues
and 85% of the segment's adjusted income from operations in 2016. In 2016, our
Global Supplemental Benefits segment operations in South Korea represented 4% of
our consolidated operating revenues and 12% of consolidated adjusted income from
operations.

As a global company, our business is exposed to risks inherent in foreign
operations. While we continue to monitor and evaluate the impacts of the U.K.
vote to exit the European Union and the political unrest in Turkey, we do not
expect these events to materially impact the results of the Global Supplemental
Benefits segment in 2017.

Significant movements in foreign currency exchange rates could materially affect the reported results of the Global Supplemental Benefits segment.

Group Disability and Life Segment



As described in the Segment Reporting introduction on page 49, the performance
of the Group Disability and Life segment is measured using adjusted income from
operations. The key factors affecting adjusted income from operations for this
segment are:

   º •
   º premium growth, including new business and customer retention;

   º •
   º net investment income;

   º •
   º benefit expenses as a percentage of premiums (loss ratio); and

   º •
   º operating expense as a percentage of operating revenues excluding net
     investment income (expense ratio).

      CIGNA CORPORATION - 2016 Form 10-K  51

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

Results of Operations

Financial Summary


                                                                  Change                Change
                                     For the Years              Favorable             Favorable
                                  Ended December 31,          (Unfavorable)         (Unfavorable)

(In millions)                   2016      2015      2014        2016 vs. 2015         2015 vs. 2014

Operating revenues           $ 4,443   $ 4,271   $ 3,970   $   172          4 %  $   301          8 %

Adjusted income from
operations                   $   125   $   324   $   317   $  (199 )      (61 )% $     7          2 %

Adjusted margin                  2.8 %     7.6 %     8.0 %    (480 )bps              (40 )bps
Loss ratio                      83.8 %    76.3 %    76.5 %    (750 )bps               20 bps
Operating expense ratio         22.4 %    21.9 %    21.9 %     (50 )bps                - bps


During the first half of 2016, the Group Disability and Life segment experienced significant unfavorable claims in its disability and life businesses. While claims experience moderated during the second half of 2016, the first half results caused full year earnings to decline significantly from the prior year.


Disability:  We implemented modifications to our disability claims management
process in the first quarter of 2016 to drive improved quality and consistency.
These modifications extended the claims processing cycle and lowered the
disability claim resolution rate. As our modified disability claims management
process continued to mature during the latter half of 2016, our claim resolution
rate significantly improved compared with the first half of 2016. As overall
claim metrics continue to improve, management expects disability operational
margins to normalize over the course of 2017.

Life: We experienced a period of elevated life claims in the second quarter of 2016, driven by substantially higher new claim incidence and sizes, both of which improved in the second half of 2016.

2016 vs. 2015



Adjusted income from operations.  Results decreased in 2016 compared with 2015
due primarily to unfavorable disability and life claims experience as well as
the absence of favorable reserve reviews and a higher operating expense ratio.
Results in 2016 included the unfavorable impact of reserve reviews of
$18 million after-tax compared with a favorable impact of $55 million after-tax
in 2015.

Operating revenues.  Premiums and fees increased in 2016 compared with 2015
driven by new business growth due to disability and life sales. Net investment
income also increased in 2016 compared with 2015 primarily due to higher average
assets partially offset by lower yields.

The loss ratio increased in 2016 compared with 2015 due to lower claim resolutions in disability, higher life claim incidence and sizes in the second quarter, and the unfavorable impact of reserve reviews as discussed above.

Operating expense ratio. The operating expense ratio increased in 2016 compared with 2015 primarily reflecting higher disability claim management costs.

2015 vs. 2014



Adjusted income from operations.  Results in 2015 increased compared with 2014
due primarily to favorable life claims experience. Results also included the
favorable after-tax effects of reserve reviews of $55 million in 2015 and
$52 million in 2014.

Operating revenues.  The increase in 2015 compared with 2014 was driven by new
business growth due to disability and life sales. Net investment income also
increased in 2015 compared with 2014 primarily due to higher average assets
partially offset by lower yields.

The loss ratio decreased in 2015 compared with 2014 due to lower life claim incidence.

Operating expense ratio. The operating expense ratio was flat in 2015 compared with 2014 driven by effective cost management.

Other Operations



As described in the Segment Reporting introduction on page 49, the performance
of the Other Operations segment is measured using adjusted income from
operations. Cigna's corporate-owned life insurance ("COLI") business contributes
the majority of earnings in Other Operations. Cigna's Other Operations segment
also includes the results from the run-off reinsurance and settlement annuity
businesses, as well as the remaining deferred gains recognized from the sale of
the individual life insurance and annuity and retirement benefits businesses.

52 CIGNA CORPORATION - 2016 Form 10-K

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PART II

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

Results of Operations

Financial Summary


                                                                 Change                Change
                                    For the Years              Favorable             Favorable
                                  Ended December 31,         (Unfavorable)         (Unfavorable)

(In millions)                   2016      2015     2014        2016 vs. 2015         2015 vs. 2014

Operating revenues           $   472    $  485   $  510   $  (13 )        (3 )% $   (25 )       (5 )%
Adjusted income from
operations                   $    70    $   75   $   68   $   (5 )        (7 )% $     7         10 %

Adjusted margin                 14.8 %    15.5 %   13.3 %    (70 )bps               220 bps



Adjusted income from operations decreased in 2016 compared with 2015, reflecting
less favorable mortality experience and lower interest margins in COLI. Adjusted
income from operations increased in 2015 compared with 2014, reflecting
favorable mortality experience in COLI.

Operating revenues decreased in 2016 compared with 2015 due to lower net
investment income driven by lower investment yields. The decrease in operating
revenues in 2015 compared with 2014 is largely due to lower net investment
income driven by lower investment yields and, to a lesser extent, lower premiums
in COLI driven by favorable experience-rating results.

Corporate



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

Financial Summary


                                                                   Change               Change
                                      For the Years              Favorable            Favorable
                                    Ended December 31,        

(Unfavorable) (Unfavorable)

(In millions)                     2016      2015     2014        2016 vs. 2015        2015 vs. 2014

Adjusted loss from
operations                     $  (237 )  $ (253 ) $ (265 ) $     16         6 % $     12         5 %



Corporate's adjusted loss from operations decreased in 2016 compared with 2015,
primarily due to adopting ASU 2016-09 effective January 1, 2016, as further
discussed in Note 2 to the Consolidated Financial Statements, and higher net
investment income partially offset by higher pension and project expenses.

Corporate's adjusted loss from operations decreased in 2015 compared with 2014, primarily due to lower pension and interest expenses.

Investment Assets

The following table presents our invested asset portfolio, excluding separate account assets, as of December 31, 2016 and 2015. An increase in investable funds has led to an increase across all asset types, except for commercial mortgages, that have continued to decline due to a competitive investment environment and our assessment of relative value versus other fixed income opportunities.

Additional information regarding our investment assets and related accounting policies is included in Notes 2, 10, 11, 12, 13, and 14 to the Consolidated Financial Statements.

                  (In millions)                     2016       2015

                  Fixed maturities              $ 20,961   $ 19,455
                  Equity securities                  583        190
                  Commercial mortgage loans        1,666      1,864
                  Policy loans                     1,452      1,419
                  Other long-term investments      1,462      1,404
                  Short-term investments             691        381

                  Total                         $ 26,815   $ 24,713



Fixed Maturities


Investments in fixed maturities include publicly traded and privately placed
debt securities, mortgage and other asset-backed securities, and preferred
stocks redeemable by the investor. These investments are classified as available
for sale and are carried at fair value on our balance sheet. Additional
information regarding valuation methodologies, key inputs and controls is
included in Note 10 of the Consolidated Financial Statements.

The following table reflects our fixed maturity portfolio by type of issuer as of December 31, 2016 and 2015.

                (In millions)                         2016       2015

                Federal government and agency     $    877   $    779
                State and local government           1,435      1,641
                Foreign government                   2,113      2,014
                Corporate                           16,050     14,448
                Mortgage and other asset-backed        486        573

                Total                             $ 20,961   $ 19,455



      CIGNA CORPORATION - 2016 Form 10-K  53

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Table of Contents


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

As of December 31, 2016, $18.6 billion, or 89%, of the fixed maturities in our
investment portfolio were investment grade (Baa and above, or equivalent), and
the remaining $2.4 billion were below investment grade. The majority of the
bonds that are below investment grade are rated at the higher end of the
non-investment grade spectrum. These quality characteristics have not materially
changed from the prior year and are consistent with our investment strategy.

State and local government.  Our investment in state and local government
securities, with an average quality rating of Aa2, is diversified by issuer and
geography with no single exposure greater than $30 million as of December 31,
2016. We assess each issuer's credit quality based on a fundamental analysis of
underlying financial information and do not rely solely on statistical rating
organizations or monoline insurer guarantees.

Foreign government.  We invest in high quality foreign government obligations
with an average quality rating of Aa3 as of December 31, 2016. These investments
are concentrated in Asia, primarily South Korea, consistent with the geographic
locations of our international business operations. Foreign government
obligations also include $221 million of investments in European sovereign debt,
none of which are in countries with significant political or economic concerns
such as Portugal, Italy, Ireland, Greece, Spain and Turkey.

Corporate.  As of December 31, 2016, corporate fixed maturities included the
following.

   º •

º Private placement investments were $5.3 billion. These investments are

generally less marketable than publicly-traded bonds, however yields on

these investments tend to be higher than yields on publicly-traded bonds

with comparable credit risk. We perform a credit analysis of each issuer,

     diversify investments by industry and issuer and require financial and
     other covenants that allow us to monitor issuers for deteriorating
     financial strength and pursue remedial actions, if warranted.

   º •

º Investments in companies that are domiciled or have significant business

     interests in Italy, Ireland, Spain and Turkey were $354 million. These
     investments have an average quality rating of Baa3 and are diversified by
     industry sector, including approximately 1% invested in financial
     institutions.

   º •

º Investments in the energy and natural gas sector were $1.7 billion with

gross unrealized losses of $18 million. These investments have an average

quality rating of Baa2 and are diversified by issuer with no single

exposure greater than $40 million.


In addition to amounts classified in fixed maturities on our Consolidated
Balance Sheets, we operate a joint venture in China in which we have a 50%
ownership interest. We account for this joint venture on the equity basis of
accounting and report it in other assets, including other intangibles. This
entity has an investment portfolio of approximately $3.3 billion that is
primarily invested in local Chinese corporate and government fixed maturities
and has no investments with a material unrealized loss as of December 31, 2016.

Equity Securities


Equity securities increased approximately $400 million during 2016 to
$583 million as of December 31, 2016, largely due to investing in an exchange
traded fund ("ETF") as part of a temporary program to invest available funds in
high quality and liquid assets. The underlying assets of the ETF are primarily
U.S. investment grade corporate bonds and there is a gross unrealized loss of
$5 million as of December 31, 2016 due to an increase in market yields since
purchase.

Commercial Mortgage Loans


Our commercial mortgage loans are fixed rate loans, diversified by property
type, location and borrower. Loans are secured by high quality commercial
properties and are generally made at less than 70% of the property's value at
origination of the loan. Property value, debt service coverage, quality,
building tenancy and stability of cash flows are all important financial
underwriting considerations. We hold no direct residential mortgage loans and do
not securitize or service mortgage loans. We completed an annual in-depth review
of our commercial mortgage loan portfolio during the second quarter of 2016. For
further information on the property type, location and credit quality of our
commercial mortgage loans, as well as a discussion of the results of the annual
portfolio review, see Note 11 to the Consolidated Financial Statements.

Commercial real estate capital markets remain very active for well-leased, quality commercial real estate located in strong institutional investment markets. The vast majority of properties securing the mortgages in our mortgage portfolio possess these characteristics.


The $1.7 billion commercial mortgage loan portfolio consists of approximately 60
loans, including one impaired loan with a carrying value of $21 million, net of
a $5 million reserve, that is classified as a problem loan. We have $92 million
of loans maturing in the next twelve months. Given the quality and diversity of
the underlying real estate, positive debt service coverage and significant
borrower investment generally ranging between 30 and 40%, we remain confident
that borrowers will continue to perform as expected under their contract terms.

Other Long-term Investments



Other long-term investments of $1.5 billion primarily include investments in
security partnership and real estate funds as well as direct investments in real
estate joint ventures. The funds typically invest in mezzanine debt or equity of
privately held companies (securities partnerships) and equity real estate. Given
our subordinate position in the capital structure of these underlying entities,
we assume a higher level of risk in return for higher expected returns. To
mitigate risk, investments are diversified across approximately 120 separate
partnerships, and approximately 70 general partners who manage one or more of
these partnerships. Also, the funds' underlying investments are diversified by
industry sector or property type, and geographic region. No single partnership
investment exceeds 4% of our securities and real estate partnership portfolio.

54 CIGNA CORPORATION - 2016 Form 10-K

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PART II

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

                                                                   of 

Operations

Problem and Potential Problem Investments



"Problem" bonds and commercial mortgage loans are either delinquent by 60 days
or more or have been restructured as to terms, including concessions by us for
modification of interest rate, principal payment or maturity date. "Potential
problem" bonds and commercial mortgage loans are considered current (no payment
is more than 59 days past due), but management believes they have certain
characteristics that increase the likelihood that they may become problems. The
characteristics management considers include, but are not limited to, the
following:

   º •
   º request from the borrower for restructuring;

   º •

º principal or interest payments past due by more than 30 but fewer than

     60 days;

   º •
   º downgrade in credit rating;

   º •
   º collateral losses on asset-backed securities; and

   º •

º for commercial mortgages, deterioration of debt service coverage below 1.0

or value declines resulting in estimated loan-to-value ratios increasing to

100% or more.


We recognize interest income on problem bonds and commercial mortgage loans only
when payment is actually received because of the risk profile of the underlying
investment. The amount that would have been reflected in net income if interest
on non-accrual investments had been recognized in accordance with their original
terms was not significant for 2016 or 2015.

The following table shows problem and potential problem investments at amortized cost, net of valuation reserves and write-downs:

                                              December 31, 2016             December 31, 2015

(In millions)                             Gross     Reserve     Net     Gross     Reserve     Net

Problem bonds                           $    70   $     (9)   $  61   $     3   $     (1)   $   2
Problem commercial mortgage loans            26         (5)      21        90        (11)      79
Foreclosed real estate                       49           -      49         -           -       -

Total problem investments               $   145   $    (14)   $ 131   $    93   $    (12)   $  81

Potential problem bonds                 $    12   $     (7)   $   5   $    55   $    (23)   $  32
Potential problem commercial mortgage
loans                                         -           -       -        

64 (4) 60

Total potential problem investments $ 12 $ (7) $ 5 $ 119 $ (27) $ 92




The increase in problem bonds was primarily due to three additional problem
bonds in the energy sector. The increase in foreclosed real estate during 2016
reflects the foreclosure of a commercial mortgage loan classified as a problem
loan as of December 31, 2015. The decrease in potential problem commercial
mortgage loans in 2016 was due to a full payoff of one loan and partial payoff,
and subsequent reclassification to good standing, of another loan.

Investment Outlook



Global financial markets exhibited volatility throughout 2016 resulting from
global economic and political uncertainty. The volatility began early in the
year led by concerns related to slowing economic global growth, with particular
concerns regarding China, potentially destabilizing impacts from cyclically low
energy prices, followed in mid-year by concerns regarding the United Kingdom's
decision to exit the European Union, and then finished the year with strong
market reactions anticipating growth-oriented policy changes in the United
States following our recent elections. The near-term impact of these events has
not materially impacted our financial condition or liquidity; however, we
continue to closely monitor global macroeconomic trends and the potential impact
to our investment portfolio. Future realized and unrealized investment results
will be driven largely by market conditions that exist when a transaction occurs
or at the reporting date. These future conditions are not reasonably
predictable; however, we believe that the vast majority of our investments will
continue to perform under their contractual terms. Based on our strategy to
match the duration of invested assets to the duration of insurance and
contractholder liabilities, we expect to hold a significant portion of these
assets for the long term. Although future impairment losses resulting from
interest rate movements and credit deterioration due to both company-specific
and the global economic uncertainties discussed above remain possible, we do not
expect these losses to have a material adverse effect on our financial condition
or liquidity.

Market Risk


Financial Instruments


Our assets and liabilities include financial instruments subject to the risk of
potential losses from adverse changes in market rates and prices. Our primary
market risk exposures are:

º •

º Interest-rate risk on fixed-rate, medium-term instruments. Changes in

market interest rates affect the value of instruments that promise a fixed

return and our employee pension liabilities.

º •

º Foreign currency exchange rate risk of the U.S. dollar primarily to the

South Korean won, Euro, Chinese yuan renminbi, Taiwan dollar and British

pound. An unfavorable change in exchange rates reduces the carrying value

     of net assets denominated in foreign currencies.

      CIGNA CORPORATION - 2016 Form 10-K  55

--------------------------------------------------------------------------------

Back to Contents


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

Our Management of Market Risks

We predominantly rely on three techniques to manage our exposure to market risk:

º •

º Investment/liability matching. We generally select investment assets with

characteristics (such as duration, yield, currency and liquidity) that

correspond to the underlying characteristics of our related insurance and

contractholder liabilities so that we can match the investments to our

obligations. Shorter-term investments generally support shorter-term life

and health liabilities. Medium-term, fixed-rate investments support

interest-sensitive and health liabilities. Longer-term investments

generally support products with longer pay out periods such as annuities

and long-term disability liabilities.

º •

º Use of local currencies for foreign operations. We generally conduct our

international business through foreign operating entities that maintain

assets and liabilities in local currencies. While this technique does not

reduce foreign currency exposure on our net assets, it substantially limits

exchange rate risk to those net assets.

º •

º Use of derivatives. We use derivative financial instruments to minimize

certain market risks.

See Note 12 to the Consolidated Financial Statements for additional information about financial instruments, including derivative financial instruments.

Effect of Market Fluctuations



The examples that follow illustrate the adverse effect of hypothetical changes
in market rates or prices on the fair value of certain financial instruments
including:

º •

º a hypothetical increase in market interest rates, primarily for fixed

maturities and commercial mortgage loans, partially offset by liabilities

for long-term, largely fixed-rate debt; and

º •

º a hypothetical strengthening of the U.S. dollar to foreign currencies,

primarily for the net assets of foreign subsidiaries denominated in a

foreign currency.

Management believes that actual results could differ materially from these examples because:

   º •
   º these examples were developed using estimates and assumptions;

   º •

º changes in the fair values of all insurance-related assets and liabilities

have been excluded because their primary risks are insurance rather than

market risk;

º •

º changes in the fair values of investments recorded using the equity method

     of accounting and liabilities for pension and other postretirement and
     postemployment benefit plans (and related assets) have been excluded,
     consistent with the disclosure guidance; and

   º •

º changes in the fair values of other significant assets and liabilities such

as goodwill, deferred policy acquisition costs, taxes, and various accrued

liabilities have been excluded; because they are not financial instruments,

their primary risks are other than market risk.


The effects of hypothetical changes in market rates or prices on the fair values
of certain of our financial instruments, subject to the exclusions noted above
(particularly insurance liabilities), would have been as follows as of
December 31:

                                                                 Loss in fair value

Market scenario for certain non-insurance financial instruments (in billions)

                                          2016     

2015


100 basis point increase in interest rates                   $      1.0    

$ 0.9 10% strengthening in U.S. dollar to foreign currencies $ 0.4 $ 0.3




The effect of a hypothetical increase in interest rates was determined by
estimating the present value of future cash flows using various models,
primarily duration modeling. The impact of a hypothetical increase to interest
rates at December 31, 2016 was greater than that at December 31, 2015 reflecting
increased purchases of fixed maturities, in addition to valuation decreases of
our long-term debt resulting from higher market yields during 2016.

The effect of a hypothetical strengthening of the U.S. dollar relative to the
foreign currencies held by us was estimated to be 10% of the U.S. dollar
equivalent fair value. Our foreign operations hold investment assets, such as
fixed maturities, cash, and cash equivalents, that are generally invested in the
currency of the related liabilities. The effect of a hypothetical 10%
strengthening in the U.S. dollar to foreign currencies at December 31, 2016 was
greater than that effect at December 31, 2015 due to increased amounts of
investments that are primarily denominated in the South Korean won.

56 CIGNA CORPORATION - 2016 Form 10-K

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Table of Contents

                                                                         PART II
             ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk

The information contained under the caption "Market Risk" in the MD&A section of this Form 10-K is incorporated by reference.

CIGNA CORPORATION - 2016 Form 10-K 57

--------------------------------------------------------------------------------

Table of Contents

PART II

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Financials ($)
Sales 2017 40 445 M
EBIT 2017 3 393 M
Net income 2017 2 345 M
Finance 2017 98,0 M
Yield 2017 0,02%
P/E ratio 2017 16,20
P/E ratio 2018 14,04
EV / Sales 2017 0,93x
EV / Sales 2018 0,87x
Capitalization 37 872 M
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David Michael Cordani President, Chief Executive Officer & Director
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