•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.
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.
(1) See Consolidated Results of Operations beginning on page 41 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.
2016 and 2015 both increased, primarily reflecting higher operating revenues driven by business growth across the Company as discussed further below.
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.
2015 vs. 2014 - The slight increase primarily reflected higher adjusted income from operations and, to a lesser extent, the impact of share repurchase. These favorable effects were partially offset by lower realized investment results and 2015 charges for merger and debt extinguishment costs reported as special items.
(1) See Consolidated results of operations starting on page 41 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.
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.
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.
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.
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.
See Note 2 (K) to the Consolidated Financial Statements for a description of and our accounting policy for these programs that commenced in 2014.
(2) For the reinsurance program, receivables are reported in reinsurance recoverables. Receivables, net of allowances, for the risk adjustment and risk corridor programs are reported in premiums, accounts and notes receivable. Payables for the risk adjustment program as of December 31, 2016 of $51 million are netted in the receivable balance presented above, but are reported in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets.
Consolidated Results of Operations: 2016 Compared to 2015 and 2015 Compared to 2014
•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.
• 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.
• 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.
• 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.
• 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.
Consolidated short-term investments increased in both 2016 and 2015 as a result of investing excess cash balances at the parent company level.
(1) 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.
(2) 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 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.
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 reported above for the year ended 2015 excluded losses on the early extinguishment of debt.
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.
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.
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.
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:
• 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.
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.
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.
At the acquisition date, goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. We completed our annual evaluations of goodwill for impairment during the third quarter of 2016. These evaluations were performed at the reporting unit level, based on discounted cash flow analyses and market data. The evaluations indicated that no impairment was required. During the fourth quarter, we updated our analysis of the Government reporting unit, reflecting an increase in market interest rates. The updated analysis for the Government reporting unit continued to indicate that no impairment was required.
Changes in the funding for our Medicare programs by the federal government, or our inability to resolve the matters arising from the CMS Notice in a timely and satisfactory manner, could materially reduce revenues and profitability in our Government reporting unit and have a significant impact on its fair value.
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.
See Note 17 to the Consolidated Financial Statements for additional discussion of our goodwill.
These liabilities are estimates of the present value of the qualified and nonqualified pension benefits to be paid (attributed to employee service to date) net of the fair value of plan assets. The accrued pension benefit liability as of December 31 was as follows (in millions): •
See Note 15 to the Consolidated Financial Statements for assumptions and methods used to estimate pension liabilities.
Medical costs payable for the Global Health Care segment include both reported claims and estimates for losses incurred but not yet reported. Liabilities for medical costs payable as of December 31 were as follows (in millions):
See Note 7 to the Consolidated Financial Statements for additional information regarding assumptions and methods used to estimate this liability.
As described in Note 8, key assumptions in the calculation of long-term disability reserves include the discount rate and claim resolution rates, both of which are reviewed annually and updated when experience or future expectations would indicate a necessary change. Based on recent and historical resolution rate patterns and changes in investment portfolio yields, it is reasonably possible that a 5 percent change in claim resolution rates and a 25 basis point change in the discount rate could occur.
The discount rate is the interest rate used to discount the projected future benefit payments to their present 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.
For all fixed maturities with cost in excess of their fair value, if this excess was determined to be other-than-temporary, shareholders' net income for the year ended December 31, 2016 would have decreased by approximately $115 million after-tax. Unlike impairments, there is no impact to shareholders' net income for holding fixed maturities with a fair value in excess of cost because we classify our fixed maturities as available for sale.
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.
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.
• is covered under an insurance policy or service agreement issued by us;
• 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.
• 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.
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.
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:
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.
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.
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.
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.
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.
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.
• 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.
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.
• 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.
• 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;
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.
(2) 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 for further discussion.
• run-off reinsurance business that is predominantly comprised of guaranteed minimum death benefit ("GMDB") and guaranteed minimum income benefit ("GMIB") business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire") in 2013;
•Supplemental health, life and accident insurance (primarily individual products) and group health and accident insurance products are deferred and amortized, generally in proportion to the ratio of periodic revenue to the estimated total revenues over the contract periods.
Liabilities for contractholder deposit funds primarily include deposits received from customers for investment-related and universal life products and investment earnings on their fund balances. These liabilities are adjusted to reflect administrative charges and, for universal life fund balances, mortality charges. In addition, this caption includes: 1) premium stabilization reserves under group insurance contracts representing experience refunds left with the Company to pay future premiums; 2) deposit administration funds used to fund non-pension retiree insurance programs; 3) retained asset accounts; and 4) annuities or supplementary contracts without significant life contingencies. Interest credited on these funds is accrued ratably over the contract period.
Future policy benefits represent the present value of estimated future obligations under long-term life and supplemental health insurance policies and annuity products currently in force. These obligations are estimated using actuarial methods and consist primarily of reserves for annuity contracts, life insurance benefits, GMDB contracts (see Note 9 for additional information) and certain health, life and accident insurance products of our Global Supplemental Benefits segment.
Accounts payable, accrued expenses and other liabilities include liabilities for pension, other postretirement and postemployment benefits (see Note 15), GMIB contract liabilities (see Note 9), self-insured exposures, management compensation, cash overdraft positions and various insurance-related liabilities, including experience-rated refunds, reinsurance contracts and the minimum medical loss ratio rebate accrual under The Patient Protection and Affordable Care Act (the "Health Care Reform Act" or "ACA"). Legal costs to defend the Company's litigation and arbitration matters are expensed when incurred in cases where the Company cannot reasonably estimate the ultimate cost to defend. In cases where the Company can reasonably estimate the cost to defend, a liability for these costs is accrued when the claim is reported.
The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies that are generally their functional currencies. The Company uses exchange rates as of the balance sheet date to translate assets and liabilities into U.S. dollars. Translation gains or losses on functional currencies, net of applicable taxes, are recorded in accumulated other comprehensive income (loss). The Company uses average monthly exchange rates during the year to translate revenues and expenses into U.S. dollars.
Premium revenue also includes an adjustment to reflect the estimated effect of rebates due to customers under the commercial minimum medical loss ratio provisions of the Health Care Reform Act. These rebates are settled in the year following the policy year.
Premiums received for the Company's Medicare Advantage Plans and Medicare Part D products from the Centers for Medicare and Medicaid Services ("CMS") and customers are recognized as revenue ratably over the contract period. CMS provides risk-adjusted premium payments for Medicare Advantage Plans and Medicare Part D products based on the demographics and wellness of enrollees. The Company recognizes periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured. Additionally, Medicare Part D premiums include payments from CMS for risk sharing adjustments. The risk sharing adjustments that are estimated quarterly based on claim experience, compare actual incurred drug benefit costs to estimated costs submitted in original contracts and may result in more or less revenue from CMS. Final revenue adjustments are determined and settled with CMS in the year following the contract year. Premium revenue also includes an adjustment to reflect the estimated effect of rebates due to CMS under the Medicare Advantage and Medicare Part D minimum medical loss ratio provisions of the Health Care Reform Act.
Accounting for the Health Care Reform Act's Risk Mitigation Programs. Beginning in 2014, as prescribed by the Health Care Reform Act, programs went into effect to reduce the risk for participating health insurance companies selling coverage on the public exchanges.
•A permanent risk adjustment program reallocates funds from insurers with lower risk populations to insurers with higher risk populations based on the relative risk scores of participants in non-grandfathered plans in the individual and small group markets, both on and off the exchanges. We estimate our receivable or payable based on the risk of our members compared to the risk of other members in the same state and market, considering data obtained from industry studies and HHS.
The merger agreement provides (a) for the merger of the Company and Merger Sub, with the Company continuing as the surviving corporation and (b) if certain tax opinions are delivered, immediately following the completion of the initial merger, for the surviving corporation to be merged with and into Anthem, with Anthem continuing as the surviving corporation (collectively, the "merger"). Subject to certain terms, conditions, and customary operating covenants, each share of Cigna common stock issued and outstanding immediately prior to the effective time of the merger would be converted into the right to receive (a) $103.40 in cash, without interest, and (b) 0.5152 of a share of Anthem common stock. The closing price of Anthem common stock on February 22, 2017 was $163.27.
On July 21, 2016, the U.S. Department of Justice ("DOJ") and certain state attorneys general filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia (the "District Court") seeking to block the merger and, on January 4, 2017, the parties concluded the District Court trial.
On January 18, 2017, the Company received a written notice from Anthem seeking to extend the termination date of the merger agreement from January 31, 2017 to April 30, 2017.
On February 8, 2017, the District Court issued an order enjoining the proposed merger. Anthem filed a notice of appeal of the District Court's order with the U.S. Court of Appeals for the District of Columbia Circuit (the "Appeals Court") and requested an expedited appeal.
On February 14, 2017, the Company delivered a notice to Anthem terminating the merger agreement and filed suit in the Delaware Court of Chancery (the "Chancery Court") seeking, among other things, declaratory judgment that Cigna's termination of the merger agreement is lawful and that Anthem does not have the right to extend the merger agreement termination date. Later that day, Anthem filed a lawsuit in the Chancery Court against the Company seeking, among other things, a temporary restraining order to enjoin Cigna from terminating the merger agreement, specific performance and damages, and, on February 15, 2017, the Chancery Court issued an order temporarily enjoining the Company from terminating the merger agreement. This order will be subject to further review at a preliminary injunction hearing.
On February 17, 2017, the Appeals Court granted Anthem's motion for an expedited appeal and set oral arguments for March 24, 2017. That same day, the Company filed its notice of appeal of the District Court's order enjoining the merger with the Appeals Court.
to total consolidated capitalization (each as defined in the credit agreement) - to exceed 0.50. The leverage ratio excludes the following items that are included in accumulated other comprehensive loss on the Company's Consolidated Balance Sheets: net unrealized appreciation in fixed maturities and the portion of the post-retirement benefits liability adjustment attributable to pension. The Company was in compliance with its debt covenants as of December 31, 2016.
The Company had $9.7 billion of borrowing capacity within the maximum debt coverage covenant in the letter of credit agreement, in addition to the $5 billion of debt outstanding as of December 31, 2016. This additional borrowing capacity includes the $1.5 billion available under the credit agreement. Letters of credit outstanding as of December 31, 2016 totaled $14 million.
On March 11, 2015, the Company issued $900 million of 10-Year Notes due April 15, 2025 at a stated interest rate of 3.25% ($892 million, net of discount and issuance costs, with an effective annual interest rate of 3.36%). Interest is payable on April 15 and October 15 of each year beginning October 15, 2015. The proceeds of this debt were used to repay debt maturing in 2016 and in 2019 as described below.
• 100% of the principal amount of the Notes to be redeemed; or
Interest expense on long-term and short-term debt was $251 million in 2016, $252 million in 2015, and $265 million in 2014. The 2015 expense excludes losses on the early extinguishment of debt.
This liability is primarily calculated using "completion factors" developed by comparing the claim incurral date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products. The Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.
For each reporting period, the Company compares key assumptions used to establish the medical costs payable to actual experience. When actual experience differs from these assumptions, medical costs payable are adjusted through current period shareholders' net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.
Liability balance details. The liability for Global Health Care medical costs payable as of December 31 is comprised of the following:
(2) Percentage of current year incurred costs as reported for 2014.
The net impact of prior year development on shareholders' net income was not significant for the year ended December 31, 2016 compared with a $60 million increase for the year ended December 31, 2015. Favorable prior year development implies primarily lower than expected utilization of medical services and vice versa while amounts close to zero imply utilization of medical services that are consistent with expectations.
As discussed in Note 2, the Company is newly required by ASU 2015-09 to present additional information about its claim estimates related to short-duration insurance contracts. The following information relates to the Company's unpaid claims and claim expense liabilities.
Reinsurance in the table above reflect amounts due from reinsurers related to unpaid claims liabilities. The Company's insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses. See Note 9 for additional information on reinsurance.
The majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts. Interest earned on assets backing these liabilities is an integral part of pricing and reserving. Therefore, interest accreted on prior year balances is shown as a separate component of prior year incurred claims. This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period. The remaining prior year incurred claims amount primarily reflects updates to the Company's liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability. Assumptions reflect the Company's expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business. Prior year incurred claims reported in 2016 included the impact of modifications made to our disability claims management process and a period of elevated life claims.
The following is supplementary and unaudited information about average historical claims payout patterns for the long-term disability business for the years presented in the development table as of December 31, 2016. The average annual percentage payout of incurred claims, net of reinsurance, is approximately 9% in year one, 24% in year two, 16% in year three, 9% in year four and 8% in year five.
The Company's insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating
insurer of liability. Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.
A discussion of each of these businesses follows. While GMDB is accounted for as reinsurance, GMIB assets and liabilities are reported as derivatives at fair value as discussed below. Accordingly, GMIB assets are reported in other assets, including intangibles, and GMIB liabilities are reported in accounts payable, accrued expenses and other liabilities.
Accounting policy. The Company estimates the gross liability and reinsurance recoverable with an internal model based on the Company's experience and future expectations over an extended period, consistent with the long-term nature of this product. As a result of the reinsurance transaction, reserve increases have a corresponding increase in the recorded reinsurance recoverable, provided the increased recoverable remains within the overall Berkshire limit (including the GMIB asset presented below). The ending net retained reserve covers ongoing administrative expenses, as well as minor claim exposure retained by the Company.
Activity in future policy benefit reserves for the GMDB business was as follows:
In this business, the Company reinsured contracts with issuers of GMIB products. The Company's exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values. Payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that must occur within 30 days of a policy anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage ("GMIB assets") for these contracts.
Other assumptions that affect GMIB assets and liabilities include capital market assumptions (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments) and future annuitant behavior (including mortality, lapse, and annuity election rates). As certain assumptions used to estimate fair values for these contracts are largely unobservable (primarily related to future annuitant behavior), the Company classifies GMIB assets and liabilities in Level 3 in the fair value hierarchy presented in Note 10.
The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities. Significant decreases in assumed lapse rates or spreads used to calculate non-performance risk of the Company, or significant increases in assumed annuity election rates or spreads used to calculate the non-performance risk of the reinsurers, would result in higher fair value measurements. A change in one of these assumptions is not necessarily accompanied by a change in another assumption.
The Company's financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset's or a liability's classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument's fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The following tables provide information as of December 31, 2016 and 2015 about the Company's financial assets and liabilities carried at fair value. Separate account assets that are also recorded at fair value on the Company's Consolidated Balance Sheets are reported separately under the heading separate account assets as gains and losses related to these assets generally accrue directly to policyholders.
(1) Fixed maturities included $483 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $30 million of appreciation for securities classified in Level 3. See Note 11A for additional information.
Fixed maturities and equity securities. Approximately 93% of the Company's investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Because many fixed maturities do not trade daily, third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.
Short-term investments are carried at fair value that approximates cost. On a regular basis, the Company compares market prices for these securities to recorded amounts to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.
Equity securities. The significant unobservable input used to value the following equity securities is a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"). These securities are comprised of private equity investments with limited trading activity and therefore a ratio of price to EBITDA is used to estimate value based on company circumstances and relative risk characteristics.
Significant increases in fixed maturity spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. Significant decreases in equity price-to-EBITDA multiples would result in lower fair value measurements while increases in these inputs would result in higher fair value measurements. Generally, the unobservable inputs are not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.
The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the years ended December 31, 2016 and 2015. Separate account asset changes are reported separately under the heading "separate account assets" as the changes in fair values of these assets generally accrue directly to the policyholders. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company's best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. For the year ended 2016, transfers between Level 2 and Level 3 primarily reflect changes in liquidity and credit risk estimates for certain private placement issuers in the metals, mining, energy, electric and consumer sectors. For the year ended 2015, transfers out of Level 3 primarily reflect a change in the significance of the unobservable inputs related to liquidity and credit estimates used to value several private corporate bonds.
At December 31, fair values of separate account assets were as follows:
(1) Non-guaranteed separate accounts included $3.7 billion as of December 31, 2016 and $3.6 billion as of December 31, 2015 in assets supporting the Company's pension plans, including $0.3 billion classified in Level 3 and $0.9 billion priced at NAV as a practical expedient for both periods.
Separate account investments in securities partnerships, real estate, and hedge funds are generally valued based on the separate account's ownership share of the equity of the investee (NAV as a practical expedient), including changes in the fair values of its underlying investments. Substantially all of these assets support the Cigna Pension Plans. The table below provides additional information on these investments.
The following table includes the Company's financial instruments not recorded at fair value that are subject to fair value disclosure requirements at December 31, 2016 and 2015. In addition to universal life products and capital leases, financial instruments that are carried in the Company's Consolidated Financial Statements at amounts that approximate fair value are excluded from the following table.
Cigna's investment portfolio consists of a broad range of investments including fixed maturities and equity securities, commercial mortgage loans, other long-term investments and short-term investments. The sections below provide more detail regarding our accounting policies, investment balances, net investment income and realized investment gains and losses. See Note 10 for information about the valuation of the Company's investment portfolio.
The above table includes investments with a fair value of $2.7 billion at December 31, 2016 and 2015 supporting liabilities of the Company's run-off settlement annuity business. These investments had gross unrealized appreciation of $539 million and gross unrealized depreciation of $15 million at December 31, 2016, compared with gross unrealized appreciation of $521 million and gross unrealized depreciation of $38 million at December 31, 2015.
As of December 31, 2016, the Company had commitments to purchase $26 million of fixed maturities, all of which bear interest at a fixed market rate.
Accounting policy. Commercial mortgage loans are carried at unpaid principal balances or, if impaired, the lower of unpaid principal or fair value of the underlying real estate. See the "Impaired commercial mortgage loans" section below for the Company's accounting policy for impaired commercial mortgage loans.
At December 31, 2016, scheduled commercial mortgage loan maturities were as follows:
Impaired commercial mortgage loans. A commercial mortgage loan is considered impaired when it is probable that the Company will not collect all amounts due according to the terms of the original loan agreement. These loans are included in either problem or potential problem
loans. The Company monitors credit risk and assesses the impairment of loans individually and on a consistent basis for all loans in the portfolio. Impaired loans are carried at the lower of unpaid principal balance or the fair value of the underlying real estate. The Company estimates the fair value of the underlying real estate using internal valuations generally based on discounted cash flow analyses. Certain commercial mortgage loans without valuation reserves are considered impaired because the Company will not collect all interest due according to the terms of the original agreements; however, the Company expects to recover the unpaid principal because it is less than the fair value of the underlying real estate. Because of the risk profile of the underlying investment, the Company recognizes interest income on impaired mortgage loans only when payment is actually received.
The average recorded investment in impaired loans was $72 million during 2016 and $126 million during 2015. The decrease in the average recorded investment was partially due to the foreclosure of one impaired loan. Interest income on impaired commercial mortgage loans was not significant for 2016 or 2015.
• $263 million to limited liability entities that hold either real estate or loans to real estate entities that are diversified by property type and geographic region; and
Short-term investments and cash equivalents included corporate securities of $2.2 billion, federal government securities of $378 million and money market funds of $11 million as of December 31, 2016. The Company's short-term investments and cash equivalents as of December 31, 2015 included corporate securities of $925 million, federal government securities of $220 million and money market funds of $55 million.
Net investment income for separate accounts that is excluded from the Company's revenues was $236 million for 2016, $262 million for 2015, and $225 million for 2014.
Included in these realized investment gains (losses) were pre-tax asset write-downs as follows:
Purpose. To hedge the interest and foreign currency cash flows of its fixed maturity bonds to match associated insurance liabilities.
Terms of derivative instruments. The Company periodically exchanges cash flows between variable and fixed interest rates or between two currencies for both principal and interest. Foreign currency swaps are Euros, Canadian dollars, and Japanese yen and have terms for periods of up to five years.
Accounting. Using cash flow hedge accounting, fair values are reported in other long-term investments or accounts payable, accrued expenses, and other liabilities. Changes in fair values are reported in accumulated other comprehensive income and amortized into net investment income or other realized investment gains and losses as interest or principal payments are received.
Terms of derivative instruments. The Company periodically exchanges cash flows between U.S. dollars and Euros for both principal and interest for periods of up to ten years.
Accounting. Using fair value hedge accounting, fair values are reported in other long-term investments or accounts payable, accrued expenses, and other liabilities. Changes in fair values of the swap contracts, as well as changes in the fair values of the hedged bonds attributable to the hedged risk are reported in other realized investment gains and losses.
As of and for the years ended December 31, 2016 and 2015, the effects of these derivative instruments on the Consolidated Financial Statements were not material. No material amounts were excluded from the assessment of hedge effectiveness and no significant gains or losses were recognized due to hedge ineffectiveness.
The Company owns interests in security and real estate limited partnerships that are now defined as variable interest entities under GAAP (see discussion of ASU 2015-02 in Note 2). These partnerships invest in the equity or mezzanine debt of privately held companies and real estate properties. General partners unaffiliated with the Company control decisions that most significantly impact the partnership's operations and the limited partners do not have substantive kick-out or participating rights. The Company's maximum exposure to these entities of $2.1 billion across approximately 100 limited partnerships as of December 31, 2016 includes $1 billion reported in other long-term investments and commitments to contribute an additional $1.1 billion. The Company's non-controlling interest in each of these limited partnerships is generally less than 10% of the partnership ownership interests.
In the normal course of its investing activities, the Company also makes passive investments in certain asset-backed and corporate securities that are issued by variable interest entities whose sponsors or issuers are unaffiliated with the Company. The Company receives fixed-rate cash flows from these investments and the maximum potential exposure to loss is limited to the carrying amount of $0.6 billion as of December 31, 2016, that is reported in fixed maturities. The Company's combined ownership interests are insignificant relative to the total principal amounts issued by these entities.
over these entities is shared equally, and there is no primary beneficiary. The Company's maximum exposure to loss was approximately equal to its carrying value that is reported in other long-term investments.
The Company is not the primary beneficiary of any of the variable interest entities described above and does not consolidate these entities because either:
Accumulated other comprehensive income (loss) excludes amounts required to adjust future policy benefits for the run-off settlement annuity business. Changes in the components of accumulated other comprehensive income (loss) were as follows:
As further discussed in Note 21, Cigna Corporation and the Cigna Pension Plan are defendants in a class action lawsuit related to the Plan's conversion of certain employees from an annuity to a cash balance benefit in 1997. When the required plan amendment related to this litigation is adopted, the pension benefit obligation will be updated to reflect benefits resulting from this litigation.
For balance sheet purposes, we measure plan assets at fair value. When the actual return differs from the expected return, those differences are reflected in the net unrealized actuarial gain (loss) discussed above. However, to measure pension benefit costs, we use a "market-related" asset valuation for domestic pension plan assets invested in non-fixed income investments that is different than the actual fair value. The "market-related" value recognizes the difference between actual and expected long-term returns in the portfolio over five years, a method that reduces the short-term impact of market fluctuations on pension costs. At December 31, 2016, the market-related asset value was approximately $3.9 billion compared with a fair value of approximately $4.0 billion.
The following table summarizes the projected benefit obligations and assets related to our domestic and international pension and other postretirement benefit plans as of, and for the years ended, December 31:
(1) Positive amount reflects a decrease in the discount rate, partially offset by a favorable change in the mortality assumption.
(2) Negative amount reflects an increase in the discount rate and a favorable change in the mortality assumption.
The Company used the Society of Actuaries mortality table RP2014 and the updated improvement scales published in 2015 and 2016 to value its benefit obligations because the Company's mortality experience closely matched these tables based on internal studies. The updated improvement scales published in 2015 and 2016 both indicated that mortality improvement is expected to be lower than was originally projected when the study was first published in 2014, resulting in decreases to the benefit obligations in both years.
throughout the domestic market, but only selects those for the curve that have an above average return at each duration. Management believes that this curve is representative of the yields that the Company is able to achieve through its plan asset investment strategy.
As of December 31, 2016, pension assets included $3.7 billion invested in the separate accounts of Connecticut General Life Insurance Company and Life Insurance Company of North America, subsidiaries of the Company, as well as an additional $276 million invested directly in funds offered by the buyer of the retirement benefits business.
The fair values of pension assets by category are as follows as of December 31, 2016 and 2015.
Securities partnerships, real estate and hedge funds are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. See Note 10 for additional disclosures related to these assets invested in the separate accounts of the Company's subsidiaries. Certain securities as described in Note 10, as well as commercial mortgage loans and guaranteed deposit account contracts, are classified in Level 3 because unobservable inputs used in their valuation are significant.
The Company records compensation expense for stock and option awards over their vesting periods primarily based on the estimated fair value at the grant date. Fair value is determined differently for each type of award as discussed under each award type below.
Black-Scholes option-pricing model assumptions and the resulting fair value of options are presented in the following table.
Compensation cost for restricted stock grants and units was as follows for the years ended December 31:
As of December 31, the fair value of vested restricted stock was:
At the end of 2016, approximately 4,400 employees held 1.3 million restricted stock grants and units with $55 million of related compensation expense to be recognized over the next two years (weighted average period).
The Company awards strategic performance shares to executives and certain other key employees generally with a performance period of three years. Strategic performance shares are divided into two broad groups: 50% are subject to a market condition (total shareholder return relative to industry peer companies) and 50% are subject to performance conditions (2014 awards: revenue growth and cumulative adjusted net income; 2015 and 2016 awards, cumulative adjusted net income). These targets are set by the Committee. At the end of the performance period, holders of strategic performance shares will be awarded anywhere from 0 to 200% of the original grant of strategic performance shares in Cigna common stock.
performance conditions, expense is initially accrued based on the most likely outcome, but evaluated for adjustment each period for updates in the expected outcome. At the end of the performance period, expense is adjusted to the actual outcome (number of shares awarded times the share price at the grant date). At the grant date, the Company estimates forfeitures based on experience and adjusts the expense to reflect actual forfeitures over the vesting period.
Compensation expense for strategic performance shares was as follows for the years ended December 31:
As of December 31, the fair value of vested strategic performance shares was:
At the end of 2016, approximately 1,400 employees held 942,000 strategic performance shares and $37 million of related compensation expense is expected to be recognized over the next two years. For strategic performance shares subject to a performance condition, the amount of expense may vary based on actual performance in 2017 and 2018.
During the vesting period, the Company records tax benefits in shareholders' net income based on the amount of expense being recognized. Beginning in 2016, in connection with the early adoption of ASU 2016-09 discussed in Note 2, when stock options are exercised, or when restricted stock and strategic performance share awards vest, the difference between tax benefits based on the expense and the actual tax benefit realized are also recorded in net income. Prior to 2016, such excess tax benefits were recorded as an adjustment to additional paid-in capital. The table below provides information about the cost and tax benefits related to all of our share-based compensation arrangements.
Accounting policy. The Company's other intangible assets include purchased customer and producer relationships, provider networks and trademarks. The fair value of purchased customer relationships and the amortization method were determined as of the dates of purchase using an income approach that relies on projected future net cash flows including key assumptions for the customer attrition rate and discount rate. The Company amortizes other intangibles on an accelerated or straight-line basis over periods from five to 30 years. Management revises amortization periods if it believes there has been a change in the length of time that an intangible asset will continue to have value. Costs incurred to renew or extend the terms of these intangible assets are generally expensed as incurred.
Accounting policy. Property and equipment is carried at cost less accumulated depreciation. When applicable, cost includes interest, real estate taxes and other costs incurred during construction. Also included in this category is internal-use software that is acquired, developed or modified solely to meet the Company's internal needs, with no plan to market externally. Costs directly related to acquiring, developing or modifying internal-use software are capitalized.
The Company calculates depreciation and amortization principally using the straight-line method generally based on the estimated useful life of each asset as follows: buildings and improvements, 10 to 40 years; purchased software, one to five years; internally developed software, three to seven years; and furniture and equipment (including computer equipment), three to 10 years. Improvements to leased facilities are depreciated over the lesser of the remaining lease term or the estimated life of the improvement. The Company considers events and circumstances that would indicate the carrying value of property, equipment or capitalized software might not be recoverable. If the Company determines the carrying value of any of these assets is not recoverable, an impairment charge is recorded.
Description of operating leases. The Company's operating leases are primarily for office space. Some of these leases include renewal options and other incentives that are amortized over the life of the lease. Office space leases active in 2016 had terms ranging from one month to 18 years.
The Company's HMO and life subsidiaries are subject to minimum statutory surplus requirements and may be required to maintain investments on deposit with state departments of insurance or other regulatory bodies. Additionally, these subsidiaries may be subject to regulatory restrictions on the amount of annual dividends or other distributions (such as loans or cash advances) that insurance companies may extend to the parent company without prior approval. As of December 31, 2016, these amounts, including restricted net assets of the Company, were as follows:
Accounting policy. Deferred income tax assets and liabilities are recognized for differences between the financial and income tax reporting bases of the underlying assets and liabilities and established based upon enacted tax rates and laws. Deferred income tax assets are recognized when available evidence indicates that realization is more likely than not. The deferred income tax provision generally represents the net change in deferred income tax assets and liabilities during the year, excluding amounts reported as adjustments to accumulated other comprehensive income or amounts initially recorded due to business combinations. The current income tax provision generally represents estimated amounts due on various income tax returns for the year reported plus the effect of any uncertain tax positions. Uncertain tax positions are evaluated in accordance with GAAP.
As part of its global capital management strategy, the Company's foreign operations retain a significant portion of their earnings overseas. These undistributed earnings are deployed outside of the U.S. in support of the liquidity and capital needs of our foreign operations. The Company does not intend to repatriate these earnings to the U.S. and as a result, income taxes are provided using the respective foreign jurisdictions' tax rate.
Consolidated pre-tax income from the Company's foreign operations was approximately 11% of the Company's pre-tax income in 2016 and 2015, compared with 10% in 2014.
intended to repatriate these foreign earnings to the U.S., the Company's Consolidated Balance Sheets would have included an additional $325 million of deferred tax liabilities as of December 31, 2016.
The Company conducts business in a number of state and foreign jurisdictions, and may be engaged in multiple audit proceedings at any given time. Generally, no further state audit activity is expected for tax years prior to 2009, and prior to 2010 for foreign audit activity.
The Company had financial guarantees and indemnification obligations to lenders of approximately $152 million as of December 31, 2016, related to borrowings by certain real estate joint ventures that the Company either records as an investment or consolidates. These borrowings, that are primarily nonrecourse obligations of the Company, are secured by the joint ventures' real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in 2018 through 2021. The Company's indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these financial guarantees or indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these guarantees and indemnification obligations as of December 31, 2016.
The Company had indemnification obligations as of December 31, 2016 in connection with acquisition, disposition and reinsurance transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, the filing of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations because not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities for these indemnification obligations as of December 31, 2016.
The business of administering and insuring health services programs, particularly health care and group insurance programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the U.S. Departments of Health and Human Services, Treasury, Labor and Justice, as well as the courts. Health care regulation and legislation in its various forms, including the Health Care Reform Act, other regulatory reform initiatives, such as those relating to Medicare programs, or additional changes in existing laws or regulations or their interpretations, could have a material adverse effect on the Company's business, results of operations and financial condition.
In December 2016, the Company received a Civil Investigative Demand from the Civil Division of the U.S. Department of Justice relating to our Medicare Part C and D risk adjustment compliance activities and business processes, particularly as they relate to our review of medical records conducted as part of our data and payment accuracy compliance efforts. We believe that this request for information is in connection with a broader review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We intend to cooperate with and voluntarily respond to the information request.
When the Company (in the course of its regular review of pending litigation and legal or regulatory matters) has determined that a material loss is reasonably possible, the matter is disclosed. Such matters are described below. In accordance with GAAP, when litigation and regulatory matters present loss contingencies that are both probable and estimable, the Company accrues the estimated loss by a charge to shareholders' net income. The amount accrued represents the Company's best estimate of the probable loss at the time. If only a range of estimated losses can be determined, the Company accrues an amount within the range that, in the Company's judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, the Company accrues the minimum amount of the range. In cases when the Company has accrued an estimated loss, the accrued amount may differ materially from the ultimate amount of the loss. In many proceedings, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount or range of any loss. The Company provides disclosure in the aggregate for material pending litigation and legal or regulatory matters, including accruals, range of loss, or a statement that such information cannot be estimated. As a litigation or regulatory matter develops, the Company monitors the matter for further developments that could affect the amount previously accrued, if any, and updates such amount accrued or disclosures previously provided as appropriate.
In September 2011, the District Court (1) dismissed all claims by the health care provider and medical association plaintiffs for lack of standing; and (2) dismissed the antitrust claims, the New Jersey state law claims and the ERISA disclosure claim. In January 2013 and again in April 2014, the District Court denied separate motions by the plaintiffs to certify a nationwide class of subscriber plaintiffs. The Third Circuit denied plaintiffs' request for an immediate appeal of the January 2013 ruling. As a result, the case is proceeding on behalf of the named plaintiffs only. In June 2014, the District Court granted the Company's motion for summary judgment to terminate all claims, and denied the plaintiffs' partial motion for summary judgment. In July 2014, the plaintiffs appealed all of the District Court's decisions in favor of the Company, including the class certification decision, to the Third Circuit. On May 2, 2016, the Third Circuit affirmed the District Court's decisions denying class certification for the claims asserted by members, the granting of summary judgment on the individual plaintiffs' claims, as well as the dismissal of the antitrust claims. However, the Third Circuit also reversed the earlier dismissal of the providers' ERISA claims. The Company will continue to vigorously defend its position.
The Company 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. The Company remains 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 the Company's ability to restore some or all of our downgraded 2018 Star Ratings, modify our product offerings and implement operational efficiencies in the Government business.
Also on February 14, 2017, Anthem filed a lawsuit in the Chancery Court against the Company seeking (i) a temporary restraining order to enjoin Cigna from terminating and taking any action contrary to the terms of the merger agreement, (ii) specific performance compelling Cigna to comply with the merger agreement and (iii) damages. On February 15, 2017, the Chancery Court granted Anthem's motion for a temporary restraining order and issued an order temporarily enjoining the Company from terminating the Merger Agreement. This is not a decision on the merits of the case, but rather an order to ensure irrevocable actions do not take place before the Chancery Court's substantive review of the issues. The Company will continue to abide by terms of the merger agreement until the expiration or lifting of the Chancery Court's order and any further review of the case by the Chancery Court. This order will be subject to review by the Chancery Court at a preliminary injunction hearing.
Shareholder Litigation. Following announcement of the Company's merger agreement with Anthem as discussed in Note 3, putative class action complaints (collectively the "complaints" or "Cigna Merger Litigation") were filed by purported Cigna shareholders on behalf of a purported class of Cigna shareholders. Additional lawsuits arising out of or relating to the merger agreement or the merger may be filed in the future.
Cigna, members of the Cigna board of directors, Anthem and Anthem Merger Sub Corp ("Merger Sub") have been named as defendants. The plaintiffs generally assert that the members of the Cigna board of directors breached their fiduciary duties to the Cigna shareholders during merger negotiations and by entering into the merger agreement and approving the merger, and that Cigna, Anthem and Merger Sub aided and abetted such breaches of fiduciary duties. The allegations include, among other things, that (1) the merger consideration undervalues Cigna, (2) the sales process leading up to the merger was flawed due to purported conflicts of interest of members of the Cigna board of directors and (3) certain provisions of the merger agreement inappropriately favor Anthem and inhibit competing bids. Plaintiffs seek, among other things, injunctive relief enjoining the merger, rescission of the merger agreement to the extent already implemented, and costs and damages.
Effective November 24, 2015, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the Company, the Company's directors, Anthem and Merger Sub entered into a Memorandum of Understanding ("MOU") to settle the Cigna Merger Litigation. Subject to approval by the Connecticut Superior Court, Judicial District of Hartford and further definitive documentation in a settlement agreement that will be subject to customary conditions, the MOU resolved the Cigna Merger Litigation and provided that the Company would make certain additional disclosures related to the merger. If the Court approves the settlement, the Cigna Merger Litigation will be dismissed with prejudice and all claims that were or could have been brought in any actions challenging any aspect of the merger, the merger agreement and any related disclosures will be released. In connection with the settlement, subject to the ultimate determination of the Court, plaintiffs' counsel may receive an award of reasonable fees. There can be no assurance that the parties will ultimately enter into a settlement agreement, or that the Court will approve the settlement even if the parties were to enter into such agreement. The MOU may terminate, if, among other reasons, the Court does not approve the settlement or the merger is not consummated for any reason.
The Company uses "adjusted income (loss) from operations" as its principal financial measure of segment operating performance because management believes it best reflects the underlying results of business operations and permits analysis of trends in underlying revenue, expenses and profitability. Adjusted income from operations is defined 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:
Summarized segment financial information for the years ended December 31, was as follows:
The Company had net receivables from CMS of $0.6 billion as of December 31, 2016 and $1.5 billion as of December 31, 2015. These amounts were included in premiums, accounts and notes receivable and reinsurance recoverables. As a percentage of consolidated revenues, premiums and fees from CMS were 20% in 2016 and 21% in 2015 and 2014. These amounts were reported in the Global Health Care segment.
The following unaudited quarterly financial data is presented on a consolidated basis for each of the years ended December 31, 2016 and December 31, 2015. Quarterly financial results necessarily rely heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business, suggest the need to exercise caution in drawing specific conclusions from quarterly consolidated results.