Our global real estate portfolio consists of approximately 7.9 million square feet of owned and leased properties. Our domestic portfolio has approximately 5.7 million square feet in 38 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Our international properties contain approximately 2.2 million square feet located throughout the following countries: Belgium, Canada, China, Hong Kong, India, Indonesia, Kenya, New Zealand, Singapore, South Korea, Spain, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom.
Our principal domestic office locations include the Wilde Building located at 900 Cottage Grove Road in Bloomfield, Connecticut (our corporate headquarters) and Two Liberty Place located at 1601 Chestnut Street in Philadelphia, Pennsylvania. The Wilde Building measures approximately 893,000 square feet and is owned, while Two Liberty Place measures approximately 322,000 square feet and is leased space.
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 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 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:
•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.
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 evolved strategy is to "Go Deeper", "Go Local" and "Go Beyond" 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.
2017 versus 2016 and 2016 versus 2015 - Increases in both 2017 and 2016 primarily reflected higher operating revenues driven by business growth as discussed further below.
2017 versus 2016 - Increase driven by business growth in Global Health Care and Global Supplemental Benefits.
2016 versus 2015 - Decrease was a result of significantly lower earnings in Group Disability and Life reflecting unfavorable claim experience. Costs related to the Government segment's response to the Centers for Medicare and Medicaid Services ("CMS") audit also contributed to the decline. Increased earnings contributions in Global Supplemental Benefits and the Commercial segment partially offset those unfavorable impacts.
(1) See Consolidated results of operations starting on page 38 for reconciliations of operating revenues to total revenues and adjusted income from operations to shareholders' net income on a dollar and per share basis.
We recorded additional tax expense of $232 million in 2017 resulting from this legislation, comprised of $144 million due to the revaluation of deferred tax assets and liabilities to reflect the reduction in the corporate tax rate and $88 million due to the assessment of U.S. taxes related to the Company's accumulated unremitted foreign earnings. The legislation provides an election to pay these taxes over eight years and we expect to adopt this election. Both the revaluation of deferred tax assets and liabilities and the taxes on accumulated unremitted foreign earnings are considered provisional as certain adjustments used to calculate the tax at year-end were based on estimates.
On May 12, 2017, we announced that the merger agreement between Cigna and Anthem, Inc. had been terminated.
See Note 21(E) to our Consolidated Financial Statements in this Form 10-K for additional details.
•Premiums. The increase in 2017 compared with 2016 was primarily due to customer growth in the Commercial segment and in Global Supplemental Benefits. Expected decreases in Government segment premiums due to Medicare disenrollment partially offset these increases. In 2016, premiums increased compared with 2015, reflecting customer growth in Global Health Care, Global Supplemental Benefits as well as Group Disability and Life. Rate actions in our commercial health care businesses consistent with medical cost trend also contributed to these increases.
•Fees and other revenues. The increases in both 2017 and 2016 compared with each prior year primarily reflected growth from specialty products offered through our Global Health Care segment and an increased customer base for our administrative services only business.
•Mail order pharmacy revenues were flat in 2017 compared with 2016, reflecting increased Commercial customers, specialty medication prices and utilization (e.g., certain injectables) offset by lower oral medication volumes and Medicare customers. In 2016, mail order pharmacy revenues increased compared with 2015, driven by greater volume, primarily for specialty medications due to our higher customer base and increased utilization. In each period, changes in mail order pharmacy costs were driven by the same factors as mail order pharmacy revenues.
•Realized investment results increased in 2017 compared with 2016 primarily due to higher gains on sales of alternative and real estate investments as well as lower impairment losses. Realized investment results increased in 2016 compared with 2015 due to significantly lower impairment losses.
• Other operating expenses. In 2017, the increase in other operating expenses compared with 2016 reflected debt extinguishment costs, a long-term care guaranty fund assessment and higher volume-based expenses reflecting business growth. These increases were offset by the moratorium on the health insurance industry tax in 2017 and a reduction in costs related to our CMS audit response. The increase in 2016 compared with 2015 was due to costs associated with our CMS audit response, business growth, strategic investment across our segments and special item charges including transaction-related costs and a risk corridor allowance described in Note 22 to our Consolidated Financial Statements.
• Amortization of other acquired intangible assets, net. The decrease in 2017 compared with 2016 was driven by the expected continuing decline in amortization from our 2012 acquisition of HealthSpring, Inc. 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 decline in our HealthSpring, Inc. amortization.
(1) Risk adjustment and risk corridor receivables, net of allowances, are reported in premiums, accounts and notes receivable in the Consolidated Balance Sheets. Risk adjustment receivables totaled $69 million as of December 31, 2017 and $52 million as of December 31, 2016.
• medical costs and benefit payments to policyholders; • expense requirements, primarily for employee compensation and benefits, information technology and facilities costs; and • income taxes.
(1) As required in adopting ASU 2016-09 in 2016, we retrospectively reclassified $79 million of cash payments from operating to financing activities in 2015. These payments were related to employee tax obligations associated with stock compensation. The comparable amounts reported in financing activities were $61 million in 2017 and $72 million in 2016.
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 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 used in investing activities decreased in 2017 compared with 2016, primarily due to lower net investment purchases. In 2017, more cash was deployed to share repurchase than investment purchases in accordance with our capital management strategy discussed in the below "Capital Resources" section of this MD&A.
Cash used in investing activities increased in 2016 compared with 2015, due to higher purchases of fixed maturity investments.
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 2017, we repurchased 15.7 million shares for $2.8 billion. From January 1, 2018 through January 31, 2018 we repurchased 1.2 million shares for approximately $260 million. We repurchased 0.8 million shares for $110 million in 2016 and 5.5 million shares for $683 million in 2015.
Interest expense reported above excluded losses on the early extinguishment of debt.
The weighted average interest rate for outstanding short-term debt (primarily commercial paper) was 1.63% as of December 31, 2017. There was no commercial paper outstanding as of December 31, 2016.
At December 31, 2017, there was approximately $1.2 billion in cash and marketable investments available at the parent company level. In 2018, the parent company's combined cash obligations are expected to approximate $480 million for repayment of debt, interest and dividends. We expect to have sufficient liquidity to meet the obligations discussed above, based on the parent company's current cash position and current projections for subsidiary dividends. In addition, we actively monitor our debt obligations and engage in issuance or redemption activities as needed in accordance with our capital management strategy.
We continue to maintain a capital management strategy to retain overseas a significant portion of the earnings from our foreign operations. These undistributed earnings are deployed outside of the United States predominantly in support of the liquidity and regulatory capital requirements of our foreign operations as well as to support growth initiatives overseas. As a result of the U.S. tax reform legislation enacted in December 2017, we recorded additional U.S. taxes of $88 million related to these undistributed earnings. The legislation provides an election to pay these taxes over eight years. We expect to adopt that election.
We are contingently liable for various contractual obligations entered into in the ordinary course of business. See the "Liquidity and Capital Resources" section of this MD&A beginning on page 41 for additional background on how we manage our liquidity requirements related to these obligations. The maturities of our primary contractual cash obligations, as of December 31, 2017, are estimated to be as follows:
• Insurance liabilities. Excluded from the table above are $5 billion of insurance liabilities 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 ($3 billion in contractholder deposit funds; $2 billion in future policy benefits) as their related net cash flows are not expected to impact our cash flows. Excluding these amounts, the sum of the obligations presented above exceeds the corresponding insurance and contractholder liabilities of $21 billion recorded on the balance sheet because some of the recorded insurance liabilities reflect discounting for interest and the recorded contractholder liabilities exclude future interest crediting, charges and fees. The timing and amount of actual future cash flows may differ from those presented above as actual results differ from those assumed.
Our estimated future service commitments primarily represent contracts for certain outsourced business processes and information technology 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 our Consolidated Financial Statements.
Fair values of reporting units are estimated using models and assumptions that we believe a hypothetical market participant would use to determine a 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 is 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 are 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 consider market data to evaluate the fair value of each reporting unit.
See Note 17 to our Consolidated Financial Statements for additional discussion of our goodwill.
See Note 15 to our Consolidated Financial Statements for assumptions and methods used to estimate pension liabilities.
As described in Note 7, Global Health Care medical costs payable is primarily impacted by assumptions related to completion factors and medical cost trend. Changes in either assumption from actual results could impact the Global Health Care medical costs payable balance as noted below. A large number of factors may cause the medical cost trend to vary from the Company's estimates, including: changes in medical management practices, changes in the level and mix of benefits offered and services utilized, and changes in medical practices. Completion factors may be affected if actual claims submission rates from providers differ from estimates (that can be influenced by a number of factors, including provider 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 $35 million, resulting in a decrease in net income of approximately $30 million after-tax, and a 50 basis point decrease in completion factors would increase this liability by approximately $75 million, resulting in a decrease in net income of approximately $60 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 $70 million after-tax.
Determining fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to 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 Notes 10 and 11(A) to our Consolidated Financial Statements for a discussion of our fair value measurements, the procedures performed by management to determine that the amounts represent appropriate estimates and our accounting policy regarding unrealized appreciation on fixed maturities.
Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows of the instrument. 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. If the interest rates used to calculate fair value increased by 100 basis points, the fair value of the total fixed maturity portfolio of $23 billion would decrease by approximately $1.5 billion, resulting in an after-tax decrease to shareholders' equity of approximately $0.9 billion.
Certain fixed maturities with a fair value below amortized cost are carried at fair value with changes in fair value recorded in accumulated other comprehensive income. For these investments, we have determined that the decline in fair value below its amortized cost is temporary. To make this determination, we evaluated the expected recovery in value and our intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery. In making this evaluation, we considered a number of general and specific factors including the regulatory, economic and market environments, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer. The after-tax amounts as of December 31 in Accumulated Other Comprehensive Income for fixed maturities in an unrealized loss position were as follows (in millions):
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 35 for summarized financial results of each of our reporting segments.
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:
• medical costs as a percentage of premiums (medical care ratio or "MCR") for our commercial and government businesses; and
The Government medical care ratio decreased slightly, reflecting increased premium rates and favorable prior year reserve development, partially offset by higher medical costs.
Medical costs payable was higher as of December 31, 2017 compared with 2016, primarily due to customer growth in our commercial risk businesses and medical cost trend across all businesses. 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. See Note 7 to our Consolidated Financial Statements for additional information.
• has access to our provider network for covered services under their medical plan; or
• has medical claims that are administered by us. Our medical customer base increased as of December 31, 2017 compared with 2016, reflecting growth across our Commercial market segments, partially offset by declines in our Medicare Advantage business. Our medical customer base increased as of December 31, 2016 compared with 2015, primarily driven by growth in our middle market, select and international market segments.
• 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 increased primarily due to business growth, particularly in the United States and South Korea, and the favorable impact of foreign currency movements, primarily in the South Korean Won.
Adjusted income from operations increased, reflecting business growth, primarily in South Korea and China, and lower acquisition cost ratios.
The segment's loss ratio decreased, primarily due to favorable claims experience, largely offset by a shift in business mix to products with higher loss ratios.
The segment's loss ratio was flat, reflecting favorable claims in South Korea, largely offset by a shift in business mix to products with higher loss ratios.
The decrease in the expense ratio (excluding acquisition costs) was primarily driven by operating efficiencies.
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 89% of the segment's adjusted income from operations in 2017. In 2017, our Global Supplemental Benefits segment operations in South Korea represented 5% of our consolidated operating revenues and 12% of consolidated adjusted income from operations.
Significant movements in foreign currency exchange rates could materially affect the reported results of the Global Supplemental Benefits segment.
As described in the Segment Reporting introduction on page 47, 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:
• operating expense as a percentage of operating revenues excluding net investment income (expense ratio).
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 and operational margins normalized over the course of 2017.
The loss ratio decreased in 2017 compared with 2016 due to improvement in the disability claim resolution rate as noted above, lower disability new claim incidence and significantly improved life claims experience.
Corporate's adjusted loss from operations was lower in 2017 compared with 2016, primarily due to higher excess tax benefits on stock compensation driven by increased option exercise activity in 2017. Higher net investment income also contributed to the lower loss, partially offset by higher operating expenses. Corporate's adjusted loss from operations decreased in 2016 compared with 2015, primarily due to recognizing excess tax benefits on stock compensation in net income beginning in 2016 as a result of our early adoption of ASU 2016-09.
The following table presents our invested asset portfolio, excluding separate account assets, as of December 31, 2017 and 2016. Additional information regarding our investment assets and related accounting policies is included in Notes 2, 10, 11, 12, 13, and 14 to our Consolidated Financial Statements.
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 to our Consolidated Financial Statements. More detailed information about fixed maturities by type of issuer and maturity dates is included in Note 11 to our Consolidated Financial Statements.
Foreign government. We invested in high quality foreign government obligations with an average quality rating of Aa3 as of December 31, 2017. These investments were concentrated in Asia, primarily South Korea, consistent with the geographic locations of our international business operations. Foreign government obligations also included $243 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, 2017, corporate fixed maturities included the following:
• Investments in companies that are domiciled or have significant business interests in Italy, Ireland, Spain and Turkey were $400 million. These investments have an average quality rating of Baa2 and are diversified by industry sector, including less than 2% invested in financial institutions.
• 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 2017 or 2016.
Problem and potential problem investments decreased by $42 million since December 31, 2016 primarily due to payoffs and paydowns of problem bonds and mortgage loans.
Our assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. Consistent with disclosure requirements, the following items have been excluded from this consideration of market risk for financial instruments:
• changes in the fair values of insurance-related assets and liabilities because their primary risks are insurance rather than market risk;
•Foreign currency exchange rate risk of the U.S. dollar primarily to the South Korean won, Euro, Taiwan dollar, Chinese yuan renminbi, and British pound. An unfavorable change in exchange rates reduces the carrying value of net assets denominated in foreign currencies.
• Use of derivatives. We use derivative financial instruments to minimize certain market risks. See Note 12 to our Consolidated Financial Statements for additional information about derivative financial instruments.
The effect of a hypothetical strengthening of the U.S. dollar relative to the foreign currencies of certain financial instruments 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, 2017 was greater than that effect at December 31, 2016 due to increased amounts of investments that are primarily denominated in the South Korean won.
We have audited the accompanying consolidated balance sheets of Cigna Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in total equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
(1) As required in adopting Accounting Standard Update ("ASU") 2016-09 in 2016, the Company retrospectively reclassified $79 million of cash payments from operating to financing activities in 2015. These payments were related to employee tax obligations associated with stock compensation. The comparable amounts reported in financing activities were $61 million in 2017 and $72 million in 2016.
(2) As required in adopting ASU 2016-15 in 2016, the Company retrospectively reclassified $137 million of cash distributions of earnings from partnership investments from investing to operating activities in 2015. The comparable amounts reported in operating activities were $161 million in 2017 and $144 million in 2016.
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 evolved strategy is to "Go Deeper", "Go Local" and "Go Beyond" with a differentiated set of medical, dental, disability, life and accident insurance and related products and services offered by our subsidiaries. The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations. Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the United States and selected international markets. In addition to these ongoing operations, Cigna also has certain run-off operations.
• The Commercial operating segment ("Commercial segment") encompasses both the U.S. commercial and certain international health care businesses serving employers and their employees, other groups, and individuals. Products and services include medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services to insured and self-insured customers.
The Company's accounting policies are described either in this Note or in the applicable Notes to the Consolidated Financial Statements as indicated in the table below.
Premiums, accounts and notes receivable and reinsurance recoverables are reported net of allowances for doubtful accounts and unrecoverable reinsurance of $210 million as of December 31, 2017 and $ 203 million as of December 31, 2016. The Company estimates these allowances for doubtful accounts and unrecoverable reinsurance using management's best estimates of collectability, taking into consideration the age of the outstanding amounts, historical collection patterns and other economic factors. See Note 22 for additional discussion of the allowance established in 2016 for the risk corridor receivable.
Costs eligible for deferral include incremental, direct costs of acquiring new or renewal insurance and investment contracts and other costs directly related to successful contract acquisition. Examples of deferrable costs include commissions, sales compensation and benefits, policy
Each year, deferred policy acquisition costs are tested for recoverability. For universal life and other individual products, management estimates the present value of future revenues less expected payments. For group health and accident insurance products, management estimates the sum of unearned premiums and anticipated net investment income less future expected claims and related costs. If management's estimates of these sums are less than the deferred costs, the Company reduces deferred policy acquisition costs and records an additional expense.
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 risk adjustment and minimum medical loss ratio rebate accruals under The Patient Protection and Affordable Care Act (the "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.
Premiums for group life, accident and health insurance and managed care coverages are recognized as revenue on a pro rata basis over the contract period. Benefits and expenses are recognized when incurred and, for our Global Health Care insured business, medical costs are presented net of pharmaceutical manufacturer rebates. For experience-rated contracts, premium revenue includes an adjustment for experience-rated refunds based on contract terms and calculated using the customer's experience (including estimates of incurred but not reported claims).
The ACA prescribed three programs to mitigate the risk for participating health insurance companies selling coverage on the public exchanges: risk adjustment, reinsurance and risk corridor. The reinsurance and risk corridor programs expired at the end of 2016, while the permanent risk adjustment program continues. A summary of these programs and the Company's accounting policy is provided below.
• The reinsurance program (discontinued as of December 31, 2016) was designed to provide reimbursement to insurers for high cost individual business sold on or off the public exchanges. Reinsurance contributions associated with non-grandfathered individual plans were reported as reductions in premium revenues, and estimated reinsurance recoveries were established with offsetting reductions in Global Health Care medical costs. Reinsurance fee contributions for other insured business were reported in other operating expenses.
Accounting policy. The Company computes basic earnings per share using the weighted-average number of unrestricted common and deferred shares outstanding. Diluted earnings per share also includes the dilutive effect of outstanding employee stock options and restricted stock using the treasury stock method and the effect of strategic performance shares.
(1) The Company has entered into interest rate swap contracts hedging a portion of these fixed-rate debt instruments. See Note 12 for further information about the Company's interest rate risk management and these derivative instruments.
(2) The Company redeemed a portion of these debt issues through a cash tender offer in September 2017, the aggregate amount of which was $1.0 billion.
The proceeds of this debt were mainly used to pay the consideration for the cash tender offer as described below. The Company intends to use the remaining proceeds for general corporate purposes, including the maturity of its Notes due in 2018.
At any time prior to July 15, 2027 (three months prior to the maturity date of the 10-Year Notes) or April 15, 2047 (six months prior to the maturity date of the 30-Year Notes), the Company may redeem the 10-Year Notes or the 30-Year Notes, in whole or in part, with accrued and unpaid interest, at a redemption price equal to the greater of:
• the sum of the present values of the remaining scheduled payments of principal and interest (excluding interest accrued at the redemption date) from the redemption date to the maturity date discounted at the applicable Treasury Rate plus 15 basis points for the 10-Year Notes and 20 basis points for the 30-Year Notes. In the third quarter of 2017, the Company completed a cash tender offer to purchase $1.0 billion of aggregate principal amount of certain of its outstanding debt securities. The Company recorded a pre-tax loss of $321 million ($209 million after-tax), consisting primarily of premium payments on the tender.
Interest expense on long-term and short-term debt was $243 million in 2017, $251 million in 2016, and $252 million in 2015. These amounts exclude losses on the early extinguishment of debt.
The Company maintains a share repurchase program authorized by its Board of Directors. Under this program, the Company may repurchase shares from time to time. 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.
Medical costs payable for the Global Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.
For more recent months, the Company relies more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior.
For the years ended December 31, variances in incurred costs related to prior years' medical costs payable that resulted from the differences between actual experience and the Company's key assumptions were as follows:
The following information relates to the Company's unpaid claims and claim expense liabilities.
The Company also establishes a liability for the expected present value of future benefit payments for known claims that have recently been resolved but may reopen in the future, based on Company experience. Prior to a claim becoming known, the Company establishes a liability for incurred but not reported claims, using standard actuarial techniques and calculations based on completion factors and loss ratio assumptions using the Company's experience combined with an analysis current trends and operational factors. Completion factors are impacted by several key items including changes in claim inventory levels, claim payment patterns, changes in business volume and other factors. Loss ratio assumptions are developed using historical Company experience, adjusted prospectively for expected changes in the underlying business including rate actions, persistency and inforce growth.
Activity in the Company's Group Disability and Life and the Global Supplemental Benefits segments' liabilities for unpaid claims and claim expenses are presented in the following table. Liabilities associated with the Company's Other Operations segment are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.
Long-term disability development tables. The table below presents information about incurred and paid claims development as of December 31, 2017 (net of reinsurance) cumulative claim frequency and total incurred but not reported liabilities for the Company's long-term disability book of business. The information about incurred and paid claims development for the years ended 2012 through 2016 is presented as supplementary information and is unaudited. As permitted under GAAP, the Company presented development table information beginning in 2012 because obtaining information beyond this period was impracticable as historical data was not maintained in such detail.
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, 2017. 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, 7% in year five, and 6% in year six.
The following table reconciles the long-term disability net incurred and paid claims development table to the liability for unpaid claims and claim expenses in the Company's Consolidated Balance Sheets as of December 31, 2017.
The effects of reinsurance on written premiums for short-duration contracts were not materially different from the recognized premium amounts shown in the table above.
In 2013, the Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction. Berkshire reinsured 100% of the Company's future claim payments in this business, net of other reinsurance arrangements existing at that time. The reinsurance agreement is subject to an overall limit with approximately $3.4 billion remaining at December 31, 2017.
Accounting policy. The Company reports GMIB liabilities and assets as derivatives at fair value because cash flows of these liabilities and assets are affected by equity markets and interest rates, but are without significant life insurance risk and are settled in lump sum payments. Periodically, the Company receives and pays fees based on either contractholders' account values or deposits increased at a contractual rate. The Company will also pay and receive cash depending on changes in account values and interest rates when contractholders first elect to receive minimum income payments. Cash flows on these contracts are reported in operating activities.
GMIB guarantees. Future payments are not fixed and determinable under the terms of these contracts. Accordingly, the Company calculated exposure, without considering any reinsurance coverage, using the following hypothetical assumptions:
The Company is responsible for determining fair value, as well as for assigning the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. The minimal exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations. Annually, we conduct an on-site visit of the most significant pricing service to review their processes, methodologies and controls. This on-site review includes a walk-through of inputs for a sample of securities held across various asset types to validate the documented pricing process.
The following table provides information as of December 31, 2017 and 2016 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 in the Separate Accounts section as gains and losses related to these assets generally accrue directly to policyholders.
Short-term investments are carried at fair value which 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.
Credit risk related to the clearinghouse counterparty and the Company is considered minimal when estimating the fair values of these derivatives because of upfront margin deposits and daily settlement requirements. The nature and use of these other derivatives are described in Note 12.
Fair values of mortgage and other asset-backed securities, corporate and government fixed maturities are primarily determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. For mortgage and other asset-backed securities, inputs and assumptions for pricing may also include collateral attributes and prepayment speeds. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research in its evaluation, as well as the issuer's financial statements.
The following table summarizes the fair value and significant unobservable inputs used in pricing the following securities that were developed directly by the Company as of December 31, 2017 and 2016. The range and weighted average basis point amounts ("bps") for fixed maturity spreads (adjustment to discount rates) and price-to-earnings multiples for equity investments reflect the Company's best estimates of the unobservable adjustments a market participant would make to calculate these fair values.
Mortgage and other asset-backed securities. The significant unobservable inputs used to value the following mortgage and other asset-backed securities are liquidity and weighting of credit spreads. When there is limited trading activity for the security, an adjustment for liquidity is made as of the measurement date that considers current market conditions, issuer circumstances and complexity of the security structure. An adjustment to weight credit spreads is needed to value a more complex bond structure with multiple underlying collateral and no standard market valuation technique. The weighting of credit spreads is primarily based on the underlying collateral's characteristics and their proportional cash flows supporting the bond obligations.
Hybrid equity securities. The significant unobservable input used to value the following hybrid equity securities is an adjustment for liquidity due to limited trading activity. These cumulative preferred shares are deemed likely to exercise certain call options and the Company estimates an adjustment used to discount cash flows based on current market conditions and issuer circumstances.
As noted in the preceding tables, total gains and losses included in shareholders' net income are reflected in the following captions in the Consolidated Statements of Income:
Reclassifications impacting Level 3 financial instruments are reported as transfers into or out of the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore gains and losses in income only reflect activity for the period the instrument was classified in Level 3.
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. During 2017 and 2016, transfers between Level 2 and Level 3 primarily reflected changes in liquidity and credit risk estimates for certain private placement issuers across several sectors including metals, mining, energy, utilities, capital goods, consumer products and transportation services.
(1) Non-guaranteed separate accounts included $3.9 billion as of December 31, 2017 and $3.7 billion as of December 31, 2016 in assets supporting the Company's pension plans, including $0.3 billion classified in Level 3 for both periods and $0.8 billion as of December 31, 2017 and $0.9 billion as of December 31, 2016 priced at NAV as a practical expedient for each year.
Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as investments in real estate, partnership entities and commercial mortgage loans when they become impaired. Impaired values for these asset types classified as Level 3 representing less than 1% of total investments, were written down to their fair values, resulting in immaterial realized investment losses in 2017 and 2016.
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, 2017 and 2016. 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.
The fair values for all financial instruments presented in the table above have been estimated using market information when available. The following valuation methodologies and inputs are used by the Company to determine fair value.
Equity securities include hybrid investments consisting of preferred stock with call features that are carried at fair value with changes in fair value reported in other realized investment gains (losses) and dividends reported in net investment income. As of December 31, 2017, fair values of these securities were $49 million and amortized cost was $61 million. As of December 31, 2016, fair values of these securities were $36 million and amortized cost was $49 million.
The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at December 31, 2017:
As of December 31, 2017, the Company had commitments to purchase $118 million of fixed maturities, all of which bear interest at a fixed market rate.
• the Company's intent to sell or the likelihood of a required sale prior to recovery. Based on this review, management believes the unrealized depreciation below to be temporary, and therefore has not impaired these amounts. The table below summarizes fixed maturities with a decline in fair value from amortized cost by the length of time these securities have been in an unrealized loss position.
There were no available for sale equity securities with a significant unrealized loss reflected in accumulated other comprehensive income at December 31, 2017.
Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are generally issued at a fixed rate of interest and are secured by high quality, primarily completed and substantially leased operating properties.
As of December 31, 2017, approximately 86% of the Company's commercial mortgage loan portfolio is scheduled to mature in 2022 or thereafter.
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.
Accounting policy. Security investments with maturities of greater than three months to one year from time of purchase are classified as short-term, available for sale and carried at fair value that approximates cost. Cash equivalents consist of short-term investments with maturities of three months or less from the time of purchase and are carried at cost that approximates fair value.
Included in the realized investment gains and losses in the above table were pre-tax asset write-downs on debt securities and other asset write-downs of $31 million for the year ended December 31, 2017, $58 million for the year ended December 31, 2016 and $140 million for the year ended December 31, 2015. Realized investment gains in other investments, including derivatives, represent primarily gains on sale of real estate properties held in joint ventures.
Terms of derivative instruments. The Company provides upfront margin and settles fair value changes and net interest between variable and fixed rates daily with a central clearinghouse.
Terms of derivative instruments. The Company periodically exchanges cash flows between two currencies for both principal and interest. Foreign currency swaps are Euros and British pounds and have terms for up to twelve 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.
Terms of derivative instruments. The Company agrees to purchase South Korean won in exchange for U.S. dollars at a future date, generally within three months from the contracts' trade dates.
Collateral and termination features. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize this risk. As of December 31, 2017, the Company had $9 million in cash on
deposit representing the upfront margin required for the Company's centrally-cleared derivative instruments. Certain of the Company's over-the-counter derivative instruments contain provisions requiring either the Company or the counterparty to post collateral or demand immediate payment depending on the amount of the net liability position and predefined financial strength or credit rating thresholds. Collateral posting requirements vary by counterparty. The net asset or liability positions of these derivatives were not material as of December 31, 2017 or 2016.
Securities limited partnerships and real estate limited partnerships. The Company owns interests in securities limited partnerships and real estate limited partnerships that are defined as variable interest entities. 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 $2.4 billion across approximately 116 limited partnerships as of December 31, 2017 includes $1.2 billion reported in other long-term investments and commitments to contribute an additional $1.2 billion. The Company's non-controlling interest in each of these limited partnerships is generally less than 10% of the partnership ownership interests.
Pension plans. The Company's principal qualified defined benefit pension plans, the Cigna Pension Plan and the Cigna Pension Plan for Certain Former Employees, cover approximately 22,200 retirees, 14,500 vested former employees and 14,000 active employees. Current retirees, certain vested former employees and longer-service active employees are entitled to an annuity benefit based on pay and length of service. Most pension-eligible active employees and certain vested former employees are entitled to a cash balance defined benefit. The Cigna Supplemental Pension Plan, a non-qualified and unfunded plan, covers only certain employees. We froze future benefit accruals for all of these domestic pension plans in 2009. Additionally the Company has foreign pension and other postretirement benefit plans that are immaterial to our results of operations, liquidity and financial position.
Other postretirement benefit plans. The Company's postretirement benefit medical plan covers approximately 18,400 retirees and 18,600 active employees. Post-1988 retirees contribute to the cost of this coverage, whereas pre-1989 retirees do not. For post-1988 retirees, the Company's cost is capped at 200% of the per capita cost in 2000. Pharmacy coverage for Medicare-eligible retirees is delivered using an Employer Group Waiver Plan. Under that plan, the Company receives subsidies from CMS. The postretirement medical plan is unfunded and future benefit accruals were frozen in 2013. The Company also offers certain postretirement life insurance benefits through various plans. Retirees do not contribute to the cost of life insurance benefits.
Accounting policy. The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. Benefit obligations are measured at the present value of estimated future payments based on actuarial assumptions. The Company uses the "corridor" method to account for changes in the benefit obligation when actual results differ from those assumed, or when assumptions change. These changes are called net unrecognized actuarial gains (losses). Under the corridor method, net unrecognized actuarial gains (losses) are initially recorded in accumulated other comprehensive income. When the unrecognized gain (loss) exceeds 10% of the benefit obligation, that excess is amortized to other operating expense over the expected remaining lives of plan participants.
Amounts reflected in the pension and other postretirement benefit liabilities shown above that have not yet been reported in net income and therefore are included in accumulated other comprehensive loss consisted of the following as of December 31:
Expected long-term rates of return on plan assets were developed considering actual long-term historical returns, expected long-term market conditions, plan asset mix and management's investment strategy that continues a significant allocation to domestic and foreign equity securities as well as securities partnerships, real estate and hedge funds. Expected long-term market conditions take into consideration certain key macroeconomic trends including expected domestic and foreign GDP growth, employment levels and inflation.
The estimated rate of future increases in the per capita cost of postretirement health care benefits is 6.50% in 2018, decreasing by 0.25% per year to 4.75% in 2024 and beyond. The impact of a 1% increase or decrease in the estimated rate would be immaterial to postretirement cost and benefit obligation.
As of December 31, 2017, pension assets included $3.9 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 $342 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, 2017 and 2016.
The Company's current target investment allocation percentages (50% fixed income, 30% public equity securities and 20% in other investments, including private equity (securities partnerships), real estate and hedge funds) are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. The Company would expect to further reduce the allocation to equity securities and other investments and increase the allocation to fixed income investments as funding levels improve.
See Note 10 for further details regarding how fair value is determined, including the level within the fair value hierarchy and the procedures we use to validate fair value measurements. Within pension plan assets, the Company classifies substantially all fixed maturities in Level 2. These assets are valued using recent trades of similar securities or are fund investments priced using their daily net asset value that is the exit price. Within pension assets, a substantial portion of domestic equity securities are classified as Level 1, while international equity funds are predominantly classified in Level 2 using daily net asset value.
The Company sponsors a 401(k) plan in which the Company matches a portion of employees' pre-tax contributions. Participants in the plan may invest in various funds that invest in the Company's common stock, several diversified stock funds, a bond fund or a fixed-income fund.
The People Resources Committee ("the Committee") of the Board of Directors awards stock options, restricted stock, deferred stock and strategic performance shares ("SPS") to certain employees. The Committee has issued common stock instead of cash compensation. The Company issues shares from Treasury stock for these awards.
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 below.
Accounting policy. The Company awards options to purchase Cigna common stock at the market price of the stock on the grant date. Options vest over periods ranging from one to three years and expire no later than 10 years from grant date. Fair value is estimated using the Black-Scholes option-pricing model by applying the assumptions presented below. That fair value is reduced by options expected to be forfeited during the vesting period. The Company estimates forfeitures at the grant date based on our experience and adjusts the expense to reflect actual forfeitures over the vesting period. The fair value of options, net of forfeitures, is recognized in operating expenses on a straight line basis over the vesting period.
The following table summarizes information for outstanding common stock options at December 31, 2017:
The Company awards restricted stock to the Company's employees with vesting periods ranging from three to five years. Recipients of restricted stock awards accumulate dividends during the vesting period, but forfeit their awards and accumulated dividends if their employment terminates before the vesting date.
At the end of 2017, approximately 4,800 employees held 1.3 million restricted stock awards with $68 million of related compensation expense to be recognized over the next two years (weighted average period).
Accounting policy. Compensation expense for SPSs is recorded over the performance period. For "market condition" SPSs, fair value is determined at the grant date using a Monte Carlo simulation model and not subsequently adjusted regardless of the final outcome. For "performance condition" SPSs, 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 SPSs was as follows for the years ended December 31:
Accounting policy. Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. The resulting goodwill is assigned to those reporting units expected to realize cash flows from the acquisition, allocated to reporting units based on relative fair values, primarily reported in the Global Health Care segment ($5.9 billion) and, to a lesser extent, the Global Supplemental Benefits segment ($0.3 billion).
(1) Other property and equipment includes amortization on assets recorded under capital leases of $14 million in 2017, $20 million in 2016 and $22 million in 2015.
(2) Includes the one-time $23 million bargain purchase gain on an acquisition in 2015.
The Company also has capital lease arrangements. See Note 17 and Note 5 for further information on assets recorded under capital leases and the related obligations.
State insurance departments and foreign jurisdictions that regulate certain of the Company's subsidiaries prescribe accounting practices (differing in some respects from GAAP) to determine statutory net income and surplus. The Company's life, accident and health insurance and Health Maintenance Organization ("HMO") subsidiaries are regulated by such statutory requirements. Due to regulatory changes in the jurisdiction of one of our foreign insurance affiliates, surplus increased significantly in 2017, primarily due to including deferred policy acquisition costs as an admitted asset. The statutory net income of the Company's life, accident and health insurance and HMO subsidiaries for the years ended, and their statutory surplus as of December 31, were as follows:
There were no permitted practices for the Company's insurance subsidiaries that significantly differed from prescribed regulatory accounting practices.
Major U.S. tax reform legislation was signed into law on December 22, 2017. The legislation is highlighted by a reduction in the corporate income tax rate from the current 35% to 21% effective January 1, 2018. The Company expects a significant decline in its effective tax rate beginning in 2018 as a result of the rate reduction. The remaining provisions of the law, most of which take effect on January 1, 2018, are not expected to have a material impact on the Company's results of operations beginning in 2018.
The Company recorded additional tax expense of $232 million in 2017 resulting from this legislation, comprised of $144 million due to the revaluation of net deferred tax assets to reflect the reduction in the corporate tax rate and $88 million due to the assessment of U.S. taxes related to the Company's accumulated unremitted foreign earnings. The legislation provides an election to pay these taxes over eight years, and we expect to adopt this election. Both the revaluation of deferred tax assets and liabilities and the taxes on accumulated unremitted
foreign earnings are considered provisional as permitted under SAB 118 (see Note 2) because certain adjustments used to calculate the taxes at year-end were based on estimates.
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, including the U.S. tax reform legislation enacted in December 2017. 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.
Consolidated pre-tax income from the Company's foreign operations was approximately 14% of the Company's pre-tax income in 2017. The comparable amount in prior years was 11% in 2016 and 2015. South Korean operations produced approximately 13% of the Company's pre-tax income in 2017, 11% in 2016 and 8% in 2015.
The Company retains a significant portion of its foreign earnings overseas. If the Company intended to remit these earnings it would have recorded additional deferred tax liabilities of approximately $120 million for foreign withholding taxes. A portion of these taxes may be eligible for credit against the Company's U.S. tax liability.
Deferred income tax balances as of December 31, 2017 have been adjusted to reflect the reduced statutory tax rate that took effect as of January 1, 2018 pursuant to the recently enacted U.S. tax reform legislation. The Company has recorded incremental tax expense of $144 million including the adjustment of deferred tax balances related to items reported in accumulated other comprehensive income.
The Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. If employers fail to do so, the Company or an affiliate of the buyer of the retirement benefits business (Prudential Retirement Insurance and Annuity Company or "Prudential") has the right to redirect the management of the related assets to provide for benefit payments. As of December 31, 2017, employers maintained assets that exceeded the benefit obligations under these arrangements of approximately $470 million. Approximately 12% of these are reinsured by Prudential. The remaining guarantees are provided by the Company with minimal reinsurance from third parties. The Company establishes an additional liability if management believes
The Company had indemnification obligations as of December 31, 2017 in connection with acquisition and disposition 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, 2017.
Pending litigation and legal or regulatory matters that the Company has identified with a reasonably possible material loss are described below. 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 estimated loss is the Company's best estimate of the probable loss at the time or an amount within a range of estimated losses reflecting the most likely outcome or the minimum amount of the range (if no amount is better than any other estimated amount in the range.) 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. Due to numerous uncertain factors presented in these cases, it is not possible to estimate an aggregate range of loss (if any) for these matters at this time. In light of the uncertainties involved in these matters, there is no assurance that their ultimate resolution will not exceed the amounts currently accrued by the Company. An adverse outcome in one or more of these matters could be material to the Company's results of operations, financial
Civil Investigative Demand. The U.S. Department of Justice ("DOJ") is currently conducting an industry review of the risk adjustment data submission practices and business processes, including review of medical charts, of Medicare Advantage organizations under Medicare Parts C and D. In connection with this industry review, in December 2016, the Company received a Civil Investigative Demand from the Civil Division of the DOJ. We are in the process of voluntarily cooperating with the DOJ's request and responding to the information request.
Also in February 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.
The litigation between the parties remains pending. Trial is scheduled for 2019. We believe in the merits of our claims and dispute Anthem's claims, and we intend to vigorously defend ourselves and pursue our claims. The outcomes of lawsuits are inherently unpredictable, and we may be unsuccessful in the ongoing litigation or any future claims or litigation.
The Company uses "adjusted income 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 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:
• Special items, if any, are excluded because management believes they are not representative of the underlying results of operations. This is generally because the nature and size of these matters are not indicative of our ongoing business operations. Additional details about these items that provide further context as to why they are not considered indicative of ongoing business operations may be found in the footnotes referenced in the table below. The following table presents the special items recorded by the Company for the years ended December 31, 2017, 2016 and 2015.
(1) Includes the Company's share of the earnings of its joint ventures in China and India in the Global Supplemental Benefits segment.
Revenue from external customers includes premiums, fees and other revenues and mail order pharmacy revenues. The following table presents these revenues by product type for the years ended December 31:
The Company had net receivables from CMS of $0.5 billion as of December 31, 2017 and $0.6 billion as of December 31, 2016. 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 17% in 2017, 20% in 2016 and 21% in 2015. These amounts were reported in the Global Health Care segment.
In 2016, the Company recorded an allowance for the balance of its risk corridor receivable from CMS of $124 million based on court decisions and the large risk corridor program deficit. As of December 31, 2017, the Company continues to hold an allowance for the balance of its risk corridor receivable of $109 million based on the current status of court decisions. However, the Company continues to believe that the government has a binding obligation to satisfy the risk corridor receivable.
(1) Shareholders' net income includes the following after-tax charges (benefits), described in Note 22 to the Consolidated Financial Statements: