Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Cigna Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Cigna Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, 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, 2019, 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment

As described in Note 18 to the consolidated financial statements, as of December 31, 2019, goodwill is primarily reported in the Health Services segment ($33.7 billion), the Integrated Medical segment ($10.5 billion) and, to a lesser extent, the International Markets segment ($0.4 billion). Management evaluates goodwill for impairment at least annually during the third quarter at the reporting unit level and writes the goodwill balance down through shareholders’ net income if impaired. Fair value of a reporting unit is generally estimated based on either a market approach or a discounted cash flow analysis using assumptions that management believes 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 discount rate is selected to correspond with each 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 that reporting unit. Projections of future cash flows for each reporting unit are consistent with management’s annual planning process for revenues, pharmacy costs, benefits expenses, operating expenses, taxes, capital levels and long-term growth rates.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when determining the fair value measurement of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the reporting units’ fair value including the assumptions for the discount rate and projection of future cash flows. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over management’s methodology, inputs and assumptions used in its goodwill impairment assessment. These procedures also included, among others, testing management’s process for determining the fair value estimate of the reporting units; evaluating the appropriateness of the discounted cash flow analysis; testing the completeness and accuracy of underlying data used in the discounted cash flow analysis; and evaluating the key inputs and significant assumptions, including the discount rate and the projections of future cash flows. The underlying inputs and assumptions used in the development of the discount rate and the projections of future cash flows that were evaluated included the weighted average cost of capital, revenues, pharmacy costs, benefits expenses, operating expenses, capital levels and long-term growth rates. Evaluating the reasonableness of management’s inputs and assumptions involved considering (i) the current and past performance of the reporting unit, (ii) the consistency of the discount rate and long-term growth rates with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rate.

Valuation of Long-term Disability Disabled Life Reserves

As described in Note 9 to the consolidated financial statements, the majority of the Company's liability for disability claims consists of “disabled life reserves”, measured as the present value of estimated future benefit payments, including expected development, for each reported claim that is currently receiving benefit payments over the expected disability period or pending a decision on eligibility for benefits. As of December 31, 2019, the long-term disability disabled life reserves were $3.5 billion. Management projects the expected disability period by using historical resolution rates combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. Expected claim resolution rates may vary based upon management’s experience for the anticipated disability period, the covered benefit period, the cause of disability, the benefit design and the claimant’s age, gender and income level. The gross monthly benefit is reduced (offset) by disability income received under other benefit programs, most commonly Social Security Disability Income, workers' compensation, statutory disability or other group benefit plans. Management

estimates the probability and amount of future offset awards and lapses based on management’s experience for certain offsets not yet finalized.

The principal considerations for our determination that performing procedures relating to the valuation of long-term disability disabled life reserves is a critical audit matter are there was significant judgment by management when determining the reserves. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the actuarial methodologies and assumptions including the discount rate, resolution rates, offset awards, and adequacy utilized to estimate the reserves. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of long-term disability disabled life reserves, including controls over management’s actuarial methodologies and the development of significant assumptions including the discount rate, resolution rates, offset awards, and adequacy. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the reserves which included evaluating the appropriateness of management’s actuarial methodologies and the reasonableness of the aforementioned assumptions utilized in determining the reserves balances and recalculating the reserves for a sample of long-term disability disabled life reserves utilizing management’s actuarial methodologies and assumptions. The professionals with specialized skill and knowledge also recalculated a sample of long-term disability disabled life reserves utilizing an independent model and management’s assumptions. Performing these procedures involved testing the completeness and accuracy of the data provided by management.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 27, 2020

We have served as the Company’s auditor since 1983.

Cigna Corporation
Consolidated Statements of Income
	For the years ended December 31,
(In millions, except per share amounts)	2019		2018		2017
Revenues
Pharmacy revenues	$	103,099	$	5,479	$	2,979
Premiums		39,714		36,113		32,491
Fees and other revenues		9,363		5,578		5,110
Net investment income		1,390		1,480		1,226
TOTAL REVENUES		153,566		48,650		41,806
Benefits and expenses
Pharmacy and other service costs		97,668		4,793		2,456
Medical costs and other benefit expenses		30,819		27,528		25,263
Selling, general and administrative expenses		14,053		11,934		10,030
Amortization of acquired intangible assets		2,949		235		115
TOTAL BENEFITS AND EXPENSES		145,489		44,490		37,864
Income from operations		8,077		4,160		3,942
Interest expense and other		**(**1,682)		(498)		(252)
Debt extinguishment costs		**(**2)		-		(321)
Net realized investment gains (losses)		177		(81)		237
Income before income taxes		6,570		3,581		3,606
TOTAL INCOME TAXES		1,450		935		1,374
Net income		5,120		2,646		2,232
Less: net income (loss) attributable to noncontrolling interests		16		9		(5)
SHAREHOLDERS’ NET INCOME	$	5,104	$	2,637	$	2,237
Shareholders’ net income per share
Basic	$	13.58	$	10.69	$	8.92
Diluted	$	13.44	$	10.54	$	8.77
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Cigna Corporation
Consolidated Statements of Comprehensive Income
		For the years ended December 31,
(In millions)			2019			2018			2017
Net Income		$	5,120		$	2,646		$	2,232
Other comprehensive income (loss), net of tax
Net unrealized appreciation (depreciation) on securities and derivatives			957			(365)			(37)
Net translation (losses) gains on foreign currencies			**(**59)			(167)			301
Postretirement benefits liability adjustment			**(**133)			127			33
Other comprehensive income (loss), net of tax			765			(405)			297
Total comprehensive income			5,885			2,241			2,529
Comprehensive income (loss) attributable to noncontrolling interests
Net income attributable to redeemable noncontrolling interest			11			9			-
Net income (loss) attributable to other noncontrolling interests			5			-			(5)
Other comprehensive (loss) attributable to redeemable noncontrolling interest			**(**5)			(15)			(3)
Total comprehensive income (loss) attributable to noncontrolling interests			11			(6)			(8)
SHAREHOLDERS' COMPREHENSIVE INCOME		$	5,874		$	2,247		$	2,537
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Cigna Corporation
Consolidated Balance Sheets
	As of December 31,
(Dollars in millions)	2019		2018
Assets
Cash and cash equivalents	$	4,619	$	3,855
Investments		937		2,045
Accounts receivable, net		10,716		10,473
Inventories		2,661		2,821
Other current assets		1,400		1,236
Assets of business held for sale		9,512		-
Total current assets		29,845		20,430
Long-term investments		21,542		26,929
Reinsurance recoverables		5,100		5,507
Deferred policy acquisition costs		2,958		2,821
Property and equipment		4,417		4,562
Goodwill		44,602		44,505
Other intangible assets		36,562		39,003
Other assets		2,283		1,630
Separate account assets		8,465		7,839
TOTAL ASSETS	$	155,774	$	153,226
Liabilities
Current insurance and contractholder liabilities	$	4,921	$	6,801
Pharmacy and service costs payable		10,454		10,702
Accounts payable		5,090		4,366
Accrued expenses and other liabilities		7,347		7,071
Short-term debt		5,514		2,955
Liabilities of business held for sale		6,812		-
Total current liabilities		40,138		31,895
Non-current insurance and contractholder liabilities		16,052		19,974
Deferred tax liabilities, net		9,387		9,453
Other non-current liabilities		4,460		3,470
Long-term debt		31,893		39,523
Separate account liabilities		8,465		7,839
TOTAL LIABILITIES		110,395		112,154
Contingencies — Note 22		-		-
Redeemable noncontrolling interests		35		37
Shareholders’ equity
Common stock (1)		4		4
Additional paid-in capital		28,306		27,751
Accumulated other comprehensive loss		**(**941)		(1,711)
Retained earnings		20,162		15,088
Less: treasury stock, at cost		**(**2,193)		(104)
TOTAL SHAREHOLDERS’ EQUITY		45,338		41,028
Other noncontrolling interests		6		7
Total equity		45,344		41,035
Total liabilities and equity	$	155,774	$	153,226
*(1) Par value per share, $*0.01; shares issued, 386 million as of December 31, 2019 and 381 million as of December 31, 2018; authorized shares; 600 million.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Cigna Corporation
Consolidated Statements of Changes in Total Equity
(In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Non- controlling Interests		Total Equity		Redeemable Non- controlling Interest
Balance at December 31, 2016	$	74	$	2,892	$	**(**1,382)	$	13,831	$	**(**1,716)	$	13,699	$	4	$	13,703	$	58
2017 Activity
Effect of issuing stock for employee benefit plans				51				(258)		455		248				248
Other comprehensive income (loss)						300						300				300		(3)
Net income (loss)								2,237				2,237		(5)		2,232		-
Common dividends declared (per share: $0.04)								(10)				(10)				(10)
Repurchase of common stock										(2,760)		(2,760)				(2,760)
Other transactions impacting noncontrolling interests				(3)								(3)		1		(2)		(6)
Balance at December 31, 2017		74		2,940		**(**1,082)		15,800		**(**4,021)		13,711		-		13,711		49
2018 Activity
Cumulative effect of accounting for financial instruments and hedging						(10)		68				58				58
Reclassification adjustment related to U.S. tax reform legislation						(229)		229				-				-
Retirement of treasury stock		(13)		(529)				(3,498)		4,040		-				-
Exchange of Old Cigna common stock		(58)		58								-				-
Acquisition of Express Scripts (see Note 4)		1		25,223								25,224		7		25,231
Effect of issuing stock for employee benefit plans				59				(138)		206		127				127
Other comprehensive (loss)						(390)						(390)				(390)		(15)
Net income								2,637				2,637				2,637		9
Common dividends declared (per share: $0.04)								(10)				(10)				(10)
Repurchase of common stock										(329)		(329)				(329)
Other transactions impacting noncontrolling interests												-				-		(6)
Balance at December 31, 2018		4		27,751		**(**1,711)		15,088		**(**104)		41,028		7		41,035		37
2019 Activity
Cumulative effect of adopting new lease accounting guidance (ASU 2016-02) (1)								**(**15)				**(**15)				**(**15)
Effects of issuing stock for employee benefit plans				555						**(**104)		451				451
Other comprehensive income (loss)						770						770				770		**(**5)
Net income								5,104				5,104		5		5,109		11
Common dividends declared (per share: $0.04)								**(**15)				**(**15)				**(**15)
Repurchase of common stock										**(**1,985)		**(**1,985)				**(**1,985)
Other transactions impacting noncontrolling interests												-		**(**6)		**(**6)		**(**8)
Balance at December 31, 2019	$	4	$	28,306	$	**(**941)	$	20,162	$	**(**2,193)	$	45,338	$	6	$	45,344	$	35
(1) See Note 2 for further information about the Company's adoption of new lease accounting guidance (ASU 2016-02)
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Cigna Corporation
Consolidated Statements of Cash Flows
	For the years ended December 31,
(In millions)	2019		2018		2017
Cash Flows from Operating Activities
Net income	$	5,120	$	2,646	$	2,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,651		695		566
Realized investment (gains) losses, net		**(**177)		81		(237)
Deferred income tax (benefit) expense		**(**313)		(101)		242
Debt extinguishment costs		2		-		321
Net changes in assets and liabilities, net of non-operating effects:
Accounts receivable		**(**713)		705		(233)
Inventories		149		(107)		(72)
Deferred policy acquisition costs		**(**242)		(237)		(282)
Reinsurance recoverable and Other assets		**(**277)		(234)		115
Insurance liabilities		575		560		506
Pharmacy and service costs payable		**(**192)		(842)		35
Accounts payable and Accrued expenses and other liabilities		1,343		332		696
Other, net		559		272		197
NET CASH PROVIDED BY OPERATING ACTIVITIES		9,485		3,770		4,086
Cash Flows from Investing Activities
Proceeds from investments sold:
Debt securities and equity securities		3,487		2,655		2,012
Investment maturities and repayments:
Debt securities and equity securities		1,825		2,151		2,051
Commercial mortgage loans		199		215		335
Other sales, maturities and repayments (primarily short-term and other long-term investments)		1,311		734		1,702
Investments purchased or originated:
Debt securities and equity securities		**(**4,282)		(5,637)		(5,628)
Commercial mortgage loans		**(**307)		(312)		(430)
Other (primarily short-term and other long-term investments)		**(**1,753)		(1,189)		(1,065)
Property and equipment purchases, net		**(**1,050)		(528)		(471)
Acquisitions, net of cash acquired		**(**153)		(24,455)		(209)
Other, net		**(**11)		(12)		-
NET CASH (USED IN) INVESTING ACTIVITIES		**(**734)		(26,378)		(1,703)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		955		1,040		1,230
Withdrawals and benefit payments from contractholder deposit funds		**(**1,097)		(1,151)		(1,363)
Net change in short-term debt		**(**681)		1,487		80
Payments for debt extinguishment		**(**3)		-		(313)
Repayment of long-term debt		**(**4,491)		(131)		(1,250)
Net proceeds on issuance of long-term debt		-		22,856		1,581
Repurchase of common stock		**(**1,987)		(342)		(2,725)
Issuance of common stock		224		68		131
Other, net		**(**107)		(312)		(22)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		**(**7,187)		23,515		(2,651)
Effect of foreign currency rate changes on cash and cash equivalents		**(**8)		(24)		55
Net increase (decrease) in cash, cash equivalents, and restricted cash		1,556		883		(213)
Cash, cash equivalents, and restricted cash January 1,		3,855		2,972		3,185
Cash, cash equivalents, and restricted cash December 31,		5,411		3,855		2,972
Cash reclassified to assets held for sale		**(**743)		-		-
Cash, cash equivalents, and restricted cash December 31, per Consolidated Balance Sheets (1)	$	4,668	$	3,855	$	2,972
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	1,776	$	1,019	$	1,036
Interest paid	$	1,645	$	267	$	240
(1) Includes restricted cash of $ 26 million reported in Other noncurrent assets and $ 23 million reported in Long-term investments as of December 31, 2019.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Notes to the Consolidated Financial Statements

TABLE OF CONTENTS

Note Number	Footnote	Page
Business and Capital Structure
1	Description of Business	86
2	Summary of Significant Accounting Policies	87
3	Accounts Receivable, Net	94
4	Mergers, Acquisitions and Dispositions	95
5	Assets and Liabilities of Business Held for Sale	97
6	Earnings Per Share	98
7	Debt	99
8	Common and Preferred Stock	101
Insurance Information
9	Insurance and Contractholder Liabilities	101
10	Reinsurance	107
Investments
11	Investments, Investment Income and Gains and Losses	111
12	Fair Value Measurements	118
13	Variable Interest Entities	123
14	Accumulated Other Comprehensive Income (Loss)	125
Workforce Management and Compensation
15	Organizational Efficiency Plan	126
16	Pension	126
17	Employee Incentive Plans	130
Property, Leases and Other Asset Balances
18	Goodwill, Other Intangibles and Property and Equipment	133
19	Leases	135
Compliance, Regulation and Contingencies
20	Shareholders’ Equity and Dividend Restrictions	137
21	Income Taxes	138
22	Contingencies and Other Matters	140
Results Details
23	Segment Information	143
	Quarterly Financial Data	147

Note 1 – Description of Business

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”) is a global health service organization dedicated to a mission of helping those we serve improve their health, well-being and peace of mind. Our evolved strategy in support of our mission is Go Deeper, Go Local, Go Beyond using a differentiated set of pharmacy, 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 Company reports its results in the following segments.

Health Services includes pharmacy benefits management, specialty pharmacy services, clinical solutions, home delivery and health management services.

Integrated Medical offers a variety of health care solutions to employers and individuals.

The Commercial operating segment serves employers (also referred to as “clients”) and their employees (also referred to as “customers”) and other groups. This segment provides deeply integrated medical and specialty offerings including medical, pharmacy, dental, behavioral health, vision, health advocacy programs and other products and services to insured and self-insured clients.

The Government operating segment offers Medicare Advantage, Medicare Supplement and Medicare Part D plans (including the acquired Express Scripts’ Medicare Part D business) for seniors, Medicaid plans, and individual health insurance coverage both on and off the public exchanges.

International Markets includes supplemental health, life and accident insurance products and health care coverage in our international markets as well as health care benefits to globally mobile employees of multinational organizations.

The remainder of our business operations are reported in Group Disability and Other, consisting of the following:

****Group Disability and Life provides group long-term and short-term disability, group life, accident, voluntary and specialty insurance products and related services. In December 2019, Cigna entered into a definitive agreement to sell the Group Disability and Life insurance business to New York Life Insurance Company. See Note 5 for further information on the classification of this business as held for sale.

****Corporate-Owned Life Insurance (“COLI”) offers permanent insurance contracts sold to corporations to provide coverage on the lives of certain employees for financing employer-paid future benefit obligations.

****Run-off businesses:

****Reinsurance: 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.

****Settlement Annuity business in run-off.

****Individual Life Insurance and Annuity and Retirement Benefits Businesses: deferred gains from the sales of these businesses.

Corporate reflects amounts not allocated to operating segments, including interest expense, net investment income on investments not supporting segment and other operations, interest on uncertain tax positions, certain litigation matters, expense associated with our frozen pension plans, severance, certain enterprise-wide projects and intersegment eliminations for products and services sold between segments. Prior to 2019, compensation cost for stock options was also included in Corporate. Beginning in the first quarter of 2019, this cost is allocated and reported by the segments.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of Cigna Corporation and its consolidated subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Amounts recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment and receivable valuations, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment.

Recently Adopted Accounting Guidance

The Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases¸ as of January 1, 2019 (the adoption date) on a modified retrospective basis for leases in effect as of and after the adoption date. This new guidance requires balance sheet recognition of assets and liabilities arising from leases, as well as additional disclosures regarding the amount, timing and uncertainty of cash flows from leases. We implemented a new lease system and corresponding internal controls to administer our leases and facilitate compliance with this new standard.

The Company elected the practical expedient package, allowing us to carry forward the assessment of 1) whether our contracts contain or are leases, 2) lease classification and 3) whether previously capitalized costs continue to qualify as initial direct costs. Upon adoption, we recognized new right-of-use assets and lease liabilities related only to our operating leases, as finance (capital) leases were already reflected on the Company’s Consolidated Balance Sheets. The impact of adoption on our net assets and retained earnings was not material, nor was there a material impact on our Consolidated Statements of Income or Cash Flows. See Note 19 for additional disclosures about the Company’s leases.

Accounting Guidance Not Yet Adopted

Accounting Standard and Effective Date		Requirements and Expected Effects of New Guidance Not Yet Adopted
Measurement of Credit Losses on Financial Instruments (ASU 2016-13) Required as of January 1, 2020	Requires:
•	A new approach using expected credit losses to estimate and recognize credit losses for certain financial instruments (such as mortgage loans, reinsurance recoverables and other receivables) when such instruments are first originated or acquired, compared with the incurred loss model currently used. Upon adoption, the Company will record an allowance for estimated credit losses on the balance sheet. Subsequent changes in the allowance will be reported in current period earnings.
•	Changes in the criteria for impairment of available-for-sale debt securities
•	Adoption using a modified retrospective approach with a cumulative-effect adjustment recorded in retained earnings
Expected effects:
•	The Company has completed its evaluation of this new standard and its expected effects on our financial statements and disclosures. We will adopt the standard as of January 1, 2020.
•	An additional allowance for future expected credit losses under the new model of approximately $50 million after-tax will be required, primarily for reinsurance recoverables.

Simplifying the Test for Goodwill Impairment (ASU 2017-04) Required as of January 1, 2020	Guidance:
•	Simplifies the accounting for goodwill impairment by eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment
•	Redefines the amount of goodwill impairment to equal the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill of the reporting unit
•	Requires prospective adoption
Expected effects:
•	The Company will adopt this new standard effective January 1, 2020, and we do not expect its impact to be significant.

Accounting Standard and Effective Date		Requirements and Expected Effects of New Guidance Not Yet Adopted
Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12) Required as of January 1, 2022 (early adoption permitted)	Requires (for insurance entities that issue long-duration contracts):
•	Changes in measuring our future policy benefits liability for traditional and limited-pay insurance contracts:
	-	Assumptions used to measure cash flows (such as mortality, morbidity and lapse assumptions) to be updated at least annually with the effect of changes in those assumptions remeasured retrospectively and reflected in current period net income.
	-	Discount rate assumptions to be updated quarterly based on an upper-medium grade fixed-income instrument yield that maximizes the use of observable market inputs with any changes reflected in other comprehensive income.
•	Deferred policy acquisition costs (DAC) related to long-duration insurance contracts to be amortized on a constant-level basis over the expected term of the contracts. Other related deferred or capitalized balances (such as unearned revenue liability and value of business acquired) may use this simplified amortization method.
•	Market risk benefits (defined as protecting the contractholder from other-than-nominal capital market risk and exposing the insurer to that risk) to be measured at fair value with changes in fair value recognized in net income each period, except for the effect of changes in the insurance entity’s credit risk to be recognized in other comprehensive income.
•	Additional disclosures, including disaggregated rollforwards for the liability for future policy benefits, market risk benefits, separate account liabilities and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions and methods used in measurement.
•	Transition methods at adoption vary:
	-	Changes to the liability for future policy benefits to use a modified retrospective approach applied to all outstanding contracts on the basis of their carrying amounts as of the beginning of the earliest period presented, with an option to elect a full retrospective transition under certain criteria. Remeasuring the future policy benefits liability for the discount rate to be recorded through accumulated other comprehensive income at transition.
	-	Deferred policy acquisition costs to follow the transition method used for future policyholder benefits.
	-	Market risk benefits to be transitioned retrospectively and measured at fair value at the beginning of the earliest period presented. The difference between this fair value and carrying value to be recognized in the opening balance of retained earnings, excluding the effect of credit risk changes that are to be recognized in accumulated other comprehensive income.
Expected effects:
•	The new guidance will apply to our long-duration insurance products predominantly within the International Markets and Group Disability and Other segments.
•	The Company is evaluating the impact of this guidance and expects to have significant changes to our processes, systems, controls, financial results and disclosures. We continue to monitor developing implementation guidance, particularly with respect to reinsured blocks of business.
•	Although we continue to evaluate the new requirements and model their impacts across various products, we are not yet able to project or estimate the magnitude or frequency of expected changes to our financial results. However, it is possible that the Company's income recognition pattern could change for several reasons:
	-	Applying periodic assumption updates, versus the current locked-in model, may change our timing of profit or loss recognition.
	-	Amortizing DAC on a constant-level basis over the expected term of the related contracts, versus being tied to the emergence of profit for such contracts.
	-	Measuring market-risk benefit features, such as those provided in our GMDB product, at fair value will subject these liabilities and related reinsurance recoverables to market sensitivity, notably to interest rates.

Significant Accounting Policies

The Company’s accounting policies are described either in this Note or in the applicable Notes to the Consolidated Financial Statements as listed in the table of contents.

**A.**Cash and Cash Equivalents

Cash and cash equivalents are carried at cost that approximates fair value. Cash equivalents consist of short-term investments with maturities of three months or less from the time of purchase. The Company reclassifies cash overdraft positions to liabilities when the legal right of offset does not exist.

**B.**Inventories

Inventories consist of prescription drugs and medical supplies and are stated at the lower of first-in-first-out cost or net realizable value.

C.Reinsurance Recoverables

Reinsurance recoverables represent amounts due from reinsurers for both paid and unpaid claims of the Company’s insurance businesses and are presented net of allowances for uncollectible reinsurance. The allowances were immaterial as of December 31, 2019 and December 31, 2018. Most reinsurance recoverables are classified as non-current assets. The current portion of reinsurance recoverables is reported in other current assets and consists primarily of recoverables on paid claims expected to be settled within one year.

**D.**Deferred Policy Acquisition Costs

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 issuance and underwriting costs. The Company records acquisition costs differently depending on the product line. Acquisition costs for:

****Supplemental health, life and accident insurance products (primarily individual products) that comprise the majority of the Company’s deferred policy acquisition costs 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.

****Universal life products are deferred and amortized in proportion to the present value of total estimated gross profits over the expected lives of the contracts.

****Other products are expensed as incurred.

Deferred policy acquisition costs also include the value of business acquired (“VOBA”) for certain acquisitions with material long-duration insurance contracts. The Company recorded amortization of deferred policy acquisition costs of $483 million in 2019, $406 million in 2018 and $322 million in 2017 primarily in selling, general and administrative expenses.

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.

**E.**Other Assets (Current and Non-Current)

Other current assets consist primarily of prepaid expenses, accrued investment income and the current portion of reinsurance recoverables. Other non-current assets consist primarily of GMIB assets and various other insurance-related assets. See Note 10 for the Company’s accounting policy for GMIB assets. Additionally, other non-current assets include the carrying value of our equity-method investments in joint ventures in China, India, the U.S. and other foreign jurisdictions.

**F.**Redeemable Noncontrolling Interest

Products and services are offered in Turkey through our joint venture. The Company is the majority equity holder of this joint venture, owning 51%, and accordingly, it is consolidated.

Redeemable noncontrolling interest on our Consolidated Balance Sheets represents the Turkey joint venture partner’s preferred and common stock interests in the entity as of December 31, 2019 and 2018. Our joint venture partner may choose to require the Company to purchase their redeemable noncontrolling interest. We also have the right to require our joint venture partner to sell their redeemable noncontrolling interest to us. The redeemable noncontrolling interest was recorded at fair value as of the date of purchase. When the estimated redemption value for a redeemable noncontrolling interest exceeds its carrying value, an adjustment to increase the redeemable noncontrolling interest is recorded with an offsetting reduction to additional paid-in capital. When an adjustment is made to the carrying value of the redeemable noncontrolling interest, the calculation of shareholders’ net income per share will be adjusted if the redemption value exceeds the greater of the carrying value or fair value.

**G.**Accrued Expenses and Other Current and Non-Current Liabilities

Accrued expenses (current) includes financial and performance guarantee liabilities under pharmacy contracts (see section I), management compensation 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”). Other non-current liabilities include obligations for pension (see Note 16), other postretirement and postemployment benefits, GMIB contract liabilities (see Note 10) and self-insured exposures not expected to be settled within one year.

The Company accrues for legal and regulatory matters when a loss contingency is both probable and estimable. The estimated loss is generally recorded in selling, general and administrative expenses and represents the Company’s best estimate of the loss contingency. If the loss estimate is a range, the Company accrues the minimum amount in the range if no amount is better than any other estimated amount in the range. Legal costs to defend the Company’s litigation and arbitration matters are expensed as incurred in cases that the Company cannot reasonably estimate the ultimate cost to defend. If the Company can reasonably estimate the cost to defend, a liability for these costs is accrued when the claim is reported. Litigation and legal or regulatory matters that the Company has identified with a reasonable possibility of material loss are described in Note 22 to the Consolidated Financial Statements.

**H.**Translation of Foreign Currencies

The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies that are 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.

I. Pharmacy Revenues and Costs

Pharmacy revenues**.** Pharmacy revenues are primarily derived from providing pharmacy benefit management services to clients and customers. Pharmacy revenues are recognized when control of the promised goods or services is transferred to clients and customers, in an amount that reflects the consideration the Company expects to receive for those goods or services.

The Company provides or makes available various services supporting benefit management and claims administration and is generally obligated to provide prescription drugs to clients’ members using multiple distribution methods including retail networks, home delivery and specialty pharmacies. These goods and services are integrated into a single performance obligation to process claims, dispense prescription drugs and provide other services over the contract period (generally three years). This performance obligation is satisfied as the business stands ready to fulfill its obligation.

Revenues for dispensing prescription drugs through retail pharmacies are reported gross and consist of the prescription price (ingredient cost and dispensing fee) contracted with clients, including the customer copayment, and any associated fees for services because the Company acts as the principal in these arrangements. When a prescription is presented to a retail network pharmacy, the Company is solely responsible for customer eligibility, drug utilization review, drug-to-drug interaction review, any required clinical intervention, plan provision information, payment to the pharmacy and client billing. These revenues are recognized based on the full prescription price when the pharmacy claim is processed and approved for payment. The Company also provides benefit design and formulary consultation services to clients and negotiates separate contractual relationships with clients and network pharmacies. These factors indicate that the Company has control over these transactions until the prescription is processed. Revenues are billed,

due and recognized at contract rates either on a periodic basis or as services are provided (such as based on volume of claims processed). This recognition pattern aligns with the benefits from services provided.

Home delivery and specialty pharmacy revenues are due and recognized as each prescription is shipped, net of reserves for discounts and contractual allowances estimated based on historical experience. Any differences between estimates and actual collections are reflected in operations when payments are received. Historically, adjustments to original estimates and returns have not been material. The Company has elected the practical expedient to account for shipping and handling as a fulfillment activity.

We may also provide certain financial and performance guarantees, including a minimum level of discounts a client may receive, generic utilization rates and various service levels. Clients may be entitled to receive compensation if we fail to meet the guarantees. Actual performance is compared to the contractual guarantee for each measure throughout the period and the Company defers revenue for any estimated payouts within accrued expenses and other liabilities (current). These estimates are adjusted at the end of the guarantee period. Historically, adjustments to original estimates have not been material. The performance guarantee liability was $1.0 billion as of December 31, 2019 and $895 million as of December 31, 2018.

The Company administers programs through which we may receive rebates and other vendor consideration from pharmaceutical manufacturers. The amounts of such rebates or other vendor consideration shared with pharmacy benefit management services clients vary based on the contractual arrangement with the client and in some cases the type of consideration received from the pharmaceutical manufacturer. Rebates and other vendor consideration payable to pharmacy benefit management services clients are recorded as a reduction of pharmacy revenues. Estimated amounts payable to clients are based on sharing percentages in contractual arrangements between the Company and the client, and are typically adjusted when amounts are collected from pharmaceutical manufacturers. Historically, these adjustments have not been material.

Other pharmacy service revenues are earned by distributing specialty pharmaceuticals and medical supplies to providers, clinics and hospitals and services to specialty pharmacy manufacturers. These revenues are recognized as prescriptions and supplies are shipped and services are provided.

Pharmacy costs**.** Pharmacy costs include the cost of prescriptions sold, network pharmacy claim costs and copayments. Also included are direct costs of dispensing prescriptions including supplies, shipping and handling, and direct costs associated with clinical programs, such as drug utilization management and medication adherence counseling. Home delivery and specialty pharmacy costs are recognized when the drug is shipped and retail network costs are recognized when the drug is processed and approved for payment. Rebates and other vendor consideration received when providing pharmacy benefit management services are recorded as a reduction of pharmacy costs. Rebates are recognized as prescriptions are shipped or processed and approved for payment. The Company maintains reimbursement guarantees with certain retail network pharmacies. For each such guarantee, the Company records a pharmacy and service costs payable or prepaid asset for applicable retail network claims based on our actual performance throughout the period against the contractual reimbursement rate. The Company’s contracts with certain retail pharmacies give the Company the right to adjust reimbursement rates during the annual guarantee period.

Other**.** Incremental costs of obtaining service and pharmacy contracts for short-term arrangements are expensed as incurred.

**J.**Premiums and Related Expenses

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 Integrated Medical insured business, 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).

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 ACA. 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 our customer demographics and wellness. 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. These adjustments are estimated quarterly based on claim experience by comparing actual incurred drug benefit costs to estimated costs submitted in original contracts. These adjustments 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 may also include 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 ACA.

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 ACA risk corridor programs expired at the end of 2016, while the permanent risk-adjustment program continues.

The 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 customers compared to the risk of other customers in the same state and market, considering data obtained from industry studies and the United States Department of Health and Human Services (“HHS”). Receivables or payables are recorded as adjustments to premium revenue based on our year-to-date experience when the amounts are reasonably estimable and collection is reasonably assured. Final revenue adjustments are determined by HHS in the year following the policy year.

Premiums for individual life, accident and supplemental health insurance and annuity products, excluding universal life and investment-related products, are recognized as revenue when due. Benefits and expenses are matched with premiums.

Revenue for universal life products is recognized as follows:

Investment income on assets supporting universal life products is recognized in net investment income as earned.

Charges for mortality, administration and policy surrender are recognized in premiums as earned. Administrative fees are considered earned when services are provided.

Benefits and expenses for universal life products consist of benefit claims in excess of policyholder account balances and income earned by policyholders. Expenses are recognized when claims are incurred, and income is credited to policyholders in accordance with contract provisions.

The unrecognized portion of premiums received is recorded as unearned premiums included in insurance and contractholder liabilities (see Note 9 for further information).

**K.**Fees and Related Expenses

The majority of the Company’s service fees are derived from administrative services only (“ASO”) arrangements, fee-for-service clinical solutions and health benefit management services.

ASO arrangements allow plan sponsors to self-fund claims and assume the risk of medical or other benefit costs. Most of the Company’s ASO arrangements are for medical and specialty services, including pharmacy benefits. Generally, the Company’s ASO arrangements are short-term. Contract modifications typically occur on renewal and are prospective in nature.

In return for fees from these clients, the Company provides access to our participating provider networks and other services supporting benefit management, including claims administration, behavioral health services, disease management, utilization management and cost containment programs. In general, the Company considers these services to be a combined performance obligation to provide cost effective administration of plan benefits over the contract period. Fees are billed, due and recognized monthly at contracted rates based on current membership or utilization. This recognition pattern aligns with the benefits from services provided to clients. These revenues are reported in fees and other revenues in the Consolidated Statements of Income.

The Company may also provide performance guarantees that provide potential refunds to clients if certain service standards, clinical outcomes or financial metrics are not met. If these standards, outcomes and metrics are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company defers revenue by recording a liability for estimated payouts associated with these guarantees within accrued expenses and other liabilities. The amount of revenue deferred is estimated for each type of guarantee using either a most likely amount or expected value method depending on the nature of the guarantee and the information available to estimate refunds. Estimates are refined each reporting period as additional information on the Company’s performance becomes available and upon final reconciliation and settlement at the end of the guarantee period. Amounts accrued and paid for these performance guarantees during the reporting periods were not material.

Rebates from pharmaceutical manufacturers for ASO client purchases at retail pharmacies, net of amounts payable to ASO clients, were considered compensation for use of the manufacturer’s products and recorded in fees and other revenues prior to transitioning

Integrated Medical’s Commercial customers to Express Scripts’ retail pharmacy network in the third quarter of 2019. After this transition, these rebates are reflected as a reduction to pharmacy costs (See “Pharmacy Costs” above).

Expenses associated with administrative programs and services are recognized as incurred in selling, general and administrative expenses.

The Company also earns revenue, as part of its integrated pharmacy benefits performance obligation, by offering fee-for-service clinical solutions to our clients, such as drug utilization management and medication adherence counseling. These clinical programs help clients to drive better health outcomes at a lower cost by identifying and addressing potentially unsafe or wasteful prescribing, dispensing and utilization of prescription drugs, and communicating with, or supporting communications with physicians, pharmacies and patients. Fees are billed, due and recognized at contracted rates either on a periodic basis or as services are provided. This recognition pattern aligns with the benefits from services provided. These revenues are reported in fees and other revenues in the Consolidated Statements of Income. Direct costs associated with these programs are recognized in pharmacy and other service costs, and other related expenses are recorded as incurred in selling, general and administrative expenses.

The Company also earns fees by providing health benefit management solutions that drive cost reductions and improve quality outcomes. Clients are primarily sponsors of health benefit plans and fees may be stated as a per-member-per-month fee or as a per-claim fee. The Company considers the services to be a single performance obligation to stand ready to provide utilization management services over the contract period (generally three years). In certain arrangements, the Company assumes the financial obligation for third-party provider costs for medical services provided to the health plan’s customers. Fees are recorded gross in fees and other revenues in the Consolidated Statements of Income because the Company is acting as a principal in arranging for and controlling the services provided by third-party network providers. Contractual fees vary based on enrollment and provider costs and are billed, due and recognized monthly. Direct costs associated with these programs are recognized in pharmacy and other service costs, and other related expenses are recorded in selling, general and administrative expenses as incurred.

Certain health benefit management contracts require the Company to share the results of medical cost experience that differ from specified targets. This variable consideration is estimated at contract inception and adjusted through the contract period. The estimated profits and costs are recognized net in fees and other revenues.

Note 3 - Accounts Receivable, Net

Accounting policy. The Company’s accounts receivable balances primarily include amounts due from clients, third-party payors, customers and pharmaceutical manufacturers, and are presented net of allowances. Allowances for doubtful accounts are based on the current status of each customer’s receivable balance as well as current economic and market conditions and a variety of other factors including the length of time the receivables are past due, the financial health of customers and our past experience. We bill pharmaceutical manufacturers based on management’s interpretation of contractual terms and estimate a contractual allowance at the time a claim is processed based on the best information available. Contractual allowances for certain rebates receivable from pharmaceutical manufacturers are determined by reviewing payment experience and specific known items that could be adjusted under contract terms. The Company’s estimation process for contractual allowances for pharmaceutical manufacturer receivables generally results in an allowance for balances outstanding greater than 90 days. Contractual allowances for certain receivables from third-party payors are based on the contractual terms and are estimated based on the Company’s best information available at the time revenue is recognized. Receivables are written off against allowances only when such amounts are determined unrecoverable and all collection attempts have failed. We regularly review the adequacy of these allowances based on a variety of factors, including age of the outstanding receivable and collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted.

The following amounts were included within accounts receivable, net:

(In millions)	2019		2018
Noninsurance customer receivables	$	5,143	$	4,988
Pharmaceutical manufacturers receivable (1)		3,439		3,321
Insurance customer receivables		2,321		1,888
Other receivables		334		276
Total		11,237		10,473
Accounts receivable, net classified as assets held for sale		**(**521)
Accounts receivable, net per Consolidated Balance Sheets	$	10,716	$	10,473
*(1) Includes receivables from service contracts with customers of $**285 million at December 31, 2019 and $*406 million at December 31, 2018.

The receivable balances above are reported net of allowances of $778 million as of December 31, 2019 and $217 million as of December 31, 2018. Reported within these allowances as of December 31, 2019 are contractual allowances for certain rebates receivable from manufacturers of $343 million and contractual allowances from third-party payors of $135 million based upon the contractual payment terms. See the “Pharmacy Revenues and Costs” section within Note 2 for more information regarding these estimates that reduce revenue. The remaining allowances of $300 million include allowances for doubtful accounts based on the factors described above in our Accounting Policy and discounts and claims adjustments issued to customers in the form of client credits.

As part of purchase accounting, Express Scripts’ receivables were recorded at their estimated fair values with no allowances as of December 31, 2018.

Note 4 – Mergers, Acquisitions and Dispositions

**A.**Acquisition of Express Scripts

On December 20, 2018, Cigna acquired Express Scripts through a series of mergers (collectively, the “Merger”). Cigna Holding Company (formerly named Cigna Corporation and referred to as “Old Cigna”) and Express Scripts each merged with and into a wholly-owned subsidiary of Cigna. As a result of these transactions, Cigna became the parent of the combined company. The acquired Express Scripts business accelerates Cigna’s strategy by greatly increasing the Company’s ability to put medicine within reach of customers and also making health care more affordable, predictable and simple.

Old Cigna shareholders received one share of Cigna common stock in exchange for each share of Old Cigna common stock held immediately prior to the Merger. Express Scripts shareholders received (1) 0.2434 of a share of Cigna common stock and (2) cash of $48.75, without interest, subject to applicable withholding taxes (the “Merger Consideration”), in exchange for each share of Express Scripts common stock held immediately prior to the Merger. Cash consideration was funded primarily through a combination of cash available and debt financing discussed further in Note 7. After completing the Merger, shares of Cigna common stock were listed for trading on the New York Stock Exchange.

Merger consideration**:** Total merger consideration of $52.8 billion was calculated as follows:

(Dollars and shares in millions, except per share amounts)
Cash consideration
Express Scripts common stock outstanding					564.3
Cash consideration per share				$	48.75
Cash consideration paid to Express Scripts common stockholders				$	27,510
Cash paid in lieu of fractional shares				$	4
Cash consideration paid to Express Scripts performance shareholders				$	65
Total cash consideration				$	27,579
Stock consideration
Express Scripts common stock outstanding					564.3
Per share exchange ratio					0.2434
Shares of Cigna issued to Express Scripts common stockholders					137.3
Shares of Cigna issued to Express Scripts performance shareholders and other equity holders					0.3
Shares of Cigna issued to Express Scripts shareholders					137.6
Closing price of Cigna common stock on December 20, 2018				$	179.80
Total stock consideration				$	24,745
Noncontrolling interest				$	7
Fair value of other share-based compensation awards				$	479
Total merger consideration				$	52,810

Fair value of share-based compensation award. Express Scripts employees’ awards of options and restricted stock units of Express Scripts stock were rolled over to Cigna stock options and restricted stock units on the date of the acquisition. Each holder of an Express Scripts stock option or restricted stock unit received 0.4802 of a Cigna stock option or restricted stock award. The Cigna stock option exercise price was determined using this same conversion ratio. Vesting periods and the remaining life of the options remained consistent with the original Express Scripts awards.

The Company valued the restricted stock units at Cigna’s stock price and stock options using a Black-Scholes pricing model as of the acquisition date. The assumptions used were generally consistent with the 2018 assumptions disclosed in Note 17, except the expected life of these options averaged 4.3 years and the exercise price did not equal the market value at the date of grant.

The fair value of these options and restricted stock unit awards was included in the purchase price for services that had been provided prior to the acquisition based on the grant date of the original Express Scripts award and vesting period. The remaining fair value not included in the purchase price will be recorded as compensation expense in future periods over the remaining vesting periods. Most of the expense was recognized in 2019 with the balance expected in 2020.

Purchase price allocation: In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s final estimates of their fair values. During 2019 the Company made immaterial measurement period adjustments to the preliminary purchase price allocation. The impact to any financial statement line item of these measurement period adjustments was not material. The following table summarizes management’s final allocation of fair values of assets acquired and liabilities assumed at the closing date.

(In millions)
Cash and cash equivalents		$	3,517
Receivables			7,832
Inventories			2,472
Other current assets			600
Property and equipment			2,924
Goodwill			38,364
Other identifiable intangible assets			38,725
Other assets acquired, non-current			314
Total assets acquired			94,748
Other current liabilities			18,479
Long-term debt, including current portion			12,816
Deferred income tax liabilities			9,558
Other liabilities, non-current			1,085
Total liabilities acquired			41,938
Net assets acquired		$	52,810

Most of the goodwill ($33.7 billion) is assigned to the Health Services segment, with the remainder to the Integrated Medical segment and is not deductible for federal income tax purposes. In addition, a portion of the purchase price has been allocated to intangible assets that are presented and discussed below.

			Estimated		Estimated Useful		Amortization
(In millions)			Fair Value		Life in Years		Method
Customer relationships		$	30,210		**14-**29		Cash flow trended
Internal-use software (1)			2,443		**3-**7		Straight Line
Trade name - Express Scripts			8,400		N/A		Indefinite
Trade name - Other			115		10		Straight Line
Total		$	41,168
(1) Reported in property and equipment.

The fair value of the customer relationships and their amortization periods and method were determined using an income approach that relied heavily on projected future net cash flows including key assumptions for customer attrition, margins, and discount rates. The estimated useful lives reflect the time periods and pattern that Cigna expects to receive the benefits of the related cash flows.

The results of Express Scripts have been included in the Company’s Consolidated Financial Statements from the date of the acquisition. Revenues of Express Scripts included in the Company’s results for 2018 approximated $2.6 billion and Express Scripts’ results of operations were immaterial to Cigna's net income.

Unaudited pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of Express Scripts had occurred on January 1, 2017. The primary adjustments reflected in the pro forma results relate to the interest expense on the debt issued to fund the Merger, the amortization of the acquired intangible assets and the presentation of transaction related costs. Transaction related costs incurred by the Company and Express Scripts in 2018 have been presented as if they had been incurred on January 1, 2017. The pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

		Unaudited
		Year Ended December 31,
(In millions)			2018		2017
Total revenues		$	149,544	$	143,288
Shareholders’ net income		$	5,632	$	4,435

Pro forma shareholders’ net income for the year ended December 31, 2017 includes $1.2 billion in integration and transaction-related costs incurred in connection with the acquisition.

**B.**Integration and Transaction-related Costs

The Company has incurred costs detailed in the table below related to the acquisition and integration of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”) and other transactions. These costs consisted primarily of certain projects to integrate the Company’s systems, products and services, fees for legal, advisory and other professional services and certain employment-related costs. Costs in 2018 also included charitable contributions and amortization of certain financing fees and interest expense on the debt issued in the third quarter of 2018 to fund the Express Scripts merger, net of investment income earned on proceeds of the debt issuance.

		2019				2018				2017
(In millions)		Before-tax		After-tax		Before-tax		After-tax		Before-tax		After-tax
Integration costs		$		$		$		$		$		$
Interest expense on newly-issued debt			-		-		227		179		-		-
Net investment income on debt proceeds			-		-		(123)		(97)		-		-
Charitable contributions			-		-		200		158		-		-
Legal and advisory fees			53		41		204		185		36		23
Bridge facility fees			-		-		140		111		-		-
All other transaction-related costs			499		386		204		133		90		69
Tax (benefit) - previously non-deductible costs					-				-				(59)
Integration and transaction-related costs, net		$	552	$	427	$	852	$	669	$	126	$	33

Note 5 – Assets and Liabilities of Business Held for Sale

Accounting Policy. The Company classifies assets and liabilities as held for sale (“disposal group”) when management commits to a plan to sell the disposal group, the sale is probable within one year and the disposal group is available for immediate sale in its present condition. The Company considers various factors, particularly whether actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Assets held for sale are measured at the lower of carrying value or fair value less costs to sell. Any loss resulting from the measurement is recognized in the period the held-for-sale criteria are met. Conversely, gains are not recognized until the date of the sale. When the disposal group is classified as held for sale, depreciation and amortization ceases and the Company tests the assets for impairment.

In December 2019, Cigna entered into a definitive agreement to sell its Group Disability and Life insurance business to New York Life Insurance Company for $6.3 billion. The sale is expected to close in the third quarter of 2020 following applicable regulatory approvals and other customary closing conditions. The Company believes this sale is probable and has aggregated and classified the assets and liabilities directly associated with the pending sale of its Group Disability and Life insurance business as held for sale and has reported them separately on our Consolidated Balance Sheet as of December 31, 2019. The assets and liabilities held for sale were as follows:

(In millions)		December 31, 2019
Cash and cash equivalents		$	743
Accounts receivable, net			521
Investments			7,709
Other assets			539
Total assets held for sale		$	9,512
Insurance and contractholder liabilities		$	6,308
Other liabilities			504
Total liabilities held for sale		$	6,812

The business did not meet the criteria to be classified as a discontinued operation as the sale of the business will not have a major effect on the Company’s operations and financial results.

Note 6 – Earnings Per Share (“EPS”)

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.

Basic and diluted earnings per share were computed as follows:

			2019						2018						2017
(Shares in thousands, dollars in millions, except per share amounts)				Effect of						Effect of						Effect of
Basic		Dilution		Diluted		Basic		Dilution		Diluted		Basic		Dilution		Diluted
Shareholders’ net income		$	5,104			$	5,104	$	2,637	$		$	2,637	$	2,237			$	2,237
Shares
Weighted average			375,919				375,919		246,652				246,652		250,892				250,892
Common stock equivalents					3,898		3,898				3,573		3,573				4,180		4,180
Total shares			375,919		3,898		379,817		246,652		3,573		250,225		250,892		4,180		255,072
EPS		$	13.58	$	**(**0.14)	$	13.44	$	10.69	$	(0.15)	$	10.54	$	8.92	$	(0.15)	$	8.77

The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive.

(In millions)	2019	2018	2017
Anti-dilutive options	3.5	0.9	0.9

Note 7 – Debt

The outstanding amounts of debt and finance leases were as follows:

		December 31,		December 31,
(In millions)	Issuer(s)	2019		2018
Short-term debt
Current maturities: $1,000 million, 2.25% Notes	Express Scripts (1)	$	-	$	995
Current maturities: $337 million, 7.25% Notes	ESI (1)		-		343
Current maturities: $1,000 million, Floating Rate Notes	Cigna		999		-
Current maturities: $300 million, 5.125% Notes	Old Cigna		300		-
Current maturities: $1,750 million, 3.2% Notes	Cigna		1,748		-
Current maturities: $349 million, 4.125% Notes	Cigna		351		-
Current maturities: $500 million, 2.6% Notes	Express Scripts		496		-
Current maturities: $400 million, Floating Rate Notes	Express Scripts		400		-
Current maturities: $250 million, 4.375% Notes	Old Cigna		249		-
Commercial paper	Cigna/Old Cigna		944		1,500
Other, including finance leases	Other		27		117
Total short-term debt		$	5,514	$	2,955
Long-term debt
$250 million, 4.375% Notes due 2020	Old Cigna	$	-	$	248
$300 million, 5.125% Notes due 2020	Old Cigna		-		298
$500 million, 4.125% Notes due 2020	Medco (1)		-		506
$500 million, 2.6% Notes due 2020	Express Scripts		-		493
$1,750 million, 3.2% Notes due 2020	Cigna		-		1,743
$400 million, Floating Rate Notes due 2020	Express Scripts		-		399
$1,000 million, Floating Rate Notes due 2020	Cigna		-		997
$3,000 million, Floating Rate Term Loan due 2021	Cigna		-		2,997
$500 million, 3.3% Notes due 2021	Cigna/Express Scripts (2)		499		499
$300 million, 4.5% Notes due 2021	Cigna/Old Cigna (2)		298		297
$78 million, 6.37% Notes due 2021	Other		78		78
$1,000 million, Floating Rate Notes due 2021	Cigna		998		996
$1,250 million, 3.4% Notes due 2021	Cigna		1,247		1,245
$1,248 million, 4.75% Notes due 2021	Cigna/Express Scripts (2)		1,272		1,285
$750 million, 4% Notes due 2022	Cigna/Old Cigna (2)		747		746
$999 million, 3.9% Notes due 2022	Cigna/Express Scripts (2)		999		998
$500 million, 3.05% Notes due 2022	Cigna/Express Scripts (2)		485		481
$17 million, 8.3% Notes due 2023	Cigna/Old Cigna (2)		17		17
$100 million, 7.65% Notes due 2023	Cigna/Old Cigna (2)		100		100
$700 million, Floating Rate Notes due 2023	Cigna		698		697
$1,000 million, 3% Notes due 2023	Cigna/Express Scripts (2)		966		959
$3,100 million, 3.75% Notes due 2023	Cigna		3,088		3,085
$1,000 million, 3.5% Notes due 2024	Cigna/Express Scripts (2)		970		966
$900 million, 3.25% Notes due 2025	Cigna/Old Cigna (2)		895		895
$2,200 million, 4.125% Notes due 2025	Cigna		2,188		2,187
$1,500 million, 4.5% Notes due 2026	Cigna/Express Scripts (2)		1,506		1,508
$1,500 million, 3.4% Notes due 2027	Cigna/Express Scripts (2)		1,396		1,386
$259 million, 7.875% Debentures due 2027	Cigna/Old Cigna (2)		259		259
$600 million, 3.05% Notes due 2027	Cigna/Old Cigna (2)		595		595
$3,800 million, 4.375% Notes due 2028	Cigna		3,776		3,774
$45 million, 8.3% Step Down Notes due 2033	Cigna/Old Cigna (2)		45		45
$190 million, 6.15% Notes due 2036	Cigna/Old Cigna (2)		190		190
$2,200 million, 4.8% Notes due 2038	Cigna		2,178		2,178
$121 million, 5.875% Notes due 2041	Cigna/Old Cigna (2)		119		119
$449 million, 6.125% Notes due 2041	Cigna/Express Scripts (2)		491		493
$317 million, 5.375% Notes due 2042	Cigna/Old Cigna (2)		315		315
$1,500 million, 4.8% Notes due 2046	Cigna/Express Scripts (2)		1,465		1,465
$1,000 million, 3.875% Notes due 2047	Cigna/Old Cigna (2)		988		988
$3,000 million, 4.9% Notes due 2048	Cigna		2,964		2,964
Other, including finance leases	Other		61		32
Total long-term debt		$	31,893	$	39,523
(1) Express Scripts Holding Company is identified as Express Scripts. Express Scripts, Inc. is identified as ESI. Medco Health Solutions, Inc. is identified as Medco.
(2) Due to the Exchange of legacy Notes for Cigna Notes, there are two series of outstanding Notes.

Debt repayment. During 2019, the Company repaid approximately $5.2 billion of outstanding obligations, including the $3.0 billion term loan, $1.3 billion in current maturities of long-term debt, $0.7 billion in short term debt and $151 million for the early redemption of the Medco Notes.

Exchange of Legacy Notes for Cigna Notes and Redemption of Medco Notes. In the fourth quarter of 2019, the Company completed an exchange of $12.7 billion of legacy Notes issued by Express Scripts, Medco and Old Cigna for new Notes issued by Cigna with the same interest rates, maturities and other comparable terms. The Company entered into this exchange primarily to simplify its capital structure and reporting obligations. Additionally, in the fourth quarter of 2019, the Company fully redeemed all of the remaining outstanding Medco Notes. As a result of the exchange and redemption, guarantees of obligations under the remaining legacy Notes not exchanged, as well as under Notes issued by Cigna in September 2018 to finance its acquisition of Express Scripts, were released and Cigna is no longer required to separately present Condensed Consolidated Financial Information under Rule 3-10 of Regulation S-X.

Term Loan Credit Agreement. Cigna borrowed $3.0 billion under its Term Loan Credit Agreement to finance the Merger and to pay fees and expenses of the Merger. As of December 31, 2019, the Company repaid the term loan in full and the agreement was terminated.

Notes issued to fund the Express Scripts acquisition. In the third quarter of 2018, the Company issued private placement Notes with registration rights to finance the Express Scripts acquisition. Total proceeds were approximately $20.0 billion. Interest on this debt is generally paid semi-annually except for quarterly interest payments on the floating rate notes. We completed an exchange offer to register such debt in the third quarter of 2019.

Revolving Credit Agreements. Cigna has a Revolving Credit and Letter of Credit Agreement (the “Revolving Credit Agreement”) that matures on April 6, 2023 and is diversified among 23 banks. Cigna can borrow up to $3.25 billion for general corporate purposes, with up to $500 million to issue letters of credit, net of $10 million of letters of credit outstanding under the Revolving Credit Agreement as of December 31, 2019. The Revolving Credit Agreement also includes an option to increase the facility amount up to $500 million and an option to extend the termination date for additional one-year periods, subject to consent of the banks.

In the fourth quarter of 2019, Cigna entered into an additional 364-day revolving credit agreement that matures in October 2020 and is diversified among 23 banks. Under this revolving credit agreement, Cigna can borrow up to $1.0 billion for general corporate purposes. The agreement includes the option to “term out” any revolving loans that are outstanding at maturity by converting them into a term loan maturing on the one-year anniversary of conversion.

The revolving credit agreements contain customary covenants and restrictions including a financial covenant that the Company’s leverage ratio may not exceed 60%.

Commercial Paper outstanding as of December 31, 2019 had an average interest rate of 2.11%.

The Company was in compliance with its debt covenants as of December 31, 2019.

Maturities of outstanding long-term debt and finance leases are as follows:

	Scheduled Maturities
(In millions)	Long-term Debt (1)		Finance Leases
2020	$	4,549	$	27
2021	$	4,376	$	18
2022	$	2,249	$	16
2023	$	4,917	$	7
2024	$	1,000	$	5
Maturities after 2024	$	19,581	$	15
(1) Long-term debt maturity amounts include current maturities of long-term debt and exclude maturities of finance leases.

Interest expense on long-term and short-term debt was $1.6 billion in 2019, $507 million in 2018 and $243 million in 2017, excluding $209 million after-tax loss on the early extinguishment of debt in 2017.

Note 8 – Common and Preferred Stock

As a result of Cigna's acquisition of Express Scripts on December 20, 2018, Old Cigna shareholders exchanged each of their shares for a share of Cigna common stock and shareholders of Express Scripts received 0.2434 of a share of Cigna (and $48.75 in cash) for each share of Express Scripts. Following the Merger, Old Cigna was de-listed and shares of Cigna were listed on the New York Stock Exchange for trading.

Cigna (and, prior to the Merger, Old Cigna) has a total of 25 million shares of $1 par value preferred stock authorized for issuance. No shares of preferred stock were outstanding at December 31, 2019, 2018 or 2017.

The following table presents the share activity of Old Cigna and Cigna for the years ended December 31, 2019, 2018 and 2017.

(Shares in thousands)	2019	2018	2017
**Common: Par value $**0.25; 600,000 shares authorized - Old Cigna
Outstanding - January 1,		243,967	256,869
Issued for stock option exercises and other benefit plans		1,118	2,761
Repurchased common stock		(1,300)	(15,663)
Balance, December 20, 2018 (Merger Date)		243,785
Exchange of Old Cigna shares for shares of Cigna		(243,785)
Outstanding - December 31,		-	243,967
Retirement of treasury stock on December 20, 2018		(52,358)
Exchange of Old Cigna certificated treasury stock for new Cigna certificated treasury stock		(2)
Treasury stock - December 31,		-	52,178
Issued - December 31,		-	296,145
**Common: Par value $**0.01; 600,000 shares authorized - Cigna
Outstanding - January 1,	380,924	-
Shares issued to Old Cigna shareholders		243,785
Shares issued to Express Scripts shareholders		137,337
Issued for stock option exercises and other benefit plans	3,413	91
Repurchased common stock	**(**11,806)	(289)
Outstanding - December 31,	372,531	380,924
Treasury stock	13,012	570
Issued - December 31,	385,543	381,494

Note 9 – Insurance and Contractholder Liabilities

A. Account Balances – Insurance and Contractholder Liabilities

As of December 31, 2019 and 2018, the Company’s insurance and contractholder liabilities were comprised of the following:

		December 31, 2019						December 31, 2018
(In millions)		Current		Non-current		Total		Current		Non-current		Total
Contractholder deposit funds	$	600	$	7,139	$	7,739	$	641	$	7,365	$	8,006
Future policy benefits		553		9,281		9,834		740		8,981		9,721
Unpaid claims and claim expenses
Integrated Medical		2,875		17		2,892		2,678		19		2,697
Other segments		2,529		3,474		6,003		2,394		3,230		5,624
Unearned premiums		453		360		813		348		379		727
Total		7,010		20,271		27,281		6,801		19,974		26,775
Insurance and contractholder liabilities classified as liabilities held for sale (1)		**(**2,089)		**(**4,219)		**(**6,308)
Insurance and contractholder liabilities per Consolidated Balance Sheets	$	4,921	$	16,052	$	20,973	$	6,801	$	19,974	$	26,775
*(1) Amounts classified as liabilities held for sale primarily include $**4.9 billion of unpaid claims, $**717 million of contractholder deposit funds and $*653 million of future policy benefits.

Insurance and contractholder liabilities expected to be paid within one year are classified as current.

Accounting Policy - Contractholder Deposit Funds. 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.

Accounting Policy - Future Policy Benefits. 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 10 for additional information) and certain health, life and accident insurance products of our International Markets segment.

Obligations for annuities represent specified periodic benefits to be paid to an individual or groups of individuals over their remaining lives. Obligations for life insurance policies and GMDB contracts represent benefits expected to be paid to policyholders, net of future premiums expected to be received. Management estimates these obligations based on assumptions as to premiums, interest rates, mortality or morbidity, future claim adjudication expenses and surrenders, allowing for adverse deviation as appropriate. Mortality, morbidity and surrender assumptions are based on the Company’s own experience and published actuarial tables. Interest rate assumptions are based on management’s judgment considering the Company’s experience and future expectations, and range from 1% to 9%. Obligations for the run-off settlement annuity business include adjustments for realized and unrealized investment returns consistent with GAAP when a premium deficiency exists.

B. Unpaid Claims and Claim Expenses – Integrated Medical

This liability 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.

Accounting policy. The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

The Company compares key assumptions used to establish the medical costs payable to actual experience for each reporting period. The unpaid claims liability is adjusted through current period shareholders’ net income when actual experience differs from these assumptions. 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 trend.

The 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.

The Company relies more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations for more recent months. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of health 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.

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at December 31, 2019 and $2.5 billion at December 31, 2018.

Activity in the unpaid claims liability for the Integrated Medical segment for the years ended December 31 was as follows:

(In millions)	2019		2018		2017
Balance at January 1,	$	2,697	$	2,420	$	2,261
Less: Reinsurance and other amounts recoverable		264		262		273
Balance at January 1, net		2,433		2,158		1,988
Acquired, net		-		40		-
Incurred costs related to:
Current year		24,368		21,331		19,334
Prior years		**(**165)		(173)		(227)
Total incurred		24,203		21,158		19,107
Paid costs related to:
Current year		21,851		18,978		17,179
Prior years		2,196		1,945		1,758
Total paid		24,047		20,923		18,937
Balance at December 31, net		2,589		2,433		2,158
Add: Reinsurance and other amounts recoverable		303		264		262
Balance at December 31,	$	2,892	$	2,697	$	2,420

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business for which the Company administers the plan benefits without any right of offset. See Note 10 for additional information on reinsurance.

Variances in incurred costs related to prior years’ unpaid claims and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions were as follows:

		Year Ended
(Dollars in millions)		December 31, 2019			December 31, 2018
			$	%(1)			$	%(2)
Actual completion factors		$	90	0.4	%	$	92	0.5	%
Medical cost trend			75	0.4			72	0.4
Other			-	-			9	-
Total favorable variance		$	165	0.8	%	$	173	0.9	%
(1) Percentage of current year incurred costs as reported for the year ended December 31, 2018.
(2) Percentage of current year incurred costs as reported for the year ended December 31, 2017.

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

Prior year development increased shareholders’ net income by $67 million ($85 million before-tax) for the year ended December 31, 2019, compared with $77 million ($97 million before-tax) for the year ended December 31, 2018. Favorable prior year development in both years reflects lower than expected utilization of medical services.

The following table depicts the incurred and paid claims development as of December 31, 2019 (net of reinsurance), claims frequency metrics and incurred but not reported liabilities reported in the Integrated Medical segment. The information about incurred and paid claims development for the year ended December 31, 2018 is presented as supplementary information and is unaudited.

	Incurred Costs
Incurral Year	2018 (Unaudited)		2019		Unpaid Claims & Claim Expenses		Claims Frequency
(In millions)
2018	$	20,458	$	20,320	$	58		2.9 million
2019				23,306	$	2,386		3.5 million
Cumulative incurred costs plus acquired for the periods presented			$	43,626
	Cumulative Costs Paid
Incurral Year	2018 (Unaudited)		2019
2018	$	18,192	$	20,262
2019				20,920
Cumulative paid costs for the periods presented			$	41,182
Outstanding liabilities for the periods presented, net of reinsurance			$	2,444
Other long-duration liabilities not included in development table above				145
Net unpaid claims and claims expenses - Integrated Medical				2,589
Reinsurance and other amounts recoverable				303
Unpaid claims and claim expenses - Integrated Medical			$	2,892

More than 95% of health claims for an accident year are paid within one year of their incurred date.

There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is the number of customers for whom an insured medical claim was paid. Customers for whom no insured medical claim was paid are excluded from the calculation. Claims that did not result in a liability are not included in the frequency metric.

C. Unpaid Claims and Claim Expenses – Group Disability and Other and International Markets

Accounting policy. Liabilities for unpaid claims and claim expenses are established by book of business within Group Disability and Other and International Markets. Unpaid claims and claim expenses within the Group Disability and Other and International Markets segments consist of (1) case or claims reserves for reported claims that are unpaid as of the balance sheet date; (2) incurred but not reported reserves for claims when the insured event has occurred but has not been reported to the Company and (3) loss adjustment expense reserves for the expected costs of settling these claims. The Company consistently estimates incurred but not yet reported losses using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the expected payment period. The Company recognizes the actuarial best estimate of the ultimate liability within a level of confidence, consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions. The Company immediately records an adjustment in medical costs and other benefit expenses when estimates of these liabilities change.

Liabilities for unpaid claims and claim expenses within the group disability and life business reflect the following primary products: long-term and short-term disability, life insurance and accident coverages. The majority of the Company’s liability for disability claims consists of “disabled life reserves”, measured as the present value of estimated future benefit payments, including expected development, for each reported claim that is currently receiving benefit payments over the expected disability period or pending a decision on eligibility for benefits. The Company projects the expected disability period by using historical resolution rates combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. Expected claim resolution rates may vary based upon the Company’s experience for the anticipated disability period, the covered benefit period, the cause of disability, the benefit design and the claimant’s age, gender and income level. The gross monthly benefit is reduced (offset) by disability income received under other benefit programs, most commonly Social Security Disability Income, workers’ compensation, statutory disability or other group benefit plans. The Company estimates the probability and amount of future offset awards and lapses based on the Company’s experience for certain offsets not yet finalized.

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 of 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.

Liability balance details. The liability details for unpaid claims and claim expenses are as follows:

(In millions)	2019(1)		2018
International Markets	$	844	$	758
Group Disability and Other
Group Disability and Life		4,972		4,674
Other Operations		187		192
Total Group Disability and Other		5,159		4,866
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	6,003	$	5,624
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.

The Company discounts certain liabilities, predominantly long-term disability liabilities, because benefits payments are made over extended periods. Discount rate assumptions for these liabilities are based on projected investment returns for the supporting asset portfolios. Details of the Company’s Group Disability and Life unpaid claim discounted liability balance as of December 31 were as follows:

(In billions)		2019(1)							2018
Discounted liabilities	$				4.5		$				4.2
Aggregate amount of discount	$				1.2		$				1.1
Range of discount rates		4.0	%	-	5.2	%		4.2	%	-	5.2	%
(1) Includes unpaid claims amounts classified as Liabilities held for sale.

Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.

(In millions)	2019(1)		2018		2017
Balance at January 1,	$	5,432	$	5,274	$	4,997
Less: Reinsurance		156		140		123
Balance at January 1, net		5,276		5,134		4,874
Incurred claims related to:
Current year		5,616		5,350		5,097
Prior years
Interest accretion		152		156		163
All other incurred		**(**40)		(147)		(43)
Total incurred		5,728		5,359		5,217
Paid claims related to:
Current year		3,488		3,391		3,229
Prior years		1,873		1,808		1,757
Total paid		5,361		5,199		4,986
Acquisitions		-		23		-
Foreign currency		**(**11)		(41)		29
Balance at December 31, net		5,632		5,276		5,134
Add: Reinsurance		184		156		140
Balance at December 31,	$	5,816	$	5,432	$	5,274
(1) Includes unpaid claims amounts classified as Liabilities held for sale.

Reinsurance in the table above reflects 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 10 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 and reported in medical costs and other benefit expenses in the income statement. 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. Favorable prior year incurred claims for the years ended December 31, 2019 and December 31, 2018 primarily reflect favorable long-term disability and life experience. The favorable experience is driven by higher resolution rate experience relative to expectations reflected in the prior year reserve and lower than expected incidence.

Long-term disability development tables. The table below presents information about incurred and paid claims development as of December 31, 2019 (net of reinsurance), total incurred but not reported liabilities and cumulative claims frequency for the Company’s long-term disability book of business. The information about incurred and paid claims development for the years ended 2012 through 2018 is presented as supplementary information and is unaudited. As permitted under GAAP, the Company presents development table information beginning in 2012 because obtaining information beyond this period was impracticable as historical data was not maintained in such detail

(In millions, except for claims frequency)
																	Incurred
	Incurred Claims (undiscounted)																But Not
	Unaudited																Reported		Claims
Accident Year		2012	2013		2014		2015		2016		2017		2018		2019		Liabilities (1)		Frequency
2012	$	995	$	951	$	889	$	876	$	883	$	880	$	861	$	860	$	-		21,186
2013				1,063		1,037		1,062		1,072		1,057		1,032		1,030		-		23,526
2014						1,158		1,129		1,167		1,146		1,094		1,081		-		25,324
2015								1,184		1,154		1,185		1,160		1,148		-		25,781
2016										1,246		1,184		1,199		1,202		-		25,577
2017												1,226		1,193		1,207		1		23,959
2018														1,348		1,267		10		25,154
2019																1,434		533		13,061
Cumulative incurred claims for the periods presented															$	9,229
(1) Incurred but not reported amounts are included in 2019 incurred claims.
	Cumulative Paid Claims
	Unaudited
Accident Year		2012	2013		2014		2015		2016		2017		2018		2019
2012	$	81	$	288	$	429	$	504	$	571	$	621	$	661	$	693
2013				92		342		503		600		670		732		780
2014						111		379		575		667		743		803
2015								114		417		603		702		783
2016										122		411		598		709
2017												110		396		590
2018														116		434
2019																126
Cumulative paid claims for the periods presented															$	4,918
All outstanding liabilities for the periods presented, net of reinsurance															$	4,311
All outstanding liabilities prior to 2012, net of reinsurance																771
Impact of discounting																**(**891)
Liability for long-term disability unpaid claims and claim expenses, net of reinsurance (1)(2)															$	4,191
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.
*(2) Includes approximately $*3.5 billion of disabled life reserves for individuals on long-term disability.

The claims frequency metric used for the Company’s long-term disability line of business represents the number of unique claim events for which benefits have been approved and payments made. Claim events are assigned a unique claimant identifier and incurral date. Thus, if an individual has multiple claims for different disabling events (and therefore different incurral dates), each will be determined to be a unique claim event. However, if an individual receives multiple benefits under more than one policy (for example for supplemental disability benefits such as pension contribution benefits or survivor benefits), the Company treats this as a single claim occurrence because they related to the same claim event. Claims frequency metrics for the most recent year are expected to be low reflecting the long-term disability product features including waiting and elimination periods that result in delayed eligibility for contract benefits. Claims that did not result in a liability are not included in the frequency metric.

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, 2019. The average annual percentage payout of incurred claims, net of reinsurance, is approximately 9% in year one, 25% in year two, 16% in year three, 9% in year four, 7% in year five, 6% in year six, 5% in year seven and 4% in year eight.

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, 2019.

(In millions)
Net outstanding liabilities – Group Disability and Life businesses
Long-term disability liabilities, net of reinsurance	$	4,191
Other short-duration insurance books of business, net of reinsurance		652
Liabilities for unpaid claims and claim expenses, net of reinsurance		4,843
Reinsurance recoverable on unpaid claims – Group Disability and Life businesses
Long-term disability		117
Other short-duration insurance books of business		12
Total reinsurance recoverable on unpaid claims		129
Total liability for unpaid claims and claim expenses – Group Disability and Life businesses		4,972
International Markets segment		844
Other Operations		187
Unpaid claims and claim expenses - Group Disability and Other and International Markets(1)	$	6,003
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.

The Group Disability and Life and International Markets books of business, net of reinsurance, also include liabilities for life, accident and short-term disability insurance products. Liabilities for these products are typically complete within one year. Claim development on these liabilities is largely driven by completion factors and loss ratio assumptions.

Note 10 – Reinsurance

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance is also used to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. 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.**Reinsurance Recoverables

The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Components of the Company’s reinsurance recoverables are presented in the following table. The table below includes $222 million as of December 31, 2019 and $297 million as of December 31, 2018 of current reinsurance recoverables that are reported in other current assets.

(Dollars in millions)			December 31,		December 31,				Collateral and Other Terms
	Line of Business	Reinsurer(s)	2019 (1)		2018				at December 31, 2019
Ongoing Operations
	Integrated Medical, International Markets, Group Disability, COLI(1)	Various	$	514	$	464			Balances range from less than $1 million up to $72 million. Approximately 70% of the balance is from companies rated as investment grade by Standard & Poor’s.
	Total recoverables related to ongoing operations			514		464
Acquisition, disposition or runoff activities
	Individual Life and Annuity (sold in 1998)	Lincoln National Life and Lincoln Life & Annuity of New York		3,174		3,312			Both companies’ ratings were well above the level that would trigger a contractual obligation to fully secure the outstanding balance.
	GMDB (effectively exited in 2013)	Berkshire		787		893			100% secured by assets in a trust.
	Retirement Benefits Business (sold in 2004)	Prudential Retirement Insurance and Annuity		711		787			100% secured by assets in a trust.
	Supplemental Benefits Business (2012 acquisition)	Great American Life		238		261			100% secured by assets in a trust.
	Other	Various		71		87			100% secured by assets in a trust or other deposits.
	Total recoverables related to acquisition, disposition or runoff activities			4,981		5,340
Total reinsurance recoverables			$	5,495	$	5,804
*(1) Includes $*173 million of recoverables classified as Assets held for sale.

The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables if recovery is not considered probable.

**B.**Effects of Reinsurance

The following table presents direct, assumed and ceded premiums for both short-duration and long-duration insurance contracts. It also presents reinsurance recoveries that have been netted against benefit expenses in the Company’s Consolidated Statements of Income.

(In millions)	2019		2018		2017
Premiums
Short-duration contracts
Direct	$	35,690	$	32,148	$	28,838
Assumed		64		77		199
Ceded		**(**203)		(182)		(150)
Total short-duration contract premiums		35,551		32,043		28,887
Long-duration contracts
Direct		4,352		4,268		3,748
Assumed		105		116		130
Ceded
Individual life insurance and annuity business sold		**(**126)		(133)		(143)
Other		**(**168)		(181)		(131)
Total long-duration contract premiums		4,163		4,070		3,604
Total premiums	$	39,714	$	36,113	$	32,491
Reinsurance recoveries
Individual life insurance and annuity business sold	$	238	$	249	$	259
Other		157		203		66
Total reinsurance recoveries	$	395	$	452	$	325

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.

**C.**Effective Exit of GMDB and GMIB Business

The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013. 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 $3.3 billion remaining at December 31, 2019.

GMDB is accounted for as reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below. GMIB assets are reported in other current assets and other assets and GMIB liabilities are reported in accrued expenses and other liabilities and other non-current liabilities.

GMDB

The GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death. The Company’s exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death.

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 following table presents the account value, net amount at risk and the number of contractholders for guarantees assumed by the Company in the event of death. The net amount at risk is the amount that the Company would have to pay in excess of the contractholders’ account value if all contractholders died as of the specified date. The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.

	December 31,		December 31,
(Dollars in millions, excludes impact of reinsurance ceded)	2019		2018
Account value	$	9,110	$	8,402
Net amount at risk	$	1,764	$	2,466
Average attained age of contractholders (weighted by exposure)		76		74
Number of contractholders (estimated)		200,000		220,000

GMIB

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 related underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that can only occur within 30 days of a policy anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage (“GMIB assets”) for these contracts including retrocessional coverage from Berkshire.

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. The Company receives and pays fees periodically 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.

Assumptions used in fair value measurement**.** GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates). The Company classifies GMIB assets and liabilities in Level 3 of the fair value hierarchy described in Note 12 because assumptions related to future annuitant behavior are largely unobservable.

The only assumption expected to impact future shareholders’ net income is non-performance risk. The non-performance risk adjustment reflects a market participant’s view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company and (b) the GMIB assets to be paid by the reinsurers, after considering collateral. The impact of non-performance risk was immaterial for twelve months ended December 31, 2019 and 2018.

GMIB liabilities totaling $688 million as of December 31, 2019 and $706 million as of December 31, 2018 were reported in accrued expenses and other liabilities and other non-current liabilities. There were three reinsurers covering 100% of the GMIB exposures as of December 31, 2019 and December 31, 2018 as follows:

(In millions)
Line of Business	Reinsurer	December 31, 2019		December 31, 2018			Collateral and Other Terms at December 31, 2019
GMIB	Berkshire	$	332	$	341		100% were secured by assets in a trust.
	Sun Life Assurance Company of Canada		202		208
	Liberty Re (Bermuda) Ltd.		179		184		96% were secured by assets in a trust.
Total GMIB recoverables reported in other current assets and other assets		$	713	$	733

Amounts included in shareholders net income for GMIB assets and liabilities were not material in 2019, 2018 or 2017.

Note 11 – Investments, Investment Income and Gains and Losses

Cigna’s investment portfolio consists of a broad range of investments including debt securities, equity securities, commercial mortgage loans, policy loans, other long-term investments, short-term investments and derivative financial instruments. The sections below provide more detail regarding our accounting policies, investment balances, net investment income and realized investment gains and losses. See Note 12 for information about valuing the Company’s investment portfolio. Debt securities, commercial mortgage loans, derivative financial instruments and short-term investments with contractual maturities during the next twelve months are classified on the balance sheet as current investments, unless they are held as statutory deposits or restricted for other purposes and then they are classified in long-term investments. Equity securities may include exchange traded funds that are used in our cash management strategy and classified as current investments. All other investments are classified as long-term investments. The following table summarizes the Company’s investments by category and current or long-term classification.

		December 31, 2019 (1)						December 31, 2018
(In millions)		Current		Long-term		Total		Current		Long-term		Total
Debt securities	$	928	$	22,827	$	23,755	$	1,320	$	21,608	$	22,928
Equity securities		-		303		303		377		171		548
Commercial mortgage loans		-		1,947		1,947		32		1,826		1,858
Policy loans		-		1,357		1,357		-		1,423		1,423
Other long-term investments		-		2,403		2,403		-		1,901		1,901
Short-term investments		423		-		423		316		-		316
Total		1,351		28,837		30,188		2,045		26,929		28,974
Investments classified as assets held for sale (1)		**(**414)		**(**7,295)		**(**7,709)
Investments per Consolidated Balance Sheets	$	937	$	21,542	$	22,479	$	2,045	$	26,929	$	28,974
*(1) The table above includes $*7.7 billion of investments associated with the Group Disability and Life business that is held for sale to New York Life. Under the terms of the definitive agreement, some of the assets currently associated with the Group Disability and Life business can be substituted for other assets. The assets that will transfer to New York Life will be primarily debt securities and to a lesser extent commercial mortgage loans and short-term investments.

**A.**Investment Portfolio

Debt Securities

Accounting policy. Debt securities (including bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor) are classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within shareholders’ equity. Net unrealized appreciation on debt securities supporting the Company’s run-off settlement annuity business is reported in future policy benefit liabilities rather than accumulated other comprehensive income (loss).

The Company records impairment losses in net income for debt securities with fair value below amortized cost that meet either of the following conditions:

If the Company intends to sell or determines that it is more likely than not to be required to sell these debt securities before their fair values recover, an impairment loss is recognized for the excess of the amortized cost over fair value.

If the net present value of projected future cash flows of a debt security (based on qualitative and quantitative factors, including the probability of default, and the estimated timing and amount of recovery) is below the amortized cost basis, that difference is recognized as an impairment loss. For mortgage and asset-backed securities, estimated future cash flows are also based on assumptions about the collateral attributes including prepayment speeds, default rates and changes in value.

Debt securities are classified as either current or long-term investments based on their contractual maturities.

The amortized cost and fair value by contractual maturity periods for debt securities were as follows at December 31, 2019:

	Amortized		Fair
(In millions)	Cost		Value
Due in one year or less	$	920	$	932
Due after one year through five years		7,176		7,452
Due after five years through ten years		9,098		9,644
Due after ten years		4,209		5,191
Mortgage and other asset-backed securities		506		536
Total	$	21,909	$	23,755

Actual maturities of these securities could differ from their contractual maturities used in the table above because issuers may have the right to call or prepay obligations, with or without penalties.

Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below.

	Amortized		Unrealized		Unrealized		Fair
(In millions)	Cost		Appreciation		Depreciation		Value
December 31, 2019
Federal government and agency	$	498	$	235	$	-	$	733
State and local government		729		81		-		810
Foreign government		2,027		230		**(**1)		2,256
Corporate		18,149		1,299		**(**28)		19,420
Mortgage and other asset-backed		506		31		**(**1)		536
Total	$	21,909	$	1,876	$	**(**30)	$	23,755
Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)	$	2,229	$	740	$	**(**4)	$	2,965
December 31, 2018
Federal government and agency	$	507	$	204	$	(1)	$	710
State and local government		920		66		(1)		985
Foreign government		2,214		155		(7)		2,362
Corporate		18,403		411		(453)		18,361
Mortgage and other asset-backed		506		16		(12)		510
Total	$	22,550	$	852	$	(474)	$	22,928
Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)	$	2,264	$	479	$	(40)	$	2,703
(1) Net unrealized appreciation for these investments is excluded from accumulated other comprehensive income.

The Company had commitments to purchase $98 million of debt securities as of December 31, 2019, bearing interest at a fixed market rate.

Review of declines in fair value. Management reviews debt securities with a decline in fair value from cost for impairment based on criteria that include:

length of time and severity of decline;

financial health and specific near term prospects of the issuer;

changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and

the Company’s intent to sell or the likelihood of a required sale prior to recovery.

Management believes the unrealized depreciation below to be temporary based on this review, and therefore has not impaired these amounts. The table below summarizes debt securities with a decline in fair value from amortized cost by investment grade and by the length of time these securities have been in an unrealized loss position.

	December 31, 2019								December 31, 2018
	Fair		Amortized		Unrealized		Number		Fair		Amortized		Unrealized		Number
(Dollars in millions)	Value		Cost		Depreciation		of Issues		Value		Cost		Depreciation		of Issues
One year or less
Investment grade	$	723	$	729	$	**(**6)	267		$	7,127	$	7,367	$	(240)	1,324
Below investment grade	$	340	$	348	$	**(**8)	355		$	1,185	$	1,240	$	(55)	1,190
More than one year
Investment grade	$	366	$	378	$	**(**12)	118		$	3,023	$	3,181	$	(158)	784
Below investment grade	$	84	$	88	$	**(**4)	93		$	249	$	270	$	(21)	245

Equity Securities

Accounting policy. Changes in the fair values of equity securities that have a readily determinable fair value are reported in net realized investment gains (losses). As of December 31, 2019, the fair values of these securities were $64 million and cost was $61 million, compared with fair value of $415 million and cost of $433 million as of December 31, 2018. Private equity securities of $192 million as of December 31, 2019, and $89 million as of December 31, 2018, without a readily determinable fair value are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The amount of impairments or value changes resulting from observable price changes was not material.

Equity securities also include hybrid investments consisting of preferred stock with call features that are carried at fair value with changes in fair value reported in net realized investment gains (losses) and dividends reported in net investment income.As of December 31, 2019, fair values of these securities were $47 million and cost was $58 million, compared with fair value of $44 million and cost of $58 million as of December 31, 2018.

Commercial Mortgage Loans

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 fixed rates of interest and are secured by high quality, primarily completed and substantially leased operating properties. Commercial mortgage loans are classified as either current or long-term investments based on their contractual maturities.

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 collateral. A commercial mortgage loan is considered impaired when it is probable that the Company will not collect all amounts due per the terms of the promissory note. Writedowns are recorded in realized investments losses. Interest income on impaired loans is only recognized when a payment is received.

There were no impaired commercial mortgage loans as of December 31, 2019 or 2018.

As of December 31, 2019, virtually all of the Company’s commercial mortgage loan portfolio is scheduled to mature in 2022 or thereafter. Actual maturities could differ from contractual maturities for several reasons, including that borrowers may have the right to prepay their obligations with or without prepayment penalties, the maturity date may be extended or loans may be refinanced.

Credit quality**.** The Company regularly evaluates and monitors credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal credit quality rating system designed to evaluate the relative risk of the transaction at origination that is then updated each year as part of the annual portfolio loan review. The Company evaluates and monitors credit quality on a consistent and ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.

Quality ratings are based on our evaluation of a number of key inputs related to the loan, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the estimated amount of property cash flow available to meet annual interest and principal payments on debt, with a ratio below 1.0 indicating that there is not enough cash flow to cover the required loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property

collateralizing the loan.

The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios as of December 31, 2019 and 2018:

(Dollars in millions)	December 31, 2019					December 31, 2018
Loan-to-Value Ratio		Carrying Value	Average Debt Service Coverage Ratio	Average Loan-to-Value Ratio			Carrying Value	Average Debt Service Coverage Ratio	Average Loan-to-Value Ratio
Below 60%	$	1,136	2.19			$	1,132	2.14
60% to 79%		723	1.98				650	1.93
80% to 100%		88	1.62				76	1.49
Total	$	1,947	2.09	58%		$	1,858	2.04	58%

The Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. The Company’s investment professionals completed the annual in-depth review in the second quarter of 2019 that included an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimated the current year and future stabilized property income and fair value for each loan.

The Company re-evaluates a loan’s credit quality between annual reviews if new property information is received or an event such as delinquency or a borrower’s request for restructure causes management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.

Policy Loans

Accounting policy. Policy loans, primarily associated with our corporate-owned life insurance business, are carried at unpaid principal balances plus accumulated interest, the total of which approximates fair value. These loans are collateralized by life insurance policy cash values and therefore have minimal exposure to credit loss. Interest rates are reset annually based on a rolling average of benchmark interest rates.

Other Long-Term Investments

Accounting policy. Other long-term investments include investments in unconsolidated entities. These entities include certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company’s ownership percentage of reported income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income from these investments is reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments.

Other long-term investments also include investment real estate carried at depreciated cost less any impairment write-downs to fair value when cash flows indicate that the carrying value may not be recoverable. Depreciation is generally recorded using the straight-line method based on the estimated useful life of each asset. Investment real estate as of December 31, 2019 and 2018 is expected to be held longer than one year and may include real estate acquired through the foreclosure of commercial mortgage loans.

Additionally, other long-term investments include foreign currency swaps carried at fair value. See discussion below for information on the Company’s accounting policies for these derivative financial instruments.

Other long-term investments and related commitments are diversified by issuer, property type and geographic regions. The following table provides unfunded commitment and carrying value information for these investments. The Company expects to disburse approximately 30% of the committed amounts in 2020.

						Unfunded
		Carrying value as of December 31,				Commitments as of
(In millions)	2019		2018			December 31, 2019
Real estate investments	$	788	$	679		$	551
Securities partnerships		1,409		1,045			1,379
Other		206		177			24
Total	$	2,403	$	1,901		$	1,954

Short-Term Investments and Cash Equivalents

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.

Short-term investments and cash equivalents included the following types of issuers:

		December 31,		December 31,
(In millions)		2019		2018
Corporate securities	$	1,985	$	581
Federal government securities	$	472	$	82
Foreign government securities	$	65	$	238
Money market funds	$	631	$	1,174

Derivative Financial Instruments

The Company uses derivative financial instruments to manage the characteristics of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contract holder liabilities. The Company also uses derivative financial instruments to hedge the risk of changes in the net assets of certain of its foreign subsidiaries due to changes in foreign currency exchange rates. The Company has written and purchased GMIB reinsurance contracts in its run-off reinsurance business that are accounted for as freestanding derivatives as discussed in Note 10. Derivatives in the Company’s separate accounts are excluded from the following discussion because associated gains and losses generally accrue directly to separate account policyholders.

Derivative instruments used by the Company typically include foreign currency swap contracts and foreign currency forward contracts. Foreign currency swap contracts periodically exchange cash flows between two currencies for principal and interest. Foreign currency forward contracts require the Company to purchase a foreign currency in exchange for the functional currency of its operating unit at a future date, generally within three months from the contracts’ trade dates.

The Company manages the credit risk of these derivative instruments by diversifying its portfolio among approved dealers of high credit quality and through routine monitoring of credit risk exposures. Certain of the Company’s over-the-counter derivative instruments require either the Company or the counterparty to post collateral or demand immediate payment depending on the amount of the net liability position of the derivative instrument and predefined financial strength or credit rating thresholds. These collateral posting requirements vary by counterparty and amounts posted were not significant as of December 31, 2019 or 2018.

Accounting policy. Derivatives are recorded on our balance sheet at fair value and are classified as current or non-current according to their contractual maturities. Further information on our policies for determining fair value are discussed in Note 12. The Company applies hedge accounting when derivatives are designated, qualified and highly effective as hedges. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income. Various qualitative or quantitative methods appropriate for each hedge are used to formally assess and document hedge effectiveness at inception and each period throughout the life of a hedge.

Gross fair values of our derivative financial instruments are presented in Note 12. As of December 31, 2019 and 2018, and for the years then ended, the effects of derivative instruments on the Consolidated Financial Statements were not material, including gains or losses reclassified from accumulated other comprehensive income into shareholders’ net income, as well as amounts excluded from the assessment of hedge effectiveness. The following table summarizes the types and notional quantity of derivative instruments held by the Company.

		Notional Value as of
(In millions)		December 31,		December 31,
Purpose	Type of Instrument	2019		2018
Fair value hedge: To hedge the foreign exchange-related changes in fair values of certain foreign-denominated bonds, primarily Euro and British pounds. The notional value of these derivatives matches the amortized cost of the hedged bonds.	Foreign currency swap contracts	$	817	$	525
Net investment hedge: To reduce the risk of changes in net assets due to changes in foreign currency spot exchange rates for certain foreign subsidiaries that conduct their business principally in Euros and Korean Won. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.	Foreign currency swap contracts and foreign currency forward contracts	$	844	$	439
Economic hedge: To hedge the foreign exchange-related changes in fair values of a U.S. dollar-denominated investment portfolio to reflect the local currency for the Company’s foreign subsidiary in South Korea. The notional value of hedging instruments generally aligns with the fair value of the hedged investment portfolio.	Foreign currency forward contracts	$	410	$	309

The Company’s derivative financial instruments are presented as follows:

Fair value hedges of the foreign exchange-related changes in fair values of certain foreign-denominated bonds: Swap fair values are reported in long-term investments or other non-current liabilities. Changes in fair values attributable to foreign exchange risk of the swap contracts and the hedged bonds are reported in realized investment gains and losses. The portion of the swap contracts’ changes in fair value excluded from the assessment of hedge effectiveness is recorded in accumulated other comprehensive income and recognized in net investment income as swap coupon payments are accrued, offsetting the foreign-denominated coupons received on the designated bonds. Net interest cash flows are reported in operating activities, while exchanges of notional principal amounts are reported in investing activities.

Net investment hedges of certain foreign subsidiaries that conduct their business principally in currencies other than the U.S. dollar: The fair values of the foreign currency swap and forward contracts are reported in other assets or other liabilities. The changes in fair values of these instruments are reported in other comprehensive income, specifically in translation of foreign currencies. The portion of the change in fair values relating to foreign exchange spot rates will be recognized in earnings upon deconsolidation of the hedged foreign subsidiaries. The remaining changes in fair value of these instruments are excluded from our effectiveness assessment and recognized in interest expense when coupon payments are accrued or ratably over the term of the instrument. The notional value of hedging instruments matches the hedged amount of subsidiary net assets. Cash flows relating to these contracts are reported in investing activities.

Economic hedges for derivatives not designated as accounting hedges: Fair values of forward contracts are reported in current investments or accrued expenses and other liabilities. The changes in fair values are reported in realized investment gains and losses. Cash flows relating to these contracts are reported in investing activities.

Concentration of Risk

The Company did not have a concentration of investments in a single issuer or borrower exceeding 10% of shareholders’ equity as of December 31, 2019 or 2018.

**B.**Net Investment Income

Accounting policy. When interest and principal payments on investments are current, the Company recognizes interest income when it is earned. The Company recognizes interest income on a cash basis when interest payments are delinquent based on contractual terms or when certain terms (interest rate or maturity date) of the investment have been restructured. For unconsolidated entities that are included in Other long-term investments, investment income is generally recognized according to the Company’s share of the reported income or loss on the underlying investments. Investment income attributed to the Company’s separate accounts is excluded from our earnings because associated gains and losses generally accrue directly to separate account policyholders.

The components of net investment income for the years ended December 31 were as follows:

(In millions)	2019		2018		2017
Debt Securities	$	986	$	1,009	$	946
Equity securities		5		28		14
Commercial mortgage loans		88		78		81
Policy loans		66		70		69
Other long-term investments		167		156		124
Short-term investments and cash		131		194		42
Total investment income		1,443		1,535		1,276
Less investment expenses		53		55		50
Net investment income	$	1,390	$	1,480	$	1,226

Real estate investments and securities partnerships with a carrying value of $192 million at December 31, 2019 and $150 million at December 31, 2018 were non-income producing during the preceding twelve months.

C. Realized Investment Gains and Losses

Accounting policy. Realized investment gains and losses are based on specifically identified assets and results from sales, investment asset write-downs, changes in the fair values of certain derivatives and equity securities and changes in valuation reserves on commercial mortgage loans.

The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business (consistent with accounting for a premium deficiency), as well as realized gains and losses attributed to the Company’s separate accounts because those gains and losses generally accrue directly to separate account policyholders.

(In millions)	2019		2018		2017
Net realized investment gains (losses), excluding investment asset write-downs	$	189	$	(34)	$	268
Write-downs on debt securities		**(**12)		(43)		(26)
Write-downs on other invested assets		-		(4)		(5)
Net realized investment gains (losses), before income taxes	$	177	$	(81)	$	237

Net realized investment gains, excluding investment asset write-downs in 2019 and 2017 primarily represent gains on the sales of real estate partnerships and debt securities. Additionally, 2019 included mark-to-market gains and 2017 included gains on sales of equity securities. Net realized investment losses, excluding investment asset write-downs in 2018 represented mark-to-market losses on equity securities and derivatives, partially offset by gains on the sales of real estate partnerships. Realized gains or losses on equity securities still held at December 31, 2019 and 2018 were not material.

The following table presents sales information for available-for-sale debt securities. Gross gains on sales and gross losses on sales exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.

(In millions)	2019		2018		2017
Proceeds from sales	$	3,077	$	2,625	$	2,012
Gross gains on sales	$	72	$	28	$	103
Gross losses on sales	$	**(**19)	$	(47)	$	(18)

Note 12 – Fair Value Measurements

The Company carries certain financial instruments at fair value in the financial statements including debt securities, certain equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value only under certain conditions, such as when impaired or when there are observable price changes for equity securities with no readily determinable fair value.

Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.

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 Company estimates fair values using prices from third parties or internal pricing methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available, and other market information that a market participant would use to estimate fair value. The internal pricing methods are performed by the Company’s investment professionals and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.

The Company is responsible for determining fair value and 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. We conduct an annual 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.

**A.**Financial Assets and Financial Liabilities Carried at Fair Value

The following table provides information as of December 31, 2019 and 2018 about the Company’s financial assets and liabilities carried at fair value. Separate account assets are also recorded at fair value on the Company’s Consolidated Balance Sheets and are reported separately in the Separate Accounts section below as gains and losses related to these assets generally accrue directly to policyholders.

(In millions)		Quoted Prices in Active Markets for Identical Assets (Level 1)					Significant Other Observable Inputs (Level 2)					Significant Unobservable Inputs (Level 3)					Total
		As of		As of			As of		As of			As of		As of			As of		As of
		December 31,		December 31,			December 31,		December 31,			December 31,		December 31,			December 31,		December 31,
		2019		2018			2019		2018			2019		2018			2019		2018
Financial assets at fair value
Debt securities
	Federal government and agency	$	197	$	209		$	536	$	501		$	-	$	-		$	733	$	710
	State and local government		-		-			810		985			-		-			810		985
	Foreign government		-		-			2,228		2,356			28		6			2,256		2,362
	Corporate		-		-			19,063		18,127			357		234			19,420		18,361
	Mortgage and other asset-backed		-		-			398		372			138		138			536		510
Total debt securities			197		209			23,035		22,341			523		378			23,755		22,928
Equity securities (1)			7		384			72		43			32		32			111		459
Short-term investments			-		-			423		316			-		-			423		316
Derivative assets			-		-			83		53			-		-			83		53
Real estate funds priced at NAV as a practical expedient (2)																		184		239
Financial liabilities at fair value
Derivative liabilities		$	-	$	-		$	18	$	10		$	-	$	-		$	18	$	10
(1) Excludes certain equity securities that have no readily determinable fair value.
(2) As a practical expedient, certain real estate funds are carried at fair value based on the Company’s ownership share of the equity of the investee (Net Asset Value (“NAV“)) including changes in the fair value of its underlying investments. The funds have a quarterly redemption frequency, *45-**90 day redemption notice period and $*56 million in unfunded commitments as of December 31, 2019.

Level 1 Financial Assets

Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.

Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. A relatively small portion of the Company’s investment assets are classified in this category given the narrow definition of Level 1 and the Company’s investment asset strategy to maximize investment returns.

Level 2 Financial Assets and Financial Liabilities

Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.

Debt and equity securities. Approximately 97% of the Company’s investments in debt and equity securities are classified in Level 2 including most public and private corporate debt and hybrid equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics because many debt securities do not trade daily. Pricing models are used to determine these prices when recent trades are not available. 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.

Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued using a single, unadjusted market-observable input derived by averaging multiple broker-dealer quotes, consistent with local market practice.

Short-term investments are carried at fair value that approximates cost. The Company compares market prices for these securities to recorded amounts on a regular basis 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.

Derivative assets and liabilities classified in Level 2 represent over-the-counter instruments such as foreign currency forward and swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties and determined that no adjustments for credit risk were required as of December 31, 2019 or 2018. The nature and use of these derivative financial instruments are described in Note 11.

Level 3 Financial Assets and Financial Liabilities

Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.

The Company classifies certain newly-issued, privately-placed, complex or illiquid securities in Level 3. Approximately 2% of debt and equity securities are priced using significant unobservable inputs and classified in this category.

Fair values of mortgage and other asset-backed securities, as well as corporate and government debt securities, 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. Inputs and assumptions for pricing may also include characteristics of the issuer, collateral attributes and prepayment speeds for mortgage and other asset-backed securities. 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.

Quantitative Information about Unobservable Inputs

The following table summarizes the fair value and significant unobservable inputs used in pricing the following debt securities that were developed directly by the Company as of December 31, 2019 and 2018. The range and weighted average basis point amounts (“bps”) for liquidity and credit spreads (adjustment to discount rates) reflect the Company’s best estimates of the unobservable adjustments a market participant would make to calculate these fair values.

Corporate and government debt securities. The significant unobservable input used to value the following corporate and government debt securities is an adjustment for liquidity. An adjustment is needed to reflect current market conditions and issuer circumstances when there is limited trading activity for the security.

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. An adjustment for liquidity is made as of the measurement date that considers current market conditions, issuer circumstances and complexity of the security structure when there is limited trading activity for the security. 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.

	Fair Value as of						Unobservable Adjustment Range (Weighted Average) as of
	December 31,					Unobservable Input	December 31,
(Fair value in millions )	2019		2018			December 31, 2019	2019	2018
Debt securities
Corporate and government debt securities	$	385	$	229		Liquidity	70 - 930 (280) bps	50 - 930 (230) bps
Mortgage and other asset-backed securities		138		138		Liquidity	60 - 370 (70) bps	60 - 340 (70) bps
						Weighting of credit spreads	240 - 460 (330) bps	190 - 340 (260) bps
Securities not priced by the Company (1)		-		11
Total Level 3 debt securities	$	523	$	378
(1) The fair values for these securities use single, unadjusted non-binding broker quotes not developed directly by the Company.

Significant increases in liquidity or credit spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. The unobservable inputs are generally not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.

Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes the changes in financial assets and financial liabilities classified in Level 3 in 2019 and 2018. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.

(In millions)		2019		2018
Balance at January 1,		$	410	$	732
Total (losses) included in shareholders’ net income			**(**8)		(22)
Gains (losses) included in other comprehensive income			22		(8)
Gains (losses) required to adjust future policy benefits for settlement annuities (1)			2		(8)
Purchases, sales and settlements
Purchases			72		22
Sales			-		(11)
Settlements			**(**19)		(70)
Total purchases, sales and settlements			53		(59)
Transfers into/(out of) Level 3
Transfers into Level 3			170		44
Transfers out of Level 3 (2)			**(**94)		(269)
Total transfers into/(out of) Level 3			76		(225)
Balance at December 31,		$	555	$	410
Total (losses) included in shareholders’ net income attributable to instruments held at the reporting date		$	**(**8)	$	(9)
(1) Amounts do not accrue to shareholders.
*(2) Beginning in 2018, certain private equity securities are no longer carried at fair value under the policy election of ASU 2016-01 (Recognition and Measurement of Financial Assets and Financial Liabilities). Private equity securities of $*70 million as of December 31, 2017 are included in the 2018 Transfers out of Level 3 amount.

Total gains and losses included in shareholders’ net income in the tables above are reflected in the Consolidated Statements of Income as realized investment gains (losses) and net investment income.

Gains and losses included in other comprehensive income in the tables above are reflected in net unrealized appreciation (depreciation) on securities in the Consolidated Statements of Comprehensive Income.

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. Transfers between Level 2 and Level 3 during 2019 and 2018 primarily reflected changes in liquidity and credit risk estimates for certain private placement issuers across several sectors.

Separate Accounts

Accounting policy. Separate account assets and liabilities are contractholder funds maintained in accounts with specific investment objectives. The assets of these accounts are legally segregated and are not subject to claims that arise out of any of the Company’s other businesses. These separate account assets are carried at fair value with equal amounts recorded for related separate account liabilities. The investment income and fair value gains and losses of these accounts generally accrue directly to the contractholders and, together with their deposits and withdrawals, are excluded from the Company’s Consolidated Statements of Income and Cash Flows. Fees and charges earned for mortality risks, asset management or administrative services are reported in either premiums or fees and other revenues. Investments that are measured using the practical expedient of NAV are excluded from the fair value hierarchy.

Fair values of separate account assets at December 31 were as follows:

(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)					Significant Other Observable Inputs (Level 2)					Significant Unobservable Inputs (Level 3)					Total
	2019		2018			2019		2018			2019		2018			2019		2018
Guaranteed separate accounts (See Note 22)	$	219	$	187		$	271	$	267		$	-	$	-		$	490	$	454
Non-guaranteed separate accounts (1)		1,450		1,204			5,522		5,216			263		233			7,235		6,653
Subtotal	$	1,669	$	1,391		$	5,793	$	5,483		$	263	$	233			7,725		7,107
Non-guaranteed separate accounts priced at NAV as a practical expedient (1)																	756		732
Total																	8,481		7,839
Separate account assets classified as assets held for sale																	**(**16)
Separate account assets per Consolidated Balance Sheets																$	8,465	$	7,839
(1) Non-guaranteed separate accounts included $ *4.0 billion as of December 31, 2019 and $**3.8 billion as of December 31, 2018 in assets supporting the Company’s pension plans, including $*0.2 billion classified in Level 3 as of December 31, 2019 and 2018.

Separate account assets classified as Level 1 primarily include exchange-listed equity securities. Level 2 assets primarily include:

corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and

actively-traded institutional and retail mutual fund investments.

Separate account assets classified in Level 3 primarily support Cigna’s pension plans and include certain newly-issued, privately-placed, complex, or illiquid securities that are priced using methods discussed above as well as commercial mortgage loans.Activity, including transfers into and out of Level 3, was not material in 2019 or 2018.

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 following table provides additional information on these investments.

						Unfunded
	Fair Value as of					Commitments	Redemption Frequency
	December 31,					as of	(if currently	Redemption Notice
(In millions)	2019		2018			December 31, 2019	eligible)	Period
Securities partnerships	$	531	$	477	$	320	Not applicable	Not applicable
Real estate funds		220		237		-	Quarterly	30 - 90 days
Hedge funds		5		18		-	Up to annually, varying by fund	30 - 90 days
Total	$	756	$	732	$	320

As of December 31, 2019, the Company does not have plans to sell any of these assets at less than fair value. These investments are structured to satisfy longer-term investment objectives. Securities partnerships are contractually unredeemable, and the underlying investment assets are expected to be liquidated by the investees within ten years after inception.

**B.**Assets and Liabilities Measured at Fair Value under Certain Conditions

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 when they become impaired, including investment real estate and commercial mortgage loans, and certain equity securities with no readily determinable fair value. Equity securities with no readily determinable fair value are also measured at fair value when there are observable price changes from orderly transactions with the same issuer. In 2019 there were immaterial gains relating to price changes for equity securities with no readily determinable fair value and no impaired investments written down to their fair values. In 2018, there were immaterial realized investment losses resulting from impairments on these assets, and no price changes for the equity securities with no readily determinable fair value. Carrying values represented less than 1% of total investments for both 2019 and 2018.

C. Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

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, 2019 and 2018. In addition to universal life products and finance 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.

			December 31, 2019				December 31, 2018
(In millions)	Classification in Fair Value Hierarchy		Fair Value		Carrying Value		Fair Value		Carrying Value
Commercial mortgage loans	Level 3	$	1,989	$	1,947	$	1,832	$	1,858
Long-term debt, including current maturities, excluding finance leases	Level 2	$	39,439	$	36,375	$	40,819	$	40,829

Fair values of off-balance sheet financial instruments were not material as of December 31, 2019 or 2018.

Note 13 – Variable Interest Entities

When the Company becomes involved with a variable interest entity and when there is a change in the Company’s involvement with an entity, the Company must determine if it is the primary beneficiary and must consolidate the entity. The Company is considered the primary beneficiary if it has the power to direct the entity’s most significant economic activities and has the right to receive benefits or obligation to absorb losses that could be significant to the entity. The Company evaluates the following criteria:

the structure and purpose of the entity;

the risks and rewards created by, and shared through, the entity; and

the Company’s ability to direct its activities, receive its benefits and absorb its losses relative to the other parties involved with the entity including its sponsors, equity holders, guarantors, creditors and servicers.

The Company determined it was not a primary beneficiary in any material variable interest entities as of December 31, 2019 or 2018. The Company’s involvement in variable interest entities for which it is not the primary beneficiary is described below.

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 loss from these entities of $3.4 billion across approximately 140 limited partnerships as of December 31, 2019 includes $1.8 billion reported in long-term investments and commitments to contribute an additional $1.6 billion. The Company’s noncontrolling interest in each of these limited partnerships is generally less than 15% of the partnership ownership interests.

Other asset-backed and corporate securities. 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 $0.7 billion as of December 31, 2019 that is reported in debt securities. The Company’s combined ownership interests are insignificant relative to the total principal amounts issued by these entities.

The Company is involved with various other variable interest entities with immaterial carrying values and maximum exposures to loss.

The Company has not provided, and does not intend to provide, financial support to any of the above entities that it is not contractually required to provide. The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.

Note 14 – Accumulated Other Comprehensive Income (Loss) (“AOCI”)

AOCI includes unrealized appreciation on securities and derivatives (excluding appreciation on investments supporting future policy benefit liabilities of the run-off settlement annuity business), foreign currency translation and the net postretirement benefits liability adjustment (see Note 16). AOCI includes the Company’s share from unconsolidated entities reported on the equity method. Generally, tax effects in AOCI are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCI reclassifications are recognized. Changes in the components of AOCI were as follows:

(In millions)		2019		2018		2017
Securities and Derivatives
Beginning balance	$	18	$	328	$	365
Reclassification adjustment to retained earnings related to U.S. tax reform legislation		-		65		-
Reclassification adjustment to retained earnings related to new financial instruments guidance		-		(4)		-
Reclassification adjustment from retained earnings related to new hedging guidance		-		(6)		-
Adjusted beginning balance		18		383		365
Appreciation (depreciation) on securities and derivatives		1,266		(512)		34
Tax (expense) benefit		**(**270)		100		(19)
Net appreciation (depreciation) on securities and derivatives		996		(412)		15
Reclassification adjustment for (gains) losses included in shareholders' net income (net realized investment (gains) losses)		**(**49)		60		(81)
Reclassification adjustment for losses included in shareholders' net income (selling, general and administrative expenses)		-		-		1
Tax benefit (expense)		10		(13)		28
Net (gains) losses reclassified from AOCI to net income		**(**39)		47		(52)
Other comprehensive income (loss), net of tax		957		(365)		(37)
Ending balance	$	975	$	18	$	328
Translation of foreign currencies
Beginning balance	$	**(**221)	$	(65)	$	(369)
Reclassification adjustment to retained earnings related to U.S. tax reform legislation		-		(4)		-
Adjusted beginning balance		**(**221)		(69)		(369)
Translation of foreign currencies		**(**57)		(167)		306
Tax (expense)		**(**2)		-		(5)
Net translation of foreign currencies		**(**59)		(167)		301
Less: Net translation of foreign currencies attributable to noncontrolling interests		**(**5)		(15)		(3)
Shareholders' net translation of foreign currencies		**(**54)		(152)		304
Ending balance	$	**(**275)	$	(221)	$	(65)
Postretirement benefits liability
Beginning balance	$	**(**1,508)	$	(1,345)	$	(1,378)
Reclassification adjustment to retained earnings related to U.S. tax reform legislation		-		(290)		-
Adjusted beginning balance		**(**1,508)		(1,635)		(1,378)
Reclassification adjustment for amortization of net losses from past experience and prior service costs (interest expense and other)		62		69		64
Reclassification adjustment for settlement (interest expense and other)		10		-		7
Tax (expense)		**(**15)		(15)		(24)
Net adjustments reclassified from AOCI to net income		57		54		47
Valuation update		**(**249)		93		(22)
Tax benefit (expense)		59		(20)		8
Net change due to valuation update		**(**190)		73		(14)
Other comprehensive (loss) income, net of tax		**(**133)		127		33
Ending balance	$	**(**1,641)	$	(1,508)	$	(1,345)

Note 15 – Organizational Efficiency Plan

The Company is continuously evaluating ways to deliver our products and services more efficiently and at a lower cost. During the fourth quarter of 2019, we committed to a plan to increase our organizational alignment, operational efficiency and reduce costs. As a result, we recognized a charge in selling, general and administrative expenses of $207 million pre-tax ($162 million after-tax) in the fourth quarter of 2019 primarily for severance costs related to headcount reductions. We expect most of the severance to be paid by the end of 2021.

(In millions)
Fourth quarter 2019 charge						$	207
Less: 2019 payments							2
Balance, December 31, 2019						$	205

Note 16 – Pension

**A.**About Our Plans

The Company sponsors U.S. and non-U.S. defined benefit pension plans; future benefit accruals for the domestic plans are frozen.

Accounting policy. The Company measures the assets and liabilities of its domestic pension 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 expense over the expected remaining lives of plan participants. The net plan expense is reported in interest expense and other in the Consolidated Statements of Income.

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 that differs from the actual fair value for domestic pension plan assets invested in non-fixed income investments. 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. The market-related asset value was approximately $4.2 billion, compared with a fair value of approximately $4.4 billion at December 31, 2019.

**B.**Funded Status and Amounts Included in Accumulated Other Comprehensive Income

The following table summarizes the projected benefit obligations and assets related to our U.S. and non-U.S. pension plans as of, and for the years ended, December 31.

			Pension
			Benefits
(In millions)		2019		2018
Change in benefit obligation
Benefit obligation, January 1		$	4,741	$	4,969
Service cost			2		3
Interest cost			194		169
Assumed in acquisition			-		137
Litigation settlement			142		32
Loss (gain) from past experience			574	(1)	(235)
Benefits paid from plan assets			**(**325)		(314)
Benefits paid — other			**(**14)		(20)
Benefit obligation, December 31			5,314		4,741
Change in plan assets
Fair value of plan assets, January 1			4,151		4,281
Assumed in acquisition			-		96
Actual return on plan assets			594		85
Benefits paid			**(**325)		(314)
Contributions			21		3
Fair value of plan assets, December 31			4,441		4,151
Funded status		$	**(**873)	$	(590)
Liability in Consolidated Balance Sheets
Accrued expenses and other liabilities		$	**(**18)	$	(30)
Other non-current liabilities		$	**(**855)	$	(560)
(1) Loss reflects a decrease in the discount rate and an unfavorable change in the mortality assumption.

We fund our qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. The Company made immaterial contributions to the qualified pension plans in 2019. For 2020, contributions to the qualified pension plans are expected to be immaterial. Future years’ contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates and funding targets. There are no plan assets for our non-qualified pension plans as they are generally funded on a pay-as-you-go basis.

Benefit payments. The following benefit payments are expected to be paid in:

		Pension
(In millions)		Benefits
2020		$	322
2021		$	312
2022		$	314
2023		$	318
2024		$	318
2025-2029		$	1,574

Amounts reflected in the pension liabilities shown above that have not yet been reported in net income and, therefore, have been included in accumulated other comprehensive loss consisted of the following as of December 31:

	Pension Benefits
(In millions)	2019		2018
Unrecognized net (losses)	$	**(**2,132)	$	(1,980)
Unrecognized prior service cost		**(**5)		(6)
Postretirement benefits liability adjustment	$	**(**2,137)	$	(1,986)

**C.**Cost of Our Plans

Net pension cost was as follows:

		Pension Benefits
(In millions)		2019		2018		2017
Service cost		$	2	$	3	$	3
Interest cost			194		169		186
Expected long-term return on plan assets			**(**245)		(257)		(260)
Litigation settlement			142		32		-
Amortization of:
Net loss from past experience			59		70		66
Settlement loss			10		-		7
Net plan cost		$	162	$	17	$	2

As further discussed in Note 22, Old Cigna and the Cigna Pension Plan (the “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. In the fourth quarter of 2018, the Plan was ordered to pay $32 million representing the attorney fee portion of the settlement. This payment was recognized as an expense in 2018. In the first quarter of 2019, the Plan implemented the court order described in Note 22 resulting in an increase to the pension liability of $142 million. The Company reversed a litigation reserve for the expenses recognized for this matter in both 2019 and 2018 aggregating to the same amount resulting in no impact on net income.

D. Assumptions Used for Pension

		2019	2018
Discount rate:
Pension benefit obligation		3.30%	4.23%
Pension benefit cost		4.23%	3.51%
Expected long-term return on plan assets:
Pension benefit cost		6.75%	7.00%
Mortality table for pension obligations		White Collar mortality table with MP 2019 projection scale	RP 2014 with MP 2018 projection scale

In 2019, to better align with our mortality experience, the Company adopted the “White Collar mortality table with MP 2019 projection scale” to value our benefit obligations.

The Company sets discount rates by applying actual annualized yields for high quality bonds at various durations to the expected cash flows of the pension liabilities. A discount rate curve is constructed using an array of bonds in various industries 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.

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.

**E.**Pension Plan Assets

As of December 31, 2019, pension assets included $4 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 $284 million invested directly in funds offered by the buyer of the retirement benefits business, and $122 million invested by others.

The fair values of pension assets by category are as follows as of December 31, 2019 and 2018.

(In millions)		2019		2018
Debt securities:
Corporate	$	1,906	$	1,446
Asset-backed		41		32
Fund investments		460		768
Total debt securities		2,407		2,246
Equity securities:
Domestic		582		506
International, including funds and pooled separate accounts (1)		419		360
Total equity securities		1,001		866
Securities partnerships		531		477
Real estate funds, including pooled separate accounts (1)		230		250
Commercial mortgage loans		96		110
Hedge funds		24		36
Guaranteed deposit account contract		100		107
Cash equivalents and other current assets, net		52		59
Total pension assets at fair value	$	4,441	$	4,151
(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

The Company’s current target investment allocation percentages (60% fixed income, 25% public equity securities and 15% in other investments, including private equity (securities partnerships) and real estate) 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 12 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. The Company classifies substantially all debt securities in Level 2 for pension plan assets. 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. A substantial portion of domestic equity securities within pension assets are classified as Level 1, while international equity funds within pension assets are predominantly classified in Level 2 using daily net asset value.

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 12 for additional disclosures related to these assets invested in the separate accounts of the Company’s subsidiaries. Certain securities as described in Note 12, 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.

**F.**401(k) Plans

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 Company may elect to increase its matching contributions if the Company’s annual performance meets certain targets. The Company’s annual expense for these plans was as follows:

(In millions)	2019		2018		2017
Expense	$	256	$	196	$	122

Note 17 – Employee Incentive Plans

A. About Our Plans

The People Resources Committee (the “Committee”) of the Board of Directors awards stock options, restricted stock grants, restricted stock units, deferred stock and strategic performance shares (“SPS”) to certain employees. The Committee has issued common stock instead of cash compensation.

Prior to the acquisition of Express Scripts, the Company issued shares from Treasury stock for these awards. Following the acquisition, original issue shares were used.

Awards of Express Scripts options and restricted stock units were rolled over to Cigna stock options and restricted stock units in connection with the Express Scripts acquisition on December 20, 2018. Information in this footnote includes the effect of the Express Scripts rollover awards unless otherwise indicated.

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.

Shares of common stock available for award at December 31 were as follows:

(In millions)	2019		2018		2017
Common shares available for award		23.2		25.7		14.0

B. Stock Options

Accounting policy. The Company awards options to purchase Cigna common stock at the market price of the stock on the grant date except for rollover option awards issued to Express Scripts employees in connection with the acquisition. Options vest over periods ranging from one year 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 selling, general and administrative expenses on a straight-line basis over the vesting period.

Black-Scholes option-pricing model assumptions and the resulting fair value of options are presented in the following table. The average fair value of options and the expected option life exclude the rollover options granted to Express Scripts employees in connection with the acquisition. See Note 4 for further information.

		2019		2018		2017
Dividend yield		0.0%		0.0%		0.0%
Expected volatility		30.0%		35.0%		35.0%
Risk-free interest rate		2.5%		2.5%		1.8%
Expected option life		4.4 years		4.4 years		4.3 years
Weighted average fair value of options	$	53.10	$	64.18	$	46.38

The expected volatility reflects the past daily stock price volatility of Cigna stock. The Company does not consider volatility implied in the market prices of traded options to be a good indicator of future volatility because remaining traded options will expire within one year. The risk-free interest rate is derived using the four-year U.S. Treasury bond yield rate as of the award date for the primary annual grant. Expected option life reflects the Company’s historical experience.

The following table shows the status of, and changes in, common stock options during the last three years.

(Options in thousands)	2019				2018				2017
			Weighted				Weighted				Weighted
			Average				Average				Average
	Options		Exercise Price		Options		Exercise Price		Options		Exercise Price
Outstanding - January 1		12,370	$	125.46		6,156	$	100.79		7,097	$	82.01
Granted		1,569	$	183.41		7,080	$	143.62		1,230	$	149.17
Exercised		**(**2,297)	$	106.75		(771)	$	88.35		(2,072)	$	63.41
Expired or canceled		**(**204)	$	180.08		(95)	$	165.04		(99)	$	138.41
Outstanding - December 31		11,438	$	136.19		12,370	$	125.46		6,156	$	100.79
Options exercisable at year-end		8,874	$	123.87		9,446	$	114.22		3,894	$	77.36

Compensation expense of $64 million related to unvested stock options at December 31, 2019 will be recognized over the next two years (weighted average period).

The table below summarizes information for stock options exercised during the last three years:

(In millions)	2019		2018		2017
Intrinsic value of options exercised	$	180	$	86	$	218
Cash received for options exercised	$	224	$	68	$	131
Tax benefit from options exercised	$	34	$	8	$	41

The following table summarizes information for outstanding common stock options at December 31, 2019:

		Options		Options
		Outstanding		Exercisable
Number (in thousands)		11,438		8,874
Total intrinsic value (in millions)	$	781	$	715
Weighted average exercise price	$	136.19	$	123.87
Weighted average remaining contractual life		5.6 years		4.7 years

C. Restricted Stock

The Company awards restricted stock (grants and units) to the Company’s employees that vest over periods ranging from one to three 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.

Accounting policy. Fair value of restricted stock awards is equal to the market price of Cigna’s common stock on the date of grant. This fair value is reduced by awards that are expected to forfeit. At the grant date, the Company estimates forfeitures based on experience and adjusts the expense to reflect actual forfeitures over the vesting period. This fair value, net of forfeitures, is recognized in selling, general and administrative expenses over the vesting period on a straight-line basis.

The following table shows the status of, and changes in, restricted stock awards during the last three years.

(Awards in thousands)	2019			2018			2017
		Weighted Average Fair Value at Award Date			Weighted Average Fair Value at Award Date			Weighted Average Fair Value at Award Date
	Grants/Units	Grants/Units	Grants/Units
Outstanding - January 1	2,138	$	168.12	1,295	$	126.44	1,309	$	97.78
Awarded	870	$	183.86	1,451	$	183.29	451	$	155.21
Vested	**(**964)	$	160.74	(560)	$	112.53	(409)	$	67.09
Forfeited	**(**99)	$	168.68	(48)	$	150.84	(56)	$	121.74
Outstanding - December 31	1,945	$	178.78	2,138	$	168.12	1,295	$	126.44

The fair value of vested restricted stock at the vesting date for the years ended December 31 was as follows:

(In millions)	2019		2018		2017
Fair value of vested restricted stock	$	171	$	107	$	62

Approximately 10,300 employees held 1.9 million restricted stock awards at the end of 2019 with $160 million of related compensation expense to be recognized over the next two years (weighted average period).

D. Strategic Performance Shares (“SPS”)

The Company awards SPSs to executives and certain other key employees generally with a performance period of three years. Half of these shares are subject to a market condition (total shareholder return relative to industry peer companies) and half are subject to a performance condition (cumulative adjusted net income). These targets are set by the Committee at the beginning of the performance period. Holders of these awards receive shares of Cigna common stock at the end of the performance period ranging anywhere from 0 to 200% of the original awards.

Accounting policy. Compensation expense for SPSs is recorded over the performance period. Fair value is determined at the grant date for “market condition” SPSs using a Monte Carlo simulation model and not subsequently adjusted regardless of the final outcome. Expense is initially accrued for “performance condition” SPSs based on the most likely outcome, but evaluated for adjustment each period for updates in the expected outcome. Expense is adjusted to the actual outcome (number of shares awarded times the share price at the grant date) at the end of the performance period.

The following table shows the status of, and changes in, SPSs during the last three years:

	2019				2018				2017
		Weighted				Weighted				Weighted
		Average Fair Value				Average Fair Value				Average Fair Value
(Awards in thousands)	Shares	at Award Date			Shares	at Award Date			Shares	at Award Date
Outstanding - January 1	707	$	160.74		778	$	136.57		942	$	109.14
Awarded	389	$	184.72		221	$	197.51		275	$	150.06
Vested	**(**244)	$	139.27		(269)	$	121.57		(386)	$	78.91
Forfeited	**(**34)	$	178.98		(23)	$	158.16		(53)	$	138.19
Outstanding - December 31	818	$	177.94		707	$	160.74		778	$	136.57

The fair value of vested SPSs at the vesting date for the years ended December 31 was as follows:

	2019				2018				2017
(Shares in thousands; $ in millions)	Shares		Fair Value		Shares		Fair Value		Shares		Fair Value
Shares of Cigna common stock distributed upon SPS vesting		254	$	45		380	$	73		476	$	70

Approximately 1,600 employees held 818,000 SPSs at the end of 2019 and $58 million of related compensation expense is expected to be recognized over the next two years. The amount of expense for “performance condition” SPSs will vary based on actual performance in 2020 and 2021.

E.

Compensation Cost and Tax Effects of Share-based Compensation

The Company records tax benefits in shareholders’ net income during the vesting period based on the amount of expense being recognized. The difference between tax benefits based on the expense and the actual tax benefit realized are also recorded in net income when stock options are exercised, or when restricted stock and SPSs vest.

(In millions)	2019		2018		2017
Total compensation cost for shared-based awards	$	299	$	180	$	178
Tax benefits recognized	$	59	$	36	$	79

Note 18 – Goodwill, Other Intangibles and Property and Equipment

**A.**Goodwill

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, based on those reporting units’ relative fair values. As a result, goodwill is primarily reported in the Health Services segment ($33.7 billion), the Integrated Medical segment ($10.5 billion) and, to a lesser extent, the International Markets segment ($0.4 billion).

The Company evaluates goodwill for impairment at least annually during the third quarter at the reporting unit level and writes it down through shareholders’ net income if impaired. Fair value of a reporting unit is generally estimated based on either a market approach or a discounted cash flow analysis using assumptions that the Company believes 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 discount rate is selected to correspond with each 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 that reporting unit. Projections of future cash flows for each reporting unit are consistent with our annual planning process for revenues, pharmacy costs, benefits expenses, operating expenses, taxes, capital levels and long-term growth rates.

Goodwill activity. Goodwill activity during 2019 and 2018 was as follows:

(In millions)		2019		2018
Balance at January 1,	$	44,505	$	6,164
Goodwill acquired, net		103		38,371
Impact of foreign currency translation		**(**6)		(30)
Balance at December 31,	$	44,602	$	44,505

The significant increase in goodwill during 2018 reflects the Company’s acquisition of Express Scripts as further discussed in Note 4.

**B.**Other Intangibles

Accounting policy. The Company’s other intangible assets primarily 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 customer attrition and discount rates. The Company’s definite-lived intangible assets are amortized on an accelerated or straight-line basis, reflecting their pattern of economic benefits, over periods from one to 39 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.

The Company’s amortized intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows generated by the underlying asset group is less than the carrying amount of the asset group, the Company recognizes an impairment charge equal to the difference between the carrying value of the asset group and its estimated fair value. The Company’s indefinite-lived intangible assets are each reviewed for impairment at least annually by comparing their fair value with their carrying value. If the carrying value exceeds fair value, that excess is recognized as an impairment loss.

There were no material impairments in the years ended December 31, 2019, 2018 or 2017.

Components of other assets, including other intangibles. Other intangible assets were comprised of the following at December 31:

			Accumulated	Net Carrying
(In millions)		Cost	Amortization	Value
2019
Customer relationships	$	31,184	3,319	27,865
Trade Name - Express Scripts		8,400		8,400
Other		383	86	297
Other intangible assets		39,967	3,405	36,562
Value of business acquired (reported in deferred policy acquisition costs)		643	122	521
Total	$	40,610	3,527	37,083
2018
Customer relationships	$	31,451	1,213	30,238
Trade Name - Express Scripts		8,400		8,400
Other		560	195	365
Other intangible assets		40,411	1,408	39,003
Value of business acquired (reported in deferred policy acquisition costs)		665	102	563
Total	$	41,076	1,510	39,566

The Company has indefinite-lived intangible assets totaling $8.4 billion at December 31, 2019 and 2018, largely consisting of trade names and licenses.

C. Property and Equipment

Accounting policy. Property and equipment is carried at cost less accumulated depreciation. Cost includes interest, real estate taxes and other costs incurred during construction when applicable. Internal-use software that is acquired, developed or modified solely to meet the Company’s internal needs, with no plan to market externally, is also included in this category. 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, three 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. An impairment charge is recorded if the Company determines the carrying value of any of these assets is not recoverable. The Company also reviews and shortens the estimated useful lives of these assets, if necessary.

Components of property and equipment. Property and equipment was comprised of the following as of December 31:

				Accumulated		Net Carrying
(In millions)		Cost		Amortization		Value
2019
Internal-use software	$	6,578	$	3,282	$	3,296
Other property and equipment		2,569		1,353		1,216
Total property and equipment		9,147		4,635		4,512
Property and equipment classified as Assets held for sale		**(**226)		**(**131)		**(**95)
Total property and equipment per Consolidated Balance Sheet	$	8,921	$	4,504	$	4,417
2018
Internal-use software	$	5,694	$	2,415	$	3,279
Other property and equipment		2,264		981		1,283
Total property and equipment	$	7,958	$	3,396	$	4,562

Components of depreciation and amortization. Depreciation and amortization expense was comprised of the following for the years ended December 31:

(In millions)	2019		2018		2017
Internal-use software	$	850	$	323	$	298
Other property and equipment		284		146		153
Value of business acquired (reported in deferred policy acquisition costs)		34		16		18
Other intangibles		2,483		210		97
Total depreciation and amortization	$	3,651	$	695	$	566

The Company estimates annual pre-tax amortization for intangible assets, including internal-use software, over the next five calendar years to be as follows:

(In millions)	Pre-tax Amortization
2020	$	2,466
2021	$	2,386
2022	$	2,061
2023	$	1,902
2024	$	1,773

Note 19 – Leases

As discussed in Note 2, the Company adopted ASU 2016-02, Leases, as of January 1, 2019. As permitted by the standard, the Company did not restate its Consolidated Financial Statements for periods prior to the adoption date and the required disclosures presented below are prospective from the date of adoption. The Company’s leases are primarily for office space and certain computer and other equipment, and have terms of up to 23 years.

Accounting policy. The Company determines if an arrangement is a lease and its lease classification (operating or finance) at inception. Beginning in the first quarter of 2019, both operating and finance leases result in (1) a right-of-use (“ROU”) asset that represents our right to use the underlying asset for the lease term and (2) a lease liability that represents our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are reflected in the following lines in the Company’s Consolidated Balance Sheet:

		ROU Asset		Current Lease Liability		Non-Current Lease Liability
Operating lease		Other assets		Accrued expenses and other liabilities (current)		Other liabilities (non-current)
Finance lease		Property and equipment		Short-term debt		Long-term debt

These lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Most of the Company’s leases do not provide an implicit rate, so the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset also includes any lease pre-payments made and excludes lease incentives for operating leases. The Company’s expected life of a lease may consider options to extend or terminate a lease when it is reasonably certain that the Company will exercise that option.

The Company has lease agreements with lease and non-lease components that are accounted for as a single lease component. Variable lease payments are expensed as incurred and represent amounts that are neither fixed in nature, such as maintenance and other services provided by the lessor, nor tied to an index or rate.

The components of lease expense were as follows:

(In millions)		Year Ended December 31, 2019
Operating lease cost	$	188
Finance lease cost:
Amortization of ROU assets		28
Interest on lease liabilities		3
Total finance lease cost		31
Variable lease cost		50
Total lease cost	$	269

Rental expense under operating lease agreements was $162 million for the years ended December 31, 2018 and 2017.

Supplemental cash flow information related to leases was as follows:

		Year ended
(In millions)		December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	173
Operating cash outflows from finance leases	$	3
Financing cash outflows from finance leases	$	25
ROU assets obtained in exchange for lease obligations:
Operating leases	$	89
Finance leases	$	68

The non-cash impact of adopting the new lease guidance was an increase of Other assets of $615 million and an increase to Accrued expenses and other liabilities of $630 million.

Operating and finance lease ROU assets and lease liabilities were as follows at the balance sheet date:

(In millions)		December 31, 2019
Operating leases:
Operating lease ROU assets	$	536
Accrued expenses and other current liabilities	$	166
Other non-current liabilities		465
Total operating lease liabilities	$	631
Finance leases:
Property and equipment, gross	$	110
Accumulated depreciation		**(**23)
Property and equipment, net	$	87
Short-term debt	$	27
Long-term debt		61
Total finance lease liabilities	$	88

As of December 31, 2019, the weighted average remaining lease term was five years for operating leases and five years for finance leases, and the weighted average discount rate was 3.89% for operating leases and 3.77% for finance leases.

Maturities of lease liabilities as of December 31, 2019 were as follows:

(In millions)	Operating Leases		Finance Leases
2020	$	177	$	28
2021		159		21
2022		133		18
2023		89		8
2024		63		6
Thereafter		74		16
Total lease payments		695		97
Less: imputed interest		64		9
Total	$	631	$	88

Note 20 – Shareholders’ Equity and Dividend Restrictions

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. 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:

(In billions)	2019		2018		2017
Net income	$	3.8	$	3.4	$	2.5
Surplus	$	13.8	$	12.2	$	10.4

The Company’s HMO and life, accident and health insurance subsidiaries are also 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 their parent companies without prior approval. As of December 31, 2019, these amounts, including restricted GAAP net assets of the Company’s subsidiaries, were as follows:

(In billions)					2019
Minimum statutory surplus required by regulators					$	4.8
Investments on deposit with regulatory bodies					$	0.5
Maximum dividend distributions permitted in 2020 without regulatory approval					$	2.9
Maximum loans to the parent company permitted without regulatory approval					$	1.0
Restricted GAAP net assets of Cigna Corporation's subsidiaries					$	15.3

Permitted practices used by the Company’s insurance subsidiaries in 2019 that differed from prescribed regulatory accounting had an immaterial impact on statutory net income and surplus.

Note 21 – Income Taxes

Accounting policy. Deferred income taxes are reflected in the Consolidated Balance Sheets for differences between the financial and income tax reporting bases of the Company’s 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, and a valuation allowance is established to the extent this standard is not met. The deferred income tax provision generally represents the net change in deferred income tax assets and liabilities during the reporting period excluding adjustments to accumulated other comprehensive income or amounts recorded in connection with a business combination. The current income tax provision generally represents estimated amounts due on income tax returns for the year reported to various jurisdictions plus the effect of any uncertain tax positions. The Company recognizes a liability for uncertain tax positions if management believes the probability that the positions will be sustained is less than 50 percent. The liabilities for uncertain tax positions are classified as current when the position is expected to be settled within 12 months or the statute of limitation expires within 12 months.

Income taxes attributable to the Company’s foreign operations are generally provided using the respective foreign jurisdictions’ tax rate.

Our capital management strategy to support the liquidity and regulatory capital requirements of our foreign operations and certain international growth initiatives is to retain overseas a significant portion of the earnings generated by our foreign operations. This strategy does not materially limit our ability to meet our liquidity and capital needs in the United States. The Company generally does not intend to repatriate these earnings.

**A.**Income Tax Expense

The components of income taxes for the years ended December 31 were as follows:

(In millions)	2019		2018		2017
Current taxes
U.S. income taxes	$	1,476	$	804	$	974
Foreign income taxes		173		185		122
State income taxes		114		47		36
Total current taxes		1,763		1,036		1,132
Deferred taxes (benefits)
U.S. income taxes (benefits)		**(**236)		(75)		204
Foreign income taxes		16		8		39
State income tax (benefits)		**(**93)		(34)		(1)
Total deferred taxes (benefits)		**(**313)		(101)		242
Total income taxes	$	1,450	$	935	$	1,374

Total income taxes for the years ended December 31 were different from the amount computed using the nominal federal income tax rate for the following reasons:

		2019			2018				2017
(In millions)		$	%			$	%			$	%
Tax expense at nominal rate	$	1,380	21.0	%	$	752	21.0	%	$	1,262	35.0	%
Effect of U.S. tax reform legislation		-	-			(4)	(0.1)			232	6.4
Effect of foreign earnings		24	0.4			74	2.1			(70)	(1.9)
Health insurance industry tax		-	-			78	2.2			-	-
State income tax (net of federal income tax benefit)		32	0.5			10	0.3			23	0.6
Other		14	0.2			25	0.6			(73)	(2.0)
Total income taxes	$	1,450	22.1	%	$	935	26.1	%	$	1,374	38.1	%

The decrease in the 2019 effective tax rate was due primarily to the suspension of the health insurance industry tax. Tax expense in 2017 was based on a federal income tax rate of 35% and included a $232 million charge due to U.S. tax reform, driven by revaluation of deferred tax balances and the deemed repatriation tax on accumulated foreign earnings.

Consolidated pre-tax income from the Company’s foreign operations was approximately 12% of the Company’s pre-tax income in 2019. The comparable amounts in prior years were 15% in 2018 and 14% in 2017. South Korean operations produced a majority of the Company’s foreign pre-tax earnings.

B. Deferred Income Taxes

Deferred income tax assets and liabilities as of December 31 were as follows:

(In millions)	2019		2018
Deferred tax assets (1)
Employee and retiree benefit plans	$	511	$	411
Other insurance and contractholder liabilities		282		396
Loss carryforwards		260		255
Other accrued liabilities		183		341
Other		218		187
Deferred tax assets before valuation allowance		1,454		1,590
Valuation allowance for deferred tax assets		**(**196)		(199)
Deferred tax assets, net of valuation allowance		1,258		1,391
Deferred tax liabilities (1)
Depreciation and amortization		630		744
Acquisition-related basis differences		9,386		9,863
Policy acquisition expenses		113		211
Unrealized appreciation on investments and foreign currency translation		223		(29)
Other		293		55
Total deferred tax liabilities		10,645		10,844
Net deferred income tax (liabilities) assets	$	**(**9,387)	$	(9,453)
(1) Certain prior year balances have been reclassified to align with the year end 2019 presentation.

Management believes that future results will be sufficient to realize a majority of the Company’s gross deferred tax assets. We establish valuation allowances against deferred tax assets when we determine that it is more likely than not that the asset will not be recognized. Valuation allowances have been established against certain federal, state and foreign capital and operating losses. There are multiple expiration dates associated with these losses, though a significant portion expire in 2021.

C. Uncertain Tax Positions and Other Tax Matters

Reconciliations of unrecognized tax benefits for the years ended December 31 follow:

(In millions)	2019		2018		2017
Balance at January 1,	$	928	$	35	$	31
Increase due to prior year positions		68		40		-
Increase due to business combinations		-		860		-
Increase due to current year positions		29		6		7
Reduction related to settlements with taxing authorities		-		(1)		(1)
Reduction related to lapse of applicable statute of limitations		**(**7)		(12)		(2)
Balance at December 31,	$	1,018	$	928	$	35

Substantially all unrecognized tax benefits would impact shareholders’ net income if recognized. The increase in the liability for uncertain tax positions from 2017 to 2018 was largely due to matters related to Health Services.

The Company classifies net interest expense on uncertain tax positions as a component of income tax expense, but excludes this amount from the disclosed liability for uncertain tax positions. The liability for net interest expense on uncertain tax positions was approximately $100 million as of December 31, 2019, and immaterial for the prior two years.

**D.**Other Tax Matters

The statute of limitations for Cigna's consolidated federal income tax returns through 2015 has closed and there are no pending examinations. The Internal Revenue Service (“IRS”) has examined Express Scripts’ tax returns for 2010 through 2012, for which there is a significant disputed tax matter, and is currently examining returns for 2013 through 2015. In addition, the Company has pending refund claims for various years. 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 or foreign audit activity is expected for tax years prior to 2011 for Cigna’s entities and 2006 for Express Scripts’ entities.

Note 22 – Contingencies and Other Matters

The Company, through its subsidiaries, is contingently liable for various guarantees provided in the ordinary course of business.

**A.**Financial Guarantees: Retiree and Life Insurance Benefits

The Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits. For the majority of these 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, 2019, employers maintained assets that exceeded the benefit obligations under these arrangements of approximately $450 million. These guarantees are generally provided by the Company with minimal reinsurance from third parties. An additional liability is established if management believes that the Company will be required to make payments under the guarantees; there were no additional liabilities required for these guarantees, net of reinsurance, as of December 31, 2019. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy (see Note 12).

The Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.

**B.**Certain Other Guarantees

The Company had indemnification obligations as of December 31, 2019 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, 2019.

**C.**Guaranty Fund Assessments

The Company operates in a regulatory environment that may require its participation in assessments under state insurance guaranty association laws. The Company’s exposure to assessments for certain obligations of insolvent insurance companies to policyholders and claimants is based on its share of business written in the relevant jurisdictions.

There were no material impacts related to existing or new guaranty fund assessments in 2019.

D. Legal and Regulatory Matters

The Company is routinely involved in numerous claims, lawsuits, regulatory inquiries and audits, government investigations, including under the federal False Claims Act and state false claims acts initiated by a government investigating body or by a qui tam relator’s filing of a complaint under court seal and other legal matters arising, for the most part, in the ordinary course of managing a global health service business. Additionally, the Company has received and is cooperating with subpoenas or similar processes from various governmental agencies requesting information, all arising in the normal course of its business. Disputed tax matters arising from audits by the Internal Revenue Service or other state and foreign jurisdictions, including those resulting in litigation, are accounted for under GAAP guidance for uncertain tax positions. Further information on income tax matters can be found in Note 21.

Pending litigation and legal or regulatory matters that the Company has identified with a reasonable possibility of material loss are described below. For material pending litigation and legal or regulatory matters discussed below, the Company provides disclosure in the aggregate of accruals and range of loss, or a statement that such information cannot be estimated. The Company’s accruals for the matters discussed below under “Litigation Matters” and “Regulatory Matters” are immaterial. 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 condition or liquidity for any particular period. The outcomes of lawsuits are inherently unpredictable, and we may be unsuccessful in these ongoing litigation matters or any future claims or litigation.

Litigation Matters

Amara cash balance pension plan litigation. In December 2001, Janice Amara filed a class action lawsuit in the U.S. District Court for the District of Connecticut against Cigna Corporation (now Old Cigna) and the Plan on behalf of herself and other similarly situated Plan participants affected by the 1998 conversion to a cash balance formula. The plaintiffs allege various violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), including that the Plan’s cash balance formula discriminates against older employees; that the conversion resulted in a wear-away period (when the pre-conversion accrued benefit exceeded the post-conversion benefit); and that the Plan communications contained inaccurate or inadequate disclosures about these conditions.

In 2008, the District Court (1) affirmed the Company’s right to convert to a cash balance plan prospectively beginning in 1998; (2) found for plaintiffs on the disclosure claim only; and (3) required the Company to pay pre-1998 benefits under the pre-conversion traditional annuity formula and post-1997 benefits under the post-conversion cash balance formula. From 2008 through 2015, this case has undergone a series of court proceedings that resulted in the original District Court Order being largely upheld. In 2015, the Company submitted to the District Court its proposed method for calculating the additional pension benefits due to class members and plaintiffs responded in August 2015.

Since then, there has been continued litigation regarding the calculation of benefits and attorneys’ fees and administration of the remedy payments. On November 29, 2018, the Court ordered the Pension Plan to pay attorneys’ and incentive fees of $32 million, and to pay any past due lump sums and back benefits within 90 days of the Order. The attorneys’ fees were paid as ordered in December 2018. In the first quarter of 2019, the Company amended the Plan, notified class participants of their increased benefits and commenced remedy benefit payments out of the Plan, including the past due lump sums and back benefits. See Note 16 for additional information.

In April 2019, plaintiffs challenged certain aspects of the methodology used to calculate and pay benefits. In August 2019, the Court denied plaintiffs’ challenge in all but one minor respect that did not result in a material change to the pension obligation. The plaintiffs filed a motion for reconsideration that the Court denied on January 10, 2020. On January 15, 2020, plaintiffs filed a motion for an equitable accounting and a notice of appeal.

Cigna Litigation with Anthem. In February 2017, the Company delivered a notice to Anthem terminating the 2015 merger agreement, and notifying Anthem that it must pay the Company the $1.85 billion reverse termination fee pursuant to the terms of the merger agreement. Also in February 2017, the Company filed suit against Anthem in the Delaware Court of Chancery (the “Chancery Court”) seeking declaratory judgments that the Company’s termination of the merger agreement was valid and that Anthem was not permitted to extend the termination date. The complaint also sought payment of the reverse termination fee and additional damages in an amount exceeding $13 billion, including the lost premium value to the Company’s shareholders caused by Anthem’s willful breaches of the merger agreement. Anthem countersued, alleging its own claims for damages.

On February 15, 2017, the Chancery Court granted Anthem’s motion for a temporary restraining order and temporarily enjoined the Company from terminating the merger agreement. In May 2017, the Chancery Court denied Anthem’s motion for a preliminary injunction to enjoin Cigna from terminating the merger agreement but stayed its ruling pending Anthem’s determination as to whether to seek an appeal. Anthem subsequently notified Cigna and the Chancery Court that it did not intend to appeal the Chancery Court’s decision. As a result, the merger agreement was terminated.

The litigation between the parties remains pending. A trial was held during the first quarter of 2019. Oral arguments on post-trial briefs were held on November 26, 2019. In February 2020, the Chancery Court issued a letter requesting certain supplemental briefing. The supplemental briefs are due March 6, 2020. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.

Express Scripts Litigation with Anthem. In March 2016, Anthem filed a lawsuit in the United States District Court for the Southern District of New York alleging various breach of contract claims against Express Scripts relating to the parties’ rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties including allegations that Express Scripts failed to negotiate new pricing concessions in good faith, as well as various alleged service issues. Anthem also requested that the court enter declaratory judgment that Express Scripts is required to provide Anthem competitive benchmark pricing, that Anthem can terminate the agreement, and that Express Scripts is required to provide Anthem with post-termination services at competitive benchmark pricing for one year following any termination by Anthem. Anthem claims it is entitled to $13 billion in additional pricing concessions over the remaining term of the agreement, as well as $1.8 billion for one year following any contract termination by Anthem and $150 million in damages for service issues (“Anthem’s Allegations”). On April 19, 2016, in response to Anthem’s complaint, Express Scripts filed its answer denying Anthem’s Allegations in their entirety and asserting affirmative defenses and counterclaims against Anthem. The court subsequently granted Anthem’s motion to dismiss two of six counts of Express Scripts’ amended counterclaims. The current scheduling order runs through the completion of summary judgment briefing in October 2020. There is no tentative trial date. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.

Regulatory Matters

Civil Investigative Demand. The U.S. Department of Justice (“DOJ”) is conducting an industry-wide investigation of Medicare Advantage organizations’ risk adjustment practices under Medicare Parts C and D including medical chart reviews and health exams. The Company is currently responding to information requests (civil investigative demands) received from the DOJ (U.S. Attorney’s Offices for the Eastern District of Pennsylvania and the Southern District of New York). We will continue to cooperate with the DOJ’s investigation.

Disability claims regulatory matter. The Company is subject to an agreement with the Departments of Insurance for Maine, Massachusetts, Pennsylvania, Connecticut and California (together, the “Lead States”), originally entered into in 2013, that relates to the Company’s long-term disability claims handling practices. The agreement provides for enhanced procedures related to documentation and disposition. Cigna has cooperated fully with the Lead States and we believe we have addressed the requirements of the agreement. The Lead States initiated a re-examination of our practices. Accordingly, the Company may be subject to additional costs, penalties and requests to change its business practices that could negatively impact future earnings for this business.

Note 23 – Segment Information

See Note 1 for a description of our segments. Effective with the first quarter of 2019, the Company began allocating compensation cost for stock options to the segments. Prior year segment information was not restated for this change. A description of our basis for reporting segment operating results is outlined below. Intersegment transactions primarily reflect pharmacy sales to insured customers of the Integrated Medical segment. These and other transactions are eliminated in consolidation.

The Company uses “pre-tax adjusted income from operations” and “adjusted revenues” as its principal financial measures of segment operating performance because management believes they best reflect the underlying results of business operations and permit analysis of trends in underlying revenue, expenses and profitability. Pre-tax adjusted income from operations is defined as income before taxes excluding realized investment results, amortization of acquired intangible assets, results of Anthem and Coventry Health Care, Inc. (the “transitioning clients”) and special items. Income or expense amounts that are excluded from adjusted income from operations because they are not indicative of underlying performance or the responsibility of operating segment management include:

Realized investment gains (losses) including changes in market values of certain financial instruments between balance sheet dates, as well as gains and losses associated with invested asset sales

Amortization of acquired intangible assets because these relate to costs incurred for acquisitions

Results of transitioning clients because those results are not indicative of ongoing results

Special items, if any, that management believes are not representative of the underlying results of operations due to the nature or size of these matters.

The Company does not report total assets by segment since this is not a metric used to allocate resources or evaluate segment performance.

Adjusted revenues is defined as revenues excluding: 1) revenue contributions from transitioning clients; 2) the Company’s share of certain realized investment results of its joint ventures reported in the International Markets segment using the equity method of accounting and 3) special items, if any.

The following tables present the special items recorded by the Company in 2019, 2018 and 2017.

(In millions)
Description of Special Item Charges (Benefits) and Financial Statement Line Item(s)			After-tax			Before-tax
Year ended December 31, 2019
	Total integration and transaction-related costs (Selling, general and administrative expenses)	$	427		$	552
	Charge for organizational efficiency plan (Selling, general and administrative expenses)	$	162		$	207
	Charges associated with litigation matters (Selling, general and administrative expenses)	$	41		$	51
Year ended December 31, 2018
	Integration and transaction-related costs
	- Selling, general and administrative expenses	$	587		$	748
	- Interest expense and other		179			227
	- Net investment income		(97)			(123)
	Total integration and transaction-related costs	$	669		$	852
	Charges associated with litigation matters (Selling, general and administrative expenses)	$	19		$	25
	Charges associated with U.S. tax reform
	- Selling, general and administrative expenses	$	1		$	2
	- Tax (benefit)		(3)
	Total (benefits) charges associated with U.S. tax reform	$	(2)		$	2
Year ended December 31, 2017
	Integration and transaction-related costs
	- Selling, general and administrative expenses	$	92		$	126
	- Tax (benefit)		(59)
	Total integration and transaction-related costs	$	33		$	126
	Charges associated with U.S. tax reform
	- Selling, general and administrative expenses	$	(36)		$	(56)
	- Tax expense		232
	Total charges (benefits) associated with U.S. tax reform	$	196		$	(56)
	Debt extinguishment costs	$	209		$	321
	Long-term care guaranty fund assessment (Selling, general and administrative expenses)	$	83		$	129

Summarized segment financial information for the years ended December 31 was as follows:

(In millions)	Health Services		Integrated Medical		International Markets		Group Disability and Other		Corporate and Eliminations		Total
2019
Revenues from external customers (1)	$	107,354	$	34,861	$	5,500	$	4,461	$	-	$	152,176
Inter-segment revenues		2,380		1,180		-		26		**(**3,586)
Net investment income		60		478		159		695		**(**2)		1,390
Total revenues		109,794		36,519		5,659		5,182		**(**3,588)		153,566
Revenue contributions from transitioning clients		**(**13,347)		-		-		-		-		**(**13,347)
Net realized investment results from equity method subsidiaries (2)		-		-		**(**44)		-		-		**(**44)
Adjusted revenues	$	96,447	$	36,519	$	5,615	$	5,182	$	**(**3,588)	$	140,175
Depreciation and amortization	$	3,071	$	449	$	87	$	41	$	3	$	3,651
Income (loss) before taxes	$	3,983	$	3,904	$	785	$	562	$	**(**2,664)	$	6,570
Pre-tax adjustments to reconcile to adjusted income from operations
Adjustment for transitioning clients		**(**1,726)		-		-		-		-		**(**1,726)
(Income) attributable to noncontrolling interests		**(**4)		-		**(**16)		-		-		**(**20)
Net realized investment (gains) (2)		-		**(**112)		**(**43)		**(**66)		-		**(**221)
Amortization of acquired intangible assets		2,839		69		36		5		-		2,949
Special items
Integration and transaction-related costs		-		-		-		-		552		552
Charge for organizational efficiency plan		-		-		-		-		207		207
Charges associated with litigation matters		-		**(**30)		-		-		81		51
Pre-tax adjusted income (loss) from operations	$	5,092	$	3,831	$	762	$	501	$	**(**1,824)	$	8,362
(In millions)	Health Services		Integrated Medical		International Markets		Group Disability and Other		Corporate and Eliminations		Total
2018
Revenues from external customers (1)	$	5,902	$	31,759	$	5,174	$	4,335	$	-	$	47,170
Inter-segment revenues		1,154		573		-		14		(1,741)
Net investment income		9		459		149		712		151		1,480
Total revenues	$	7,065	$	32,791	$	5,323	$	5,061	$	(1,590)	$	48,650
Revenue contributions from transitioning clients		(459)		-		-		-		-		(459)
Net realized investment results from equity method subsidiaries (2)		-		-		43		-		-		43
Special items reported in integration and transaction-related costs		-		-		-		-		(123)		(123)
Adjusted revenues	$	6,606	$	32,791	$	5,366	$	5,061	$	(1,713)	$	48,111
Depreciation and amortization	$	120	$	466	$	55	$	53	$	1	$	695
Income (loss) before taxes	$	329	$	3,342	$	670	$	497	$	(1,257)	$	3,581
Pre-tax adjustments to reconcile to adjusted income from operations
Adjustment for transitioning clients		(62)		-		-		-		-		(62)
(Income) attributable to noncontrolling interests		-		-		(14)		-		-		(14)
Net realized investment losses(2)		-		36		61		25		2		124
Amortization of acquired intangible assets		113		99		18		5		-		235
Special items
Integration and transaction-related costs		-		-		-		-		852		852
Charges associated with litigation matters		-		25		-		-		-		25
U.S. tax reform		-		-		-		2		-		2
Pre-tax adjusted income (loss) from operations	$	380	$	3,502	$	735	$	529	$	(403)	$	4,743
(1) Includes the Company’s share of the earnings of its joint ventures reported in the International Markets segment using the equity method of accounting.
(2) Beginning in 2018, includes the Company's share of certain realized investment gains (losses) of its joint ventures reported using the equity method of accounting.

(In millions)	Health Services		Integrated Medical		International Markets		Group Disability and Other		Corporate and Eliminations		Total
2017
Revenues from external customers (1)	$	3,250	$	28,193	$	4,774	$	4,363	$	-	$	40,580
Inter-segment revenues		988		476		-		12		(1,476)
Net investment income		3		366		127		700		30		1,226
Total revenues	$	4,241	$	29,035	$	4,901	$	5,075	$	(1,446)	$	41,806
Adjusted revenues	$	4,241	$	29,035	$	4,901	$	5,075	$	(1,446)	$	41,806
Depreciation and amortization	$	-	$	470	$	61	$	31	$	4	$	566
Income (loss) before taxes	$	288	$	2,859	$	667	$	614	$	(822)	$	3,606
Pre-tax adjustments to reconcile to adjusted income from operations
Loss attributable to noncontrolling interests		-		1		1		-		-		2
Net realized investment (gains)		-		(137)		(31)		(69)		-		(237)
Amortization of acquired intangible assets		-		93		17		5		-		115
Special items
Debt extinguishment costs		-		-		-		-		321		321
Long-term care guaranty fund assessment		-		106		-		23		-		129
Integration and transaction-related costs		-		-		-		-		126		126
U.S. tax reform		-		-		-		(56)		-		(56)
Pre-tax adjusted income (loss) from operations	$	288	$	2,922	$	654	$	517	$	(375)	$	4,006
(1) Includes the Company’s share of the earnings of its joint ventures reported in the International Markets segment using the equity method of accounting.

Revenue from external customers includes pharmacy revenues, premiums and fees and other revenues. The following table presents these revenues by product, premium and service type for the twelve months ended December 31:

(In millions)	2019				2018			2017
Products (Pharmacy revenues) (ASC 606)
Network revenues	$		50,431		$	1,415		$	-
Home delivery and specialty revenues			47,768			3,997			2,979
Other			4,900			67			-
Total pharmacy revenues			103,099			5,479			2,979
Integrated Medical premiums (ASC 944)
Commercial
Health Insurance			12,523			10,710			9,439
Stop loss			4,328			4,008			3,483
Other			1,040			1,038			917
Government
Medicare Advantage			6,314			5,832			5,534
Medicare Part D			1,699			764			764
Other			4,185			4,496			3,494
Total Integrated Medical premiums			30,089			26,848			23,631
International Markets premiums			5,266			5,043			4,619
Domestic disability, life and accident premiums			4,225			4,000			3,973
Other premiums			134			222			268
Total premiums			39,714			36,113			32,491
Services (ASC 606)
Fees			9,229			5,558			5,053
Other external revenues			134			20			57
Total services			9,363			5,578			5,110
Total revenues from external customers	$		152,176		$	47,170		$	40,580

Foreign and U.S. revenues from external customers for the three years ended December 31 are shown below. The Company’s foreign revenues are generated by its foreign operating entities. In the periods shown, no foreign country contributed more than 5% of consolidated revenues from external customers.

(In millions)		2019			2018			2017
United States		$	147,332		$	42,773		$	36,555
South Korea			2,022			2,093			1,892
All other foreign countries			2,822			2,304			2,133
Total		$	152,176		$	47,170		$	40,580

Quarterly Financial Data (unaudited)

The following unaudited quarterly financial data is presented on a consolidated basis for each of the years ended December 31, 2019 and December 31, 2018. 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.

(In millions, except per share amounts)					Three Months Ended
	March 31,			June 30,			September 30,			December 31,
Consolidated Results
2019
Total revenues	$	37,946		$	38,819		$	38,556		$	38,245
Income before income taxes		1,788			1,758			1,763			1,261
Shareholders’ net income		1,368	(1)		1,408	(1)		1,351	(1)		977	(1)
Shareholders’ net income per share	1
Basic		3.61			3.73			3.60			2.63
Diluted		3.56			3.70			3.57			2.60
2018
Total revenues	$	11,413		$	11,480		$	11,457		$	14,300
Income before income taxes		1,218			1,102			1,033			228
Shareholders’ net income		915	(1)		806	(1)		772	(1)		144	(1)
Shareholders’ net income per share
Basic		3.78			3.32			3.18			0.56
Diluted		3.72			3.29			3.14			0.55
Stock and dividend data
2019
Price range of common stock — high	$	202.02		$	170.89		$	185.77		$	207.28
— low	$	158.58		$	141.95		$	145.51		$	146.50
Dividends declared per common share	$	0.04		$	-		$	-		$	-
2018
Price range of common stock — high	$	227.13		$	182.10		$	208.73		$	226.61
— low	$	163.02		$	163.80		$	166.88		$	176.52
Dividends declared per common share	$	0.04		$	-		$	-		$	-
(1) Shareholders’ net income includes the following after-tax charges (benefits), described in Note 23 to the Consolidated Financial Statements:
	March 31,			June 30,			September 30,			December 31,
2019 Integration and transaction-related costs	$	108		$	115		$	88		$	116
2019 Charge for organizational efficiency plan		-			-			-			162
2019 Charges (benefits) associated with litigation matters		-			64			*(*23)			-
Total 2019 charges	$	108		$	179		$	65		$	278
	March 31,			June 30,			September 30,			December 31,
2018 Integration and transaction-related costs	$	50		$	109		$	108		$	402
2018 Charges (benefits) associated with litigation matters		-			-			35			*(*16)
2018 U.S. tax reform		-			-			*(*5)			3
Total 2018 charges	$	50		$	109		$	138		$	389