Employee Incentive Plans

12 Months Ended

Dec. 31, 2017

Note 16 – Employee Incentive Plans

A. About Our Plans

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

The Company records compensation expense for stock and option awards over their vesting periods primarily based on the estimated fair value at the grant date. Fair value is determined differently for each type of award as discussed below.

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

(In millions)	2017		2016		2015
Common shares available for award		14.0		6.8		8.6

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. Options vest over periods ranging from one to three years and expire no later than 10 years from grant date. Fair value is estimated using the Black-Scholes option-pricing model by applying the assumptions presented below. That fair value is reduced by options expected to be forfeited during the vesting period. The Company estimates forfeitures at the grant date based on our experience and adjusts the expense to reflect actual forfeitures over the vesting period. The fair value of options, net of forfeitures, is recognized in operating expenses on a straight line basis over the vesting period.

Compensation cost for stock options recorded in operating expenses was as follows for the years ended December 31:

(In millions)	2017		2016		2015
Stock options compensation cost	$	52	$	53	$	42

Black-Scholes option-pricing model assumptions and the resulting fair value of options are presented in the following table.

		2017		2016		2015
Dividend yield		0.0%		0.0%		0.0%
Expected volatility		35.0%		35.0%		35.0%
Risk-free interest rate		1.8%		1.2%		1.3%
Expected option life		4.3 years		4.3 years		4.3 years
Weighted average fair value of options	$	46.38	$	42.01	$	36.40

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)	2017				2016				2015
			Weighted				Weighted				Weighted
			Average				Average				Average
	Options		Exercise Price		Options		Exercise Price		Options		Exercise Price
Outstanding - January 1		7,097	$	82.01		6,433	$	68.86		7,331	$	51.84
Granted		1,230	$	149.17		1,336	$	139.20		1,410	$	120.94
Exercised		(2,072)	$	63.41		(577)	$	62.09		(2,146)	$	43.63
Expired or canceled		(99)	$	138.41		(95)	$	117.18		(162)	$	86.04
Outstanding - December 31		6,156	$	100.79		7,097	$	82.01		6,433	$	68.86
Options exercisable at year-end		3,894	$	77.36		4,409	$	58.36		3,414	$	46.55

Compensation expense of $39 million related to unvested stock options at December 31, 2017 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)	2017		2016		2015
Intrinsic value of options exercised	$	218	$	41	$	179
Cash received for options exercised	$	131	$	36	$	94
Tax benefit from options exercised	$	41	$	11	$	42

The following table summarizes information for outstanding common stock options at December 31, 2017:

		Options		Options
		Outstanding		Exercisable
Number (in thousands)		6,156		3,894
Total intrinsic value (in millions)	$	630	$	490
Weighted average exercise price	$	100.79	$	77.36
Weighted average remaining contractual life		6.6		5.5

C. Restricted Stock

The Company awards restricted stock to the Company’s employees with vesting periods ranging from three to five years. Recipients of restricted stock awards accumulate dividends during the vesting period, but forfeit their awards and accumulated dividends if their employment terminates before the vesting date.

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 other operating expenses over the vesting period on a straight line basis.

Compensation cost for restricted stock awards was as follows for the years ended December 31:

(In millions)	2017		2016		2015
Restricted stock compensation cost	$	53	$	40	$	33

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

(Awards in thousands)	2017			2016			2015
		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	1,309	$	97.78	1,642	$	72.58	2,121	$	53.59
Awarded	451	$	155.21	315	$	138.61	352	$	121.93
Vested	(409)	$	67.09	(591)	$	50.01	(736)	$	41.99
Forfeited	(56)	$	121.74	(57)	$	92.51	(95)	$	68.31
Outstanding - December 31	1,295	$	126.44	1,309	$	97.78	1,642	$	72.58

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

(In millions)	2017		2016		2015
Fair value of vested restricted stock	$	62	$	82	$	92

At the end of 2017, approximately 4,800 employees held 1.3 million restricted stock awards with $68 million of related compensation expense to be recognized over the next two years (weighted average period).

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 end of the performance period, holders of SPSs are awarded shares of Cigna common stock ranging anywhere from 0 to 200% of the original grant of SPSs.

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

Compensation expense for SPSs was as follows for the years ended December 31:

(In millions)	2017		2016		2015
Strategic performance shares compensation cost	$	40	$	35	$	36

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

	2017			2016			2015
		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	942	$	109.14	1,188	$	81.68	1,547	$	59.20
Awarded	275	$	150.06	286	$	139.05	311	$	121.78
Vested	(386)	$	78.91	(494)	$	60.15	(608)	$	45.51
Forfeited	(53)	$	138.19	(38)	$	112.70	(62)	$	76.33
Outstanding - December 31	778	$	136.57	942	$	109.14	1,188	$	81.68

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

	2017				2016				2015
(Shares in thousands; $ in millions)	Shares		Fair Value		Shares		Fair Value		Shares		Fair Value
Shares of Cigna common stock distributed upon SPS vesting		476	$	70		768	$	109		972	$	119

At the end of 2017, approximately 1,500 employees held 778,000 SPSs and $38 million of related compensation expense is expected to be recognized over the next two years. For “performance condition” SPSs, the amount of expense may vary based on actual performance in 2018 and 2019.

E. One-Time Employee Stock Award

In 2017, the Company granted most employees a one-time stock award of five shares that immediately vested. In connection with this program, approximately 205,000 shares were issued at a price of $162.96, resulting in a pre-tax cost of $33 million.

F. Compensation Cost and Tax Effects of Share-based Compensation

During the vesting period, the Company records tax benefits in shareholders’ net income based on the amount of expense being recognized. When stock options are exercised, or when restricted stock and SPSs vest, the difference between tax benefits based on the expense and the actual tax benefit realized are also recorded in net income beginning in 2016 in accordance with ASU 2016-09. Prior to 2016, such excess tax benefits were recorded as an adjustment to additional paid-in capital. The table below provides information about the cost and tax benefits related to all of our share-based compensation arrangements discussed above.

(In millions)	2017		2016		2015
Total compensation cost for shared-based awards	$	178	$	128	$	111
Tax benefits recognized	$	79	$	57	$	24