The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value only under certain conditions, such as when impaired.

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 may 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, as well as for assigning the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. The minimal exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations. Annually, we conduct an on-site visit of the most significant pricing service to review their processes, methodologies and controls. This on-site review includes a walk-through of inputs for a sample of securities held across various asset types to validate the documented pricing process.

The following tables provide information as of March 31, 2017 and December 31, 2016 about the Company's financial assets and liabilities carried at fair value. Separate account assets that are also recorded at fair value on the Company's Consolidated Balance Sheets are reported separately under the heading “separate account assets” as gains and losses related to these assets generally accrue directly to policyholders.

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
March 31, 2017
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	372	$	525	$	-	$	897
State and local government		-		1,419		-		1,419
Foreign government		-		2,273		39		2,312
Corporate		-		16,144		483		16,627
Mortgage and other asset-backed		-		324		155		479
Total fixed maturities⁽¹⁾		372		20,685		677		21,734
Equity securities		402		122		50		574
Subtotal		774		20,807		727		22,308
Short-term investments		-		303		-		303
GMIB assets		-		-		777		777
Other derivative assets		-		4		-		4
Total financial assets at fair value, excluding separate accounts	$	774	$	21,114	$	1,504	$	23,392
Financial liabilities at fair value:
GMIB liabilities	$	-	$	-	$	761	$	761
Other derivative liabilities		-		2		-		2
Total financial liabilities at fair value	$	-	$	2	$	761	$	763

(1) Fixed maturities includes $543 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $14 million of appreciation for securities classified in Level 3. See Note 10 for additional information.

















	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
December 31, 2016
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	374	$	503	$	-	$	877
State and local government		-		1,435		-		1,435
Foreign government		-		2,066		47		2,113
Corporate		-		15,552		498		16,050
Mortgage and other asset-backed		-		329		157		486
Total fixed maturities⁽¹⁾		374		19,885		702		20,961
Equity securities		396		113		74		583
Subtotal		770		19,998		776		21,544
Short-term investments		-		691		-		691
GMIB assets		-		-		799		799
Other derivative assets		-		10		-		10
Total financial assets at fair value, excluding separate accounts	$	770	$	20,699	$	1,575	$	23,044
Financial liabilities at fair value:
GMIB liabilities	$	-	$	-	$	780	$	780
Other derivative liabilities		-		5		-		5
Total financial liabilities at fair value	$	-	$	5	$	780	$	785

(1) Fixed maturities includes $524 million of net appreciation required to adjust future policy benefits for run-off settlement annuity business including $14 million of appreciation for securities classified in Level 3.

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. Given the narrow definition of Level 1 and the Company's investment asset strategy to maximize investment returns, a relatively small portion of the Company's investment assets are classified in this category.

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.

Fixed maturities and equity securities. Approximately 93% of the Company's investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Because many fixed maturities do not trade daily, third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.

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 which approximates cost. On a regular basis, the Company compares market prices for these securities to recorded amounts to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.

Other derivatives classified in Level 2 represent over-the-counter instruments such as interest rate and foreign currency 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 adjustment for credit risk was required as of March 31, 2017 or December 31, 2016. Level 2 also includes exchange-traded interest rate swap contracts. Credit risk related to the clearinghouse counterparty and the Company is considered minimal when estimating the fair values of these derivatives because of upfront margin deposits and daily settlement requirements. The nature and use of these other derivatives are described in Note 11.

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, as well as assets and liabilities relating to GMIB, in Level 3. Approximately 3% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category.

Fair values of mortgage and other asset-backed securities, corporate and government fixed maturities are primarily determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. For mortgage and other asset-backed securities, inputs and assumptions for pricing may also include collateral attributes and prepayment speeds. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research in its evaluation, as well as the issuer's financial statements.

The following tables summarize the fair value and significant unobservable inputs used in pricing the following securities that were developed directly by the Company as of March 31, 2017 and December 31, 2016. The range and weighted average basis point amounts (“bps”) for fixed maturity spreads (adjustment to discount rates) and price-to-earnings multiples for equity investments reflect the Company's best estimates of the unobservable adjustments a market participant would make to calculate these fair values.

Mortgage and other asset-backed securities. The significant unobservable inputs used to value the following mortgage and other asset-backed securities are liquidity and weighting of credit spreads. When there is limited trading activity for the security, an adjustment for liquidity is made as of the measurement date that considers current market conditions, issuer circumstances and complexity of the security structure. An adjustment to weight credit spreads is needed to value a more complex bond structure with multiple underlying collateral and no standard market valuation technique. The weighting of credit spreads is primarily based on the underlying collateral's characteristics and their proportional cash flows supporting the bond obligations. The resulting wide range of unobservable adjustments in the table below is due to the varying liquidity and quality of the underlying collateral, ranging from high credit quality to below investment grade.

Corporate and government fixed maturities. The significant unobservable input used to value the following corporate and government fixed maturities is an adjustment for liquidity. When there is limited trading activity for the security, an adjustment is needed to reflect current market conditions and issuer circumstances.

Equity securities. The significant unobservable input used to value the following equity securities is a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”). These securities are comprised of private equity investments with limited trading activity and therefore a ratio of EBITDA is used to estimate value based on company circumstances and relative risk characteristics.


			Unobservable Input	Unobservable Adjustment Range (Weighted Average)
(Fair value in millions)		Fair Value	Unobservable Input	Unobservable Adjustment Range (Weighted Average)
As of March 31, 2017
Fixed maturities:
Mortgage and other asset-backed securities	$	155	Liquidity	60 - 340 (90) bps
			Weighting of credit spreads	170 - 450 (230) bps
Corporate and government fixed maturities		498	Liquidity	70 - 2,550 (340) bps
Total fixed maturities		653
Equity securities		50	Price-to-EBITDA multiples	5.0 - 12.0 (8.3)
Subtotal		703
Securities not priced by the Company⁽¹⁾		24
Total Level 3 securities	$	727
As of December 31, 2016
Fixed maturities:
Mortgage and other asset-backed securities	$	157	Liquidity	60 - 330 (90) bps
			Weighting of credit spreads	160 - 470 (230) bps
Corporate and government fixed maturities		490	Liquidity	80 - 1,300 (340) bps
Total fixed maturities		647
Equity securities		74	Price-to-EBITDA multiples	4.2 - 11.6 (8.5)
Subtotal		721
Securities not priced by the Company⁽¹⁾		55
Total Level 3 securities	$	776
(1) The fair values for these securities use single, unadjusted non-binding broker quotes not developed directly by the Company.

Significant increases in fixed maturity spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. Significant decreases in equity price-to-EBITDA multiples would result in lower fair value measurements while increases in these inputs would result in higher fair value measurements. Generally, the unobservable inputs are not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.

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

The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three months ended March 31, 2017 and 2016. Separate account asset changes are reported separately under the heading “separate account assets” as the changes in fair values of these assets accrue directly to the policyholders. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.

	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
(In millions)	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
For the Three Months Ended March 31, 2017
Balance at January 1, 2017	$	776	$	799	$	(780)	$	19
Gains (losses) included in shareholders' net income:
GMIB fair value gain/(loss)		-		(11)		11		-
Other		23		1		(4)		(3)
Total gains (losses) included in shareholders' net income		23		(10)		7		(3)
Losses included in other comprehensive income		(8)		-		-		-
Gains required to adjust future policy benefits for settlement annuities⁽¹⁾		-		-		-		-
Purchases, sales and settlements:
Purchases		25		-		-		-
Sales		(47)		-		-		-
Settlements		(27)		(12)		12		-
Total purchases, sales and settlements		(49)		(12)		12		-
Transfers into/(out of) Level 3:
Transfers into Level 3		40		-		-		-
Transfers out of Level 3		(55)		-		-		-
Total transfers into/(out of) Level 3		(15)		-		-		-
Balance at March 31, 2017	$	727	$	777	$	(761)	$	16
Total gains (losses) included in shareholders' net income attributable
to instruments held at the reporting date	$	(6)	$	(10)	$	7	$	(3)

(1) Amounts do not accrue to shareholders.
















	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
(In millions)	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
For the Three Months Ended March 31, 2016
Balance at January 1, 2016	$	726	$	907	$	(885)	$	22
Gains (losses) included in shareholders' net income:
GMIB fair value gain/(loss)		-		61		(61)		-
Other		(25)		(1)		(5)		(6)
Total gains (losses) included in shareholders' net income		(25)		60		(66)		(6)
Losses included in other comprehensive income		-		-		-		-
Gains required to adjust future policy benefits for settlement annuities⁽¹⁾		11		-		-		-
Purchases, sales and settlements:
Purchases		24		-		-		-
Sales		-		-		-		-
Settlements		(11)		(10)		10		-
Total purchases, sales and settlements		13		(10)		10		-
Transfers into/(out of) Level 3:
Transfers into Level 3		128		-		-		-
Transfers out of Level 3		(61)		-		-		-
Total transfers into/(out of) Level 3		67		-		-		-
Balance at March 31, 2016	$	792	$	957	$	(941)	$	16
Total gains (losses) included in shareholders' net income attributable
to instruments held at the reporting date	$	(25)	$	60	$	(66)	$	(6)

(1) Amounts do not accrue to shareholders.

As noted in the preceding tables, total gains and losses included in shareholders' net income are reflected in the following captions in the Consolidated Statements of Income:

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

Reclassifications impacting Level 3 financial instruments are reported as transfers into or out of the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore gains and losses in income only reflect activity for the period the instrument was classified in Level 3.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company's best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. For the three months ended March 31, 2017, transfers between Level 2 and Level 3 primarily reflect changes in liquidity and credit risk estimates for certain private placement issuers in the metals and mining, electric and capital goods sectors. For the three months ended March 31, 2016, transfers between Level 2 and Level 3 primarily reflect changes in liquidity and credit risk estimates for certain private placement issuers in the metals and mining and energy sectors.

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company's revenues and expenses. See Note 10 to the Consolidated Financial Statements contained in the Company's 2016 Form 10-K for additional policy information related to separate accounts.

As of March 31, 2017 and December 31, 2016, separate account assets 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
March 31, 2017
Guaranteed separate accounts (See Note 16)	$	245	$	263	$	-	$	508
Non-guaranteed separate accounts⁽¹⁾		1,435		5,076		330		6,841
Subtotal	$	1,680	$	5,339	$	330		7,349
Non-guaranteed separate accounts priced at NAV as a practical expedient⁽¹⁾								848
Total separate account assets							$	8,197
December 31, 2016
Guaranteed separate accounts (See Note 16)	$	238	$	262	$	-	$	500
Non-guaranteed separate accounts⁽¹⁾		1,368		4,885		331		6,584
Subtotal	$	1,606	$	5,147	$	331		7,084
Non-guaranteed separate accounts priced at NAV as a practical expedient⁽¹⁾								856
Total separate account assets							$	7,940

(1) Non-guaranteed separate accounts included $3.8 billion as of March 31, 2017 and $3.7 billion as of December 31, 2016 in assets supporting the Company's pension plans, including $0.3 billion classified in Level 3 for both periods and $0.8 billion as of March 31, 2017 and $0.9 billion as of December 31, 2016 priced at net asset value (“NAV”) as a practical expedient.

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

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 that are valued according to the methodologies discussed below. The following tables summarize the changes in separate account assets reported in Level 3 for the three months ended March 31, 2017 and 2016.

Separate account investments in securities partnerships, real estate, and hedge funds are generally valued based on the separate account's ownership share of the equity of the investee (NAV as a practical expedient), including changes in the fair values of its underlying investments. Substantially all of these assets support the Cigna Pension Plans. The table below provides additional information on these investments.

Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as investments in real estate, partnership entities and commercial mortgage loans when they become impaired. Impaired values for these asset types classified as Level 3 representing less than 1% of total investments, were written down to their fair values, resulting in realized investment losses of $1 million after-tax for the three months ended March 31, 2017. There were no impaired real estate entities or commercial mortgage loans written down to fair value for the three months ended March 31, 2016.

The following table includes the Company's financial instruments not recorded at fair value that are subject to fair value disclosure requirements at March 31, 2017 and December 31, 2016. In addition to universal life products and capital leases, financial instruments that are carried in the Company's Consolidated Financial Statements at amounts that approximate fair value are excluded from the following table.

The fair values for all financial instruments presented in the table above have been estimated using market information when available. The following valuation methodologies and inputs are used by the Company to determine fair value.

Commercial mortgage loans. The Company estimates the fair value of commercial mortgage loans generally by discounting the contractual cash flows at estimated market interest rates that reflect the Company's assessment of the credit quality of the loans. Market interest rates are derived by calculating the appropriate spread over comparable U.S. Treasury rates based on the property type, quality rating and average life of the loan. The quality ratings reflect the relative risk of the loan considering debt service coverage, the loan-to-value ratio and other factors. Fair values of impaired mortgage loans are based on the estimated fair value of the underlying collateral generally determined using an internal discounted cash flow model. The fair value measurements were classified in Level 3 because the cash flow models incorporate significant unobservable inputs.

Contractholder deposit funds, excluding universal life products. Generally, these funds do not have stated maturities. Approximately 70% of these balances can be withdrawn by the customer at any time without prior notice or penalty. The fair value for these contracts is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of the individual life and annuity and retirement benefits businesses. The fair value for these contracts is determined using the fair value of these buyers' assets supporting these reinsured contracts. The Company had reinsurance recoverables equal to the carrying value of these reinsured contracts. These instruments were classified in Level 3 because certain inputs are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement.

Long-term debt, including current maturities, excluding capital leases. The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company's estimated current borrowing rate for debt of similar terms and remaining maturities. These measurements were classified in Level 2 because the fair values are based on quoted market prices or other inputs that are market observable or can be corroborated by market data.

Fair values of off-balance sheet financial instruments were not material as of March 31, 2017 and December 31, 2016.