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.

The following table provides information as of March 31, 2020 and December 31, 2019 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 March 31, 2020		As of December 31, 2019		As of March 31, 2020		As of December 31, 2019		As of March 31, 2020		As of December 31, 2019		As of March 31, 2020		As of December 31, 2019
Financial assets at fair value
Debt securities
Federal government and agency	$	193	$	197	$	434	$	536	$	—	$	—	$	627	$	733
State and local government	—		—		777		810		—		—		777		810
Foreign government	—		—		2,153		2,228		25		28		2,178		2,256
Corporate	—		—		17,944		19,063		559		357		18,503		19,420
Mortgage and other asset-backed	—		—		321		398		167		138		488		536
Total debt securities	193		197		21,629		23,035		751		523		22,573		23,755
Equity securities ⁽¹⁾	6		7		130		72		15		32		151		111
Short-term investments	—		—		306		423		—		—		306		423
Derivative assets	—		—		239		83		—		—		239		83
Real estate funds priced at NAV as a practical expedient ⁽²⁾													179		184
Financial liabilities at fair value
Derivative liabilities	$	—	$	—	$	19	$	18	$	—	$	—	$	19	$	18

(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 the Company has $57 million in unfunded commitments as of March 31, 2020.

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.

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 96% 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 March 31, 2020 or December 31, 2019. The nature and use of these derivative financial instruments 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.

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.

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 March 31, 2020 and December 31, 2019. 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. The range and weighted averages have increased over the reported periods, resulting from growing concerns over the economic impacts related to COVID-19.

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 by Quantity)
as of

(Fair value in millions )

March 31, 2020

December 31, 2019

Unobservable input March 31, 2020

March 31, 2020

December 31, 2019

Debt securities

Corporate and government debt securities

582

385

Liquidity

70 - 2330 (370) bps

70 - 930 (280) bps

Mortgage and other asset-backed securities

167

138

Liquidity

60 - 350 (120) bps

60 - 370 (70) bps

Weighting of credit spreads

350 - 580 (440) bps

240 - 460 (330) bps

Securities not priced by the Company ⁽¹⁾

—

Total Level 3 debt securities

751

523

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.

The following table summarizes the changes in financial assets and financial liabilities classified in Level 3 for the three months ended March 31, 2020 and 2019. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.


Debt and Equity Securities
	For the Three Months Ended March 31,
(In millions)	2020		2019
Balance at January 1,	$	555	$	410
Total (losses) included in shareholders’ net income	(12)		(1)
Gains (losses) included in other comprehensive income	(71)		7
Gains (losses) required to adjust future policy benefits for settlement annuities⁽¹⁾	(10)		2
Purchases, sales and settlements
Purchases	62		—
Sales	(12)		—
Settlements	(2)		(1)
Total purchases, sales and settlements	$	48	$	(1)
Transfers into/(out of) Level 3
Transfers into Level 3	348		20
Transfers out of Level 3	(92)		(1)
Total transfers into/(out of) Level 3	$	256	$	19
Balance at March 31,	$	766	$	436
Total (losses) included in shareholders’ net income attributable to instruments held at the reporting date	$	(18)	$	(1)
Change in unrealized gains or losses included in other comprehensive income for assets held at the end of the reporting period	$	(66)	N/A

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 2020 and 2019 primarily reflected changes in liquidity and credit risk estimates for certain private placement issuers across several sectors.

The investment income and fair value gains and losses of separate account assets 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.


(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, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Guaranteed separate accounts (See Note 19)	$	197	$	219	$	265	$	271	$	—	$	—	$	462	$	490
Non-guaranteed separate accounts⁽¹⁾	1,160		1,450		4,966		5,522		322		263		6,448		7,235
Subtotal	$	1,357	$	1,669	$	5,231	$	5,793	$	322	$	263	$	6,910	$	7,725
Non-guaranteed separate accounts priced at NAV as a practical expedient ⁽¹⁾													742		756
Total													$	7,652	$	8,481
Separate account assets of business classified as held for sale													(12)		(16)
Separate account assets per Consolidated Balance Sheets													$	7,640	$	8,465

(1)Non-guaranteed separate accounts included $3.5 billion as of March 31, 2020 and $4.0 billion as of December 31, 2019 in assets supporting the Company’s pension plans, including $0.3 billion classified in Level 3 as of March 31, 2020 and $0.2 billion classified in Level 3 as of December 31, 2019.

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 for the three months ended March 31, 2020 and 2019.

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.


	Fair Value as of						Unfunded Commitment as of March 31, 2020	Redemption Frequency (if currently eligible)	Redemption Notice Period
(In millions)	March 31, 2020		December 31, 2019
Securities partnerships	$	513	$	531	$	302	Not applicable	Not applicable
Real estate funds	224		220		—		Quarterly	30 - 90 days
Hedge funds	5		5		—		Up to annually, varying by fund	30 - 90 days
Total	$	742	$	756	$	302

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. For the three months ended March 31, 2020, there were immaterial losses relating to price changes for equity securities with no readily determinable fair value and no impaired investments written down to their fair values. For the three months ended March 31, 2019, there are no realized investment losses resulting from impairments on these assets or price changes for equity securities with no readily determinable fair value. Carrying values represented less than 1% of total investments as of both March 31, 2020 and March 31, 2019.

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, 2020 and December 31, 2019. 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.


		March 31, 2020						December 31, 2019
(In millions)	Classification in Fair Value Hierarchy	Fair Value		Carrying Value		Fair Value		Carrying Value
Commercial mortgage loans	Level 3	$	1,958	$	1,935	$	1,989	$	1,947
Long-term debt, including current maturities, excluding finance leases	Level 2	$	38,134	$	35,634	$	39,439	$	36,375