UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the quarterly period ended March 31, ~~2016~~2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the transition period from _________ to_________

Commission File Number: 1-16095

Aetna Inc.

(Exact name of registrant as specified in its charter)



Pennsylvania (State or other jurisdiction of incorporation or organization)	23-2229683 (I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, CT (Address of principal executive offices)	06156 (Zip Code)
Registrant’s telephone number, including area code:	(860) 273-0123

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)

during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o
		Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

There were ~~350.6~~331.7 million shares of the registrant’s voting common stock with a par value of $.01 per share outstanding at March 31, ~~2016~~.2017.

Aetna Inc.

Form 10-Q

For the Quarterly Period Ended March 31, ~~2016~~2017

Unless the context otherwise requires, references to the terms “we”, “our” or “us” used throughout this Quarterly Report on Form 10-Q (except the Report of Independent Registered Public Accounting ~~Firm on page 39)~~Firm), refer to Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”).



Table of Contents		Page

Part I	Financial Information

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53 49
Item 4.	Controls and Procedures	53 50

Part II	Other Information

Item 1.	Legal Proceedings	54 50
Item 1A.	Risk Factors	54 50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54 50
Item 3	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	54 51
Item 5.	Other Information	51
Item 6.	Exhibits	55 52

Signatures		56 53
~~Index to Exhibits~~		57

Form 10-Q Table of Contents


Part I.	Financial Information


Item 1.	Financial Statements

Index to Consolidated Financial Statements




	Page
Consolidated Balance Sheets at March 31, 2017 and December 31, 2016	2
Consolidated Statements of Income for the three months ended March 31, 2017 and 2016	3
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016	4
Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2017 and 2016	5
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	6
Condensed Notes to the Consolidated Financial Statements	7
Report of the Independent Registered Public Accounting Firm	37

Index to Consolidated Financial Statements

Consolidated Balance Sheets



	(Unaudited)
(Millions)	At March 31, 2017			At December 31, 2016
Assets:
Current assets:
Cash and cash equivalents	$	3,877		$	17,996
Investments	3,079			3,046
Premiums receivable, net	2,745			2,356
Other receivables, net	2,367			2,224
Accrued investment income	230			232
Income taxes receivable	75			44
Other current assets	2,645			2,551
Total current assets	15,018			28,449
Long-term investments	21,922			21,833
Reinsurance recoverables	716			727
Goodwill	10,637			10,637
Other acquired intangible assets, net	1,382			1,442
Property and equipment, net	577			587
Deferred income taxes	93			—
Other long-term assets	1,762			1,480
Separate Accounts assets	4,244			3,991
Total assets	$	56,351		$	69,146

Liabilities and shareholders’ equity:
Current liabilities:
Health care costs payable	$	6,432		$	6,558
Future policy benefits	645			645
Unpaid claims	790			801
Unearned premiums	2,078			556
Policyholders’ funds	2,775			2,772
Current portion of long-term debt	1,249			1,634
Accrued expenses and other current liabilities	5,579			5,728
Total current liabilities	19,548			18,694
Future policy benefits	5,908			5,929
Unpaid claims	1,705			1,703
Policyholders’ funds	870			812
Long-term debt, less current portion	8,174			19,027
Deferred income taxes	—			4
Other long-term liabilities	1,564			1,043
Separate Accounts liabilities	4,244			3,991
Total liabilities	42,013			51,203
Commitments and contingencies (Note 14)
Shareholders’ equity:
Common stock ($.01 par value; 2.5 billion shares authorized and 331.7 million shares issued and outstanding in 2017; 2.5 billion shares authorized and 351.7 million shares issued and outstanding in 2016) and additional paid-in capital	4,006			4,716
Retained earnings	11,531			14,717
Accumulated other comprehensive loss	(1,276		)	(1,552		)
Total Aetna shareholders’ equity	14,261			17,881
Non-controlling interests	77			62
Total equity	14,338			17,943
Total liabilities and equity	$	56,351		$	69,146

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Index to Consolidated Financial Statements

Consolidated Statements of Income

(Unaudited)


	For the Three Months							For the Three Months
	Ended March 31,							Ended March 31,
(Millions, except per common share data)	2016			2015				2017			2016
Revenue:
Health care premiums	$	13,469.0		$	12,940.1			$	13,219		$	13,469
Other premiums	540.1			538.0				544			540
Fees and other revenue ⁽¹⁾	1,467.0			1,375.0				1,475			1,467
Net investment income	217.7			232.9				260			218
Net realized capital (losses) gains	(.4		)	8.1
Net realized capital losses								(333		)	(1		)
Total revenue	15,693.4			15,094.1				15,165			15,693
Benefits and expenses:
Health care costs ⁽²⁾	10,847.7			10,240.5				10,916			10,848
Current and future benefits	528.9			528.1				545			529
Operating expenses:
Selling expenses	421.1			414.9				421			421
General and administrative expenses	2,442.5			2,400.6				3,432			2,442
Total operating expenses	2,863.6			2,815.5				3,853			2,863
Interest expense	101.8			80.2				173			102
Amortization of other acquired intangible assets	62.8			63.2				60			62
Loss on early extinguishment of long-term debt								246			—
Total benefits and expenses	14,404.8			13,727.5				15,793			14,404
Income before income taxes	1,288.6			1,366.6
(Loss) income before income taxes								(628		)	1,289
Income taxes:
Current	573.1			647.0				(7		)	560
Deferred	(12.4		)	(56.7		)		(242		)	(9		)
Total income taxes	560.7			590.3
Net income including non-controlling interests	727.9			776.3
Less: Net income (loss) attributable to non-controlling interests	1.3			(1.2		)
Net income attributable to Aetna	$	726.6		$	777.5
Earnings per common share:
Total income tax (benefit) expense								(249		)	551
Net (loss) income including non-controlling interests								(379		)	738
Less: Net income attributable to non-controlling interests							Less: Net income attributable to non-controlling interests	2			1
Net (loss) income attributable to Aetna								$	(381	)	$	737
(Loss) earnings per common share:
Basic	$	2.07		$	2.22			$	(1.11	)	$	2.10
Diluted	$	2.06		$	2.20			$	(1.11	)	$	2.08

⁽¹⁾

Fees and other revenue include administrative services contract member co-payments and plan sponsor reimbursements related to our mail order and specialty pharmacy operations of ~~$24.4~~$31 million and $24 million ~~and $24.1 million (net~~(net of pharmaceutical and processing costs of ~~$308.4~~$340 million and ~~$299.3~~$308 million) for the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, respectively.


⁽²⁾	Health care costs have been reduced by Insured member co-payments related to our mail order and specialty pharmacy operations of ~~$34.0 million~~ ~~and $33.4~~$34 million for each of the three ~~months~~month periods ended March 31, ~~2016~~2017 and ~~2015, respectively.~~ 2016.

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Index to Consolidated Financial Statements

Consolidated Statements of Comprehensive Income

(Unaudited)

For the Three Months
Ended March 31,
(Millions) 2016
2015
Net income including non-controlling interests $ 727.9
$ 776.3
Other comprehensive (loss) income, net of tax:
    Previously impaired debt securities: ⁽¹⁾

Net unrealized losses
($(4.2) and $(3.4) pretax) (2.7 ) (2.2 )
Less: reclassification of (losses) gains to earnings
($(5.3) and $2.4 pretax) (3.4 ) 1.6
    Total previously impaired debt securities ⁽¹⁾
.7
(3.8 )
    All other securities:
Net unrealized gains
($317.4 and $119.9 pretax) 206.3
77.9
Less: reclassification of losses to earnings
($(23.4) and $(11.0) pretax)

(15.2 ) (7.2 )
    Total all other securities 221.5
85.1
    Foreign currency and derivatives:
Net unrealized losses
($(246.3) and $(21.4) pretax) (160.1 ) (13.9 )
Less: reclassification of losses to earnings
($(5.5) and $(1.5) pretax)
(3.6 ) (1.0 )
    Total foreign currency and derivatives (156.5 ) (12.9 )
    Pension and other postretirement employee benefit (“OPEB”) plans:
Less: amortization of net actuarial losses
($(16.0) and $(16.1) pretax) (10.4 ) (10.5 )
Less: amortization of prior service credit
($1.0 and $1.0 pretax)
.7
.7
Total pension and OPEB plans 9.7
9.8
Other comprehensive income 75.4
78.2
Comprehensive income including non-controlling interests 803.3
854.5
Less: Comprehensive income (loss) attributable to non-controlling interests 1.3
(1.2 )
Comprehensive income attributable to Aetna $ 802.0
$ 855.7



	For the Three Months
	Ended March 31,
(Millions)	2017			2016
Net (loss) income including non-controlling interests	$	(379	)	$	738
Other comprehensive income, net of tax:
Previously impaired debt securities	—			1
All other securities	44			221
Derivatives and foreign currency	222			(157		)
Pension and other postretirement employee benefit (“OPEB”) plans	10			10
Other comprehensive income	276			75
Comprehensive (loss) income including non-controlling interests	(103		)	813
Less: Comprehensive income attributable to non-controlling interests	2			1
Comprehensive (loss) income attributable to Aetna	$	(105	)	$	812


⁽¹⁾	Represents unrealized (losses) gains on the non-credit related component of impaired debt securities that we do not intend to sell and subsequent changes in the fair value of any previously impaired security.

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited)., including Note 11 for further information about other comprehensive (loss) income.

~~Consolidated Balance Sheets~~

(Unaudited)

(Millions) At March 31, 2016

At December 31,
2015

Assets:
Current assets:
Cash and cash equivalents $ 3,766.4
$ 2,524.3
Investments 3,127.8
3,014.8
Premiums receivable, net 2,206.7
1,753.1
Other receivables, net 2,673.7
2,443.2
Accrued investment income 227.6
227.7
Income taxes receivable —
260.4
Other current assets 3,391.4
2,509.5
Total current assets 15,393.6
12,733.0
Long-term investments 22,112.2
21,664.8
Reinsurance recoverables 730.9
723.9
Goodwill 10,636.8
10,636.8
Other acquired intangible assets, net 1,626.4
1,688.3
Property and equipment, net 616.1
629.7
Other long-term assets 1,289.8
1,269.9
Separate Accounts assets 4,017.9
4,035.1
Total assets $ 56,423.7
$ 53,381.5

Liabilities and shareholders’ equity:

Current liabilities:

Health care costs payable $ 6,824.8
$ 6,305.7
Future policy benefits 666.3
671.8
Unpaid claims 775.7
772.3
Unearned premiums 716.3
549.2
Policyholders’ funds 2,444.7
2,262.5
Current portion of long-term debt 398.4
—
Income taxes payable 274.9
—
Accrued expenses and other current liabilities 5,814.1
4,920.0
Total current liabilities 17,915.2
15,481.5
Future policy benefits 6,209.1
6,268.2
Unpaid claims 1,670.7
1,655.6
Policyholders’ funds 921.0
885.6
Long-term debt, less current portion 7,382.5
7,785.4
Deferred income taxes 234.0
177.4
Other long-term liabilities 1,194.6
914.1
Separate Accounts liabilities 4,017.9
4,035.1
Total liabilities 39,545.0
37,202.9
Commitments and contingencies (Note 14)

Shareholders’ equity:
Common stock ($.01 par value; 2.5 billion shares authorized and 350.6 million shares issued
and outstanding in 2016; 2.5 billion shares authorized and 349.5 million shares issued and
outstanding in 2015) and additional paid-in capital 4,632.0
4,647.2
Retained earnings 13,436.4
12,797.4
Accumulated other comprehensive loss (1,254.9 ) (1,330.3 )
Total Aetna shareholders’ equity 16,813.5
16,114.3
Non-controlling interests 65.2
64.3
Total equity 16,878.7
16,178.6
Total liabilities and equity $ 56,423.7
$ 53,381.5

~~Refer to accompanying Condensed Notes~~Index to Consolidated Financial Statements ~~(Unaudited).~~

Consolidated Statements of Shareholders’ Equity

(Unaudited)

Attributable to Aetna
(Millions)
Number of
Common
Shares
Outstanding

Common
Stock and
Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total Aetna
Shareholders’
Equity

Non-Controlling Interests
Total
Equity

Three Months Ended March 31, 2016
Balance at December 31, 2015 349.5
$ 4,647.2
$ 12,797.4
$ (1,330.3 ) $ 16,114.3
$ 64.3
$ 16,178.6
Net income —
—
726.6
—
726.6
1.3
727.9
Other decreases in non-
  controlling interest —
—
—
—
—
(.4 ) (.4 )
Other comprehensive income (Note 8) —
—
—
75.4
75.4
—
75.4
Common shares issued for benefit
  plans, including tax benefits, net of
  employee tax withholdings 1.1
(15.2 ) —
—
(15.2 ) —
(15.2 )
Dividends declared —
—
(87.6 ) —
(87.6 ) —
(87.6 )
Balance at March 31, 2016 350.6
$ 4,632.0
$ 13,436.4
$ (1,254.9 ) $ 16,813.5
$ 65.2
$ 16,878.7

Three Months Ended March 31, 2015
Balance at December 31, 2014 349.8
$ 4,542.2
$ 11,051.7
$ (1,111.3 ) $ 14,482.6
$ 69.2
$ 14,551.8
Net income (loss) —
—
777.5
—
777.5
(1.2 ) 776.3
Other decreases in non-
  controlling interest —
—
—
—
—
(1.7 ) (1.7 )
Other comprehensive income (Note 8) —
—
—
78.2
78.2
—
78.2
Common shares issued for benefit
  plans, including tax benefits, net of
  employee tax withholdings 1.5
(2.4 ) —
—
(2.4 ) —
(2.4 )
Repurchases of common shares (2.1 ) (.1 ) (196.2 ) —
(196.3 ) —
(196.3 )
Dividends declared —
—
(87.0 ) —
(87.0 ) —
(87.0 )
Balance at March 31, 2015 349.2
$ 4,539.7
$ 11,546.0
$ (1,033.1 ) $ 15,052.6
$ 66.3
$ 15,118.9



				Attributable to Aetna
(Millions)	Number of Common Shares Outstanding			Common Stock and Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Aetna Shareholders’ Equity			Non-Controlling Interests			Total Equity
Three Months Ended March 31, 2017
Balance at December 31, 2016	351.7			$	4,716		$	14,717		$	(1,552	)	$	17,881		$	62		$	17,943
Net (loss) income	—			—			(381		)	—			(381		)	2			(379		)
Other increases in non-controlling interest	—			—			—			—			—			13			13
Other comprehensive income (Note 11)	—			—			—			276			276			—			276
Common shares issued for benefit plans, net of employee tax withholdings	0.9			(49		)	—			—			(49		)	—			(49		)
Repurchases of common shares	(20.9		)	(661		)	(2,639		)	—			(3,300		)	—			(3,300		)
Dividends declared	—			—			(166		)	—			(166		)	—			(166		)
Balance at March 31, 2017	$	331.7		$	4,006		$	11,531		$	(1,276	)	$	14,261		$	77		$	14,338

Three Months Ended March 31, 2016
Balance at December 31, 2015	349.5			$	4,647		$	12,797		$	(1,330	)	$	16,114		$	65		$	16,179
Net income	—			—			737			—			737			1			738
Other decreases in non-controlling interest	—			—			—			—			—			(1		)	(1		)
Other comprehensive income (Note 11)	—			—			—			75			75			—			75
Common shares issued for benefit plans, net of employee tax withholdings	1.1			(15		)	—			—			(15		)	—			(15		)
Dividends declared	—			—			(88		)	—			(88		)	—			(88		)
Balance at March 31, 2016	350.6			$	4,632		$	13,446		$	(1,255	)	$	16,823		$	65		$	16,888

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Index to Consolidated Financial Statements

Consolidated Statements of Cash Flows

(Unaudited)


		Three Months Ended							Three Months Ended
		March 31,							March 31,
(Millions)		2016			2015				2017			2016
Cash flows from operating activities:
Net income including non-controlling interests		$	727.9		$	776.3
Net (loss) income including non-controlling interests									$	(379	)	$	738
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Net realized capital losses (gains)		.4			(8.1		)
Net realized capital losses									333			1
Depreciation and amortization		169.2			164.0				160			169
Debt fair value amortization		(7.4		)	(7.8		)		(7		)	(7		)
Equity in losses (earnings) of affiliates, net		14.8			(9.7		)
Equity in (earnings) losses of affiliates, net									(38		)	15
Stock-based compensation expense		53.6			49.8				54			54
Amortization of net investment premium		20.6			22.3				17			21
Loss on early extinguishment of long-term debt									246			—
Changes in assets and liabilities:
Accrued investment income		.1			(.5		)
Premiums due and other receivables		(495.9		)	(830.4		)		(477		)	(182		)
Income taxes		519.3			629.5				(271		)	519
Other assets and other liabilities		64.9			123.5				(95		)	(262		)
Health care and insurance liabilities		713.4			564.5				1,356			725
Net cash provided by operating activities		1,780.9			1,473.4				899			1,791
Cash flows from investing activities:
Proceeds from sales and maturities of investments		2,938.3			2,608.9				2,738			2,938
Cost of investments		(3,060.4		)	(2,493.9		)		(2,723		)	(3,060		)
Additions to property, equipment and software		(54.6		)	(82.3		)		(71		)	(55		)
Cash used for acquisitions, net of cash acquired		—			(10.9		)
Net cash (used for) provided by investing activities		(176.7		)	21.8
Net cash used for investing activities									(56		)	(177		)
Cash flows from financing activities:
Repayment of long-term debt		—			(228.8		)		(11,484		)	—
Net repayment of short-term debt		—			(203.0		)
Deposits net of (withdrawals) and interest credited to investment contracts		.1			(7.6		)
Common shares issued under benefit plans, net		(79.1		)	(79.9		)		(103		)	(79		)
Stock-based compensation tax benefits		10.3			27.7
Settlements from repurchase agreements		—			(201.7		)
Common shares repurchased		—			(196.3		)		(3,300		)	—
Dividends paid to shareholders		(87.4		)	(87.1		)		(88		)	(87		)
Collateral on interest rate hedges		(205.6		)	(21.4		)
Distributions, non-controlling interests		(.4		)	(1.7		)
Net payment on interest rate derivatives									—			(206		)
Contributions, non-controlling interests									13			—
Net cash used for financing activities		(362.1		)	(999.8		)		(14,962		)	(372		)
Net increase in cash and cash equivalents		1,242.1			495.4
Net (decrease) increase in cash and cash equivalents									(14,119		)	1,242
Cash and cash equivalents, beginning of period		2,524.3			1,420.4				17,996			2,524
Cash and cash equivalents, end of period		$	3,766.4		$	1,915.8			$	3,877		$	3,766
Supplemental cash flow information:
Interest paid		$	43.7		$	47.6			$	130		$	44
Income taxes paid (refunded)		31.1			(66.8		)
Income taxes paid									22			31

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Index to Consolidated Financial Statements

Condensed Notes to Consolidated Financial Statements

(Unaudited)


1.	Organization

We conduct our operations in three business segments:

Health Care consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk) and emerging business products and services ~~such as Accountable Care Solutions,~~ that complement and enhance our medical products. We also offer Medicare and Medicaid products and services and other medical products, such as medical management and data analytics services, medical stop loss insurance, workers’ compensation administrative services and products that provide access to our provider networks in select geographies.

Group Insurance primarily includes group life insurance and group disability products. Group life insurance products are offered on an Insured basis. Group disability products are offered to employers on both an Insured and an ASC basis. Group Insurance also includes long-term care products that were offered primarily on an Insured basis. We no longer solicit or accept new long-term care customers.

Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. Large Case Pensions also includes certain discontinued products (refer to Note 17 ~~beginning on page~~ 3616 for additional information).


2.	Summary of Significant Accounting Policies

~~Interim Financial Statements~~Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2016 Annual Report on Form 10-K (our “2016 Annual Report”), unless the information contained in those disclosures materially changed or is required by GAAP. The accompanying unaudited consolidated financial statements and related condensed notes should be read in conjunction with the consolidated financial statements and related notes presented in our 2016 Annual Report.

These interim financial statements necessarily rely on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes presented in our 2015 Annual Report on Form 10-K (our “2015 Annual Report”). Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), but that is not required for interim reporting purposes, has been condensed or omitted. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2015 Annual Report, unless the information contained in those disclosures materially changed and is required by GAAP. The Company has evaluated subsequent events that occurred after March 31, ~~2016~~2017 through the date the financial statements were issued and determined there were no subsequent events to ~~disclose other than as disclosed in Note 11 beginning on page 26.~~disclose.

Reclassifications

Certain reclassifications were made to ~~2015~~2016 financial information to conform with the ~~2016~~2017 presentation.

~~Principles of Consolidation~~

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Aetna and the subsidiaries we control. All significant intercompany balances have been eliminated in consolidation.

New Accounting Standards

~~Accounting~~Simplifying the Test for ~~Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period~~Goodwill Impairment

Effective January 1, ~~2016,~~2017, we adopted, on a prospective basis, new accounting guidance ~~related to~~which simplifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance clarifies that awards with these provisions should be treated as performance conditions that affect vesting, and do not impact the award’s estimated grant-date fair value. The adoption of this new guidance did not have an impact on our financial position or operating results.

~~Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity~~

Effective January 1, 2016, we adopted new accounting guidance related to the approach used in determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or equity. The adoption of this new guidance did not have a material impact on our financial position or operating results.

~~Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items~~

Effective January 1, 2016, we adopted new accounting guidance related to the presentation of extraordinary items. The amendment eliminates the concept of extraordinary items, which are events that are both unusual and infrequent. Presentation and disclosure of items that are unusual or infrequent will be retained, and will be expanded to include items that are both unusual and infrequent. The adoption of this new guidance did not have a material impact on our financial position or operating results.

~~Amendments to the Consolidation Analysis~~

Effective January 1, 2016, we adopted new accounting guidance related to the evaluation of consolidation for certain legal entities. The amendment changes how a reporting entity assesses consolidation, including whether an entity is considered a variable interest entity, determination of the primary beneficiary and how related parties are considered in the analysis. The adoption of this new guidance required more of our other investments to be considered variable interest entities; however, it did not require additional investments to be consolidated or de-consolidated or have a material impact on our financial position or operating results. Our variable interest entity disclosures as of December 31, 2015 were retrospectively adjusted to conform with the new accounting guidance. Refer to Note 6 beginning on page 11 for further discussion.

~~Simplifying the Presentation of Debt Issuance Costs~~

Effective January 1, 2016, we adopted new accounting guidance related to the financial statement presentation of all debt issuance costs, including those related to line-of-credit arrangements. The amendment requires debt issuance costs to be presented as a direct deduction from the carrying amount of our debt liability, consistent with the approach used for debt premiums or discounts. We also elected to report debt issuance costs associated with any line-of-credit arrangements as a direct deduction from the carrying amount of our debt liability. Amortization of debt issuance costs also will be reported in our statements of income in interest expense, as opposed to general and administrative expenses. We are applying this new guidance on a full retrospective basis, with all prior periods restated for the new presentation. The adoption of this new guidance requires certain reclassifications in our financial statements and did not have a material impact on our financial position or operating results. As a result of adopting this guidance, we reclassified $41 million and $43 million of other current and long-term assets as a reduction of long-term debt on our balance sheets at March 31, 2016 and December 31, 2015, respectively. Additionally, we reclassified an immaterial amount of general and administrative expenses into interest expense for the three months ended March 31, 2016 and 2015.

~~Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement~~

Effective January 1, 2016, we adopted new accounting guidance related to the evaluation of fees paid by a customer in a cloud computing arrangement. The amendment provides additional guidance that aids in determining whether a cloud computing arrangement contains a software license. Arrangements that do not contain a software license must be accounted for as a service contract. If a software license is included in the cloud computing arrangement, the

license element must be accounted for consistent with the acquisition of a software license. The adoption of this new guidance did not have a material impact on our financial position or operating results.

~~Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)~~

Effective January 1, 2016, we adopted new accounting guidance related to the presentation of investments in certain entities that calculate net asset value per share (or its equivalent). The amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This new guidance is applicable to certain of our investments that reside in our separate accounts and employee benefit plans. The adoption of this new guidance did not have a material impact on our financial position or operating results.

~~Simplifying the Accounting for Measurement-Period Adjustments~~

Effective January 1, 2016, we adopted new accounting guidance related to the recognition of adjustments to provisional amounts that are identified during the measurement period in a business combination.goodwill impairment. The new guidance eliminates the requirement to ~~retrospectively account for measurement-period adjustments as part~~calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a ~~business combination and permits such adjustments to be recognized in~~reporting unit exceeds the ~~period in which the adjustment was determined. The adoption of this new guidance did not have a material impact on our financial position or operating results.~~

~~Future Application of Accounting Standards~~

~~Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern~~

Effective December 31, 2016, we will adopt new accounting guidance related to management’s evaluation of whether there is substantial doubt about an entity’s ability to continue as a going concern and the related disclosures. The adoption of this new guidance will not have a material impact on our financial position or operating results.

~~Disclosures about Short-Duration Insurance Contracts~~

Effective December 31, 2016, we will adopt new accounting guidance related to the disclosure of short-duration insurance contracts. The amendment requires insurance companies that issue short-duration contracts to include additional disclosures about those insurance liabilities, including disaggregation of certain disclosures, as appropriate. The adoption of this new guidance will not have a material impact on our financial position or operating results, however, the new guidance will require additional disclosure for our short-duration insurance liabilities that reside in our Health Care and Group Insurance segments.

~~Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships~~

Effective January 1, 2017, we will adopt new accounting guidance clarifying that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignationestimated fair value of the ~~hedge accounting relationship.~~reporting unit. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

~~Contingent Put~~Classification of Certain Cash Receipts and ~~Call Options~~Cash Payments in ~~Debt Instruments~~the Statement of Cash Flows

Effective January 1, 2017, we ~~will adopt~~adopted, on a retrospective basis, new accounting guidance ~~related to~~which clarifies the ~~assessment~~classification of ~~embedded contingent put or call options~~certain cash receipts and cash payments in ~~debt instruments. The new guidance clarifies that assessment~~our Consolidated Statements of ~~whether an embedded contingent put or call option is clearly~~Cash Flows. As a result, certain cash distributions received from our equity method investments will now be classified as cash inflows from operating activities. These cash distributions previously were classified as cash inflows from investing activities. There were no material reclassifications in our Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and ~~closely related to the debt host requires only an analysis~~March 31, 2016 as a result of the ~~four-step decision sequence. The~~ adoption of this new ~~guidance is not expected to have a material impact on our financial position or operating results.~~

~~Simplifying the Transition to the Equity Method of Accounting~~

Effective January 1, 2017, we will adopt new accounting guidance related to the accounting for investments that subsequently qualify for the equity method of accounting. The new accounting guidance eliminates the requirement that an entity retrospectively apply the equity method of accounting to an investment previously accounted for by another method when we subsequently obtain significant influence. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.guidance.

~~Improvements to Employee Share-Based Payment~~Future Application of Accounting

We will adopt new accounting guidance related to the accounting for and financial statement presentation of employee share-based payments. Under the new guidance, entities will be required to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement instead of in additional paid-in capital. The new guidance also revises the allowable number of shares an employer can withhold to satisfy the employer’s statutory income tax obligation and still qualify for equity classification on its balance sheets, permits an accounting policy election to recognize the forfeiture of share-based payment awards as they occur and provides clarification on certain statement of cash flow presentation requirements. The new guidance is effective January 1, 2017 with early adoption permitted during 2016, with any adjustments reflected as of January 1, 2016. We are currently assessing the impact of this new guidance on our financial position and operating results.

Standards

Revenue from Contracts with Customers

Effective January 1, 2018, we will adopt new accounting guidance related to revenue recognition from contracts with customers. ~~This new~~While industry-specific guidance ~~removes~~related to contracts with customers within the scope of Accounting Standards Codification (“ASC”) 944 Financial Services - Insurance remains unchanged, most other industry-specific revenue recognition requirements ~~(insurance contracts are not covered by this guidance) and~~have been removed. The new guidance requires that an entity recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ~~The~~We currently anticipate adopting the new guidance ~~allows an entity to adopt~~using the ~~standard either through a full retrospective approach or a~~ modified retrospective approach with a cumulative effect adjustment to retained earnings. ~~Early adoption of this new guidance is permitted as of January 1, 2017. We~~While we are still ~~assessing~~evaluating the impact of this new guidance on our financial ~~position and operating results in addition~~statements, we anticipate that any impact will only relate to ~~evaluating~~contracts with customers outside the ~~transition method we will use when we adopt~~scope of ASC Topic 944. Adoption of this new ~~guidance.~~guidance could result in reclassifications within our Consolidated Statements of Income; however, we do not anticipate any material changes in the timing of our recognition of revenue or net income.

Recognition and Measurement of Financial Assets and Financial Liabilities

Effective January 1, 2018, we will adopt new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Under the new guidance, all equity investments in unconsolidated entities will be measured at fair value with changes in fair value recognized in net income. A reporting entity may elect to report equity investments without a readily determinable fair value at cost. The new guidance also revises certain disclosures regarding financial assets and liabilities. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

Leases

Effective January 1, 2019, we will adopt new accounting guidance related to the recognition, measurement and disclosure requirements for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and corresponding lease liability on their balance sheets for all leases other than those that meet the definition of a short-term lease. The new guidance also revises certain disclosure requirements regarding leases. While we are still evaluating the impact of adoption of this new guidance, we anticipate that we will be required to record an asset and corresponding liability related to our operating leases (as described in Note 17 in our 2016 Annual Report) on our Consolidated Balance Sheets.

Accounting for Interest Associated with the Purchase of Callable Debt Securities

Effective January 1, 2019, we will adopt new accounting guidance related to the amortization of purchased callable debt securities held at a premium. Under the new guidance, premiums on callable debt securities are amortized to the earliest call date rather than to the contractual maturity date. Callable debt securities held at a discount will continue to be amortized to the contractual maturity date. We are still assessing the impact of this new guidance on our financial position and operating results.

Measurement of Credit Losses on Financial Instruments

Effective January 1, 2020, we will adopt new accounting guidance related to the measurement of credit losses on financial assets and certain other instruments. The new guidance requires the use of a new forward-looking expected loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. The new guidance also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. We are still assessing the impact of this new guidance on our financial position and operating results.


3.	~~Proposed~~Terminated Acquisition ~~of Humana~~and Terminated Divestiture

On July 2, 2015, we entered into a definitive agreement ~~(as it may be amended, the~~(the "Merger Agreement") to acquire Humana Inc. ("Humana"). On July 21, 2016, the U.S. Department of Justice (the “DOJ”) and certain state attorneys general filed a civil complaint in ~~a transaction valued at approximately $37 billion, based on~~ the ~~closing price~~U.S. District Court for the District of ~~Aetna common shares on July 2, 2015, including the assumption of Humana debt~~Columbia (the “District Court”) against us and Humana ~~cash and cash equivalents. Under the terms of the Merger Agreement, Humana stockholders will receive $125.00 in cash and 0.8375 Aetna common shares for each Humana share.~~

~~On October 19, 2015, Aetna and Humana each obtained the approval of their respective shareholders necessary for~~charging that our ~~proposed~~ acquisition of Humana (the “Humana ~~Acquisition”~~Transaction”).

~~The Humana Acquisition remains subject to customary closing conditions, including the expiration~~ would violate Section 7 of the ~~federal Hart-Scott-Rodino~~Clayton Antitrust ~~Improvements~~ Act, ~~of 1976 waiting period~~ and ~~approvals of state departments of insurance and other regulators, and therefore has not been reflected in these financial statements.~~seeking a permanent injunction to prevent Aetna from acquiring Humana. On January 23, 2017, the District Court granted the DOJ’s request to enjoin the Humana Transaction.


4.	~~Earnings Per Common Share~~

~~Basic earnings per share (“EPS”~~On February 14, 2017, Aetna and Humana entered into a mutual termination agreement (the “Termination Agreement”) ~~is computed~~pursuant to which the parties thereto (collectively the “Parties”) agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, entered pursuant thereto or entered in connection therewith (other than certain confidentiality agreements) (collectively with the Merger Agreement, the “Transaction Documents”), effective immediately as of February 14, 2017 (the “Termination Date”). Under the Termination Agreement, Aetna agreed to pay Humana the Regulatory Termination Fee (as defined in the Merger Agreement) of $1.0 billion in cash in full satisfaction of any amounts required to be paid by ~~dividing net income attributable~~Aetna under the Merger Agreement. The Parties also agreed to ~~Aetna by~~release each other from any and all liability, claims, rights, actions, causes of action, suits, liens, obligations, accounts, debts, demands, agreements, promises, liabilities, controversies, costs, charges, damages, expenses and fees, however arising, in connection with, arising out of or related to the ~~weighted average number~~Transaction Documents, the transactions contemplated therein or thereby or certain related matters. We paid Humana the Regulatory Termination Fee on February 16, 2017 and recorded the expense in general and administrative expenses. We funded that payment with the proceeds of ~~common shares outstanding during~~ the reporting period. Diluted EPS is computed in a similar manner, except that the weighted average number of common shares outstanding is adjusted for the dilutive effects of our outstanding stock-based compensation awards, but only if the effect is dilutive.2016 senior notes (as defined below).

~~The computations~~In June 2016, we issued $13.0 billion of ~~basic~~senior notes to partially fund the Humana Transaction (collectively, the “2016 senior notes”). In accordance with the terms of the 2016 senior notes, on February 14, 2017, we issued a notice of redemption for $10.2 billion aggregate principal amount of certain of the 2016 senior notes (collectively, the “Special Mandatory Redemption Notes”) at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and ~~diluted EPS for~~unpaid interest. We redeemed the Special Mandatory Redemption Notes on March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption of the Special Mandatory Redemption Notes, we recognized certain costs in our net income during the three months ended March 31, ~~2016~~ ~~and~~ ~~2015~~ ~~are as follows:~~

Three Months Ended
March 31,
(Millions, except per common share data) 2016
2015
Net income attributable to Aetna $ 726.6
$ 777.5
Weighted average shares used to compute basic EPS 350.7
349.5
Dilutive effect of outstanding stock-based compensation awards 2.4
3.2
Weighted average shares used to compute diluted EPS 353.1
352.7
Basic EPS $ 2.07
$ 2.22
Diluted EPS $ 2.06
$ 2.20

2017. Refer to Note 8 for additional information.

In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage relating to the Humana Transaction, on August 2, 2016, we entered into a definitive agreement (the “Aetna APA”) to sell for cash to Molina Healthcare, Inc. (“Molina”) certain of our Medicare Advantage assets. On February 14, 2017, Aetna and Molina entered into a Termination Agreement (the “APA Termination Agreement”) pursuant to which Aetna terminated the Aetna APA, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby or entered pursuant thereto. Under the APA Termination Agreement, Aetna agreed to pay Molina in cash (a) a termination fee of $53 million and (b) approximately 70% of Molina’s transaction costs. We paid Molina the termination fee on February 16, 2017 and the applicable transaction costs of $7 million on February 27, 2017 and recorded the expense in general and administrative expenses. The ~~stock-based compensation awards excluded from~~payments were funded with the ~~calculation~~proceeds of ~~diluted EPS for~~ the ~~three months ended~~ ~~March 31,~~ 2016 ~~and~~ ~~2015~~ ~~are as follows:~~ senior notes.

Three Months Ended
March 31,
(Millions) 2016
2015
Stock appreciation rights (“SARs”) ⁽¹⁾
.2
1.9
Other stock-based compensation awards ⁽²⁾
.8
1.1


⁽¹⁾	~~SARs are excluded from the calculation of diluted EPS if the exercise price is greater than the average market price of Aetna common shares during the period (i.e., the awards are anti-dilutive).~~


⁽²⁾	Performance stock units ("PSUs"), certain market stock units ("MSUs") with performance conditions, and performance stock appreciation rights ("PSARs") are excluded from the calculation of diluted EPS if all necessary performance conditions have not been satisfied at the end of the reporting period.

~~5. Operating Expenses~~4. Investments

~~For the three months ended~~ Total investments at March 31, ~~2016~~2017 and ~~2015, selling expenses (which include broker commissions, the variable component of our internal sales force compensation and premium taxes) and general and administrative expenses~~December 31, 2016 were as follows:

Three Months Ended
March 31,
(Millions) 2016
2015
Selling expenses $ 421.1
$ 414.9
General and administrative expenses:
Salaries and related benefits 1,252.4
1,206.6
Other general and administrative expenses⁽¹⁾
1,190.1
1,194.0
Total general and administrative expenses 2,442.5
2,400.6
Total operating expenses $ 2,863.6
$ 2,815.5


⁽¹⁾	The three months ended March 31, 2016 and 2015 include estimated fees mandated by the ACA comprised primarily of the health insurer fee of $213.8 million and $218.7 million, respectively, and our estimated contribution to the funding of the ACA’s reinsurance program of $29.4 million and $53.6 million, respectively.



	March 31, 2017						December 31, 2016
(Millions)	Current		Long-term		Total		Current		Long-term		Total
Debt and equity securities available for sale	$	2,928	$	18,925	$	21,853	$	2,876	$	18,866	$	21,742
Mortgage loans	151		1,356		1,507		170		1,341		1,511
Other investments	—		1,641		1,641		—		1,626		1,626
Total investments	$	3,079	$	21,922	$	25,001	$	3,046	$	21,833	$	24,879

~~6. Investments~~

~~Total investments at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015~~ ~~were as follows:~~

March 31, 2016 December 31, 2015
(Millions) Current
Long-term
Total
Current
Long-term
Total
Debt and equity securities available for sale $ 2,987.0
$ 19,120.6
$ 22,107.6
$ 2,877.1
$ 18,445.9
$ 21,323.0
Mortgage loans 138.5
1,367.7
1,506.2
126.9
1,426.8
1,553.7
Other investments 2.3
1,623.9
1,626.2
10.8
1,792.1
1,802.9
Total investments $ 3,127.8
$ 22,112.2
$ 25,240.0
$ 3,014.8
$ 21,664.8
$ 24,679.6

Debt and Equity Securities

Debt and equity securities available for sale at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


(Millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2016
March 31, 2017
Debt securities:
U.S. government securities	$	1,769.9	$	105.2	$	(.4	)		$	1,874.7	$	1,595	$	49	$	—		$	1,644
States, municipalities and political subdivisions	4,960.2		290.9		(5.2		)		5,245.9		4,886		170		(41		)	5,015
U.S. corporate securities	8,222.4		501.3		(50.7		)		8,673.0		8,400		394		(44		)	8,750
Foreign securities	2,853.1		194.4		(28.3		)		3,019.2		3,004		180		(17		)	3,167
Residential mortgage-backed securities	934.2		23.7		(1.7		)		956.2		760		9		(7		)	762
Commercial mortgage-backed securities	1,275.2		27.7		(1.3		)	⁽¹⁾	1,301.6		1,331		3		(36		)	1,298
Other asset-backed securities	910.8		6.3		(29.0		)	⁽¹⁾	888.1		1,108		9		(5		)	1,112
Redeemable preferred securities	32.8		8.7		—				41.5		22		5		—			27
Total debt securities	20,958.6		1,158.2		(116.6		)		22,000.2		21,106		819		(150		)	21,775
Equity securities	96.4		14.4		(3.4		)		107.4		69		11		(2		)	78
Total debt and equity securities ⁽²⁾	$	21,055.0	$	1,172.6	$	(120.0	)		$	22,107.6
December 31, 2015
Total debt and equity securities ⁽¹⁾⁽²⁾											$	21,175	$	830	$	(152	)	$	21,853
December 31, 2016
Debt securities:
U.S. government securities	$	1,803.5	$	68.8	$	(.6	)		$	1,871.7	$	1,643	$	51	$	—		$	1,694
States, municipalities and political subdivisions	4,889.5		244.3		(9.3		)		5,124.5		5,047		152		(61		)	5,138
U.S. corporate securities	7,981.5		339.5		(146.6		)		8,174.4		8,145		385		(55		)	8,475
Foreign securities	2,910.2		148.3		(61.4		)		2,997.1		2,958		163		(33		)	3,088
Residential mortgage-backed securities	914.6		16.6		(6.3		)		924.9		793		11		(9		)	795
Commercial mortgage-backed securities	1,262.4		17.2		(9.0		)	⁽¹⁾	1,270.6		1,382		5		(39		)	1,348
Other asset-backed securities	910.4		3.1		(19.2		)	⁽¹⁾	894.3		1,077		7		(9		)	1,075
Redeemable preferred securities	33.0		11.5		—				44.5		22		5		—			27
Total debt securities	20,705.1		849.3		(252.4		)		21,302.0		21,067		779		(206		)	21,640
Equity securities	22.8		4.1		(5.9		)		21.0		84		20		(2		)	102
Total debt and equity securities ⁽²⁾	$	20,727.9	$	853.4	$	(258.3	)		$	21,323.0
Total debt and equity securities ⁽¹⁾⁽²⁾											$	21,151	$	799	$	(208	)	$	21,742

⁽¹⁾

At both March 31, ~~2016~~2017 and December 31, ~~2015~~,2016, we held securities for which we previously recognized ~~$4.9 million~~ ~~and~~ ~~$5.4 million, respectively,~~an immaterial amount of non-credit related impairments in accumulated other comprehensive loss. These securities each had aan immaterial amount of net unrealized capital ~~gain~~gains at both March 31, ~~2016~~2017 and December 31, ~~2015~~ of ~~$1.5 million~~ ~~and~~ ~~$1.9 million, respectively.~~

2016.

⁽²⁾

Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results (refer to Note 17 ~~beginning on page~~ 3616 for additional information on our accounting for discontinued products). At March 31, ~~2016~~,2017, debt and equity securities with a fair value of approximately ~~$3.1~~$2.8 billion,, gross unrealized capital gains of ~~$274.6~~$192 million and gross unrealized capital losses of ~~$27.1~~$29 million and, at December 31, ~~2015~~,2016, debt and equity securities with a fair value of approximately ~~$3.0~~$2.9 billion,, gross unrealized capital gains of ~~$208.7~~$195 million and gross unrealized capital losses of ~~$68.0~~$35 million were included in total debt and equity securities, but support our experience-rated and discontinued products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.

The fair value of debt securities at March 31, ~~2016~~2017 is shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or ~~prepaid.~~prepaid, or we intend to sell a security prior to maturity.


(Millions)	Fair Value		Amortized Cost		Fair Value
Due to mature:
Less than one year	$	1,277.2	$	1,498	$	1,513
One year through five years	6,411.3		6,948		7,121
After five years through ten years	5,295.3		4,775		4,909
Greater than ten years	5,870.5		4,686		5,060
Residential mortgage-backed securities	956.2		760		762
Commercial mortgage-backed securities	1,301.6		1,331		1,298
Other asset-backed securities	888.1		1,108		1,112
Total	$	22,000.2	$	21,106	$	21,775

Mortgage-Backed and Other Asset-Backed Securities

All of our residential mortgage-backed securities at March 31, ~~2016~~2017 were issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At March 31, ~~2016,~~2017, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of ~~3.9~~4.7 years.

Our commercial mortgage-backed securities have underlying loans that are dispersed throughout the United States. Significant market observable inputs used to value these securities include loss severity and probability of default. At March 31, ~~2016,~~2017, these securities had an average credit quality rating of ~~AA+~~AAA and a weighted average duration of ~~3.5~~6.9 years.

Our other asset-backed securities have a variety of underlying collateral (e.g., automobile loans, credit card receivables, home equity loans and commercial loans). Significant market observable inputs used to value these securities include the unemployment rate, loss severity and probability of default. At March 31, ~~2016,~~2017, these securities had an average credit quality rating of AA- and a weighted average duration of ~~1.2~~1.3 years.

~~Unrealized Capital Losses and Net Realized Capital Gains (Losses)~~

When a debt or equity security is in an unrealized capital loss position, we monitor the duration and severity of the loss to determine if sufficient market recovery can occur within a reasonable period of time. We recognize an other-than-temporary impairment (“OTTI”) when we intend to sell a debt security that is in an unrealized capital loss position or if we determine a credit-related loss on a debt or equity security has occurred.

Summarized below are the debt and equity securities we held at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:


	Less than 12 months				Greater than 12 months				Total ⁽¹⁾				Less than 12 months					Greater than 12 months					Total ⁽¹⁾
(Millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2016
(Millions, except number of securities)													Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
March 31, 2017
Debt securities:
U.S. government securities	$	5.5	$	.1	$	10.5	$	.3	$	16.0	$	.4	32	$	59	$	—	—	$	—	$	—	32	$	59	$	—
States, municipalities and political subdivisions	385.5		2.1		121.4		3.1		506.9		5.2		530	1,539		38		45	87		3		575	1,626		41
U.S. corporate securities	779.1		27.5		406.4		23.2		1,185.5		50.7		1,210	1,965		35		79	78		9		1,289	2,043		44
Foreign securities	376.7		14.2		211.3		14.1		588.0		28.3		421	693		15		42	57		2		463	750		17
Residential mortgage-backed securities	43.2		.1		124.4		1.6		167.6		1.7		194	431		7		102	16		—		296	447		7
Commercial mortgage-backed securities	198.8		1.0		48.5		.3		247.3		1.3		280	1,025		36		—	—		—		280	1,025		36
Other asset-backed securities	429.3		22.8		63.6		6.2		492.9		29.0		239	449		3		114	102		2		353	551		5
Redeemable preferred securities	1.4		—		—		—		1.4		—
Total debt securities	2,219.5		67.8		986.1		48.8		3,205.6		116.6		2,906	6,161		134		382	340		16		3,288	6,501		150
Equity securities	16.5		2.6		1.5		.8		18.0		3.4		1	4		—		10	2		2		11	6		2
Total debt and equity securities ⁽¹⁾	$	2,236.0	$	70.4	$	987.6	$	49.6	$	3,223.6	$	120.0	2,907	$	6,165	$	134	392	$	342	$	18	3,299	$	6,507	$	152
December 31, 2015
December 31, 2016
Debt securities:
U.S. government securities	$	66.8	$	.2	$	12.6	$	.4	$	79.4	$	.6	26	$	39	$	—	1	$	1	$	—	27	$	40	$	—
States, municipalities and political subdivisions	714.2		6.1		91.6		3.2		805.8		9.3		865	2,228		58		37	75		3		902	2,303		61
U.S. corporate securities	3,168.7		130.8		144.3		15.8		3,313.0		146.6		1,428	2,277		44		114	101		11		1,542	2,378		55
Foreign securities	1,102.4		50.4		89.2		11.0		1,191.6		61.4		649	970		27		62	76		6		711	1,046		33
Residential mortgage-backed securities	328.7		2.9		89.5		3.4		418.2		6.3		188	455		8		104	17		1		292	472		9
Commercial mortgage-backed securities	562.0		8.6		23.8		.4		585.8		9.0		285	1,038		39		3	3		—		288	1,041		39
Other asset-backed securities	653.5		15.6		67.1		3.6		720.6		19.2		226	403		4		208	177		5		434	580		9
Total debt securities	6,596.3		214.6		518.1		37.8		7,114.4		252.4		3,667	7,410		180		529	450		26		4,196	7,860		206
Equity securities	—		5.0		1.3		.9		1.3		5.9		2	3		—		8	3		2		10	6		2
Total debt and equity securities ⁽¹⁾	$	6,596.3	$	219.6	$	519.4	$	38.7	$	7,115.7	$	258.3	3,669	$	7,413	$	180	537	$	453	$	28	4,206	$	7,866	$	208


⁽¹⁾	At March 31, ~~2016~~2017 and December 31, ~~2015~~2016, debt and equity securities in an unrealized capital loss position of $~~27.1~~29 million and $~~68.0~~35 million, respectively, and with related fair value of $~~426.4~~794 million and $~~966.2~~890 million, respectively, related to experience-rated and discontinued products.

We reviewed the securities in the tables above and concluded that these are performing assets generating investment income to support the needs of our business. In performing this review, we considered factors such as the quality of the investment security based on research performed by our internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. At March 31, ~~2016~~,2017, we did not intend to sell these securities, and we did not believe it was more likely than not that we would be required to sell these securities prior to anticipated recovery of their amortized cost basis.

The maturity dates for debt securities in an unrealized capital loss position at March 31, ~~2016~~2017 were as follows:

Supporting discontinued and
experience-rated products

Supporting remaining
products
Total
(Millions)
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Due to mature:
Less than one year $ —
$ —
$ 166.9
$ .6
$ 166.9
$ .6
One year through five years 26.6
.5
647.1
9.0
673.7
9.5
After five years through ten years 148.9
5.9
557.2
20.3
706.1
26.2
Greater than ten years 223.8
18.5
527.3
29.8
751.1
48.3
Residential mortgage-backed securities —
—
167.6
1.7
167.6
1.7
Commercial mortgage-backed securities 19.9
—
227.4
1.3
247.3
1.3
Other asset-backed securities 3.0
—
489.9
29.0
492.9
29.0
Total $ 422.2
$ 24.9
$ 2,783.4
$ 91.7
$ 3,205.6
$ 116.6

~~Net realized capital (losses) gains for the three months ended~~ ~~March 31, 2016~~ ~~and~~ ~~2015, excluding amounts related to experience-rated contract holders and discontinued products, were as follows:~~

Three Months Ended
March 31,
(Millions) 2016
2015
OTTI losses on debt securities recognized in earnings $ (9.1 ) $ (2.4 )
Other net realized capital gains 8.7
10.5
Net realized capital (losses) gains $ (.4 ) $ 8.1

The net realized capital losses for the three months ended March 31, 2016 were primarily attributable to yield-related OTTI on debt securities, substantially offset by gains from the sales of other investments. The net realized capital gains for the three months ended ~~March 31, 2015~~ ~~were primarily attributable to gains from the sales of debt securities.~~

~~We had no individually material realized capital losses on debt or equity securities that impacted our operating results during three months ended March 31, 2016 or~~ ~~2015~~.

~~Excluding amounts related to experience-rated and discontinued products, proceeds from the sale of debt securities and the related gross realized capital gains and losses for the three months ended~~ ~~March 31, 2016~~ ~~and~~ ~~2015~~ ~~were as follows:~~

Three Months Ended
March 31,
(Millions) 2016
2015
Proceeds on sales $ 1,582.4
$ 945.9
Gross realized capital gains 32.3
24.9
Gross realized capital losses 31.3
8.8



	Supporting discontinued and experience-rated products				Supporting remaining products				Total
(Millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Due to mature:
Less than one year	$	7	$	—	$	207	$	—	$	214	$	—
One year through five years	47		1		1,612		19		1,659		20
After five years through ten years	252		6		1,095		25		1,347		31
Greater than ten years	261		14		997		37		1,258		51
Residential mortgage-backed securities	17		—		430		7		447		7
Commercial mortgage-backed securities	182		6		843		30		1,025		36
Other asset-backed securities	27		—		524		5		551		5
Total	$	793	$	27	$	5,708	$	123	$	6,501	$	150

Mortgage Loans

Our mortgage loans are collateralized by commercial real estate. During the three months ended March 31, ~~2016~~2017 and ~~2015~~2016 we had the following activity in our mortgage loan portfolio:

Three Months Ended
March 31,
(Millions) 2016
2015
New mortgage loans $ 12.2
$ 12.7
Mortgage loans fully repaid 48.3
39.5
Mortgage loans foreclosed —
9.0

At ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, we had no material problem, restructured or potential problem mortgage loans. We also had no material impairment reserves on these loans at~~ ~~March 31, 2016~~ or ~~December 31, 2015~~.



	Three Months Ended
	March 31,
(Millions)	2017		2016
New mortgage loans	$	54	$	12
Mortgage loans fully repaid	48		48

We assess our mortgage loans on a regular basis for credit impairments, and annually assign a credit quality indicator to each loan. Our credit quality indicator is internally developed and categorizes our portfolio on a scale from 1 to 7. Category 1 represents loans of superior quality, and Category 7 represents loans where collections are potentially at risk. The vast majority of our mortgage loans fall into the Category 2 to 4 ratings. These ratings represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes. Categories 5 and 6 represent loans where credit risk is not substantial, but these loans warrant management’s close attention. These indicators are based upon several factors, including current loan to value ratios, property condition, market trends, creditworthiness of the borrower and deal structure. ~~At both March 31, 2016~~The vast majority of our mortgage loans fall into categories 2 to 4.

Category 1 - Represents loans of superior quality

Category 2 to 4 - Represents loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.

Categories 5 and ~~December 31, 2015 we did~~6 - Represents loans where credit risk is not ~~have any~~substantial, but these loans in warrant management’s close attention.

Category 7. 7 - Represents loans where collections are potentially at risk and if necessary, an impairment is recorded.

Based upon our most recent assessments at March 31, ~~2016~~2017 and December 31, ~~2015~~,2016, our mortgage loans were given the following credit quality indicators:



(In Millions, except credit ratings indicator)	March 31, 2017		December 31, 2016
1	$	44	$	45
2 to 4	1,446		1,449
5 and 6	17		17
7	—		—
Total	$	1,507	$	1,511

Net Investment Income

Sources of net investment income for the three months ended March 31, 2017 and 2016 were as follows:



	Three Months Ended
	March 31,
(Millions)	2017			2016
Debt securities	$	190		$	195
Mortgage loans	22			29
Other investments	58			4
Gross investment income	270			228
Investment expenses	(10		)	(10		)
Net investment income ⁽¹⁾	$	260		$	218


⁽¹⁾	Net investment income includes $66 million and $45 million for the three months ended March 31, 2017 and 2016, respectively, related to investments supporting our experience-rated and discontinued products.

Realized Capital Gains/Losses

Net realized capital losses for the three months ended March 31, 2017 and 2016, excluding amounts related to experience-rated contract holders and discontinued products, were as follows:



	Three Months Ended
	March 31,
(Millions)	2017			2016
Other-than-temporary impairment (“OTTI”) losses on debt securities recognized in earnings	$	(2	)	$	(9	)
Other net realized capital (losses) gains	(331		)	8
Net realized capital losses	$	(333	)	$	(1	)

The net realized capital losses for the three months ended March 31, 2017 were primarily attributable to the recognition into earnings of the entire unamortized effective portion of the related hedge losses upon the mandatory redemption of $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and the redemption of $750 million aggregate principal amount of senior notes due 2020. The net realized capital losses for the three months ended March 31, 2016 were primarily attributable to yield-related OTTI on debt securities, substantially offset by gains from the sales of other investments.

We had no individually material realized capital losses on debt or equity securities that impacted our operating results during three months ended March 31, 2017 or 2016.

Excluding amounts related to experience-rated and discontinued products, proceeds from the sale of available for sale debt and equity securities and the related gross realized capital gains and losses for the three months ended March 31, 2017 and 2016 were as follows⁽¹⁾:

(In Millions, except credit ratings indicator) March 31,
2016
December 31,
2015
1 $ 50.7
$ 65.8
2 to 4 1,434.7
1,466.9
5 and 6 20.8
21.0
Total $ 1,506.2
$ 1,553.7



��	Three Months Ended
	March 31,
(Millions)	2017		2016
Proceeds on sales	$	1,110	$	1,546
Gross realized capital gains	21		32
Gross realized capital losses	14		31


⁽¹⁾	The proceeds on sales and gross realized capital gains and losses exclude the impact of the sales of short-term debt securities which primarily relate to our investments in mutual funds. These investments were excluded from the disclosed amounts because they represent an immaterial amount of aggregate gross realized capital gains or losses and have a high volume of sales activity.

Variable Interest Entities

~~As discussed in Note 2 beginning on page 6, we adopted the guidance of Accounting Standards Update (ASU)~~ ~~No. 2015-02, Amendments to the Consolidation Analysis (Topic 810)~~ ~~effective January 1, 2016~~. ~~As a result of adopting the new guidance, we~~We have investments in certain hedge fund and private equity investments and real estate partnerships that are considered Variable Interest Entities (“VIE’s”). We do not have a future obligation to fund losses or debts on behalf of these investments; however, we may voluntarily contribute funds.

In evaluating whether we are the primary beneficiary of a VIE, we considered several factors, including whether we (a) have the power to direct the activities that most significantly impact the VIE’s

economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE.

Variable Interest Entities - Primary Beneficiary

~~Upon adoption of the new guidance, we identified~~We have one hedge fund investment previously consolidated as a Voting Interest Entity in our statement of financial position and operating results that is determined to be a VIE under the new guidance. The investment represents a majority owned hedge fund investment where we are the investment manager and have the power to direct the activities that most significantly impact the VIE’s economic performance, including determining the hedge fund’s investment strategy. Accordingly, we are the primary beneficiary and ~~will continue to~~ consolidate the investment in our ~~financial~~operating results. The fund invests in additional hedge funds that are VIEs; however, we are not the primary beneficiary of these underlying funds as discussed in further detail below.

Substantially all of the assets of the VIE hedge fund are comprised of hedge fund investments reported as long-term investments on our ~~balance sheets.~~Consolidated Balance Sheets. The VIE hedge fund had no material liabilities at March 31, ~~2016~~2017 or December 31, ~~2015.~~2016. The total amount of the VIE hedge fund’s assets included in long term investments on our ~~balance sheets~~Consolidated Balance Sheets at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were ~~$494~~$459 million and ~~$477~~$472 million, respectively.

Variable Interest Entities - Other Variable Interest Holder

Our involvement with VIEs where we are not determined to be the primary beneficiary ~~consist~~consists of the following:

Hedge fund and private equity investments - We invest in hedge fund and private equity investments in order to generate investment returns for our investment portfolio supporting our businesses.

Real estate partnerships - We invest in various real estate partnerships including those that construct, own and manage low-income housing developments. For the low income housing development investments, substantially all of the projected benefits to us are from tax credits and other tax benefits.

We are not the primary beneficiary of these investments because the nature of our involvement with the activities of ~~the~~these VIEs does not give us the power to direct the activities that most significantly impact their economic performance. We record the amount of our investment in these VIEs as long-term investments on our ~~balance sheets~~Consolidated Balance Sheets and recognize our share of each VIE’s income or losses in earnings. Our maximum exposure to loss from these VIEs is limited to our investment balances as disclosed below and the risk of recapture of tax credits related to the real estate partnerships previously recognized, which we do not consider significant.

The total amount of other variable interest holder VIE assets included in long term investments on our ~~balance sheets~~Consolidated Balance Sheets at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


(Millions)	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Hedge fund investments	$	425.1	$	418.1	$	355	$	384
Private equity investments	438.8		443.3		497		454
Real estate partnerships	264.5		253.3		263		278
Total	$	1,128.4	$	1,114.7	$	1,115	$	1,116

The carrying value of the total assets and liabilities of our other variable interest holder VIE investments at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:

(Millions) March 31, 2016
December 31, 2015
Assets:
Hedge fund investments $ 34,375.0
$ 33,065.7
Private equity investments 28,075.4
28,552.5
Real estate partnerships 6,699.3
6,808.7
Total $ 69,149.7
$ 68,426.9

Liabilities:
Hedge fund investments $ 4,048.4
$ 3,535.3
Private equity investments 3,236.0
3,235.7
Real estate partnerships 5,005.1
5,044.5
Total $ 12,289.5
$ 11,815.5



(Millions)	March 31, 2017		December 31, 2016
Assets:
Hedge fund investments	$	34,203	$	32,926
Private equity investments	26,819		25,368
Real estate partnerships	6,549		6,743
Total	$	67,571	$	65,037

Liabilities:
Hedge fund investments	$	3,464	$	2,819
Private equity investments	3,353		2,354
Real estate partnerships	4,727		4,938
Total	$	11,544	$	10,111

Non-controlling (Minority) Interests

At March 31, ~~2016~~2017 and December 31, ~~2015,~~2016, continuing business non-controlling interests were ~~$65~~$77 million and ~~$64~~$62 million, respectively, primarily related to third party interests in our investment holdings as well as third party interests in certain of our operating entities. The non-controlling entities’ share was included in total equity. Net income attributable to non-controlling interests was ~~$1.3~~$2 million ~~for the three months ended~~ ~~March 31, 2016. Net loss attributable to non-controlling interests was $1.2~~and $1 million for the three months ended March 31, ~~2015.~~2017 and 2016, respectively. These non-controlling interests did not have a material impact on our financial position or operating results.

~~Net Investment Income~~

~~Sources of net investment income for the three months ended~~ ~~March 31, 2016~~ ~~and~~ ~~2015~~ ~~were as follows:~~

Three Months Ended
March 31,
(Millions) 2016
2015
Debt securities $ 194.9
$ 196.4
Mortgage loans 29.1
21.9
Other investments 3.8
23.9
Gross investment income 227.8
242.2
Investment expenses (10.1 ) (9.3 )
Net investment income ⁽¹⁾
$ 217.7
$ 232.9


⁽¹⁾	~~Net investment income includes~~ ~~$44.7 million~~ ~~and $66.6 million for the three months ended~~ ~~March 31, 2016~~ ~~and 2015, respectively, related to investments supporting our experience-rated and discontinued products.~~

~~7. Health Care Reform’s Reinsurance, Risk Adjustment and Risk Corridor (the “3Rs”)~~

We participate in certain public health insurance exchanges (“Public Exchanges”) established pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, “Health Care Reform” or the “ACA”). Under regulations established by the U.S. Department of Health and Human Services (“HHS”), HHS pays us a portion of the premium (“Premium Subsidy”) and a portion of the health care costs (“Cost Sharing Subsidy”) for low-income individual Public Exchange members. In addition, HHS administers the 3Rs risk management programs.

~~Our net receivable (payable) related to the 3Rs risk management programs at March 31, 2016 and December 31, 2015 were as follows:~~

As of March 31, 2016 As of December 31, 2015
(Millions) Reinsurance Risk Adjustment Risk Corridor Reinsurance Risk Adjustment Risk Corridor
Current $ 291.9
$ (698.9 ) $ (.7 ) $ 394.5
$ (710.2 ) $ (8.1 )
Long-term 1.9
(177.7 ) —
—
—
—
Total net receivable (payable) $ 293.8
$ (876.6 ) $ (.7 ) $ 394.5
$ (710.2 ) $ (8.1 )

At March 31, 2016, we did not record any ACA risk corridor receivables related to the 2016 or 2015 program years or any amount in excess of the prorated 12.6% HHS funding amount received for the 2014 program year, because payments from HHS are uncertain.

~~We expect to perform an annual final reconciliation and settlement with HHS of the Cost Sharing Subsidy and the 3Rs in each subsequent year.~~

~~8. Other Comprehensive (Loss) Income~~

~~Shareholders’ equity included the following activity in accumulated other comprehensive loss for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2016~~ ~~and~~ ~~2015~~:

Net Unrealized Gains (Losses) Pension and OPEB Plans Total
Accumulated
Other
Comprehensive
(Loss) Income
Securities Foreign
Currency
and
Derivatives

(Millions)
Previously
Impaired ⁽¹⁾

All Other

Unrecognized
Net Actuarial
Losses

Unrecognized
Prior Service
Credit

Three months ended March 31, 2016
Balance at December 31, 2015 $ 18.7
$ 312.4
$ (74.0 ) $ (1,602.3 ) $ 14.9
$ (1,330.3 )
Other comprehensive (loss) income
  before reclassifications (2.7 ) 206.3
(160.1 ) —
—
43.5
Amounts reclassified from accumulated
  other comprehensive income 3.4
⁽²
⁾
15.2
⁽²
⁾
3.6
⁽³
⁾
10.4
⁽⁴
⁾
(.7 )
⁽⁴
⁾
31.9
Other comprehensive income (loss) .7
221.5
(156.5 ) 10.4
(.7 ) 75.4
Balance at March 31, 2016 $ 19.4
$ 533.9
$ (230.5 ) $ (1,591.9 ) $ 14.2
$ (1,254.9 )
Three months ended March 31, 2015

Balance at December 31, 2014 $ 34.9
$ 568.0
$ (60.9 ) $ (1,670.9 ) $ 17.6
$ (1,111.3 )
Other comprehensive (loss) income
  before reclassifications (2.2 ) 77.9
(13.9 ) —
—
61.8
Amounts reclassified from accumulated
  other comprehensive income (1.6 )
⁽²
⁾
7.2
⁽²
⁾
1.0
⁽³
⁾
10.5
⁽⁴
⁾
(.7 )
⁽⁴
⁾
16.4
Other comprehensive (loss) income (3.8 ) 85.1
(12.9 ) 10.5
(.7 ) 78.2
Balance at March 31, 2015 $ 31.1
$ 653.1
$ (73.8 ) $ (1,660.4 ) $ 16.9
$ (1,033.1 )


⁽¹⁾	~~Represents unrealized gains on the non-credit related component of impaired debt securities that we do not intend to sell and subsequent changes in the fair value of any previously impaired security.~~


⁽²⁾	Reclassifications out of accumulated other comprehensive income for previously impaired debt securities and all other securities are reflected in net realized capital gains (losses) within the Consolidated Statements of Income.

⁽³⁾

Reclassifications out of accumulated other comprehensive income for foreign currency gains (losses) and derivatives are reflected in net realized capital gains (losses) within the Consolidated Statements of Income, except for the effective portion of derivatives related to interest rate swaps which are reflected in interest expense and were not material during the ~~three~~ ~~months ended~~ ~~March 31, 2016~~ ~~or 2015. Refer to Note 11 beginning on page 26 for additional information.~~


⁽⁴⁾	Reclassifications out of accumulated other comprehensive income for pension and OPEB plan expenses are reflected in general and administrative expenses within the Consolidated Statements of Income. Refer to Note 10 ~~beginning on page~~ 26 ~~for additional information.~~

~~Refer to the Consolidated Statements of Comprehensive Income on page 2 for additional information regarding reclassifications out of accumulated other comprehensive income on a pretax basis.~~

~~9. Financial Instruments~~5. Fair Value

The preparation of our consolidated financial statements in accordance with GAAP requires certain of our assets and liabilities to be reflected at their fair value, and others on another basis, such as an adjusted historical cost basis. In this note, we provide details on the fair value of financial assets and liabilities and how we determine those fair values. We present this information for those financial instruments that are measured at fair value for which the change in fair value impacts net income attributable to Aetna or other comprehensive income separately from other financial assets and liabilities.

Financial Instruments Measured at Fair Value in our Balance Sheets

Certain of our financial instruments are measured at fair value in our ~~balance sheets.~~Consolidated Balance Sheets. The fair values of these instruments are based on valuations that include inputs that can be classified within one of three levels of a hierarchy established by GAAP. The following are the levels of the hierarchy and a brief description of the type of valuation information (“inputs”) that qualifies a financial asset or liability for each level:


◦	Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.


◦	Level 2 – Inputs other than Level 1 that are based on observable market data. These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, inputs that are observable that are not prices (such as interest rates and credit risks) and inputs that are derived from or corroborated by observable markets.


◦	Level 3 – Developed from unobservable data, reflecting our own assumptions.

Financial assets and liabilities are classified based upon the lowest level of input that is significant to the valuation. When quoted prices in active markets for identical assets and liabilities are available, we use these quoted market prices to determine the fair value of financial assets and liabilities and classify these assets and liabilities in Level 1. In other cases where a quoted market price for identical assets and liabilities in an active market is either not available or not observable, we estimate fair value using valuation methodologies based on available and observable market information or by using a matrix pricing model. These financial assets and liabilities would then be classified in Level 2. If quoted market prices are not available, we determine fair value using broker quotes or an internal analysis of each investment’s financial performance and cash flow projections. Thus, financial assets and liabilities may be classified in Level 3 even though there may be some significant inputs that may be observable.

The following is a description of the valuation methodologies used for our financial assets and liabilities that are measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Debt Securities – Where quoted prices are available in an active market, our debt securities are classified in Level 1 of the fair value hierarchy. Our Level 1 debt securities are comprised primarily of U.S. Treasury securities.

The fair values of our Level 2 debt securities are obtained using models such as matrix pricing, which use quoted market prices of debt securities with similar characteristics, or discounted cash flows to estimate fair value. We review these prices to ensure they are based on observable market inputs that include, but are not limited to, quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets and inputs that are observable but not prices (for example, interest rates and credit risks). We also review the methodologies and the assumptions used to calculate prices from these observable inputs. On a quarterly basis, we select a sample of our Level 2 debt securities’ prices and compare them to prices provided by a secondary source. Variances over a specified threshold are identified and reviewed to confirm the price provided by the primary source represents an appropriate estimate of fair value. In addition, our internal investment team consistently compares the prices obtained for select Level 2 debt securities to the team’s own independent estimates of fair value for those securities. We obtained one price for each of our Level 2 debt securities and did not adjust any of these prices at March 31, ~~2016~~2017 or December 31, ~~2015~~.2016.

We also value certain debt securities using Level 3 inputs. For Level 3 debt securities, fair values are determined by outside brokers or, in the case of certain private placement securities, are priced internally. Outside brokers determine the value of these debt securities through a combination of their knowledge of the current pricing environment and market flows. We obtained one non-binding broker quote for each of these Level 3 debt securities and did not adjust any of these quotes at March 31, ~~2016~~2017 or December 31, ~~2015~~.2016. The total fair value of our broker quoted debt securities was ~~$79~~$110 million at March 31, ~~2016~~2017 and ~~$78~~$80 million at December 31, ~~2015~~.2016. Examples of these broker quoted Level 3 debt securities include certain U.S. and foreign corporate securities and certain of our commercial mortgage-backed securities as well as other asset-backed securities. For some of our private placement securities, our internal staff determines the value of these debt securities by analyzing spreads of corporate and sector indices as well as interest spreads of comparable public bonds. Examples of these private placement Level 3 debt securities include certain U.S. and foreign securities and certain tax-exempt municipal securities.

Equity Securities – We currently have two classifications of equity securities: those that are publicly traded and those that are privately placed. Our publicly-traded securities are classified in Level 1 because quoted prices are available for these securities in an active market. For privately-placed equity securities, there is no active market; therefore, we classify these securities in Level 3 because we price these securities through an internal analysis of each investment’s financial statements and cash flow projections. Significant unobservable inputs consist of earnings and revenue multiples, discount for lack of marketability and comparability adjustments. An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement, which may be significant.

Derivatives – Where quoted prices are available in an active market, our derivatives are classified in Level 1. Certain of our derivative instruments are valued using models that primarily use market observable inputs and therefore are classified in Level 2 because they are traded in markets where quoted market prices are not readily available.

~~Financial assets and~~

There were no financial liabilities measured at fair value on a recurring basis in our ~~balance sheets~~Consolidated Balance Sheets at March 31, ~~2016~~2017 and December 31, ~~2015~~2016. Financial assets measured at fair value on a recurring basis in our Consolidated Balance Sheets at March 31, 2017 and December 31, 2016 were as follows:



(Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
March 31, 2016
March 31, 2017
Assets:
Debt securities:
U.S. government securities	$	1,690.9	$	183.8	$	—	$	1,874.7	$	1,482	$	162	$	—	$	1,644
States, municipalities and political subdivisions	—		5,244.9		1.0		5,245.9		—		5,014		1		5,015
U.S. corporate securities	—		8,610.2		62.8		8,673.0		—		8,671		79		8,750
Foreign securities	—		2,993.3		25.9		3,019.2		—		3,146		21		3,167
Residential mortgage-backed securities	—		956.2		—		956.2		—		762		—		762
Commercial mortgage-backed securities	—		1,301.6		—		1,301.6		—		1,267		31		1,298
Other asset-backed securities	—		888.1		—		888.1		—		1,106		6		1,112
Redeemable preferred securities	—		38.9		2.6		41.5		—		27		—		27
Total debt securities	1,690.9		20,217.0		92.3		22,000.2		1,482		20,155		138		21,775
Equity securities	76.6		—		30.8		107.4		47		—		31		78
Derivatives	—		.9		—		.9
Total	$	1,767.5	$	20,217.9	$	123.1	$	22,108.5	$	1,529	$	20,155	$	169	$	21,853
Liabilities:
Derivatives	$	—	$	324.4	$	—	$	324.4
December 31, 2015
December 31, 2016
Assets:
Debt securities:
U.S. government securities	$	1,671.0	$	200.7	$	—	$	1,871.7	$	1,514	$	180	$	—	$	1,694
States, municipalities and political subdivisions	—		5,123.4		1.1		5,124.5		—		5,137		1		5,138
U.S. corporate securities	—		8,110.5		63.9		8,174.4		—		8,395		80		8,475
Foreign securities	—		2,972.3		24.8		2,997.1		—		3,067		21		3,088
Residential mortgage-backed securities	—		924.9		—		924.9		—		795		—		795
Commercial mortgage-backed securities	—		1,270.6		—		1,270.6		—		1,348		—		1,348
Other asset-backed securities	—		894.3		—		894.3		—		1,075		—		1,075
Redeemable preferred securities	—		39.0		5.5		44.5		—		26		1		27
Total debt securities	1,671.0		19,535.7		95.3		21,302.0		1,514		20,023		103		21,640
Equity securities	1.7		—		19.3		21.0		59		—		43		102
Derivatives	—		19.7		—		19.7
Total	$	1,672.7	$	19,555.4	$	114.6	$	21,342.7	$	1,573	$	20,023	$	146	$	21,742
Liabilities:
Derivatives	$	—	$	88.3	$	—	$	88.3

There were no transfers between Levels 1 and 2 during the three months ended March 31, ~~2016~~2017 or ~~2015.~~2016. During the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we had an immaterial amount of gross transfers into and out of Level 3.

3 financial assets.

Financial Instruments Not Measured at Fair Value in our Balance Sheets

The following is a description of the valuation methodologies used for estimating the fair value of our financial assets and liabilities that are carried on our ~~balance sheets~~Consolidated Balance Sheets at adjusted cost or contract value.

Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates that reflect the rates at which similar loans would be made to similar borrowers. These rates reflect our assessment of the creditworthiness of the borrower and the remaining duration of the loans. The fair value estimates of mortgage loans of lower credit quality, including problem and restructured loans, are based on the estimated fair value of the underlying collateral.

Bank loans: Where fair value is determined by quoted market prices of bank loans with similar characteristics, our bank loans are classified in Level 2. For bank loans classified in Level 3, fair value is determined by outside brokers using their internal analyses through a combination of their knowledge of the current pricing environment and market flows.

Equity securities: Certain of our equity securities are carried at cost. The fair values of our cost-method investments are not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

Investment contract liabilities:

•

With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently

being offered by, or available to, us for similar contracts.

•

Without a fixed maturity: Fair value is estimated as the amount payable to the contract holder upon

demand. However, we have the right under such contracts to delay payment of withdrawals that

may ultimately result in paying an amount different than that determined to be payable on demand.

Long-term debt: Fair values are based on quoted market prices for the same or similar issued debt or, if no quoted market prices are available, on the current rates estimated to be available to us for debt of similar terms and remaining maturities.

The carrying value and estimated fair value classified by level of fair value hierarchy for our financial instruments carried on our Consolidated Balance Sheets at adjusted cost or contract value at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	Carrying Value		Estimated Fair Value								Carrying Value		Estimated Fair Value
(Millions)			Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
March 31, 2016
March 31, 2017
Assets:
Mortgage loans	$	1,506.2	$	—	$	—	$	1,562.2	$	1,562.2	$	1,507	$	—	$	—	$	1,539	$	1,539
Bank loans	11.1		—		1.9		8.1		10.0		8		—		—		8		8
Equity securities ⁽¹⁾	34.9		N/A		N/A		N/A		N/A		45		N/A		N/A		N/A		N/A
Liabilities:
Investment contract liabilities:
With a fixed maturity	8.7		—		—		8.7		8.7		8		—		—		8		8
Without a fixed maturity	380.7		—		—		366.5		366.5		370		—		—		354		354
Long-term debt	7,780.9		—		8,427.2		—		8,427.2		9,423		—		10,128		—		10,128


December 31, 2015
(Millions)
December 31, 2016
Assets:
Mortgage loans	$	1,553.7	$	—	$	—	$	1,598.7	1,598.7	$	1,511	$	—	$	—	$	1,540	$	1,540
Bank loans	192.8		—		179.9		7.6		187.5	8		—		—		8		8
Equity securities ⁽¹⁾	34.9		N/A		N/A		N/A		N/A	35		N/A		N/A		N/A		N/A
Liabilities:
Investment contract liabilities:
With a fixed maturity	8.6		—		—		8.6		8.6	8		—		—		8		8
Without a fixed maturity	371.3		—		—		351.1		351.1	378		—		—		364		364
Long-term debt	7,785.4		—		8,227.3		—		8,227.3	20,661		—		21,468		—		21,468


⁽¹⁾	It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies.

Separate Accounts Measured at Fair Value in our Balance Sheets

Separate Accounts assets in our Large Case Pensions ~~business~~segment represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets, a corresponding Separate Accounts liability has been established equal to the assets. These assets and liabilities are carried at fair value. Net investment income and capital gains and losses accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from our other businesses. Deposits, withdrawals, net investment income and realized and unrealized capital gains and losses on Separate Accounts assets are not reflected in our ~~statements~~Consolidated Statements of ~~income, shareholders’ equity~~Income, Shareholders’ Equity or ~~cash flows.~~Cash Flows.

Separate Accounts assets include debt and equity securities and derivative instruments. The valuation methodologies used for these assets are similar to the methodologies described ~~beginning on page~~ 20.in this Note 5. Separate Accounts assets also include investments in common/collective trusts that are carried at fair value. Common/collective trusts invest in other investment funds otherwise known as the underlying funds. The Separate Accounts’ interests in the common/collective trust funds are based on the fair values of the investments of the underlying funds and therefore are classified in Level 2. The assets in the underlying funds primarily consist of equity securities. Investments in common/collective trust funds are valued at their respective net asset value per share/unit on the valuation date.

Separate Accounts financial assets at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	March 31, 2016										December 31, 2015								March 31, 2017								December 31, 2016
(Millions)	Level 1		Level 2			Level 3		Total			Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Debt securities	$	778.4	$	2,305.4		$	4.4	$	3,088.2		$	750.4	$	2,382.0	$	3.8	$	3,136.2	$	784	$	2,488	$	2	$	3,274	$	766	$	2,378	$	—	$	3,144
Equity securities	166.0		5.5			—		171.5			169.8		5.2		—		175.0		147		6		—		153		166		6		—		172
Derivatives	—		(1.2		)	—		(1.2		)	—		.2		—		.2
Common/collective trusts	—		533.7			—		533.7			—		540.2		—		540.2		—		589		—		589		—		582		—		582
Total ⁽¹⁾	$	944.4	$	2,843.4		$	4.4	$	3,792.2		$	920.2	$	2,927.6	$	3.8	$	3,851.6	$	931	$	3,083	$	2	$	4,016	$	932	$	2,966	$	—	$	3,898


⁽¹⁾	Excludes $~~225.7~~228 million and $~~183.5~~93 million of cash and cash equivalents and other receivables at March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

During the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we had an immaterial amount of Level 3 Separate Accounts financial assets.

Offsetting Financial Assets and Liabilities

Certain financial assets and liabilities are offset in our ~~balance sheets~~Consolidated Balance Sheets or are subject to master netting arrangements or similar agreements with the applicable counterparty. Financial assets, including derivative assets, subject to offsetting and enforceable master netting arrangements ~~as of~~ at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	Gross Amounts of Recognized Assets ⁽¹⁾		Gross Amounts Not Offset in the Balance Sheets							Gross Amounts of Recognized Assets ⁽¹⁾		Gross Amounts Not Offset in the Balance Sheets
			Financial Instruments		Cash Collateral Received							Financial Instruments		Cash Collateral Received
(Millions)			Financial Instruments		Cash Collateral Received			Net Amount				Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2016
March 31, 2017
Derivatives	$	.9	$	11.1	$	(2.8	)	$	9.2	$	—	$	17	$	—	$	17
Total	$	.9	$	11.1	$	(2.8	)	$	9.2	$	—	$	17	$	—	$	17

December 31, 2015
December 31, 2016
Derivatives	$	19.7	$	11.8	$	(16.4	)	$	15.1	$	—	$	17	$	—	$	17
Total	$	19.7	$	11.8	$	(16.4	)	$	15.1	$	—	$	17	$	—	$	17

⁽¹⁾ There were no amounts offset in our ~~balance sheets~~Consolidated Balance Sheets at March 31, ~~2016~~2017 or December 31, ~~2015~~2016.

~~Financial~~There were no financial liabilities, including derivative liabilities, subject to offsetting and enforceable master netting arrangements ~~as of~~ at March 31, ~~2016~~2017 and December 31, ~~2015~~ ~~were as follows:~~2016.

6. Health Care and Other Insurance Liabilities

Health Care Costs Payable

The following table shows the components of the change in health care costs payable during the three months ended March 31, 2017 and 2016:

Gross Amounts of
Recognized Liabilities ⁽¹⁾
Gross Amounts Not Offset
in the Balance Sheets

Financial Instruments Cash Collateral Paid
(Millions) Net Amount
March 31, 2016
Derivatives $ 324.4
$ —
$ (282.7 ) $ 41.7
Total $ 324.4
$ —
$ (282.7 ) $ 41.7

December 31, 2015
Derivatives $ 88.3
$ —
$ (90.7 ) $ (2.4 )
Total $ 88.3
$ —
$ (90.7 ) $ (2.4 )



	Three Months Ended
	March 31,
(Millions)	2017			2016
Health care costs payable, beginning of the period	$	6,558		$	6,306
Less: Reinsurance recoverables	5			4
Health care costs payable, beginning of the period, net	6,553			6,302
Add: Components of incurred health care costs
Current year	11,420			11,475
Prior years	(614		)	(627		)
Total incurred health care costs ⁽¹⁾	10,806			10,848

Less: Claims paid
Current year	6,298			5,929
Prior years	4,742			4,398
Total claims paid	11,040			10,327

Health care costs payable, end of period, net	6,319			6,823
Add: Premium deficiency reserve	110			—
Add: Reinsurance recoverables	3			2
Health care costs payable, end of period	$	6,432		$	6,825


⁽¹⁾	~~There were no amounts offset in our balance sheets at~~Total incurred health care costs exclude from the table above $110 million related to the premium deficiency reserve recorded during the three months ended March 31, ~~2016 or December 31, 2015.~~2017 for the 2017 coverage year on our individual Commercial products.

Our estimates of prior years’ health care costs payable decreased by $614 million and $627 million in the three months ended March 31, 2017 and 2016, respectively, resulting from claims settled for amounts less than originally estimated, primarily due to lower health care cost trends as well as the actual claim submission time being faster than we assumed in establishing our health care costs payable in the prior year. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period health care costs when we established our estimate of the current year health care costs payable.

At March 31, 2017, total Health Care liabilities for the ultimate cost of medical claims that have been incurred but not yet reported to us and of those which have been reported to us but not yet paid (collectively, “IBNR”) plus expected development on reported claims totaled approximately $5.5 billion. The substantial majority of the total Health Care IBNR liabilities plus expected development on reported claims at March 31, 2017 related to the current year.

~~10. Pension~~

Long-Term Disability Unpaid Claims

The following table shows the components of the change in unpaid long-term disability claims during the three months ended March 31, 2017 and ~~Other Postretirement Plans~~2016:



	Three Months Ended
	March 31,
(Millions)	2017		2016
Long-term disability unpaid claims beginning of the period	$	1,904	$	1,819
Less: Reinsurance recoverables	26		27
Long-term disability unpaid claims, beginning of the period, net	1,878		1,792
Add: Components of incurred claims
Current year	131		137
Prior years	5		4
Total incurred claims	136		141
Less: Claims paid
Current year	1		1
Prior years	134		119
Total claims paid	135		120
Long-term disability unpaid claims, end of period, net	1,879		1,813
Add: Reinsurance recoverables	26		27
Long-term disability unpaid claims, end of period	$	1,905	$	1,840

~~Defined Benefit Retirement Plans~~

~~Components~~Our estimates of prior years’ long-term disability unpaid claims liability were relatively consistent with actual results in each of the three month periods ended March 31, 2017 and 2016.

The reconciliation of the long-term disability unpaid claims liability to the total unpaid claims liability in our Consolidated Balance Sheets is as follows at March 31, 2017 and 2016:



	At March 31,
(Millions)	2017		2016
Long-term disability unpaid claims	$	1,905	$	1,840
Term life unpaid claims	472		485
Other unpaid claims	118		122
Total unpaid claims	$	2,495	$	2,447

7. The ACA’s Reinsurance, Risk Adjustment and Risk Corridor (the “3Rs”)

We participate in certain public health insurance exchanges (“Public Exchanges”) established pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”). Under regulations established by the U.S. Department of Health and Human Services (“HHS”), HHS pays us a portion of the premium (“Premium Subsidy”) and a portion of the health care costs (“Cost Sharing Subsidy”) for low-income individual Public Exchange members. In addition, HHS administers the 3Rs risk management programs. The ACA’s temporary Reinsurance and Risk Corridor programs expired at the end of 2016.

Our net ~~periodic benefit (income) cost~~receivable (payable) related to the 3Rs risk management programs at March 31, 2017 and December 31, 2016 were as follows:



	At March 31, 2017							At December 31, 2016
(Millions)	Reinsurance		Risk Adjustment			Risk Corridor		Reinsurance		Risk Adjustment			Risk Corridor
Current	$	166	$	(696	)	$	1	$	202	$	(690	)	$	(10	)
Long-term	12		(38		)	—		—		—			—
Total net receivable (payable)	$	178	$	(734	)	$	1	$	202	$	(690	)	$	(10	)

At March 31, 2017, we estimate that we are entitled to receive a total of ~~our defined benefit pension plans~~$529 million from HHS under the three-year ACA risk corridor program for the 2014 through 2016 program years. In November 2016, HHS announced that all 2015 ACA risk corridor collections will be used to pay a portion of the balances on the 2014 ACA risk corridor payments. At March 31, 2017 and ~~other postretirement employee benefit~~December 31, 2016, we did not record any ACA risk corridor receivables related to the 2016 or 2015 program years or any amount in excess of the HHS’s announced pro-rated funding amount for the 2014 program year because payments from HHS are uncertain.

We expect to perform an annual final reconciliation and settlement with HHS of the Cost Sharing Subsidy and 3Rs in each subsequent year, except for the final reconciliation and settlement of the 2014 Cost Sharing Subsidy which occurred in 2016.

Fees Mandated by the ACA

Beginning January 1, 2014, the ACA imposes an annual premium-based health insurer fee (“~~OPEB”~~HIF”) ~~plans~~for each calendar year payable in September which is not deductible for tax purposes. In December 2015, the Consolidated Appropriation Act was enacted which included a one year suspension in 2017 of the HIF. Accordingly, there was no expense related to the HIF for the three months ended March 31, ~~2016~~ ~~and~~ ~~2015~~ ~~were as follows:~~2017 compared with an expense of $214 million for the three months ended March 31, 2016.

Pension Plans OPEB Plans
Three Months Ended Three Months Ended
March 31, March 31,
(Millions) 2016
2015
2016
2015
Amortization of prior service credit $ (.1 ) $ (.1 ) $ (.9 ) $ (.9 )
Interest cost 64.9
65.2
2.7
2.7
Expected return on plan assets (97.3 ) (104.8 ) (.6 ) (.8 )
Recognized net actuarial losses 15.4
15.4
.6
.7
Net periodic benefit (income) cost $ (17.1 ) $ (24.3 ) $ 1.8
$ 1.7

Beginning January 1, 2014, the ACA established a temporary reinsurance program that expired at the end of 2016. Accordingly, there was no expense related to our estimated contribution for the funding of the ACA’s reinsurance program for the three months ended March 31, 2017 compared with an expense of $29 million for the three months ended March 31, 2016.

~~11.~~8. Debt

Long Term Debt

The carrying value of our long-term debt at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 was as follows:

(Millions) March 31,
2016
December 31,
2015
Senior notes, 5.95%, due 2017 ⁽¹⁾
$ 398.4
$ 402.4
Senior notes, 1.75%, due 2017 249.3
249.1
Senior notes, 1.5%, due 2017 498.0
497.7
Senior notes, 2.2%, due 2019 373.1
372.9
Senior notes, 3.95%, due 2020 743.7
743.4
Senior notes, 5.45%, due 2021 671.5
674.9
Senior notes, 4.125%, due 2021 494.4
494.1
Senior notes, 2.75%, due 2022 983.8
983.1
Senior notes, 3.5%, due 2024 741.8
741.6
Senior notes, 6.625%, due 2036 765.0
765.0
Senior notes, 6.75%, due 2037 527.1
527.0
Senior notes, 4.5%, due 2042 477.3
477.1
Senior notes, 4.125%, due 2042 488.7
488.6
Senior notes, 4.75%, due 2044 370.5
370.5
Total long-term debt 7,782.6
7,787.4
Less current portion of long-term debt 398.4
—
Less credit facility issuance costs 1.7
2.0
Total long-term debt, less current portion and credit facility issuance costs $ 7,382.5
$ 7,785.4



(Millions)	March 31, 2017		December 31, 2016
Senior notes, 5.95% due March 2017 ⁽¹⁾	$	—	$	386
Senior notes, 1.75% due May 2017 ⁽¹⁾	250		250
Senior notes, 1.5% due November 2017 ⁽¹⁾	499		499
Senior notes, floating rate due December 2017 ⁽¹⁾	499		499
Senior notes, 1.7% due June 2018	998		997
Senior notes, 2.2% due March 2019	374		374
Senior notes, 1.9% due June 2019	—		1,642
Senior notes, 3.95% due September 2020	—		745
Senior notes, 2.4% due June 2021	—		1,839
Senior notes, 5.45% due June 2021	658		661
Senior notes, 4.125% due June 2021	496		495
Senior notes, 2.75% due November 2022	986		986
Senior notes, 2.8% due June 2023	1,290		1,290
Senior notes, 3.5% due November 2024	743		742
Senior notes, 3.2% due June 2026	—		2,771
Senior notes, 4.25% due June 2036	—		1,480
Senior notes, 6.625% due June 2036	765		765
Senior notes, 6.75% due December 2037	527		527
Senior notes, 4.5% due May 2042	478		478
Senior notes, 4.125% due November 2042	489		489
Senior notes, 4.75% due March 2044	371		371
Senior notes, 4.375% due June 2046	—		2,375
Total long-term debt	9,423		20,661
Less current portion of long-term debt	1,249		1,634
Total long-term debt, less current portion	$	8,174	$	19,027

⁽¹⁾

At March 31, 2017, our 1.75% senior notes due May 2017, 1.5% senior notes due November 2017 and our floating rate senior notes, due December 2017 are each classified as current in our Consolidated Balance Sheet. At December 31, 2016, our 5.95% senior notes due March 2017, 1.75% senior notes due May 2017, 1.5% senior notes due November 2017 and floating rate senior notes due December 2017 are each classified as current in our ~~consolidated balance sheet.~~Consolidated Balance Sheet.

~~We are~~2016 Senior Notes

In June 2016, in connection with the Humana Transaction, we issued the 2016 senior notes, which were comprised of: $500 million of floating rate senior notes due December 2017, $1.0 billion of 1.7% senior notes due June 2018, approximately $1.7 billion of 1.9% senior notes due June 2019, approximately $1.9 billion of 2.4% senior notes due June 2021, $1.3 billion of 2.8% senior notes due June 2023, $2.8 billion of 3.2% senior notes due June 2026, $1.5 billion of 4.25% senior notes due June 2036 and $2.4 billion of 4.375% senior notes due June 2046.

Early Extinguishment of Long-Term Debt

Special Mandatory Redemption Notes

As a ~~member~~result of the ~~Federal Home Loan Bank~~termination of ~~Boston (the “FHLBB”),~~the Merger Agreement, we redeemed the entire $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes, which were due in 2019, 2021, 2026, 2036 and as2046 at a ~~member~~redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed those notes on March 16, 2017, and we ~~have~~funded the ~~ability to obtain cash advances, subject to certain minimum collateral requirements. Our maximum borrowing capacity available from~~redemption with the ~~FHLBB at~~ proceeds of the 2016 senior notes. As a result of the redemption, we recorded a loss on early extinguishment of long-term debt of $125 million ($192 million pretax) in the three months ended March 31, ~~2016 was $813 million. At both March 31, 2016 and December 31, 2015, we did not have any outstanding borrowings from the FHLBB.~~2017.

~~Cash Flow Hedges~~

~~During~~Prior to issuing the 2016 senior notes, during 2015 and ~~the first quarter of~~ 2016 we entered into various interest rate swaps and treasury rate locks with an aggregate notional value of $3.5 billion. We designated these swaps and treasury rate locks as cash flow hedges against interest rate exposure related to the forecasted future issuance of fixed-rate debt to be primarily used to finance a portion of the purchase price of the Humana Acquisition. At March 31, 2016, these interest rate swaps and

~~treasury rate locks had a pretax fair value loss of $223 million, which was reflected net of tax in accumulated other comprehensive loss within shareholders’ equity.~~

During the second quarter of 2016, we terminated interest rate swaps with an aggregate notional value of $750 million and paid an aggregate of $66 million to the swap counterparties upon termination. We performed a final effectiveness test upon the termination of each swap, and the effective portion of the hedge loss will remain in accumulated other comprehensive loss, net of tax, as the forecasted future issuance of fixed-rate debt associated with the Humana Acquisition remains probable of occurring. The hedge loss will be amortized as an increase to interest expense over a period consistent with the term of the hedged fixed-rate debt. Upon termination of the interest rate swaps, we concurrently entered into treasury rate locks with an aggregate notional value of $750 million to replace the vacated hedged positions. The treasury rate locksthat were designated as cash flow hedges against interest rate exposure related to the forecasted future issuance of fixed-rate debt to be primarily used to finance a portion of the purchase price of the Humana ~~Acquisition.~~

Transaction. In ~~March 2014,~~addition, we ~~entered into two~~redesignated existing interest rate swaps with an aggregate notional value of $500 ~~million. We designated these swaps~~million as cash flow hedges against interest rate exposure related to the forecasted future issuance of ~~fixed-rate debt~~fixed rate debt.

Prior to ~~be primarily used to refinance long-term debt maturing in 2017. On September 30, 2015, we modified the timing~~issuance of the ~~forecasted future issuance~~2016 senior notes in June 2016, we terminated all outstanding hedges and paid an aggregate of fixed-rate debt in conjunction with the expected timing of the financing of the Humana Acquisition and, as a result, we de-designated these swaps and re-designated them as cash flow hedges against interest rate exposure related$348 million to the ~~forecasted future issuance of fixed-rate debt.~~hedge counter parties upon termination. The aggregate effective portion of the hedge loss of ~~$73~~$342 million pretax ~~remains~~was recorded in accumulated other comprehensive loss, net of ~~tax, and will be amortized as an increase to interest expense over~~tax. Upon the ~~first 20 semi-annual interest payments related to~~redemption of the ~~fixed-rate debt. At March 31, 2016, we performed a quarterly effectiveness test~~Special Mandatory Redemption Notes, the entire remaining unamortized effective portion of ~~these swaps and determined there was $4~~the hedge loss of $323 million pretax ~~of ineffectiveness. The ineffectiveness~~recorded in accumulated other comprehensive loss was ~~recorded~~recognized as a realized capital loss in the ~~first quarter~~three months ended March 31, 2017.

2020 Notes

On February 27, 2017, we announced the redemption for cash of ~~2016.~~the entire $750 million aggregate principal amount outstanding of our 3.95% senior notes due September 1, 2020 (the “2020 Notes”). The redemption of these notes occurred on March 29, 2017 at a redemption price that included a make-whole premium, plus accrued and unpaid interest. We funded the redemption from available cash and short-term debt. As a result of the redemption, we recognized a loss on the early extinguishment of long-term debt of $35 million ($54 million pretax) in the three months ended March 31, 2017. Upon redemption of the 2020 Notes, the entire remaining unamortized effective portion of the ~~re-designated swaps had a pretax fair value~~hedge loss of ~~$24~~$13 million ~~at March 31, 2016, which was reflected net~~related to the issuance of ~~tax~~the 2020 Notes recorded in accumulated other comprehensive loss ~~within shareholders’ equity.~~was recognized as a realized capital loss in the three months ended March 31, 2017.

Refer to Note 11 for additional information regarding hedge losses reclassified from accumulated other comprehensive loss to net income during the three months ended March 31, 2017.

Revolving Credit Facility

On March 27, 2012, we entered into an unsecured ~~$1.5~~$1.5 billion five-year revolving credit agreement (the “Credit Agreement”) with several financial institutions. On September 24, 2012, and in connection with the acquisition of Coventry Health Care, Inc. (“Coventry”), we entered into a First Amendment (the “First Amendment”) to the Credit Agreement and also entered into an Incremental Commitment Agreement (the “Incremental Commitment Agreement”). On March 2, 2015, we entered into a Second Amendment to the Credit Agreement (the “Second Amendment”). On July 30, 2015, in connection with the Humana ~~Acquisition,~~Transaction, we entered into a Third Amendment (the “Third Amendment”). On March 17, 2017 we entered into a Fourth Amendment to the Credit Agreement (the “Fourth Amendment,” and together with the First Amendment, the Incremental Commitment Agreement, the Second Amendment, the Third Amendment and the Credit Agreement, resulting in the “Facility”). The Facility is an unsecured $2.0 billion revolving credit ~~agreement.~~agreement that matures on March 27, 2021. The Third Amendment permits us to increase the commitments available under the Facility from $2.0 billion to $3.0 billion upon our request and the satisfaction of certain conditions, including the completion of the transactions contemplated by the Merger Agreement and the termination of Humana’s existing credit agreement dated as of July 9, 2013 (“Humana’s Existing Credit Agreement”). The Third Amendment also modified the calculation of total debt for purposes of determining compliance prior to the closing date of the Humana ~~Acquisition~~Transaction (the “Closing Date”) with certain covenants to exclude debt incurred by us to finance the Humana ~~Acquisition,~~Transaction, the other financing transactions related to the Humana ~~Acquisition~~Transaction and/or the payment of fees and expenses incurred in connection therewith so long as either (A) the net proceeds of such debt ~~are~~were set aside to finance the Humana ~~Acquisition,~~Transaction, the other financing transactions related to the Humana ~~Acquisition~~Transaction and/or the payment of fees and expenses incurred in connection therewith or (B) such debt iswas subject to mandatory redemption in the event that the Merger Agreement is terminated or expires. Among other things, the Fourth Amendment extended the maturity date of the existing Credit Agreement to March 27, 2021, eliminated the availability of swingline loans, provided us with additional time on each business day to provide notice of borrowings and added customary provisions to reflect European Union “bail-in” directive legislation.

In addition, upon our agreement with one or more financial institutions, we may expand the commitments under the Facility by an additional $500 million. The Facility also provides for the issuance of up to ~~$200~~$200 million of letters of credit at our request, which count as usage of the available commitments under the Facility. ~~In each of 2013, 2014~~

~~and 2015 we extended the maturity date of the Facility by one year. The maturity date of the Facility is March 27, 2020.~~

Various interest rate options are available under the Facility. Any revolving borrowings mature on the termination date of the Facility. We pay facility fees on the Facility ranging from .050% to .150% per annum, depending upon our long-term senior unsecured debt rating. The facility fee was .100% at March 31, ~~2016~~.2017. The Facility ~~contains a financial covenant that requires us to maintain a ratio of total debt to consolidated capitalization as of the end of each fiscal quarter at or below~~ ~~50%~~. For this purpose, consolidated capitalization equals the sum of total shareholders’ equity, excluding any overfunded or underfunded status of our pension and OPEB plans and any net unrealized capital gains and losses, and total debt (as defined in the Facility). We met this requirement at ~~March 31, 2016. There were no amounts outstanding under the Facility at any time during the~~ ~~three~~ ~~months ended~~ ~~March 31, 2016~~ ~~or 2015.~~

~~Bridge Credit Agreement~~

On July 30, 2015, we entered into a 364-day senior unsecured bridge credit agreement (the “Bridge Credit Agreement”) with a group of fifteen lenders. Under the Bridge Credit Agreement, we may borrow on an unsecured basis an aggregate principal amount of up to $13.0 billion, to the extent that we have not received $13.0 billion of net cash proceeds from issuing senior notes or from certain other transactions on or prior to the Closing Date. Any proceeds of the Bridge Credit Agreement are required to be used to fund the Humana Acquisition and to pay fees and expenses in connection with the Humana Acquisition. The lenders' undrawn commitments under the Bridge Credit Agreement will be automatically and permanently reduced in an amount equal to, and we also will be required to make prepayments of any outstanding loans under the Bridge Credit Agreement with, the (i) net cash proceeds from the issuance of debt of Aetna or any of its subsidiaries, (ii) net cash proceeds from the issuance of equity of Aetna and (iii) net cash proceeds in excess of $300 million we receive from non-ordinary course asset sales, in each case subject to certain exceptions. The lenders’ obligation to fund the loans under the Bridge Credit Agreement is subject to the satisfaction of certain conditions, including the completion of the transactions contemplated by the Merger Agreement, the termination of Humana’s Existing Credit Agreement and our having used commercially reasonable efforts to issue senior notes to provide funds to pay for the cash portion of the consideration payable under the Merger Agreement, to pay Aetna’s fees and expenses related to the Humana Acquisition and/or to refinance any loans made under the Bridge Credit Agreement. Any borrowings under the Bridge Credit Agreement mature 364 days after the Closing Date. The Bridge Credit Agreement contains a financial covenant that requires us to maintain a ratio of total debt to consolidated capitalization as of the end of each fiscal quarter at or below 50%. For this purpose, consolidated capitalization equals the sum of total shareholders’ equity, excluding any overfunded or underfunded status of our pension and OPEB plans and any net unrealized capital gains and losses, and total debt (as defined in the Bridge Credit Agreement). For purposes of determining compliance prior to the Closing Date with certain covenants, total debt also excludes debt incurred by us to finance the Humana Acquisition, the other financing transactions related to the Humana Acquisition and/or the payment of fees and expenses incurred in connection therewith so long as either (A) the net proceeds of such debt are set aside to finance the Humana Acquisition, the other financing transactions related to the Humana Acquisition and/or the payment of fees and expenses incurred in connection therewith or (B) such debt is subject to mandatory redemption in the event that the Merger Agreement is terminated or expires. The Bridge Credit Agreement also contains a covenant limiting “Restricted Payments” (as defined in the Bridge Credit Agreement) by Aetna, subject to certain exceptions and baskets, including an exception permitting the payment of regular cash dividends.

Amounts outstanding under the Bridge Credit Agreement will bear interest, at our option, either (a) at the London Interbank Offered Rate (“LIBOR”); or (b) at the base rate (defined as the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50% per annum and (iii) LIBOR for an interest period of one month plus 1.00% per annum), plus, in each case, the applicable LIBOR margin or base rate margin depending upon the ratings of our long-term senior unsecured debt. The minimum and maximum LIBOR margins are 0.75% and 1.25% per annum, respectively, and the minimum and maximum base rate margins are 0% and 0.25% per annum, respectively, provided, however, that the applicable margins will increase by 0.25% per annum on the 90th day following the Closing Date and by an additional 0.25% per annum each 90th day thereafter while loans remain outstanding under the Bridge Credit Agreement. We will also pay to each lender on each of the following dates a duration fee equal to

the following applicable percentages of the aggregate principal amount of such lender's loans outstanding under the Bridge Credit Agreement on such date: (i) 90 days after the Closing Date, 0.50%; (ii) 180 days after the Closing Date, 0.75%; and (iii) 270 days after the Closing Date, 1.00%Facility). We ~~will also pay the lenders certain other fees.~~met this requirement at March 31, 2017. There were no amounts outstanding under the ~~Bridge Credit Agreement~~Facility at any time during the three months ended March 31, 2017 or 2016.

Term Loan Agreement

On July 30, 2015, in connection with the Humana Transaction, we entered into a senior three-year $3.2 billion term loan credit agreement (the “Term Loan Agreement”) with a group of seventeen lenders. Under the Term Loan Agreement, we may borrow on an unsecured basis an aggregate principal amount of up to $3.2 billion. Any proceeds of the Term Loan Agreement are required to be used to fund the Humana Acquisition and to pay fees and expenses in connection with the Humana Acquisition. The lenders’ ~~obligation to fund the loans~~commitments under the Term Loan Agreement ~~is subject to the satisfaction~~terminated on February 14, 2017, as a result of ~~certain conditions, including the completion of the transactions contemplated by the Merger Agreement and~~ the termination of ~~Humana’s Existing Credit~~the Merger Agreement. ~~Any~~

Commercial Paper

At both March 31, 2017 and December 31, 2016, we did not have any commercial paper outstanding.

Federal Home Loan Bank of Boston

We are a member of the Federal Home Loan Bank of Boston (the “FHLBB”), and as a member we have the ability to obtain cash advances, subject to certain minimum collateral requirements. Our maximum borrowing capacity available from the FHLBB at March 31, 2017 was $801 million. At both March 31, 2017 and December 31, 2016, we did not have any outstanding borrowings ~~under~~from the ~~Term Loan Agreement mature~~FHLBB.

9. Pension and Other Postretirement Plans

Defined Benefit Retirement Plans

Components of the net periodic benefit (income) cost of our defined benefit pension plans and other postretirement employee benefit (“OPEB”) plans for the three ~~years after the Closing Date. The Term Loan Agreement contains a financial covenant that requires us to maintain a ratio of total debt to consolidated capitalization~~months ended March 31, 2017 and 2016 were as follows:



	Pension Plans						OPEB Plans
	Three Months Ended						Three Months Ended
	March 31,						March 31,
(Millions)	2017			2016			2017			2016
Amortization of prior service credit	$	—		$	—		$	(1	)	$	(1	)
Interest cost	51			65			2			3
Expected return on plan assets	(95		)	(97		)	(1		)	(1		)
Recognized net actuarial losses	16			15			1			1
Net periodic benefit (income) cost	$	(28	)	$	(17	)	$	1		$	2

Effective as of the ~~end~~beginning of ~~each fiscal quarter at or below 50%. For this purpose, consolidated capitalization equals~~2017, we changed the ~~sum~~approach used to estimate the interest cost component of ~~total shareholders’ equity, excluding any overfunded or underfunded status of our~~net periodic benefit cost for pension and OPEB plans that utilize a yield curve approach. Historically, we estimated the interest cost using a single weighted average discount rate derived from the yield curve used to measure the projected benefit obligation. We have now elected to measure interest cost by applying the specific spot rates along that yield curve to the relevant projected cash flows for each component. We believe the new approach provides a more precise estimate of such interest cost. This refinement has no effect on the estimation of our plan obligations. We have accounted for this as a change in accounting estimate and, ~~any~~accordingly, have accounted for it on a prospective basis beginning in 2017. The reduction in net ~~unrealized capital gains and losses, and total debt (as defined~~periodic benefit cost associated with this change in the Term Loan Agreement). For purposes of determining compliance prior to the Closing Date with certain covenants, total debt also excludes debt incurred by us to finance the Humana Acquisition, the other financing transactions related to the Humana Acquisition and/or the payment of fees and expenses incurred in connection therewith so long as either (A) the net proceeds of such debt are set aside to finance the Humana Acquisition, the other financing transactions related to the Humana Acquisition and/or the payment of fees and expenses incurred in connection therewith or (B) such debt is subject to mandatory redemption in the event that the Merger Agreement is terminated or expires. The Term Loan Agreement also contains a covenant limiting “Restricted Payments” (as defined in the Term Loan Agreement) by Aetna, subject to certain exceptions and baskets, including an exception permitting the payment of regular cash dividends.

Amounts outstanding under the Term Loan Agreement will bear interest, at our option, either (a) at LIBOR; or (b) at the base rate (defined as the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50% per annum and (iii) LIBOR for an interest period of one month plus 1.00% per annum), plus, in each case, the applicable LIBOR margin or base rate margin depending upon the ratings of our long-term senior unsecured debt. The minimum and maximum LIBOR margins are 0.75% and 1.50% per annum, respectively, and the minimum and maximum base rate margins are 0.0% and 0.50% per annum, respectively. We will also pay the lenders certain other fees. There were no amounts outstanding under the Term Loan Agreement at any time during the three months ended March 31, ~~2016.~~2017 was $6 million ($10 million pre-tax). We expect this change to result in a reduction in net periodic benefit cost of approximately $26 million ($41 million pre-tax) for the full year 2017. For our pension benefits, the 2017 weighted-average discount rate for interest costs under the new approach adopted as of the beginning of 2017 is 3.51%. Under the prior methodology, the 2017 weighted-average discount rate would have been 4.22%.

~~12. Capital Stock~~10. Shareholders’ Equity

Share Repurchases

On November 21, 2014 and February 28, 2014, our Board of Directors (our “Board”) authorized two separate share repurchase programs of our common stock of up to $1.0 billion each. ~~We did not~~On February 17, 2017, our Board approved a new share repurchase ~~any shares~~program that authorized us to repurchase up to $4.0 billion of our common ~~stock during the~~ ~~three~~ ~~months ended~~ ~~March 31, 2016~~.

stock. At March 31, ~~2016,~~2017, we had remaining authorization to repurchase an aggregate of up to approximately ~~$1.1~~$1.8 billion of common stock under the ~~November 21, 2014 and~~ February ~~28, 2014 programs.~~17, 2017 program. The repurchases are effected from time to time in the open market, through negotiated transactions, including accelerated share repurchase agreements, and through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

On February 22, 2017, we entered into accelerated share repurchase (“ASR”) agreements with two unrelated third party financial institutions to repurchase an aggregate of $3.3 billion of Aetna’s common shares. Under the terms of the ASR agreements, we made an approximately $1.7 billion payment to each unrelated third party financial institution on February 22, 2017 and received from each of them an initial delivery of approximately 10.4 million of our common shares on the same day, which represents approximately 80 percent of the total common shares expected to be repurchased under the ASR agreements based on the closing price of $126.34 per share on the day before we entered into the ASR agreements. The final number of our common shares to be repurchased pursuant to the agreements will be based on the volume-weighted average share price of our common shares during the term of the applicable transaction, less a discount and subject to adjustments pursuant to the terms of the applicable ASR agreement. The final settlement of the transactions under the ASR agreements is expected to occur during or prior to the third quarter of 2017.

We recorded the initial delivery of our common shares as a decrease to retained earnings of approximately $2.6 billion, and recorded the remaining approximately $0.7 billion as a decrease to additional paid-in capital on our Consolidated Balance Sheets. We will reclassify the approximately $0.7 billion recorded as a reduction to additional paid-in capital to a reduction of retained earnings upon final settlement of the ASR agreements. The ASR agreements met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.

Dividends

During the three months ended March 31, ~~2016~~2017 our Board declared the following cash dividends:

Date Declared

Dividend Amount

Per Share

Stockholders of

Record Date

Date Paid/

To be Paid

Total Dividends

(Millions)

Dividend Amount

Per Share

Shareholders of

Record Date

Date Paid/

To be Paid

Total Dividends

(Millions)

February 19, 2016

.25

April 14, 2016

April 29, 2016

87.6

February 17, 2017

.50

April 13, 2017

April 28, 2017

166

Prior to completion of the Humana Acquisition, pursuant to the Merger Agreement, our regular quarterly cash dividend will not exceed $.25 per share. Our dividend policy following the completion of the Humana Acquisition will be determined by our Board. Declaration and payment of future dividends is at the discretion of our Board and may be adjusted as business needs or market conditions change.

Stock-based Employee Incentive Plans

On February ~~19, 2016, .3~~17, 2017, 0.3 million ~~PSUs, .9~~performance stock units (“PSUs”), 0.4 million restricted stock units (“RSUs”) and ~~2.2~~2.1 million ~~SARs~~stock appreciation rights (“SARs”) were granted to certain employees. The number of vested PSUs (which could range from zero to 200% of the original number of units granted) is dependent upon the degree to which we achieve certain operating performance goals, as determined by our Board’s Committee on Compensation and Talent Management, during a three-year performance period which began January 1, ~~2016~~2017 and ends on December 31, ~~2018.~~2019. The vesting period for the PSUs ends on February ~~19, 2019.~~17, 2020. Each vested PSU and RSU represents one share of common stock and will be paid in shares of common stock, net of taxes, at the end of the applicable vesting period. The RSUs generally will become 100% vested approximately three years from the grant date, with one-third vesting each December. The SARs, if exercised by the employee, will be settled in common stock, net of taxes, based on the appreciation of our common stock price over ~~$103.45~~$125.27 per share, the closing price of our common stock on the grant date. SARs will generally become 100% vested approximately three years from the grant date, with one-third vesting on each anniversary of the grant date.

The SARs granted to certain employees during first quarters of ~~2016~~2017 and ~~2015~~2016 had an estimated fair market value of ~~$34.33~~$32.30 and ~~$32.13~~$34.33 per unit, respectively. The fair value per unit was calculated on each respective grant date using a modified Black-Scholes option pricing model using the following assumptions during the first quarters of ~~2016~~2017 and ~~2015:~~2016:


	2016			2015			2017			2016
Expected term (in years)	7.11			6.48			7.21			7.11
Volatility	32.9		%	33.4		%	26.52		%	32.9		%
Risk-free interest rate	1.52		%	1.81		%	2.22		%	1.52		%
Dividend yield	.91		%	1.13		%	1.71		%	0.91		%
Initial price	$	103.45		$	100.50		$	125.27		$	103.45

The expected term is based on historical equity award activity. Volatility is based on a weighted average of the historical volatility of our stock price and implied volatility from traded options on our stock. The risk-free interest rate is based on a U.S. Treasury rate with a life equal to the expected life of the SARs grant. This rate was calculated by interpolating between the 7-year and 10-year U.S. Treasury rates for both the ~~first quarter of~~2017 and 2016 ~~and the 5-year and 10-year U.S. Treasury rates for the first quarter of 2015.~~SARs grants. The dividend yield is based on our ~~historical~~expected dividends infor the upcoming 12 months ~~prior~~subsequent to the grant date.

~~13. Dividend Restrictions and Statutory Surplus~~

Regulatory Requirements

Under applicable regulatory requirements at March 31, ~~2016,~~2017, the amount of dividends that may be paid through the end of ~~2016~~2017 by our insurance and HMO subsidiaries without prior approval by regulatory authorities was $1.4 billion in the aggregate. There are no such regulatory restrictions on distributions from Aetna to its shareholders. Prior to completion of the Humana Acquisition, pursuant to the Merger Agreement, Aetna is not permitted to declare, set aside or pay any dividend or other distribution other than a regular quarterly cash dividend in the ordinary course of business, which will not exceed $.25 per share. In addition, the Bridge Credit Agreement and Term Loan Agreement each contain a covenant limiting “Restricted Payments” (as defined in the applicable agreement) by Aetna, subject to certain exceptions and baskets, including an exception permitting the payment of

~~regular cash dividends.~~ During the first quarter of ~~2016,~~2017, our insurance and HMO subsidiaries paid ~~$635~~$460 million of dividends to the Company.

The aggregate statutory capital and surplus of our insurance and HMO subsidiaries was ~~$10.0~~$10.3 billion and ~~$9.9~~$10.4 billion at March 31, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

11. Other Comprehensive (Loss) Income

Shareholders’ equity included the following activity in accumulated other comprehensive loss for three months ended March 31, 2017 and 2016:



	Three Months Ended
	March 31,
(Millions)	2017			2016
Previously impaired debt securities: ⁽¹⁾
Beginning of period balance	$	16		$	19
Net unrealized losses ($(2) and $(4) pretax)	(1		)	(3		)
Less: Net reclassification of losses to earnings($(2) and $(5) pretax)⁽²⁾	(1		)	(4		)
Other comprehensive income	—			1
End of period balance	16			20

All other securities:
Beginning of period balance	297			312
Net unrealized gains ($92 and $317 pretax)	60			206
Less: Net reclassification of gains (losses) to earnings ($25 and $(23) pretax) ⁽²⁾	16			(15		)
Other comprehensive income	44			221
End of period balance	341			533

Derivatives and foreign currency:
Beginning of period balance	(235		)	(74		)
Net unrealized losses ($(2) and $(246) pretax)	(1		)	(160		)
Less: Net reclassification of losses to earnings ($(343) and $(6) pretax) ⁽³⁾	(223		)	(3		)
Other comprehensive income (loss)	222			(157		)
End of period balance	(13		)	(231		)

Pension and OPEB plans:
Beginning of period balance	(1,630		)	(1,587		)
Less: Net amortization of net actuarial losses ($(17) and $(16) pretax) ⁽⁴⁾	(11		)	(11		)
Less: Net amortization of prior service credit ($2 and $1 pretax) ⁽⁴⁾	1			1
Other comprehensive income	10			10
End of period balance	(1,620		)	(1,577		)

Total beginning of period accumulated other comprehensive loss	(1,552		)	(1,330		)
Total other comprehensive loss	276			75
Total end of period accumulated other comprehensive loss	$	(1,276	)	$	(1,255	)


⁽¹⁾	Represents specifically identified unrealized gains and losses on the non-credit related component of impaired debt securities that we do not intend to sell and subsequent changes in the fair value of any previously impaired security.


⁽²⁾	Reclassifications out of accumulated other comprehensive income for specifically identified previously impaired debt securities and all other securities are reflected in net realized capital gains (losses) within the Consolidated Statements of Income.

⁽³⁾

Reclassifications out of accumulated other comprehensive income for specifically identified foreign currency gains (losses) and derivatives are reflected in net realized capital gains (losses) within the Consolidated Statements of Income, except for the specifically identified effective portion of derivatives related to interest rate swaps which are reflected in interest expense. During the three months ended March 31, 2017, we redeemed the entire $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and the entire $750 million aggregate principal amount outstanding of the senior notes due 2020 and reclassified out of accumulated other comprehensive income the remaining $336 million pre-tax unrealized hedge losses as a realized capital loss within the Consolidated Statements of Income. Refer to Note 8 for additional information.


⁽⁴⁾	Reclassifications out of accumulated other comprehensive income for specifically identified pension and OPEB plan expenses are reflected in general and administrative expenses within the Consolidated Statements of Income. Refer to Note 9 for additional information.


12.	Earnings Per Common Share

Basic earnings per common share (“EPS”) is computed by dividing net (loss) income attributable to Aetna by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is computed in a similar manner, except that the weighted average number of common shares outstanding is adjusted for the dilutive effects of our outstanding stock-based compensation awards, but only if the effect is dilutive.

The computations of basic and diluted EPS for the three months ended March 31, 2017 and 2016 are as follows:



	Three Months Ended
	March 31,
(Millions, except per common share data)	2017			2016
Net (loss) income attributable to Aetna	$	(381	)	$	737
Weighted average shares used to compute basic EPS	343.8			350.7
Dilutive effect of outstanding stock-based compensation awards	—			3.1
Weighted average shares used to compute diluted EPS	343.8			353.8
Basic EPS	$	(1.11	)	$	2.10
Diluted EPS	$	(1.11	)	$	2.08

The stock-based compensation awards excluded from the calculation of diluted EPS for the three months ended March 31, 2017 and 2016 are as follows:



	Three Months Ended
	March 31,
(Millions)	2017	2016
SARs ⁽¹⁾	—	.2
Other stock-based compensation awards ⁽²⁾	.9	.8
In-the-money anti-dilutive stock-based compensation awards ⁽³⁾	10.6	—


⁽¹⁾	SARs are excluded from the calculation of diluted EPS if the exercise price is greater than the average market price of Aetna common shares during the period (i.e., the awards are anti-dilutive).


⁽²⁾	PSUs, certain market stock units with performance conditions, and performance stock appreciation rights are excluded from the calculation of diluted EPS if all necessary performance conditions have not been satisfied at the end of the reporting period.

⁽³⁾

In periods when we report a net loss attributable to Aetna, in-the-money stock-based compensation awards are excluded from our calculation of diluted EPS because their inclusion would have an anti-dilutive effect. Therefore we excluded from our calculation of diluted EPS for the three months ended March 31, 2017 in-the-money stock-based compensation awards which would have increased our weighted-average shares used to compute diluted EPS by 2.4 million shares.

13. Reinsurance

In January 2017, we entered into two four-year reinsurance agreements with an unrelated reinsurer. The agreements allow us to reduce our required capital and provide collateralized excess of loss reinsurance coverage on a portion of our group Commercial Insured Health Care business.

14. Commitments and Contingencies

Guaranty Fund Assessments, Market Stabilization and Other Non-Voluntary Risk Sharing Pools

Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed ~~(up~~(in most states up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The life and health insurance guaranty associations in which we participate that operate under these laws respond to insolvencies of long-term care insurers as well as health insurers. Our assessments generally are based on a formula relating to our health care premiums in the state compared to the premiums of other insurers. Certain states allow assessments to be recovered over time as offsets to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under the ACA.

In 2009, the Pennsylvania Insurance Commissioner (the “Commissioner”) placed long-term care insurer Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. In 2012, the state court denied the Commissioner’s petition for liquidation. The Pennsylvania Supreme Court affirmed that ruling in July 2015. The state court’s 2012 order directed the Commissioner to develop a plan of rehabilitation. The Commissioner filed an initial rehabilitation plan in April 2013, and filed amended plans in August 2014 and October 2014. The state court began a hearing in July 2015, which is scheduled to continue in the second quarter of 2016, to consider the Commissioner’s most recent proposed rehabilitation plan, which contemplates a partial liquidation of Penn Treaty. If Penn Treaty iswas placed in liquidation wein March 2017. We recorded a discounted estimated liability and expense of $231 million pretax during the three months ended March 31, 2017 for our estimated share of future assessments by applicable life and health guaranty associations which reflects a 3.5% discount rate. The undiscounted estimated liability at March 31, 2017 was $347 million. The expense was recorded in general and administrative expenses in our Consolidated Statements of Income, and the liability was recorded in accrued expenses and other ~~insurers likely would be assessed immediately or over a period of years by guaranty associations~~current liabilities in our Consolidated Balance Sheets. We did not record an asset for the payments the guaranty associations are required to make to Penn Treaty policyholders. We are currently unable to predict the ultimate outcome of, or reasonably estimate the loss or range of losses resulting from, this potential insolvency because we cannot predict when or to what extent Penn Treaty ultimately will be declared insolvent,expected premium tax offsets for our in force business at March 31, 2017 as the amount ~~of the insolvency, the amount and timing of associated future guaranty association assessments or the amount or availability of potential offsets, such as premium tax offsets.~~was not material. It is reasonably possible that ~~during 2016~~in the future we may record a liability and expense relating to ~~Penn Treaty and/or~~ other insolvencies which could have a material adverse effect on our operating results, financial position and cash flows. While historically we have ~~historically~~ultimately recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could lead to legislative and/or regulatory actions that may limit future offsets.

HMOs in certain states in which we do business are subject to assessments, including market stabilization and other risk-sharing pools, for which we are assessed charges based on incurred claims, demographic membership mix and other factors. We establish liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments we pay are dependent upon our experience relative to other entities subject to the assessment, and the ultimate liability is not known at the balance sheet date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants, we believe we have adequate reserves to cover such assessments.

Litigation and Regulatory Proceedings

Out-of-Network Benefit Proceedings

We are named as a defendant in several purported class actions and individual lawsuits arising out of our practices related to the payment of claims for services rendered to our members by health care providers with whom we do not have a contract (“out-of-network providers”). Among other things, these lawsuits allege that we paid too little to our health plan members and/or providers for these services, among other reasons, because of our use of data provided by Ingenix, Inc., a subsidiary of one of our competitors (“Ingenix”). Other major health insurers are the subject of similar litigation or have settled similar litigation.

Various plaintiffs who are health care providers or medical associations seek to represent nationwide classes of out-of-network providers who provided services to our members during the period from 2001 to the present. Various plaintiffs who are members in our health plans seek to represent nationwide classes of our members who received services from out-of-network providers during the period from 2001 to the present. Taken together, these lawsuits allege that we violated state law, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and federal antitrust laws, either acting alone or in concert with our competitors. The purported classes seek reimbursement of all unpaid benefits, recalculation and repayment of deductible and coinsurance amounts, unspecified damages and treble damages, statutory penalties, injunctive and declaratory relief, plus interest, costs and attorneys’ fees, and seek to disqualify us from acting as a fiduciary of any benefit plan that is subject to ERISA. Individual lawsuits that generally contain similar allegations and seek similar relief have been brought by health plan members and out-of-network providers.

The first class action case was commenced on July 30, 2007. The federal Judicial Panel on Multi-District Litigation (the “MDL Panel”) has consolidated these class action cases in the U.S. District Court for the District of New Jersey (the “New Jersey District Court”) under the caption In re: Aetna UCR Litigation, MDL No. 2020 (“MDL 2020”). In addition, the MDL Panel has transferred the individual lawsuits to MDL 2020. On May 9, 2011, the New Jersey District Court dismissed the physician plaintiffs from MDL 2020 without prejudice. The New Jersey District Court’s action followed a ruling by the United States District Court for the Southern District of Florida (the “Florida District Court”) that the physician plaintiffs were enjoined from participating in MDL 2020 due to a prior settlement and release. The United States Court of Appeals for the Eleventh Circuit has dismissed the physician plaintiffs’ appeal of the Florida District Court’s ruling.

On December 6, 2012, we entered into an agreement to settle MDL 2020. Under the terms of the proposed nationwide settlement, we would have been released from claims relating to our out-of-network reimbursement practices from the beginning of the applicable settlement class period through August 30, 2013. The settlement agreement did not contain an admission of wrongdoing. The medical associations were not parties to the settlement agreement.

Under the settlement agreement, we would have paid up to $120 million to fund claims submitted by health plan members and health care providers who were members of the settlement classes. These payments also would have funded the legal fees of plaintiffs’ counsel and the costs of administering the settlement. In connection with the proposed settlement, the Company recorded an after-tax charge to net income attributable to Aetna of $78 million in the fourth quarter of 2012.

The settlement agreement provided us the right to terminate the agreement under certain conditions related to settlement class members who opted out of the settlement. Based on a report provided to the parties by the settlement administrator, the conditions permitting us to terminate the settlement agreement were satisfied. On March 13, 2014, we notified the New Jersey District Court and plaintiffs’ counsel that we were terminating the settlement agreement. Various legal and factual developments since the date of the settlement agreement led us to believe terminating the settlement agreement was in our best interests. As a result of this termination, we released the reserve established in connection with the settlement agreement, net of amounts due to the settlement administrator, which reduced first quarter 2014 other general and administrative expenses ~~by $67.0~~by$103 million ~~($103.0 million pretax).~~pretax.

On June 30, 2015, the New Jersey District Court granted in part our motion to dismiss the proceeding. The New Jersey District Court dismissed with prejudice the plaintiffs’ RICO and federal antitrust claims; their ERISA claims that are based on our disclosures and our purported breach of fiduciary duties; and certain of their state law claims. The New Jersey District Court also dismissed with prejudice all claims asserted by several medical association plaintiffs. The plaintiffs’ remaining claims are for ERISA benefits and breach of contract. We intend to ~~vigorously~~ defend ourselves vigorously against the plaintiffs’ remaining claims.

We also have received subpoenas and/or requests for documents and other information from, and been investigated by, attorneys general and other state and/or federal regulators, legislators and agencies relating to, and we are involved in other litigation regarding, our out-of-network benefit payment and administration practices. It is

reasonably possible that others could initiate additional litigation or additional regulatory action against us with respect to our out-of-network benefit payment and/or administration practices.

CMS Actions

The Centers for Medicare & Medicaid Services (“CMS”) regularly audits our performance to determine our compliance with CMS’s regulations and our contracts with CMS and to assess the quality of services we provide to Medicare beneficiaries. CMS uses various payment mechanisms to allocate and adjust premium payments to our and other companies’ Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by health care providers. We collect claim and encounter data from providers and generally rely on providers to appropriately code their submissions to us and document their medical records, including the diagnosis data submitted to us with claims. CMS pays increased premiums to Medicare Advantage plans and prescription drug program plans for members who have certain medical conditions identified with specific diagnosis codes. Federal regulators review and audit the providers’ medical records to determine whether those records support the related diagnosis codes that determine the members’ health status and the resulting risk-adjusted premium payments to us. In that regard, CMS has instituted risk adjustment data validation (“RADV”) audits of various Medicare Advantage plans, including certain of the Company’s plans, to validate coding practices and supporting medical record documentation maintained by health care providers and the resulting risk adjusted premium payments to the plans. CMS may require us to refund premium payments if our risk adjusted premiums are not properly supported by medical record data. The Office of Inspector General (the “OIG”) also is auditing risk adjustment data of other companies, and we expect CMS and the OIG to continue auditing risk adjustment data.

CMS revised its audit methodology for RADV audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS will project the error rate identified in the audit sample of approximately 200 members to all risk adjusted premium payments made under the contract being audited. Historically, CMS did not project sample error rates to the entire contract. As a result, the revised methodology may increase our exposure to premium refunds to CMS based on incomplete medical records maintained by providers. Since 2013, CMS has selected certain of our Medicare Advantage contracts for various contract years ~~2011 and 2012~~ for RADV audit. We are currently unable to predict which of our Medicare Advantage contracts will be selected for future audit, the amounts of any retroactive refunds of, or prospective adjustments to, Medicare Advantage premium payments made to us, the effect of any such refunds or adjustments on the actuarial soundness of our Medicare Advantage bids, or whether any RADV audit findings would cause a change to our method of estimating future premium revenue in future bid submissions to CMS or compromise premium assumptions made in our bids for prior contract years or the current contract year. Any premium or fee refunds or adjustments resulting from regulatory audits, whether as a result of RADV, Public Exchange related or other audits by CMS, the OIG, HHS or otherwise, including audits of our minimum medical loss ratio rebates, methodology and/or reports, could be material and could adversely affect our operating results, financial position and cash flows.

Other Litigation and Regulatory Proceedings

We are involved in numerous other lawsuits arising, for the most part, in the ordinary course of our business operations, including claims of or relating to bad faith, medical malpractice, non-compliance with state and federal regulatory regimes, marketing misconduct, failure to timely or appropriately pay or administer claims and benefits in our Health Care and Group Insurance businesses (including our post-payment audit and collection practices and reductions in payments to providers due to

sequestration), provider network structure (including the use of performance-based networks and termination of provider contracts), provider directory accuracy, rescission of insurance coverage, improper disclosure of personal information, anticompetitive practices, patent infringement and other intellectual property litigation, other legal proceedings in our Health Care and Group Insurance businesses and employment litigation. Some of these other lawsuits are or are purported to be class actions. We intend to ~~vigorously~~ defend ourselves vigorously against the claims brought in these matters.

Awards to us and others of certain government contracts, particularly Medicaid contracts and contracts with government customers in our ~~Medicaid~~Commercial business, are subject to increasingly frequent protests by unsuccessful bidders. These protests may result in awards to us being reversed,

delayed or modified. The loss or delay in implementation of any government contract could adversely affect our operating results. We will continue to defend vigorously contract awards we receive.

In addition, our operations, current and past business practices, current and past contracts, and accounts and other books and records are subject to routine, regular and special investigations, audits, examinations and reviews by, and from time to time we receive subpoenas and other requests for information from, CMS, the U.S. Department of Health and Human Services, various state insurance and health care regulatory authorities, state attorneys general, treasurers and offices of inspector general, the Center for Consumer Information and Insurance Oversight, OIG, the Office of Personnel Management, the U.S. Department of Labor, the U.S. Department of the Treasury, the U.S. Food and Drug Administration, committees, subcommittees and members of the U.S. Congress, the U.S. Department of Justice (the “DOJ”), the Federal Trade Commission, U.S. attorneys and other state, federal and international governmental authorities. These government actions include inquiries by, and testimony before, certain members, committees and subcommittees of the U.S. Congress regarding our withdrawal from certain states’ Public Exchanges for 2017, certain of our current and past business practices, including our overall claims processing and payment practices, our business practices with respect to our small group products, student health products or individual customers (such as market withdrawals, rating information, premium increases and medical benefit ratios), executive compensation matters and travel and entertainment expenses, as well as the investigations by, and subpoenas and requests from, attorneys general and others described above under “Out-of-Network Benefit Proceedings.” We also have produced documents and information to the Civil Division of the DOJ in cooperation with a current investigation of our patient chart review processes in connection with risk adjustment data submissions under Parts C and D of the Medicare program.

A significant number of states are investigating life insurers’ claims payment and related escheat ~~practices, and these~~practices. These investigations have resulted in significant charges to earnings by other life insurers in connection with related settlements. We have received requests for information from a number of states, and certain of our subsidiaries are being audited, with respect to our life insurance claim payment and related escheat practices. In the fourth quarter of 2013, we made changes to our life insurance claim payment practices (including related escheatment practices) based on evolving industry practices and regulatory expectations and interpretations, including expanding our existing use of the Social Security Administration’s Death Master File to identify additional potentially unclaimed death benefits and locate applicable beneficiaries. As a result of these changes, in the fourth quarter of 2013, we increased our estimated liability for unpaid life insurance claims with respect to insureds who passed away on or before December 31, 2013, and recorded in current and future benefits a charge of ~~$35.7~~$36 million ($~~55.0~~55 million pretax). Given the judicial, legislative and regulatory uncertainty with respect to life insurance claim payment and related escheat practices, it is reasonably possible that we may incur additional liability related to those practices, whether as a result of further changes in our business practices, litigation, government actions or otherwise, which could adversely affect our operating results and cash flows.

There also continues to be a heightened level of review and/or audit by regulatory authorities of, and increased litigation regarding, our and the rest of the health care and related benefits industry’s business and reporting practices, including premium rate increases, utilization management, development and application of medical policies, complaint, grievance and appeal processing, information privacy, provider network structure (including provider network adequacy, the use of performance-based networks and termination of provider contracts), provider directory accuracy, calculation of minimum medical loss ratios and/or payment of related rebates, delegated arrangements, rescission of insurance coverage, limited benefit health products, student health products, pharmacy benefit management practices (including the use of narrow networks and the placement of drugs in formulary tiers), sales practices, customer service practices, vendor oversight and claim payment practices (including payments to out-of-network providers and payments on life insurance policies).

As a leading national health and related benefits company, we regularly are the subject of government actions of the types described above. These government actions may prevent or delay us from implementing planned premium rate increases and may result, and have resulted, in restrictions on our business, changes to or clarifications of our business practices, retroactive adjustments to premiums, refunds or other payments to members, beneficiaries, states or the federal government, withholding of premium payments to us by government agencies, assessments of damages, civil or criminal fines or penalties, or other sanctions, including the possible suspension or loss of licensure and/or suspension or exclusion from participation in government programs.

Estimating the probable losses or a range of probable losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, involve claims for injunctive relief, may involve fines, penalties or punitive damages that are discretionary in amount, involve a large number of claimants or regulatory authorities, represent a change in regulatory policy, present novel legal theories, are in the early stages of the proceedings, are subject to appeal or could result in ~~a change~~changes in business practices. In addition, because most legal proceedings are resolved over long periods of time, potential losses are subject to change due to, among other things, new developments, changes in litigation strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. Except as specifically noted above under “Other Litigation and Regulatory Proceedings,” we are currently unable to predict the ultimate outcome of, or reasonably estimate the losses or a range of losses resulting from, the matters described above under “Litigation and Regulatory Proceedings”, and it is reasonably possible that their outcome could be material to us.

15. Segment Information

Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. Our Corporate Financing segment is not a business ~~segment; it~~segment. It is added to our business segments to reconcile our segment reporting to our consolidated results. The Corporate Financing segment includes transaction and integration-related costs, income taxes, interest expense on our outstanding debt and the financing components of our pension and OPEB plan expense (the service cost and prior service cost components of this expense are allocated to our business segments).

Effective March 31, 2017, to more clearly differentiate between the GAAP and non-GAAP financial measures used in this Quarterly Report on Form 10-Q and our other disclosures, we changed the naming convention for our non-GAAP financial measures from "operating" measures to "adjusted" measures. The underlying calculations of our consolidated non-GAAP financial measures did not change. Prior to March 31, 2017, operating earnings was the measure reported to the chief executive officer for purposes of assessing financial performance and making operating decisions, such as the allocation of resources among our business segments. Effective March 31, 2017, the chief executive officer assesses our consolidated results based on adjusted earnings and assesses business segment results based on pre-tax adjusted earnings because income taxes are recorded in our Corporate Financing segment and are not allocated to our business segments. Also effective March 31, 2017, transaction and integration-related costs were reclassified to our Corporate Financing segment because they do not reflect our underlying business performance. The prior period has been restated to reflect this presentation. Non-GAAP financial measures we disclose, such as ~~operating~~adjusted earnings and pre-tax adjusted earnings, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

Summarized financial information of our segment operations for the three months ended March 31, ~~2016~~2017 and ~~2015~~2016 were as follows:


(Millions)	Health Care		Group Insurance		Large Case Pensions			Corporate Financing			Total Company		Health Care		Group Insurance		Large Case Pensions		Corporate Financing			Total Company
Three Months Ended March 31, 2017
Revenue from external customers													$	14,667	$	556	$	15	$	—		$	15,238
Pre-tax adjusted earnings (loss)⁽¹⁾													1,476		33		4		(62		)	1,451
Three Months Ended March 31, 2016
Revenue from external customers	$	14,907.7	$	551.1	$	17.3		$	—		$	15,476.1	$	14,908	$	551	$	17	$	—		$	15,476
Operating earnings (loss) ⁽¹⁾	832.0		21.3		(.3		)	(42.2		)	810.8
Three Months Ended March 31, 2015
Revenue from external customers	$	14,285.8	$	554.5	$	12.8		$	—		$	14,853.1
Operating earnings (loss) ⁽¹⁾	835.6		43.9		2.1			(37.3		)	844.3
Pre-tax adjusted earnings (loss) ⁽¹⁾													1,456		25		1		(65		)	1,417


⁽¹⁾	~~Operating~~Pre-tax adjusted earnings (loss) excludes net realized capital gains or losses, amortization of other acquired intangible assets and the other items described in the reconciliation below.

A reconciliation of ~~operating~~(loss) income before income taxes to pre-tax adjusted earnings ⁽¹⁾~~to net income attributable to Aetna~~ for the three months ended March 31, ~~2016~~2017 and ~~2015~~2016 was as follows:

Three Months Ended
March 31,
(Millions) 2016
2015
Operating earnings ⁽¹⁾
$ 810.8
$ 844.3
Transaction and integration-related costs, net of tax (42.9 ) (30.7 )
Amortization of other acquired intangible assets, net of tax (40.8 ) (41.1 )
Net realized capital (losses) gains, net of tax (.5 ) 5.0
Net income attributable to Aetna $ 726.6
$ 777.5



	Three Months Ended
	March 31,
(Millions)	2017			2016
(Loss) income before income taxes (GAAP measure)	$	(628	)	$	1,289
Less: Income before income taxes attributable to non-controlling interests (GAAP measure)	3			1
(Loss) income before income taxes attributable to Aetna (GAAP measure)	(631		)	1,288
Loss on early extinguishment of long-term debt	246			—
Penn Treaty-related guaranty fund assessments	231			—
Transaction and integration-related costs	1,212			66
Amortization of other acquired intangible assets	60			62
Net realized capital losses	333			1
Pre-tax adjusted earnings ⁽¹⁾	$	1,451		$	1,417


⁽¹⁾	In addition to net realized capital losses and gains and amortization of other acquired intangible assets, the following other items are excluded from ~~operating~~adjusted earnings and pre-tax adjusted earnings because we believe they neither relate to the ordinary course of our business nor reflect our underlying business performance:

In the three months ended March 31, 2017, we incurred losses on the early extinguishment of long-term debt due to (a) the mandatory redemption of the $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes following the termination of the Merger Agreement and (b) the early redemption of $750 million aggregate principal amount of our outstanding senior notes due 2020.

In the three months ended March 31, 2017, we recorded an expense for estimated future guaranty fund assessments related to Penn Treaty, which was placed in rehabilitation in 2009 and placed in liquidation in March 2017. This expense does not directly relate to the underwriting or servicing of products for customers and is not directly related to the core performance of our business operations.

We incurred transaction and integration-related costs ~~of $42.9 million ($65.4 million pretax)~~ during the three months ended March 31, 2017 and 2016 primarily related to the ~~acquisitions of Coventry and bswift LLC (“bswift”) and the~~ Humana Acquisition, and transaction and integration-related costs of $30.7 million ($45.6 million pretax) during the three months ended March 31, 2015, related to the acquisitions of Coventry, the InterGlobal Group (“InterGlobal”) and bswift.Transaction. Transaction costs include costs associated with the termination of the Merger Agreement, the termination of our agreement to sell certain assets to Molina Healthcare, Inc. and advisory, legal and other professional fees which ~~are not deductible for tax purposes and~~ are reflected in our GAAP Consolidated Statements of Income in general and administrative ~~expenses, as well as~~expenses. Transaction costs also include the negative cost of ~~the Bridge Credit Agreement and the Term Loan Agreement executed in connection~~carry associated with the debt financing that we obtained in June 2016 for the Humana ~~Acquisition, which~~Transaction. Prior to the mandatory redemption of the Special Mandatory Redemption Notes, the negative cost of carry associated with these senior notes was excluded from adjusted earnings and pre-tax adjusted earnings. The negative cost of carry associated with the $2.8 billion aggregate principal amount of our senior notes issued in June 2016 that are not subject to mandatory redemption (the “Other 2016 Senior Notes”) was excluded from adjusted earnings and pre-tax adjusted earnings through the date of the termination of the Merger Agreement. The components of the negative cost of carry are reflected in our GAAP Consolidated Statements of Income in interest ~~expense.~~

~~16. Reinsurance~~

~~In January~~expense and net investment income. Subsequent to the termination of the Merger Agreement, the interest expense and net investment income associated with the Other 2016 ~~we entered into four-year reinsurance agreements with Vitality Re VII Limited, an unrelated reinsurer. The agreements allow us to reduce our required capital~~Senior Notes were no longer excluded from adjusted earnings and ~~provide~~ ~~$200 million~~ ~~of collateralized excess of loss reinsurance coverage on a portion of our group Commercial Insured Health Care business.~~pre-tax adjusted earnings.


~~17.~~16.	Discontinued Products

Prior to 1993, we sold single-premium annuities (“SPAs”) and guaranteed investment contracts (“GICs”), primarily to employer sponsored pension plans. In 1993, we discontinued selling these products to Large Case Pensions customers, and now we refer to these products as discontinued products. In November 2016, the last outstanding GIC matured.

We discontinued selling these products because they were generating losses for us, and we projected that they would continue to generate losses over their life (which is currently greater than 30 ~~years for SPAs)~~years); so we established a reserve for anticipated future losses at the time of discontinuance. ~~At both~~ ~~March 31, 2016~~ ~~and December 31, 2015, our remaining GIC liability was not material.~~ This reserve represents the present value (at the risk-free rate of return ~~at the time of discontinuance,~~ consistent with the duration of the liabilities) of the difference between the expected cash flows from the assets supporting these products and the cash flows expected to be required to meet the obligations of the outstanding contracts.

Key assumptions in setting the reserve for anticipated future losses include future investment results, payments to retirees, mortality and retirement rates and the cost of asset management and customer service. In 2014, we modified the mortality tables used in order to reflect the more up-to-date 2014 Retired Pensioner’s Mortality table. The mortality tables were previously modified in 2012, in order to reflect the more up-to-date 2000 Retired Pensioner’s Mortality table, and in 1995, in order to reflect the more up-to-date 1994 Uninsured Pensioner’s Mortality table. In 1997, we began the use of a bond default assumption to reflect historical default experience. Other than these changes, since 1993 there have been no significant changes to the assumptions underlying the reserve.

We review the adequacy of this reserve quarterly based on actual experience. As long as our expected future losses remain consistent with prior projections, the results of the discontinued products are applied against the reserve and do not impact net income attributable to Aetna. If actual or expected future losses are greater than we currently

estimate, we may increase the reserve, which could adversely impact net income attributable to Aetna. If actual or expected future losses are less than we currently estimate, we may decrease the reserve, which could favorably impact net income attributable to Aetna. The reserve at each of March 31, ~~2016~~2017 and December 31, ~~2015~~2016 reflects management’s best estimate of anticipated future losses, and is included in future policy benefits on our ~~balance sheets.~~Consolidated Balance Sheets.

The activity in the reserve for anticipated future losses on discontinued products for the three months ended March 31, ~~2016~~2017 and ~~2015~~2016 was as follows (pretax):


(Millions)	2016			2015		2017		2016
Reserve, beginning of period	$	1,067.2		$	1,014.7	$	962	$	1,067
Operating (loss) income	(13.4		)	3.1
Operating income (loss)						16		(13		)
Net realized capital gains	12.5			19.0		14		12
Reserve, end of period	$	1,066.3		$	1,036.8	$	992	$	1,066

During the three months ended March 31, 2017, our discontinued products reflected operating income and net realized capital gains, primarily attributable to gains from the sale of investment real estate and debt securities. During the three months ended March 31, 2016,, our discontinued products reflected an operating loss and net realized capital gains, primarily attributable to gains from the sale of debt securities and investment real estate. During the three months ended March 31, 2015, our discontinued products reflected operating income and net realized capital gains, primarily attributable to gains from the sale of debt securities and investment real estate. We evaluated these 2016 results against the expectations of future cash flows assumed in estimating the reserve for anticipated future losses and did not believe that an adjustment to the reserve was required at ~~March 31, 2016~~.

Assets and liabilities supporting discontinued products ⁽¹⁾ at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


(Millions)	2016		2015		2017		2016
Assets:
Debt and equity securities available for sale	$	2,092.3	$	2,019.6	$	1,872	$	1,913
Mortgage loans	382.2		396.0		369		370
Other investments	651.2		643.5		615		646
Total investments	3,125.7		3,059.1		2,856		2,929
Other assets	100.5		128.9		109		104
Current and deferred income taxes	23.6		20.5
Receivable from continuing products ⁽²⁾	611.2		602.0		562		554
Total assets	$	3,861.0	$	3,810.5	$	3,527	$	3,587
Liabilities:
Future policy benefits	$	2,450.0	$	2,493.5	$	2,282	$	2,326
Reserve for anticipated future losses on discontinued products	1,066.3		1,067.2		992		962
Current and deferred income taxes					38		42
Other liabilities ⁽³⁾	344.7		249.8		215		257
Total liabilities	$	3,861.0	$	3,810.5	$	3,527	$	3,587


⁽¹⁾	Assets supporting the discontinued products are distinguished from assets supporting continuing products.

⁽²⁾

At the time of discontinuance, a receivable from Large Case Pensions’ continuing products was established on the discontinued products ~~balance sheet.~~Balance Sheet. This receivable represented the net present value of anticipated cash shortfalls in the discontinued products, which will be funded from continuing products. Interest on the receivable is accrued at the discount rate that was used to calculate the reserve. The offsetting payable, on which interest is similarly accrued, is reflected in continuing products. Interest on the payable generally offsets investment income on the assets available to fund the shortfall. These amounts are eliminated in consolidation.


⁽³⁾	Net unrealized capital gains on the available-for-sale debt securities are included in other liabilities and are not reflected in consolidated shareholders’ equity.

The distributions on our discontinued products consisted of scheduled contract maturities, settlements and benefit payments of ~~$94~~$84 million and ~~$91~~$94 million for the three months ended March 31, ~~2016~~2017, and ~~2015,~~2016, respectively. Participant-directed withdrawals from our discontinued products were not significant during the three months ended

March 31, ~~2016~~2017 or ~~2015~~.2016. Cash required to fund these distributions was provided by earnings and scheduled payments on, and sales of, invested assets.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Aetna Inc.:

We have reviewed the accompanying consolidated balance sheet of Aetna Inc. and subsidiaries as of March 31, ~~2016,~~2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the ~~three month~~three-month periods ended March 31, ~~2016~~2017 and ~~2015.~~2016. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Aetna Inc. and subsidiaries as of December 31, ~~2015,~~2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February ~~19, 2016,~~17, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2015,~~2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Hartford, Connecticut

~~April 28, 2016~~May 2, 2017

Form 10-Q Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

OVERVIEW

We are one of the nation’s leading diversified health care benefits companies, serving an estimated ~~46.5~~44.9 million ~~people with~~people. We have the information and resources to help ~~them~~our members, in consultation with their health care professionals, make better informed decisions about their health care. We offer a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid health care management services, Medicare Advantage and Medicare ~~supplement~~Supplement plans, workers’ compensation administrative services and health information technology products and ~~services, such as Accountable Care Solutions (“ACS”).~~services. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions.

The following MD&A provides a review of our financial condition at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 and operating results for the three months ended March 31, ~~2016~~2017 and ~~2015.~~2016. This Overview should be read in conjunction with the entire MD&A, which contains detailed information that is important to understanding our operating results and financial condition, the consolidated financial statements and other data presented in this Quarterly Report on Form 10-Q as well as the MD&A contained in our ~~2015~~2016 Annual Report on Form 10-K ~~(the “2015~~(our “2016 Annual Report”). This Overview is qualified in its entirety by the full MD&A.

Summarized Results for the Three Months Ended March 31, ~~2016~~2017 and ~~2015:~~2016:


	Three Months Ended				Three Months Ended
	March 31,				March 31,					Change
(Millions, except where indicated)	2016		2015		2017			2016		$			%
Total revenue	$	15,693.4	$	15,094.1	$	15,165		$	15,693	$	(528	)	(3	)%
Net income attributable to Aetna	726.6		777.5
Operating earnings ⁽¹⁾	810.8		844.3
Net (loss) income attributable to Aetna					(381		)	737		(1,118		)	(152	)%
Adjusted earnings ⁽¹⁾					939			821		118			14	%
Total medical membership (in thousands)	22,989		23,670		22,446			22,989		(543		)	(2	)%
Cash flows from operations	1,780.9		1,473.4
Cash flows provided by operations					899			1,791		(892		)	(50	)%

A reconciliation of net (loss) income attributable to Aetna to adjusted earnings ⁽¹⁾for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended
	March 31,
(Millions)	2017			2016
Net (loss) income attributable to Aetna (GAAP measure)	$	(381	)	$	737
Loss on extinguishment of debt	246			—
Penn Treaty-related guaranty fund assessments	231			—
Transaction and integration-related costs	1,212			66
Amortization of other acquired intangible assets	60			62
Net realized capital losses	333			1
Income tax benefit	(762		)	(45		)
Adjusted earnings ⁽¹⁾	$	939		$	821

⁽¹⁾

~~Our discussion of operating results for our reportable business segments is based on operating~~Adjusted earnings ~~which is a non-GAAP measure of~~excludes from net (loss) income attributable to Aetna ~~(the term “GAAP” refers to U.S. generally accepted accounting principles). Non-GAAP financial measures we disclose, such as operating~~net realized capital gains and losses, amortization of other acquired intangible assets and the other items described in the reconciliation in Note 15. In addition, adjusted earnings should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. Refer to “Segment Results and Use of Non-GAAP Measures in this Document” beginning on page 42 for a discussion of non-GAAP measures. Refer to Note 15 beginning on page 35 for a reconciliation of our operating earnings toexcludes from net (loss) income attributable to ~~Aetna.~~Aetna the corresponding tax benefit or expense related to the items excluded from adjusted earnings discussed above. The tax benefit or expense was calculated utilizing the appropriate tax rate for each individual item excluded from adjusted earnings.

financial measures did not change.Our discussion of consolidated operating results is based on adjusted earnings, ~~decreased~~which is a non-GAAP measure of net income attributable to Aetna (the term “GAAP” refers to U.S. generally accepted accounting principles). Effective March 31, 2017, we began recording income taxes in our Corporate Financing segment and no longer allocated income taxes to our business segments. Accordingly, our discussion of operating results for our reportable business segments is based on pre-tax adjusted earnings which is a non-GAAP measure of income before income taxes attributable to Aetna. Effective March 31, 2017, transaction and integration-related costs were reclassified to our Corporate Financing segment. The prior period has been restated to reflect this presentation. Non-GAAP financial measures we disclose, such as adjusted earnings and pre-tax adjusted earnings, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. Refer to “Segment Results and Use of Non-GAAP Measures in this Document” for a discussion of non-GAAP measures.

Commentary

Our results for the three months ended March 31, ~~2016 compared to~~2017 include several items that impact comparability with results in prior periods. The impact of these items resulted in a net loss for the ~~corresponding~~ period, ~~in 2015, primarily due to lower operating earnings~~despite strong overall results in our ~~Group Insurance segment primarily~~underlying businesses, with the exception of our individual Commercial products. These items include costs associated with the termination of the Merger Agreement (as defined below) and an expense related to estimated future guaranty fund assessments as a result of ~~lower underwriting margins~~Penn Treaty (as defined below) being placed in liquidation. In addition, results for the three months ended March 31, 2017 reflect the temporary suspension of the health insurer fee ("HIF"). Pricing actions designed to recover the HIF and other ACA mandated fees represented approximately 3 percent of our ~~Disability products.~~Health Care premiums in 2016. Our results for the three months ended March 31, 2017 also include the impact of reduced participation on the ACA's individual public health insurance exchanges. We expect to significantly reduce our exposure to individual Commercial products in 2018.

~~Total revenue increased~~ Net loss attributable to Aetna was $381 millionduring the three months ended March 31, 2017 compared to net income attributable to Aetna of $737 million for the corresponding period in 2016. The net loss during the three months ended March 31, 2017 compared to net income during the corresponding period in 2016 was primarily due to the three months ended March 31, 2017 reflecting costs associated with the termination of the Merger Agreement.

Adjusted earnings increased $118 million during the three months ended March 31, 2017 compared to the corresponding period in ~~2015~~2016 primarily due to ~~higher~~strong performance in our Health Care segment, despite the continued pressure in our individual Commercial products described below.

Total revenue decreased $528 million during the three months ended March 31, 2017 compared to the corresponding period in 2016. The decrease was primarily due to lower premiums in our Health Care segment, including lower membership in our ACA compliant individual and small group products and the temporary suspension of the HIF in 2017, partially offset by higher premium yields in our Commercial business and membership growth in our Government business, each in our Health Care Segment. The decrease in total revenue also reflects a realized capital loss during the three months ended March 31, 2017 of $336 million pre-tax due to the unamortized effective portion of cash flow hedge losses being recognized into earnings upon the mandatory redemption of $10.2 billion aggregate principal amount of senior notes issued in 2016 and the redemption of $750 million aggregate principal amount of senior notes due in 2020.

Our effective tax rate was 39.6 percent and 42.7 percent for the three months ended March 31, 2017 and 2016, respectively. The decrease in our effective tax rate for the three months ended March 31, 2017 compared to the corresponding period in 2016 was primarily due to the temporary suspension of the non-deductible HIF in 2017. Because we were in a pre-tax loss position for the three months ended March 31, 2017, the decrease was partially offset by ~~membership losses in our group Commercial Insured products.~~the deduction of transaction-related costs during the three months ended March 31, 2017.

Total medical membership at March 31, ~~2016~~2017 decreased 543 thousand compared to March 31, ~~2015,~~2016, primarily reflecting declines in our Commercial ~~business,~~Insured products primarily in our ACA compliant individual and small group products, partially offset by ~~growth~~increases in our Commercial ASC products and Government ~~business~~.business. Refer to “Health Care - Membership” ~~beginning on page 45~~below in this MD&A for ~~additional~~further information on our medical membership.

~~We continued to generate strong cash flows~~

Cash flow from operations ~~in 2016 and 2015, generating $1.8 billion and $1.6 billion of cash flows from operations in our Health Care and Group Insurance businesses~~ decreased $892 million during the three months ended March 31, 2017 compared to the corresponding period in 2016 primarily due to cash payments associated with the termination of the Merger Agreement in 2017 and a decrease in income taxes payable due to a loss before income taxes for the three months ended March 31, 2017 compared with income before income taxes for the three months ended March 31, 2016. The decrease was partially offset by the timing of Medicare premium receipts, as we received an advanced payment associated with April 2017 in March 2017.

ended March 31, 2016 and 2015, respectively. During 2016, these cash flows funded our ordinary course operating activities, increased cash and cash equivalents in preparation for our proposed acquisition of Humana Inc. (“Humana”) and the payment of cash dividends to shareholders of $87 million.

~~Refer to “Liquidity and Capital Resources” beginning on page 51 and Note 12 of beginning on page 29 for additional information.~~

~~Proposed~~Terminated Acquisition of Humana ~~Inc.~~and Terminated Divestiture to Molina

On July 2, 2015, we entered into a definitive agreement ~~(as it may be amended, the "Merger Agreement"~~(the “Merger Agreement”) to acquire Humana Inc. (“Humana”). On July 21, 2016, the U.S. Department of Justice (the “DOJ”) and certain state attorneys general filed a civil complaint in ~~a transaction valued at approximately $37 billion, based on~~ the ~~closing price~~U.S. District Court for the District of ~~Aetna common shares on July 2, 2015, including the assumption of Humana debt~~Columbia (the “District Court”) against us and Humana ~~cash and cash equivalents. We expect to finance the cash portion of the purchase price of~~charging that our ~~proposed~~ acquisition of Humana (the “Humana ~~Acquisition”~~Transaction”) ~~through~~would violate Section 7 of the Clayton Antitrust Act, and seeking a ~~combination of cash on hand~~permanent injunction to prevent Aetna from acquiring Humana. On January 23, 2017, the District Court granted the DOJ’s request to enjoin the Humana Transaction.

On February 14, 2017, Aetna and ~~by issuing approximately $16.2 billion of new debt, including senior notes, term loans and commercial paper. We made customary representations, warranties and covenants in~~Humana entered into a mutual termination agreement (the “Termination Agreement”) pursuant to which the parties thereto (collectively, the “Parties”) agreed to terminate the Merger Agreement, including ~~among others, a covenant, subject to~~all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, entered pursuant thereto or entered in connection therewith (other than certain ~~exceptions, to conduct our business in the ordinary course between the execution of~~confidentiality agreements) (collectively with the Merger Agreement, the “Transaction Documents”), effective immediately as of February 14, 2017 (the “Termination Date”). Under the Termination Agreement, Aetna agreed to pay Humana the Regulatory Termination Fee (as defined in the Merger Agreement) of $1.0 billion in cash in full satisfaction of any amounts required to be paid by Aetna under the Merger Agreement. The Parties also agreed to release each other from any and all liability, claims, rights, actions, causes of action, suits, liens, obligations, accounts, debts, demands, agreements, promises, liabilities, controversies, costs, charges, damages, expenses and fees, however arising, in connection with, arising out of or related to the ~~closing~~Transaction Documents, the transactions contemplated therein or thereby or certain related matters. We paid Humana the Regulatory Termination Fee on February 16, 2017 and funded that payment with the proceeds of the ~~transaction.~~2016 senior notes (as defined below).

In June 2016, we issued $13.0 billion of senior notes to partially fund the Humana Transaction (collectively, the “2016 senior notes”). In accordance with the terms of the 2016 senior notes, on February 14, 2017, we issued a notice of redemption for $10.2 billion aggregate principal amount of certain of the 2016 senior notes (collectively, the “Special Mandatory Redemption Notes”) at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed the Special Mandatory Redemption Notes on March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption of the Special Mandatory Redemption Notes, we recognized on a pretax basis in our net income during the three months ended March 31, 2017 a loss on early extinguishment of long-term debt of $192 million and a realized capital loss for the remaining unrealized hedge loss of $323 million that was previously recorded in accumulated other comprehensive income.

In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage relating to the Humana Transaction, on August 2, 2016, we entered into a definitive agreement (the “Aetna APA”) to sell for cash to Molina Healthcare, Inc. (“Molina”) certain of our Medicare Advantage assets. On ~~October 19, 2015,~~February 14, 2017, Aetna and ~~Humana each obtained~~Molina entered into a Termination Agreement (the “APA Termination Agreement”) pursuant to which Aetna terminated the ~~approval~~Aetna APA, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby or entered pursuant thereto. Under the APA Termination Agreement, Aetna agreed to pay Molina in cash (a) a termination fee of ~~their respective shareholders necessary for~~$53 million and (b) approximately 70% of Molina’s transaction costs. We paid Molina the ~~Humana Acquisition.~~

~~We continue to work~~termination fee on February 16, 2017 and the applicable transaction costs of $7 million on February 27, 2017 and recorded the expense in general and administrative expenses. The payments were funded with the ~~U.S. Department of Justice to obtain clearance for the Humana Acquisition, and as of April 27, 2016, we had obtained approvals in fourteen~~proceeds of the ~~twenty states in which change of control regulatory approvals are necessary to close the transaction. The Humana Acquisition is currently projected to close in the second half of~~ 2016 and remains subject to customary closing conditions, including expiration of the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) waiting period and approvals of state departments of insurance and other regulators, and therefore has not been reflected in this Quarterly Report on Form 10-Q unless expressly stated otherwise.senior notes.

Refer to Notes 3 and ~~11 beginning on pages 9 and 26,~~8, respectively, ~~and “Forward-Looking Information/Risk Factors” beginning on page 53~~ for additional information on the Humana ~~Acquisition.~~Transaction.

Health Care Reform

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”) has ~~changed and will continue to make~~made broad-based changes to the U.S. health care system. ~~We expect~~The future of the ACA is uncertain. A bill that would have repealed or amended key provisions of the ACA was presented to the House of Representatives in March 2017 but not voted on. The administration has not decided whether to continue paying the ACA’s cost sharing subsidies, and ~~changes~~the practical implications of the President’s January 2017 executive order giving the regulatory agencies that enforce the ACA the authority to interpret regulations issued under the ACA in a way that limits fiscal burdens on states and financial or regulatory burdens on individuals, providers, health insurers and others remain unclear.

While we anticipate continued efforts in 2017 and beyond to substantially modify, repeal or replace the ACA, we expect aspects of the ACA to continue to significantly impact our business operations and ~~financial~~operating results, including our pricing, our medical benefit ratios (“MBRs”) and the geographies in which our products are available. The ACA ~~presents~~has presented us with business opportunities, but also with financial and regulatory challenges. Most of the ACA’s key components ~~of the ACA~~ were phased in during or prior to 2014, ~~including public health insurance exchanges (“Public Exchanges”), required minimum MLRs in Commercial~~ and ~~Medicare products,~~ the ~~individual coverage mandate, guaranteed issue, rating limits in individual~~ACA’s temporary Reinsurance and small group products, significant new industry-wide fees, assessments and taxes, enhanced premium rate review and disclosure processes, reduced Medicare Advantage payment rates to insurers, and linking Medicare Advantage payments to a plan’s CMS quality performance ratings or “star ratings.”Risk Corridor programs expired at the end of 2016. The effects of ~~these changes~~existing provisions of the ACA are reflected in our ~~financial~~operating results. ~~Certain components of~~If the ACA is not amended, repealed or replaced, certain of its components will continue to be phased in until 2020. ~~It is reasonably possible that the ACA and/or changes to the ACA, in the aggregate, could have a significant adverse effect on our business operations and financial results.~~

~~We continue to expect~~If the industry-wide $14.3 billion 2018 HIF (as currently enacted) is repealed or suspended, our 2017 ~~suspension of~~results may be adversely affected. If the ACA’s non tax-deductible health insurer fee (the “HIF”) to adversely affect our 2016 operating earnings, revenues and medical benefit ratios as this change begins to be reflected in reduced premiums for 2016 medical customer renewals that have member months in 2017. In addition, there2018 HIF is ~~some uncertainty whether~~not repealed or suspended, we ~~will~~may not be able to include all of our portion of the ~~industry-wide $14.3 billion~~ 2018 HIF in our premium rates beginning with 2017 medical customer renewals that have member months in 2018, particularly following the temporary suspension of the HIF ~~suspension for~~in 2017.

The ~~HIF applicable~~federal and state governments also continue to ~~2016 is payable in September 2016~~enact and ~~is being recorded within operating expenses~~seriously consider many other broad-based legislative and regulatory proposals that have had a material impact on ~~a straight-line basis in our 2016 financial results. We expect that our expense for this fee in 2016 will be $855 million. In aggregate, we expect our portion~~or could materially impact various aspects of the ~~total fees, taxes~~health care and ~~assessments imposed by~~related benefits system. We cannot predict whether pending or future federal or state legislative or court proceedings, including Federal budget negotiations and future U.S. Congressional appropriations, will change various aspects of the health care and related benefits system or the ACA toor the impact those changes will have on our business operations or operating results, but the effects could be ~~approximately $1 billion in 2016.~~materially adverse.

For additional information on the ACA, refer to ~~“MD&A-Overview-Health~~the “Overview - Health Care Reform,” ~~“MD&A-Outlook~~“Outlook for ~~2016,~~2017,” and “Regulatory Environment” sections in Part II, Item 7 of our 2016 Annual Report and ~~“Forward-Looking Information/Risk~~“Risk Factors” in Part I, Item 1A of our ~~2015~~2016 Annual Report.

Medicare Update

On April ~~5, 2016, the Centers for Medicare & Medicaid Services (“CMS”)~~3, 2017, CMS issued its ~~Final Notice~~final notice detailing final ~~2017~~2018 Medicare Advantage benchmark payment rates (the “Final Notice”). The Final Notice provides for rate cuts to the employer group waiver program that will begin in 2017 and be fully phased in for 2018 as well as adverse changes to the risk adjustment mechanism for dual eligible beneficiaries and the Medicare Advantage star rating program. Overall, we project the benchmark rates in the Final Notice will ~~decrease~~increase funding for our Medicare Advantage business by less than 1one percent in ~~2017~~2018 compared to ~~2016.~~

~~Management Update~~

Thomas J. Sabatino, Jr., Executive Vice President and General Counsel, joined Aetna in April 2016 and succeeded William J. Casazza who will continue to serve as a strategic advisor to Aetna in connection with the Humana Acquisition. Mr. Casazza has decided to retire upon the close of the Humana Acquisition.2017.

Segment Results and Use of Non-GAAP Measures in this Document

The following discussion of operating results is presented based on our reportable segments in accordance with the accounting guidance for segment reporting and is consistent with our segment disclosure included in Note 15 ~~beginning on page~~ 35.15. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. Our Corporate Financing segment is not a business segment; it is added to our business segments to reconcile our segment reporting to our consolidated results. The Corporate Financing segment includes transaction and integration-related costs, income taxes, interest expense on our outstanding debt and the financing components of our pension and other postretirement employee benefit plans (“OPEB”) expense (the service cost and prior service cost components of this expense are allocated to our business segments).

~~Our discussion of operating results is based on operating earnings. Operating~~Adjusted earnings and pre-tax adjusted earnings discussed in this quarterly report exclude from net income attributable to Aetna and income before income taxes attributable to Aetna reported in accordance with GAAP net realized capital gains or losses, amortization of other acquired intangible assets and other items, if any, that neither relate to the ordinary course of our business nor reflect our underlying business performance. Although the excluded items may recur, we believe excluding them from income before income taxes attributable to Aetna and net income attributable to Aetna to arrive at ~~operating~~pre-tax adjusted earnings and adjusted earnings provides a more useful comparison of our underlying business performance from period to period. Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of liabilities. Amortization of other acquired intangible assets relates to our acquisition ~~activities, including Coventry Health Care, Inc. (“Coventry”), the InterGlobal Group (“InterGlobal”) and bswift LLC (“bswift”).~~activities. These transactions and amortization do not directly relate to the underwriting or servicing of products for our customers and are not directly related to the core performance of our business operations. ~~Operating~~Effective March 31, 2017, pre-tax adjusted earnings is the measure reported to our ~~Chief Executive Officer~~chief executive officer for purposes of assessing business segment financial performance and making operating decisions, such as the allocation of resources among our business segments. In each

business segment discussion in this MD&A, we provide a table that reconciles ~~operating earnings to net~~ income before income taxes attributable to ~~Aetna.~~Aetna to pre-tax adjusted earnings. Each table details the net realized capital gains or losses, amortization of other acquired intangible assets and any other items excluded from ~~net~~ income before income taxes attributable to Aetna, and the footnotes to each table describe the nature of each other item and the reason we believe it is appropriate to exclude that item from ~~net~~ income before income taxes attributable to Aetna. Non-GAAP financial measures we disclose, such as ~~operating~~pre-tax adjusted earnings and adjusted earnings, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

HEALTH CARE

Health Care consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk) and emerging businesses products and services ~~such as Accountable Care Solutions,~~ that complement and enhance our medical products. We also offer Medicare and Medicaid products and services and other medical products, such as medical management and data analytics services, medical stop loss insurance, workers’ compensation administrative services and products that provide access to our provider networks in select geographies. We separately track premiums and health care costs for Government businesses (which represent our combined Medicare and Medicaid products). All other medical, dental and other Health Care products are referred to as Commercial.

Operating ~~Summary:~~Summary for the Three Months Ended March 31, 2017 and 2016:


	Three Months Ended						Three Months Ended
	March 31,						March 31,					Change
(Millions)	2016			2015			2017		2016			$			%
Premiums:
Commercial	$	6,964.3		$	7,209.7		$	6,109	$	6,964		$	(855	)	(12	)%
Government	6,504.7			5,730.4			7,110		6,505			605			9	%
Total premiums	13,469.0			12,940.1			13,219		13,469			(250		)	(2	)%
Fees and other revenue	1,438.7			1,345.7			1,448		1,439			9			1	%
Net investment income	112.6			97.5			115		112			3			3	%
Net realized capital (losses) gains	(6.0		)	4.6
Net realized capital gains (losses)							1		(6		)	7			(117	)%
Total revenue	15,014.3			14,387.9			14,783		15,014			(231		)	(2	)%
Health care costs	10,847.7			10,240.5
Health care costs:
Commercial							4,848		5,420			(572		)	(11	)%
Government							6,068		5,428			640			12	%
Total health care costs							10,916		10,848			68			1	%
Operating expenses:
Selling expenses	389.8			386.3			384		390			(6		)	(2	)%
General and administrative expenses	2,366.3			2,335.9			2,235		2,323			(88		)	(4	)%
Total operating expenses	2,756.1			2,722.2			2,619		2,713			(94		)	(3	)%
Amortization of other acquired intangible assets	62.8			63.2			60		62			(2		)	(3	)%
Total benefits and expenses	13,666.6			13,025.9			13,595		13,623			(28		)	—	%
Income before income taxes	1,347.7			1,362.0
Income taxes	586.2			597.7
Net income including non-controlling interests	761.5			764.3
Less: Net income (loss) attributable to non-controlling interests	2.7			(2.2		)
Net income attributable to Aetna for Health Care	$	758.8		$	766.5
Income before income taxes including non-controlling interests							1,188		1,391			(203		)	(15	)%
Less: Income before income taxes attributable to non-controlling interests							2		3			(1		)	(33	)%
Income before income taxes attributable to Aetna for Health Care							$	1,186	$	1,388		$	(202	)	(15	)%

We calculate our medical benefit ratio MBRs by dividing health care costs by health care premiums. For the three months ended March 31, 2017 and 2016, our Commercial, Government and Total Health Care MBRs were:



	Three Months Ended
	March 31,				Change
	2017		2016		basis points
Commercial	79.4	%	77.8	%	160
Government	85.3	%	83.4	%	190
Total Health Care	82.6	%	80.5	%	210

The table presented below reconciles ~~net~~ income ~~attributable~~before income taxes to ~~Aetna to operating~~pre-tax adjusted earnings ⁽¹⁾ for our Health Care ~~segment:~~segment for the three months ended March 31, 2017 and 2016:

Three Months Ended
March 31,
(Millions) 2016
2015
Net income attributable to Aetna for Health Care $ 758.8
$ 766.5
Transaction and integration-related costs, net of tax 28.2
30.7
Amortization of other acquired intangible assets, net of tax 40.8
41.1
Net realized capital losses (gains), net of tax 4.2
(2.7 )
Operating earnings for Health Care $ 832.0
$ 835.6



	Three Months Ended
	March 31,
(Millions)	2017			2016
Income before income taxes (GAAP measure)	$	1,188		$	1,391
Less: Income before income taxes attributable to non-controlling interests (GAAP measure)	2			3
Income before income taxes attributable to Aetna for Health Care (GAAP measure)	1,186			1,388
Penn Treaty-related guaranty fund assessments	231			—
Amortization of other acquired intangible assets	60			62
Net realized capital (gains) losses	(1		)	6
Pre-tax adjusted earnings for Health Care	$	1,476		$	1,456

⁽¹⁾

~~Operating~~Pre-tax adjusted earnings excludes net realized capital gains and losses, amortization of other acquired intangible assets and the other ~~items~~item described in the reconciliation in Note 15 beginning on page 35. Of the total transaction and integration-related costs described in the reconciliation in Note 15 beginning on page 35, $28.2 million ($42.8 million pretax) and $30.7 million ($45.6 million pretax) were recorded in the Health Care segment in the three months ended March 31, 2016 and 2015, respectively.15.

~~Operating~~Commentary

Income before income taxes attributable to Aetna for Health Care decreased $202 million during the three months ended March 31, 2017 compared to the corresponding period in 2016. The decrease was primarily due to the three months ended March 31, 2017 reflecting a $231 million pre-tax expense related to estimated future guaranty fund assessments as a result of Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) being placed in liquidation. The decrease in income before incomes taxes in three months ended March 31, 2017 also reflects the changes in pre-tax adjusted earnings described below.

Pre-tax adjusted earnings for Health Care remained relatively flat at approximately $1.5 billion for the three months ended March 31, 2017 and 2016, ~~remained relatively flat compared to~~despite the ~~corresponding period in 2015, primarily as a result of lower underwriting margins in our Commercial business, substantially offset by higher fees and other revenue.~~

~~We calculate our medical benefit ratio (“MBR”) by dividing health care costs by health care premiums. For the~~ ~~three~~ ~~months ended March 31, 2016 and 2015, our MBRs by product were:~~

Three Months Ended
March 31,
2016
2015
Commercial 77.8 % 77.4 %
Government 83.4 % 81.3 %
Total Health Care 80.5 % 79.1 %

~~Refer to our discussion of Commercial and Government results below for an explanation~~negative impact of the ~~changes~~temporary suspension of the HIF in ~~our premiums and MBRs.~~

~~Commercial operating~~2017. Our results for the three months ended March 31, ~~2016~~2017 reflect strong performance across all of our Health Care businesses, with the exception of our individual Commercial products. During the three months ended March 31, 2017, we recorded a ~~decline~~$110 million premium deficiency reserve that reflects anticipated future losses for the 2017 coverage year in ~~membership and lower underwriting margins compared to the corresponding period in 2015.~~our individual Commercial products.

Commercial premiums decreased ~~$245~~$855 million for the three months ended March 31, ~~2016~~2017 compared to the corresponding period in ~~2015,~~2016, primarily due to lower membership ~~losses~~ in our ACA compliant individual and small group ~~Commercial Insured~~ products and the temporary suspension of the HIF in 2017, partially offset by higher premium yields.

Our Commercial MBR increased 40160 basis points for the three months ended March 31, ~~2016~~2017 compared to the corresponding period in ~~2015.~~2016, primarily due to the temporary suspension of the HIF in 2017 and higher medical costs in our individual Commercial products during the three months ended March 31, 2017, including a $110 million premium deficiency reserve. The increase was partially offset by improved performance in our group Commercial ~~MBR~~Insured products.

Government premiums increased $605 million for the three months ended March 31, ~~2016 is primarily due to the extra calendar day of service in the first quarter of 2016.~~

~~Government operating results for the three months ended March 31, 2016 reflect an increase in membership and steady underwriting margins~~2017 compared to the corresponding period in ~~2015.~~

~~Government premiums increased $774 million for the~~ ~~three~~ ~~months ended March 31,~~ 2016, ~~compared~~primarily due to ~~the corresponding period in~~ ~~2015, primarily as a result of~~ membership growth in our Government ~~business.~~business, partially offset by the temporary suspension of the HIF in 2017.

Our Government MBR increased ~~210~~190 basis points for the three months ended March 31, ~~2016~~2017 compared to the corresponding period in ~~2015. The increase~~2016, primarily due to the temporary suspension of the HIF in ~~our Government MBR~~2017.

Health Care fees and other revenue remained relatively flat at $1.4 billion for for the three months ended March 31, ~~2016 is primarily a result of lower favorable development of prior-years’ health care cost estimates in 2016.~~

~~Fees and Other Revenue~~

~~Health Care fees and other revenue increased $93 million for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2016~~2017 compared to the corresponding period in ~~2015, primarily as a result of higher average fee yields.~~2016.

~~Income Taxes~~

~~Our effective tax rate remained relatively flat at 43.5 percent for the~~ ~~three~~General and administrative expenses ~~months ended March 31, 2016 compared with 43.9 percent for~~decreased by $88 million primarily due to the temporary suspension of the HIF in 2017 and the execution of our expense management initiatives, partially offset by the expense recorded during the three months ended March 31, ~~2015.~~2017 for estimated future guaranty fund assessments related to Penn Treaty described above.

Membership

Health Care’s membership at March 31, ~~2016~~2017 and ~~2015~~2016 was:


	2016			2015				2017			2016			Change
(Thousands)	Insured	ASC	Total	Insured	ASC	Total		Insured	ASC	Total	Insured	ASC	Total	Insured		ASC		Total
Medical:
Commercial	5,792	12,931	18,723	6,363	13,496	19,859		4,557	13,351	17,908	5,792	12,931	18,723	(1,235	)	420		(815	)
Medicare Advantage	1,332	—	1,332	1,228	—	1,228		1,443	—	1,443	1,332	—	1,332	111		—		111
Medicare Supplement	612	—	612	488	—	488		711	—	711	612	—	612	99		—		99
Medicaid ⁽¹⁾	1,549	773	2,322	1,338	757	2,095		1,570	814	2,384	1,549	773	2,322	21		41		62
Total Medical Membership	9,285	13,704	22,989	9,417	14,253	23,670		8,281	14,165	22,446	9,285	13,704	22,989	(1,004	)	461		(543	)


Consumer-Directed Health Plans ⁽²⁾			4,320			3,981

Dually-Eligible for Medicare and Medicaid ⁽¹⁾			26			23

Dental:
Total Dental Membership	5,913	8,392	14,305	6,182	8,413	14,595	⁽³⁾	5,898	8,116	14,014	5,913	8,392	14,305	(15	)	(276	)	(291	)

Pharmacy:
Commercial			9,767			10,789				8,217			9,767					(1,550	)
Medicare PDP (stand-alone)			1,939			1,435				2,064			1,939					125
Medicare Advantage PDP			934			850				1,106			934					172
Medicaid ⁽¹⁾			2,602			2,351				2,817			2,602					215
Total Pharmacy Benefit Management Services			15,242			15,425
Total Pharmacy Benefit Management Services Membership								Total Pharmacy Benefit Management Services Membership		14,204			15,242					(1,038	)


⁽¹⁾ ⁽¹⁾Medicaid membership includes members who are dually-eligible for both Medicare and Medicaid.	~~Medicaid membership includes members who are dually-eligible for both Medicare and Medicaid.~~


⁽²⁾	~~Represents members in consumer-directed health plans who also are included in Commercial medical membership above.~~


⁽³⁾	Dental ASC membership at March 31, 2015 has been revised to reflect a reduction of approximately 1 million Dental ASC members, as applicable Medicaid ASC members did not have a Dental ASC product at such date. This revision did not affect our financial statements.

Commentary

Total medical membership at March 31, 2017 decreased 543 thousand members compared to March 31, 2016, primarily reflecting declines in our Commercial Insured products primarily in our ACA compliant individual and small group products, partially offset by increases in our Commercial ASC products and Government business.

Total dental membership at March 31, 2017 decreased 291 thousand members compared to March 31, ~~2015~~2016, primarily reflecting declines in our dental ASC products.

Total pharmacy benefit management services membership ,at March 31, 2017 decreased 1 million members compared to March 31, 2016, primarily reflecting declines in our Commercial business ~~partially offset by growth in~~primarily attributable to our ~~Government business.~~ACA compliant individual and small group products.

~~Total dental membership at March 31, 2016 decreased slightly compared to March 31, 2015, primarily reflecting declines in our Insured dental products.~~

~~Total pharmacy benefit management services membership decreased slightly at~~ ~~March 31, 2016~~ ~~compared to~~ ~~March 31, 2015, primarily reflecting declines in our Commercial business, partially offset by growth in our Government business.~~

~~Health Care Costs Payable~~

~~The following table shows the components of the change in health care costs payable during the three months ended March 31, 2016 and 2015:~~

(Millions) 2016
2015
Health care costs payable, beginning of period $ 6,305.7
$ 5,621.1
Less: reinsurance recoverables 4.1
5.8
Health care costs payable, beginning of period, net 6,301.6
5,615.3
Add: Components of incurred health care costs:
Current year 11,474.5
10,893.6
Prior years (626.8 ) (653.1 )
Total incurred health care costs 10,847.7
10,240.5

Less: Claims paid
Current year 5,929.2
5,929.8
Prior years 4,398.2
3,841.5
Total claims paid 10,327.4
9,771.3

Health care costs payable, end of period, net 6,821.9
6,084.5
Add: reinsurance recoverables 2.9
2.7
Health care costs payable, end of period $ 6,824.8
$ 6,087.2

Our estimates of prior years’ health care costs payable decreased by $627 million and $653 million in the three months ended March 31, 2016 and 2015, respectively, resulting from claims being settled for amounts less than originally estimated, primarily due to lower health care cost trends than we assumed in establishing our health care costs payable in the prior years. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period health care costs when we established our estimate of current year health care costs payable.

GROUP INSURANCE

Operating ~~Summary:~~Summary for the Three Months Ended March 31, 2017 and 2016:

Three Months Ended
March 31,
(Millions) 2016
2015
Premiums:
Life $ 280.0
$ 301.8
Disability 234.2
214.7
Long-term care 10.8
11.1
Total premiums 525.0
527.6
Fees and other revenue 26.1
26.9
Net investment income 57.7
62.5
Net realized capital gains 3.2
2.9
Total revenue 612.0
619.9
Current and future benefits 465.8
448.1
Operating expenses:
Selling expenses 31.3
28.6
General and administrative expenses 87.3
84.4
Total operating expenses 118.6
113.0
Total benefits and expenses 584.4
561.1
Income before income taxes 27.6
58.8
Income taxes 4.2
13.0
Net income attributable to Aetna for Group Insurance $ 23.4
$ 45.8

~~The table presented below reconciles net income attributable to Aetna to operating earnings for our Group Insurance segment:~~

Three Months Ended
March 31,
(Millions) 2016
2015
Net income attributable to Aetna for Group Insurance $ 23.4
$ 45.8
Net realized capital gains, net of tax (2.1 ) (1.9 )
Operating earnings for Group Insurance $ 21.3
$ 43.9

~~Operating earnings for the three months ended~~ ~~March 31, 2016~~ ~~decreased by $23 million when compared to the corresponding period in~~ ~~2015, primarily due to lower underwriting margins in our Disability products.~~



	Three Months Ended
	March 31,				Change
(Millions)	2017		2016		$			%
Premiums:
Life	$	283	$	280	$	3		1	%
Disability	237		234		3			1	%
Long-term care	11		11		—			—	%
Total premiums	531		525		6			1	%
Fees and other revenue	25		26		(1		)	(4	)%
Net investment income	63		58		5			9	%
Net realized capital gains	2		3		(1		)	(33	)%
Total revenue	621		612		9			1	%
Current and future benefits	467		466		1			—	%
Operating expenses:
Selling expenses	37		31		6			19	%
General and administrative expenses	82		87		(5		)	(6	)%
Total operating expenses	119		118		1			1	%
Total benefits and expenses	586		584		2			—	%
Income before income taxes attributable to Aetna for Group Insurance	$	35	$	28	$	7		25	%

We calculate our group benefit ratio by dividing current and future benefits by total premiums. Our group benefit ratios were:

Three Months Ended
March 31,
2016
2015
Group benefit ratio 88.7 % 84.9 %



	Three Months Ended
	March 31,				Change
	2017		2016		basis points
Group benefit ratio	87.9	%	88.7	%	(80	)

The ~~380 basis point increase in our group benefit ratio~~table presented below reconciles income before income taxes attributable to Aetna to pre-tax adjusted earnings ⁽¹⁾ for the three months ended March 31, 2017 and 2016 for our Group Insurance segment:



	Three Months Ended
	March 31,
(Millions)	2017			2016
Income before income taxes attributable to Aetna for Group Insurance (GAAP measure)	$	35		$	28
Net realized capital gains	(2		)	(3		)
Pre-tax adjusted earnings for Group Insurance	$	33		$	25


⁽¹⁾	Pre-tax adjusted earnings excludes net realized capital gains and losses.

Commentary

Total revenue increased $9 million for the three months ended March 31, 2017 compared to the corresponding period in ~~2015 is~~2016 primarily due to ~~lower~~higher premiums in our life and disability products and higher net investment income.

Income before income taxes attributable to Aetna for Group Insurance increased $7 million for the three months ended March 31, 2017 compared to the corresponding period in 2016. Pre-tax adjusted earnings for Group Insurance increased $8 million for the three months ended March 31, 2017 compared to the corresponding period in 2016. Income before income taxes and pre-tax adjusted earnings increased primarily due to higher net investment income.

Our group benefit ratio decreased 80 basis points for the three months ended March 31, 2017 compared to the corresponding period in 2016, primarily due to higher underwriting margins in our ~~Disability~~life products.

LARGE CASE PENSIONS

Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products.

Operating ~~Summary:~~Summary for the Three Months Ended March 31, 2017 and 2016:


	Three Months Ended						Three Months Ended
	March 31,						March 31,					Change
(Millions)	2016			2015			2017		2016			$			%
Premiums	$	15.1		$	10.4		$	13	$	15		$	(2	)	(13	)%
Net investment income	47.4			72.9			71		48			23			48	%
Other revenue	2.2			2.4			2		2			—			—	%
Net realized capital gains	2.4			.6			—		2			(2		)	(100	)%
Total revenue	67.1			86.3			86		67			19			28	%
Current and future benefits	63.1			80.0			78		63			15			24	%
General and administrative expenses	3.2			3.1			3		3			—			—	%
Total benefits and expenses	66.3			83.1			81		66			15			23	%
Income before income taxes (benefits)	.8			3.2
Income taxes (benefits)	.9			(.3		)
Net (loss) income including non-controlling interests	(.1		)	3.5
Less: Net (loss) income attributable to non-controlling interests	(1.4		)	1.0
Net income attributable to Aetna for Large Case Pensions	$	1.3		$	2.5
Income before income tax expense including non-controlling interests							5		1			4			400	%
Less: Income (loss) before income taxes attributable to non-controlling interests							1		(2		)	3			(150	)%
Income before income taxes attributable to Aetna for Large Care Pensions							$	4	$	3		$	1		33	%

The table presented below reconciles ~~net~~ income ~~attributable~~before income taxes to ~~Aetna to operating (loss)~~pre-tax adjusted earnings⁽¹⁾ for the three months ended March 31, 2017 and 2016 for our Large Case Pensions segment:

Three Months Ended
March 31,
(Millions) 2016
2015
Net income attributable to Aetna for Large Case Pensions $ 1.3
$ 2.5
Net realized capital gains, net of tax (1.6 ) (.4 )
Operating (loss) earnings for Large Case Pensions $ (.3 ) $ 2.1



	Three Months Ended
	March 31,
(Millions)	2017		2016
Income before income taxes for Large Case Pensions (GAAP measure)	$	5	$	1
Less: Income (loss) before income taxes attributable to non-controlling interests (GAAP measure)	1		(2		)
Income before income taxes attributable to Aetna for Large Case Pensions (GAAP measure)	4		3
Net realized capital gains	—		(2		)
Pre-tax adjusted earnings for Large Case Pensions	$	4	$	1


⁽¹⁾	Pre-tax adjusted earnings excludes net realized capital gains and losses.

Commentary

Total revenue ~~decreased by~~increased $19 million for the three months ended March 31, ~~2016, when~~2017 compared to the corresponding period in ~~2015,~~2016, primarily ~~as a result of lower~~due to higher net investment income.

Income before income taxes attributable to Aetna for Large Care Pensions and pre-tax adjusted earnings for Large Case Pensions both remained relatively flat for the three months ended March 31, 2017 compared to the corresponding period in 2016.

Discontinued Products

In November 2016, the last outstanding GIC matured. We discontinued selling these products because they were generating losses for us, and we projected that they would continue to generate losses over their life (which is currently greater than 30 ~~years for SPAs)~~years); so we established a reserve for anticipated future losses at the time of discontinuance. ~~At both~~ ~~March 31, 2016~~ and December 31, 2015, our remaining GIC liability was not material. We provide additional information on the reserve for anticipated future losses, including key assumptions and other important information, in Note 17 ~~beginning on page~~ 36.

The operating summary for Large Case Pensions above includes revenues and expenses related to our discontinued products, with the exception of net realized capital gains and losses which are recorded as part of current and future

benefits. Since we established a reserve for anticipated future losses on discontinued products, as long as our expected future losses remain consistent with prior projections, the results of our discontinued products are applied against the reserve and do not impact net income attributable to Aetna. If actual or expected future losses are greater than we currently estimate, we may increase the reserve, which could adversely impact net income attributable to Aetna. If actual or expected future losses are less than we currently estimate, we may decrease the reserve, which could favorably impact net income attributable to Aetna. In those cases, we disclose such adjustment separately in the operating summary. Management reviews the adequacy of the discontinued products reserve quarterly. The current reserve reflects management’s best estimate of anticipated future losses, and is included in future policy benefits on our ~~balance sheets.~~Balance Sheets.

Refer to Note 17 ~~of beginning on page~~ 3616 for additional information on the activity in the reserve for anticipated future losses on discontinued products during the three months ended March 31, ~~2016~~2017 and ~~2015.~~

~~INVESTMENTS~~

~~Our investment portfolio supported the following products at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015~~:

(Millions) March 31,
2016
December 31,
2015
Experience-rated products ⁽¹⁾
$ 1,175.4
$ 1,156.7
Discontinued products ⁽¹⁾
3,125.7
3,059.1
Remaining products 20,938.9
20,463.8
Total investments $ 25,240.0
$ 24,679.6


⁽¹⁾	~~Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results.~~

The risks associated with investments supporting experience-rated pension and annuity products in our Large Case Pensions business are assumed by the contract holders and not by us (subject to, among other things, certain minimum guarantees). Assets supporting experience-rated products may be subject to contract holder or participant withdrawals. Experience-rated contract holder and participant-directed withdrawals for the ~~three~~ ~~months ended~~ ~~March 31, 2016~~ ~~and~~ ~~2015~~ ~~were as follows:~~

Three Months Ended
March 31,
(Millions) 2016
2015
Scheduled contract maturities and benefit payments ⁽¹⁾
$ 18.0
$ 20.2
Contract holder withdrawals other than scheduled contract
maturities and benefit payments .7
8.8
Participant-directed withdrawals .4
1.0


⁽¹⁾	~~Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.~~

~~Debt and Equity Securities~~

~~The debt securities in our investment portfolio had an average credit quality rating of A at both~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, with approximately $5.2 billion and $5.0 billion rated AAA at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, respectively. The debt securities that were rated below investment grade (that is, having a credit quality rating below BBB-/Baa3) were $1.5 billion and $1.4 billion at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, respectively (of which 13% at both~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, supported our experience-rated and discontinued products).~~

At ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015~~, we held $973 million and $956 million, respectively, of municipal debt securities that were guaranteed by third parties, representing 4% of our total investments at each date. These securities had an average credit quality rating of AA at both ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, with the guarantee. These securities had an average credit quality rating of A+ and A at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31,~~

~~2015, respectively, without the guarantee. We do not have any significant concentration of investments with third party guarantors (either direct or indirect).~~

~~At both~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015~~, less than 1% of our investment portfolio was comprised of investments that were either European sovereign, agency, or local government debt of countries which, in our judgment based on an analysis of market-yields, are experiencing economic, fiscal or political strains such that the likelihood of default may be higher than if those factors did not exist.

Additionally, at both March 31, 2016 and December 31, 2015, less than 7% of our investment portfolio was comprised of investments that have exposure to the oil and gas industry, with more than half that amount comprised of investment grade rated debt securities. These exposures are experiencing varied degrees of financial strains in the current depressed oil and gas price environment, and the likelihood of our portfolio incurring realized capital losses on these exposures may increase if such depressed prices persist and/or decline further.

We generally classify our debt and equity securities as available for sale, and carry them at fair value on our balance sheets. At both March 31, 2016 and December 31, 2015, 1% of our debt and equity securities were valued using inputs that reflect our own assumptions (categorized as Level 3 inputs in accordance with GAAP). Refer to Note 9 ~~beginning on page~~ 19 ~~for additional information on the methodologies and key assumptions we use to determine the fair value of investments.~~

~~Refer to Note~~ 6 ~~beginning on page~~ 11 ~~for details related to:~~

~~Our investment portfolio balances at~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015~~;

~~Gross unrealized capital gains and losses by major security type;~~

~~Debt securities with unrealized capital losses (including the amounts related to experience-rated and discontinued products);~~

~~Our net realized capital gains and losses; and~~

~~Our mortgage loan portfolio.~~

We regularly review our debt securities to determine if a decline in fair value below the carrying value is other-than-temporary. If we determine a decline in fair value is other-than-temporary, we will write down the carrying value of the security. The amount of the credit-related impairment is included in our operating results, and the non-credit related component is included in other comprehensive income unless we intend to sell the security or it is more likely than not that we will be required to sell the debt security prior to its anticipated recovery of its amortized cost basis. Accounting for other-than-temporary impairment (“OTTI”) of our debt securities is considered a critical accounting estimate. Refer to “Critical Accounting Estimates - Other-Than-Temporary Impairment of Debt Securities” in our 2015 Annual Report for additional information.

~~Risk Management and Market-Sensitive Instruments~~

We manage interest rate risk by seeking to maintain a tight match between the durations of our assets and liabilities when appropriate. We manage credit risk by seeking to maintain high average credit quality ratings and diversified sector exposure within our debt securities portfolio. In connection with our investment and risk management objectives, we also use derivative financial instruments whose market value is at least partially determined by, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. Our use of these derivatives is generally limited to hedging risk and has principally consisted of using interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options and credit default swaps. These instruments, viewed separately, subject us to varying degrees of interest rate, equity price and credit risk. However, when used for hedging, we expect these instruments to reduce overall risk.

We regularly evaluate our risk from market-sensitive instruments by examining, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. We also regularly evaluate the appropriateness of investments relative to our management-approved investment guidelines (and operate within those guidelines) and the business objectives of our portfolios.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

We meet our operating cash requirements by maintaining liquidity in our investment portfolio, using overall cash flows from premiums, fees and other revenue, deposits and income received on investments, issuing commercial paper, ~~taking~~entering into repurchase agreements and obtaining cash advances from the Federal Home Loan Bank of Boston (“FHLBB”) ~~and entering into repurchase agreements~~ from time to time. We monitor the duration of our investment portfolio of highly marketable debt securities and mortgage loans, and execute purchases and sales of these investments with the objective of having adequate funds available to satisfy our maturing liabilities. Overall cash flows are used primarily for claim and benefit payments, operating expenses, share and debt repurchases, repayment of debt, acquisitions, contract withdrawals and shareholder ~~dividends and to increase cash and cash equivalents in anticipation of the Humana Acquisition.~~dividends. We have committed short-term borrowing capacity of $2.0 billion through a revolving credit facility agreement that expires in March ~~2020.~~2021.

Presented below is a condensed ~~statement~~Statement of ~~cash flows~~Cash Flows for the three months ended March 31, ~~2016~~2017 and ~~2015~~.2016. We present net cash flows used for operating activities and net cash flows provided by investing activities separately for our Large Case Pensions segment because changes in the insurance reserves for the Large Case Pensions segment (which are reported as cash used for operating activities) are funded from the sale of investments (which are reported as cash provided by investing activities). Refer to the Consolidated Statements of Cash Flows ~~on page~~ 5for additional information.


	Three Months Ended						Three Months Ended
	March 31,						March 31,						Change
(Millions)	2016			2015			2017			2016			$			%
Cash flows from operating activities
Health Care and Group Insurance	$	1,843.7		$	1,556.2		$	983		$	1,854		$	(871	)	(47	)%
Large Case Pensions	(62.8		)	(82.8		)	(84		)	(63		)	(21		)	33	%
Net cash provided by operating activities	1,780.9			1,473.4			899			1,791			(892		)	(50	)%
Cash flows from investing activities
Health Care and Group Insurance	(203.8		)	(92.3		)	(228		)	(204		)	(24		)	12	%
Large Case Pensions	27.1			114.1			172			27			145			537	%
Net cash (used for) provided by investing activities	(176.7		)	21.8
Net cash used for investing activities							(56		)	(177		)	121			(68	)%
Net cash used for financing activities	(362.1		)	(999.8		)	(14,962		)	(372		)	(14,590		)	3,922	%
Net increase in cash and cash equivalents	$	1,242.1		$	495.4
Net (decrease) increase in cash and cash equivalents							$	(14,119	)	$	1,242		$	(15,361	)	(1,237	)%

~~Cash Flow Analysis~~Commentary

Cash flows provided by operating activities for Health Care and Group Insurance ~~were approximately $1.8 billion~~ decreased $871 million during the three months ended March 31, 2017 compared to the corresponding period in 2016 primarily due to cash payments associated with the termination of the Merger Agreement in 2017 and ~~$1.6 billion~~a decrease in income taxes payable due to a loss before income taxes for the three months ended March 31, ~~2016 and 2015, respectively. The increase in cash flows provided by operating activities~~2017 compared with income before income taxes for the three months ended March 31, ~~2016 compared with the corresponding period in 2015 is primarily attributable to~~2016. The decrease was partially offset by the timing of ~~collections of~~Medicare premium ~~and other receivables.~~receipts, as we received an advanced payment associated with April 2017 in March 2017.

Cash flows used for investing activities ~~were $177~~ decreased $121 million for the three months ended March 31, 2017 compared to the corresponding period in 2016, ~~compared with cash flows provided by investing activities~~primarily due to net sales and maturities of ~~$22 million~~investments for the three months ended March 31, ~~2015. The increase in cash used for investing activities~~2017 compared with net purchases of investments for the three months ended March 31, ~~2016 compared with~~2016.

Cash flows used for financing activities increased $14.6 billion primarily due to the ~~corresponding period in 2015 is primarily attributable to higher net purchases~~repayment of ~~investments.~~

~~During~~long-term debt and share repurchases during the three months ended March 31, 2016, our cash flows used for financing activities reflect collateral paid on interest rate hedges, dividends paid to our shareholders and the issuance of common shares under benefit plans. During the three months ended March 31, 2015, our cash flows used for financing activities reflect the repayment of debt, settlements from repurchase agreements, share repurchases, dividends paid to our shareholders and the issuance of common shares under benefit plans. 2017.

Refer to ~~Note 12 beginning on page 29~~Notes 8 and 10 for more information about debt issuances, debt repayments, share repurchases and dividend payments.

~~Long-Term Debt, Revolving Credit Facility; Bridge Credit Agreement;~~Termination of Merger Agreement and ~~Term Loan Agreement~~Aetna APA

In support of our capital management goals, during 2015 we repaid maturing long-term debt and extended the maturity date of our revolving credit facility. Additionally, in July 2015 and in connection with the Humana Acquisition, we entered intoAs a $13.0 billion 364-day senior unsecured bridge credit agreement (the “Bridge Credit Agreement”) and a $3.2 billion three-year term loan credit agreement (the “Term Loan Agreement”). In addition, in July 2015, we amended our revolving credit facility to increase the commitments available from $2.0 billion to $3.0 billion upon our request and the satisfaction of certain conditions, including the completionresult of the ~~transactions contemplated by~~termination of the Merger Agreement, we paid Humana the applicable $1.0 billion Regulatory Termination Fee on February 16, 2017. As a result of the APA Termination Agreement, we paid Molina the applicable termination fee of $53 million on February 16, 2017 and paid Molina the applicable transaction costs of $7 million on February 27, 2017. We funded these payments with the proceeds of the 2016 senior notes.

2016 Senior Notes

In June 2016, we issued $13 billion of 2016 senior notes. In accordance with the terms of the 2016 senior notes, on February 14, 2017, following the termination of ~~Humana’s existing credit agreement dated as~~the Merger Agreement, we issued a notice of ~~July 9, 2013. Refer~~redemption for the entire $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes at a redemption price equal to ~~Note 11 beginning~~101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed the Special Mandatory Redemption Notes on ~~page 26~~March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption, we recognized on a pretax basis in our net income a loss on early extinguishment of long-term debt of $192 million and a realized capital loss for ~~additional information on these transactions.~~

~~Cash Flow Hedges~~

~~We have entered into various interest rate swaps and treasury rate locks that are designated as cash flow hedges against interest rate exposure related to~~ the ~~forecasted future issuance of fixed-rate debt to be primarily used to finance a~~remaining unamortized effective portion of the ~~purchase price~~related hedge loss of ~~the Humana Acquisition.~~$323 million that was previously recorded in accumulated other comprehensive income. Refer to ~~Note 11 beginning on page 26~~Notes 3 and 8 for additional information on these transactions.

Other Liquidity Information

From time to time, we use short-term commercial paper borrowings, repurchase agreements and cash advances from the FHLBB to address timing differences between cash receipts and disbursements. At both March 31, ~~2016~~2017 and December 31, ~~2015,~~2016, we did not have any commercial paper ~~outstanding. There were no~~outstanding or outstanding advances from the FHLBB. The maximum amount of commercial paper borrowings outstanding during the three months ended March 31, ~~2016~~.2017 was approximately $450 million.

Our debt to capital ratio (calculated as the sum of all short- and long-term debt outstanding (“total debt”) divided by the sum of total Aetna shareholders’ equity plus total debt) was approximately ~~32%~~39.8% at March 31, 2016. At the completion of the Humana Acquisition, we currently project our debt to capital ratio will be approximately 46% as we expect to issue approximately $16.2 billion of new debt, including senior notes, term loans and commercial paper, to partially finance the cash portion of the purchase price. Following the announcement of the Humana Acquisition in July 2015, each of Standard & Poor’s Rating Services, A.M. Best, Fitch Ratings and Moody’s Investors Service placed certain of our debt, financial strength and other credit ratings under review for a possible downgrade. We currently project that our debt to capital ratio will decrease below 40% over the 24 months following the completion of the Humana Acquisition.2017. We continually monitor existing and alternative financing sources to support our capital and liquidity needs, including, but not limited to, debt issuance, preferred or common stock issuance, reinsurance and pledging or selling of assets.

Interest expense was ~~$102~~$173 million and ~~$80~~$102 million for the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, respectively. The increase in interest expense during ~~2016~~2017 compared to ~~2015~~2016 reflects the ~~impact of~~financing activity associated with the ~~Bridge Credit Agreement and the Term Loan Agreement.~~Humana Transaction.

Refer to Notes 118 and 12 ~~beginning on pages 26 and~~ 29~~, respectively,~~10 for information on our FHLBB membership and our stock-based compensation awards granted during 2017, respectively.

Contractual Obligations

The following table summarizes certain estimated future obligations by period under certain of our contractual obligations at March 31, 2017. The table below does not include all future obligations by period; it only includes those future obligations that have changed materially from those presented in our 2016 ~~respectively.~~Annual Report as a result of the redemption of the $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and the redemption of the $750 million aggregate principal amount of the 2020 Notes in March 2017. We believe that funds from future operating cash flows, together with cash, investments and other funds available under the Facility; from the FHLBB; and from public or private financing sources, will be sufficient to meet our existing commitments as well as our liquidity needs associated with future operations, including our strategic growth initiatives.



(Millions)	2017		2018-2019		2020-2021		Thereafter		Total
Long-term debt obligations, including interest	$	1,572	$	1,983	$	1,660	$	8,505	$	13,720

Form 10-Q Table of Contents

CRITICAL ACCOUNTING ESTIMATES

Refer to “Critical Accounting Estimates” in our ~~2015~~2016 Annual Report for information on accounting policies that we consider critical in preparing our consolidated financial statements. These policies include significant estimates we make using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used, and these estimates may not ultimately reflect the actual amounts that occur.

REGULATORY ENVIRONMENT

~~There~~Except as described in the “Health Care Reform” section of the MD&A, there were no material changes in the regulation of our business since December 31, ~~2015.~~2016. Refer to the “Regulatory Environment” section in our ~~2015~~2016 Annual Report for information on the regulation of our business.

FORWARD-LOOKING ~~INFORMATION/RISK FACTORS~~INFORMATION

Certain information in this MD&A is forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to uncertainties that are outside our control and could cause actual future results to differ materially from those statements. You should not place undue reliance on forward-looking statements, and we disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

You should read the Forward Looking Information/Risk Factors section of our 2015 Annual Report. You should read that section of our 2015 Annual Report and the information below carefully because each of them contains a discussion of important risk factors that could adversely affect our business as well as the market price for our common stock.

~~Risks relating to Humana.~~

Following completion of the Merger, Aetna will be subject to the risks described in (i) Part I, Item 1A in Humana's Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 18, 2016, and incorporated by reference into our 2015 Annual Report.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

~~We have not experienced any material changes in exposures~~Our earnings and financial position are exposed to interest rate risk, credit quality risk and market ~~risk since December 31, 2015. Refer to the information contained in the “Risk Management and Market-Sensitive Instruments” section of the MD&A beginning on page~~ 50 ~~for~~valuation risk.

For a discussion of these risks, refer to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” included in our ~~exposures~~2016 Annual Report on form 10-K. The market risk information below does not include all market risks; it only includes the market risks that have changed materially from those presented in our 2016 Annual Report as a result of the redemption of the $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and the redemption of the $750 million aggregate principal amount of the 2020 Notes in March 2017.

Evaluation of Market Risks

On a quarterly basis, we review the impact of hypothetical net losses in our investment portfolio on our consolidated near-term financial position, operating results and cash flows assuming the occurrence of certain reasonably possible changes in near-term market ~~risk.~~rates and prices. Interest rate changes (whether resulting from changes in treasury yields or credit spreads or other factors) represent the most material risk exposure category for us. In March 2017, following the termination of the Merger Agreement, we redeemed $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and also redeemed $750 million aggregate principal amount of the 2020 Notes. We have estimated the impact on the fair value of our market sensitive instruments based on the net present value of cash flows using a representative set of likely future interest rate scenarios. The assumptions used were as follows: an immediate increase of 100 basis points in interest rates (which we believe represents a moderately adverse scenario and is approximately equal to the historical annual volatility of interest rate movements for our intermediate-term available-for-sale debt securities) and an immediate decrease of 15% in prices for domestic equity securities.

Assuming an immediate 100 basis point increase in interest rates and immediate decrease of 15% in the prices for domestic equity securities, the theoretical decline in the fair values of our market sensitive instruments at March 31, 2017 is as follows:

The fair value of our long-term debt would decline by $433 million ($667 million pretax). Changes in the fair value of our long-term debt do not impact our financial position or operating results.

The theoretical reduction in the fair value of our investment securities partially offset by the theoretical reduction in the fair value of our interest rate sensitive liabilities would result in a net decline in fair value of $315 million ($484 million pretax) related to our continuing non-experience-rated products. Reductions in the fair value of our investment securities would be reflected as an unrealized loss in equity, as we classify these securities as available for sale. We do not record our liabilities at fair value.

Form 10-Q Table of Contents

Based on our overall exposure to interest rate risk and equity price risk, we believe that these changes in market rates and prices would not materially affect our consolidated near-term financial position, operating results or cash flows at March 31, 2017.


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures, which are designed to ensure that information that we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation of the effectiveness of our disclosure controls and procedures as of March 31, ~~2016~~2017 was conducted under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of March 31, ~~2016~~2017 were designed to ensure that material information relating to Aetna Inc. and its consolidated subsidiaries would be made known to the Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the periods when periodic reports under the Exchange Act are being prepared and were effective. Refer to the Certifications by our Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to this ~~report.~~Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation of such control that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Part II.	Other Information


Item 1.	Legal Proceedings

The information contained in Note 14 of Condensed Notes to Consolidated Financial Statements ~~beginning on page~~ 31is incorporated herein by reference.


Item 1A.	Risk Factors

~~The information contained under~~Except as disclosed in MD&A “Overview - Health Care Reform” in this Quarterly Report, there have been no material changes to the ~~heading “Forward-Looking Information/Risk~~“Risk Factors” disclosed in Part I, Item 1A of our 2016 Annual Report. Those risk factors could adversely affect our business, financial condition and operating results as well as the ~~MD&A, beginning on page~~ 53 ~~is incorporated herein by reference.~~market price for our common shares.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

~~During~~The following table provides information about our monthly share repurchases, all of which were purchased as part of a publicly-announced program, for the three months ended March 31, 2016, we did not repurchase any shares of common stock. At March 31, 2016, we had remaining authorization to repurchase an aggregate of up to approximately $1.1 billion of common stock under our November 21, 2014 and February 28, 2014 programs. Prior to the closing of the Humana Acquisition, our ability to repurchase shares of common stock will be limited. We expect to suspend our share repurchase programs for approximately six months following the closing of the transaction.2017:



Issuer Purchases of Equity Securities ⁽¹⁾
(Millions, except per share amounts)	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2017 - January 31, 2017	—	$	—	—	$	1,083
February 1, 2017 - February 28, 2017	20.9	126.34		20.9	1,783
March 1, 2017 - March 31, 2017	—	—		—	1,783
Total	20.9	$	126.34	20.9	N/A

⁽¹⁾

The remaining share repurchase authorization as of February 28, 2017 has been reduced for the entire $3.3 billion paid in connection with an accelerated share repurchase program. The number of shares purchased under the accelerated share repurchase program is presented in February 2017 and the remaining number of shares to be repurchased will be presented in the second and/or third quarter of 2017, based upon when the shares were ultimately delivered to the Company.

The information contained in Note 1210 of Condensed Notes to Consolidated Financial Statements ~~beginning on page~~ 29is incorporated herein by reference.

Form 10-Q Table of Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Form 10-Q Table of Contents

Item 6. Exhibits

Exhibits to this Form 10-Q are as follows:



10	Material Contracts

10.1	~~Letter Agreement~~Master Confirmation - Accelerated Share Repurchase dated ~~September 17, 2015~~February 22, 2017 between Aetna Inc. and ~~Gary W. Loveman.~~ JPMorgan Chase Bank, National Association, London Branch, incorporated herein by reference to Exhibit 10.1 to Aetna Inc.’s Form 8-K filed on February 22, 2017.

10.2	Master Confirmation - Accelerated Share Repurchase dated February 22, 2017 between Aetna Inc. and Bank of American, N.A., incorporated herein by reference to Exhibit 10.2 to Aetna Inc.’s Form 8-K filed on February 22, 2017.

10.3	Fourth Amendment dated as of March 17, 2017, to the Five-Year Credit Agreement dated as of March 27, 2012, incorporated herein by reference to Exhibit 99.1 to Aetna Inc.’s Form 8-K filed on March 21, 2017.

10.4	Notice of closing (Fourth Amendment) dated March 17, 2017 incorporated herein by reference to Exhibit 99.2 to Aetna Inc.’s Form 8-K filed on March 21, 2017.

10.5	Letter agreement dated March 31, 2016, between Aetna Inc. and Thomas J. Sabatino, Jr.*

11	Statement re: computation of per share earnings

11.1	“Computation of per share earnings” is incorporated herein by reference to Note 412 of Condensed Notes to Consolidated Financial Statements ~~beginning on page 10~~ in this Form 10-Q.

12	Statements re: computation of ratios

12.1	Computation of ratio of earnings to fixed charges.

15	Letter re: unaudited interim financial information

15.1	Letter from KPMG LLP acknowledging awareness of the use of a report dated ~~April 28, 2016~~May 2, 2017 related to their review of interim financial information.

31	Rule 13a-14(a)/15d-14(a) Certifications

31.1	Certification.

31.2	Certification.

32	Section 1350 Certifications

32.1	Certification.

32.2	Certification.

101	XBRL Documents

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.

101.DEF	XBRL Taxonomy Extension Definition Linkbase.

101.LAB	XBRL Taxonomy Extension Label Linkbase.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

* Management contract or compensatory plan or arrangement.

Form 10-Q Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Aetna Inc.
	Registrant



Date:	~~April 28, 2016~~May 2, 2017	By	/s/ Sharon A. Virag
			Sharon A. Virag
			Vice President, Controller and
			Chief Accounting Officer

Form 10-Q Table of Contents

INDEX TO EXHIBITS

Exhibit		Filing
Number	Description	Method




10	Material ~~Contracts~~contracts

~~10.1~~ 10.5	Letter ~~Agreement~~agreement dated ~~September 17, 2015~~March 31, 2016 between Aetna Inc. and ~~Gary W. Loveman.~~Thomas J. Sabatino, Jr.	Electronic

12	Statements re: computation of ratios

12.1	Computation of ratio of earnings to fixed charges.	Electronic

15	Letter re: unaudited interim financial information

15.1	Letter from KPMG LLP acknowledging awareness of the use of a report dated ~~April 28, 2016~~May 2, 2017 related to their review of interim financial information.	Electronic

31	Rule 13a-14(a)/15d-14(a) Certifications

31.1	Certification.	Electronic

31.2	Certification.	Electronic

32	Section 1350 Certifications

32.1	Certification.	Electronic

32.2	Certification.	Electronic

101	XBRL Documents

101.INS	XBRL Instance Document.	Electronic

101.SCH	XBRL Taxonomy Extension Schema.	Electronic

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.	Electronic

101.DEF	XBRL Taxonomy Extension Definition Linkbase.	Electronic

101.LAB	XBRL Taxonomy Extension Label Linkbase.	Electronic

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.	Electronic

Page 5754



	(Unaudited)
(Millions)	At March 31, 2016			At December 31, 2015
Assets:
Current assets:
Cash and cash equivalents	$	3,766.4		$	2,524.3
Investments	3,127.8			3,014.8
Premiums receivable, net	2,206.7			1,753.1
Other receivables, net	2,673.7			2,443.2
Accrued investment income	227.6			227.7
Income taxes receivable	—			260.4
Other current assets	3,391.4			2,509.5
Total current assets	15,393.6			12,733.0
Long-term investments	22,112.2			21,664.8
Reinsurance recoverables	730.9			723.9
Goodwill	10,636.8			10,636.8
Other acquired intangible assets, net	1,626.4			1,688.3
Property and equipment, net	616.1			629.7
Other long-term assets	1,289.8			1,269.9
Separate Accounts assets	4,017.9			4,035.1
Total assets	$	56,423.7		$	53,381.5

Liabilities and shareholders’ equity:
Current liabilities:
Health care costs payable	$	6,824.8		$	6,305.7
Future policy benefits	666.3			671.8
Unpaid claims	775.7			772.3
Unearned premiums	716.3			549.2
Policyholders’ funds	2,444.7			2,262.5
Current portion of long-term debt	398.4			—
Income taxes payable	274.9			—
Accrued expenses and other current liabilities	5,814.1			4,920.0
Total current liabilities	17,915.2			15,481.5
Future policy benefits	6,209.1			6,268.2
Unpaid claims	1,670.7			1,655.6
Policyholders’ funds	921.0			885.6
Long-term debt, less current portion	7,382.5			7,785.4
Deferred income taxes	234.0			177.4
Other long-term liabilities	1,194.6			914.1
Separate Accounts liabilities	4,017.9			4,035.1
Total liabilities	39,545.0			37,202.9
Commitments and contingencies (Note 14)
Shareholders’ equity:
Common stock ($.01 par value; 2.5 billion shares authorized and 350.6 million shares issued
and outstanding in 2016; 2.5 billion shares authorized and 349.5 million shares issued and
outstanding in 2015) and additional paid-in capital	4,632.0			4,647.2
Retained earnings	13,436.4			12,797.4
Accumulated other comprehensive loss	(1,254.9		)	(1,330.3		)
Total Aetna shareholders’ equity	16,813.5			16,114.3
Non-controlling interests	65.2			64.3
Total equity	16,878.7			16,178.6
Total liabilities and equity	$	56,423.7		$	53,381.5



(In Millions, except credit ratings indicator)	March 31, 2016		December 31, 2015
1	$	50.7	$	65.8
2 to 4	1,434.7		1,466.9
5 and 6	20.8		21.0
Total	$	1,506.2	$	1,553.7



	As of March 31, 2016								As of December 31, 2015
(Millions)	Reinsurance		Risk Adjustment			Risk Corridor			Reinsurance		Risk Adjustment			Risk Corridor
Current	$	291.9	$	(698.9	)	$	(.7	)	$	394.5	$	(710.2	)	$	(8.1	)
Long-term	1.9		(177.7		)	—			—		—			—
Total net receivable (payable)	$	293.8	$	(876.6	)	$	(.7	)	$	394.5	$	(710.2	)	$	(8.1	)



	Net Unrealized Gains (Losses)														Pension and OPEB Plans										Total Accumulated Other Comprehensive (Loss) Income
	Securities									Foreign Currency and Derivatives
(Millions)	Previously Impaired ⁽¹⁾					All Other							Unrecognized Net Actuarial Losses					Unrecognized Prior Service Credit
Three months ended March 31, 2016
Balance at December 31, 2015	$	18.7				$	312.4			$	(74.0	)			$	(1,602.3	)			$	14.9				$	(1,330.3	)
Other comprehensive (loss) income
before reclassifications	(2.7		)			206.3				(160.1		)			—					—					43.5
Amounts reclassified from accumulated
other comprehensive income	3.4			⁽²	⁾	15.2		⁽²	⁾	3.6			⁽³	⁾	10.4			⁽⁴	⁾	(.7		)	⁽⁴	⁾	31.9
Other comprehensive income (loss)	.7					221.5				(156.5		)			10.4					(.7		)			75.4
Balance at March 31, 2016	$	19.4				$	533.9			$	(230.5	)			$	(1,591.9	)			$	14.2				$	(1,254.9	)
Three months ended March 31, 2015
Balance at December 31, 2014	$	34.9				$	568.0			$	(60.9	)			$	(1,670.9	)			$	17.6				$	(1,111.3	)
Other comprehensive (loss) income
before reclassifications	(2.2		)			77.9				(13.9		)			—					—					61.8
Amounts reclassified from accumulated
other comprehensive income	(1.6		)	⁽²	⁾	7.2		⁽²	⁾	1.0			⁽³	⁾	10.5			⁽⁴	⁾	(.7		)	⁽⁴	⁾	16.4
Other comprehensive (loss) income	(3.8		)			85.1				(12.9		)			10.5					(.7		)			78.2
Balance at March 31, 2015	$	31.1				$	653.1			$	(73.8	)			$	(1,660.4	)			$	16.9				$	(1,033.1	)