Cigna 2008 Annual Report Download - page 39

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In order to reduce its exposure to large individual and catastrophe losses, CIGNA purchases reinsurance from unaffiliated
reinsurers.
Markets and Distribution
Prior to 2008, the Company was not actively marketing and distributing COLI products. In 2008, the Company decided to re-
enter the market for COLI products, and is currently actively pursuing opportunities associated with the COLI business.
The principal markets for COLI products are regional to national account-sized corporations, including banks. CIGNA»s COLI
products are offered through a select group of independent brokers with particular expertise in the bank market and in the use of COLI
for the financing of benefit plan liabilities.
Competition
The principal competitive factors that affect CIGNA’s COLI business are pricing, service, product innovation and access to third-
party distribution.
For CIGNA’s COLI business, competitors are primarily national life insurance companies, including insurance subsidiaries of
banks.
CIGNA expects that the competitive environment will intensify as the economy recovers and competitors develop new
investment strategies and product designs, and aggressively price their offerings to build distribution capacity and gain market share.
Industry Developments and Strategic Initiatives
The legislative environment surrounding COLI has evolved considerably over the past decade. Most recently, the Pension
Protection Act of 2006 included provisions related to the notice requirements given to insured employees and limited coverage to
certain more highly compensated employees. These changes were widely viewed as clarification of existing rules or industry best
practices.
Sale of Individual Life Insurance & Annuity and Retirement Benefits Businesses
CIGNA sold its individual life insurance and annuity business in 1998 and its retirement business in 2004. Portions of the gains
from these sales were deferred because the principal agreements to sell these businesses were structured as reinsurance arrangements.
The deferred portion relating to the remaining reinsurance is being recognized at the rate that earnings from the sold businesses would
have been expected to emerge, primarily over 15 years on a declining basis.
Because the individual life and annuity business was sold in an indemnity reinsurance transaction, CIGNA is not relieved of
primary liability for the reinsured business and had reinsurance recoverables totaling $4.6 billion as of December 31, 2008. Effective
as of December 14, 2007, the purchaser placed a significant portion of the assets supporting the reserves for the purchased business
into a trust for the benefit of CIGNA which qualifies to support CIGNA’s credit for the reinsurance ceded under Regulation 114 of the
New York Department of Insurance. Trust assets are limited to cash, certificates of deposits in U.S. banks, and securities specified by
section 1404 (a) of the New York insurance law and consist primarily of fixed maturities. At December 31, 2008, the value of the
trust assets secured approximately 90% of the reinsurance recoverable. The remaining balance is currently unsecured. If Lincoln
National Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified minimum credit or claims
paying rating, these reinsurers are required to fully secure the outstanding balance. S&P has assigned both of these reinsurers a rating
of AA.
CIGNA’s sale of its retirement business primarily took the form of an arrangement under which CIGNA reinsured with the
purchaser of the retirement business the general account contractholder liabilities under an indemnity reinsurance arrangement and the
separate account liabilities under modified coinsurance and indemnity reinsurance arrangements.
Since the sale of the retirement benefits business in 2004, the purchaser of that business has entered into agreements with certain
insured party contractholders (“novation agreements”), which relieved CIGNA of any remaining contractual obligations to the
contractholders. As a result, CIGNA reduced reinsurance recoverables, contractholder deposit funds, and separate account balances