Cigna 2009 Annual Report Download - page 167

147
Instrument / Volume of
Activity Primary Risk Purpose Cash Flows Accounting Policy
Derivatives Designated as Accounting Hedges - Cash Flow Hedges
Interest rate swaps — $160
million of par value of
related investments
Foreign currency swaps —
$179 million of U.S. dollar
equivalent par value of
related investments
Combination swaps
(interest rate and foreign
currency) — $54 million of
U.S. dollar equivalent par
value of related
investments
Interest rate and foreign
currency
To hedge the interest and/or foreign
currency cash flows of fixed
maturities and commercial
mortgage loans to match associated
liabilities. Currency swaps are
primarily euros, Australian dollars,
Canadian dollars and British pounds
for periods of up to 12 years.
The Company periodically
exchanges cash flows between
variable and fixed interest rates
and/or between two currencies for
both principal and interest. Net
interest cash flows are reported in
net investment income and included
in operating activities.
Using cash flow hedge accounting, fair values are
reported in other long-term investments or other
liabilities and accumulated other comprehensive
income and amortized into net investment income
or reported in other realized investment gains and
losses as interest or principal payments are
received.
Fair Value Effect on the Financial Statements (in millions)
As of December 31, 2009
Gain (Loss) Recognized in Other
Comprehensive Income
Instrument Other Long-Term Investments
Accounts Payable, Accrued
Expenses and Other Liabilities For the year ended December 31, 2009
Interest rate swaps $ 8 $ - $(5)
Foreign currency swaps 4 24 (24)
Interest rate and foreign currency swaps - 6 (12)
Total $ 12 $ 30 $(41)
Purchased options — $312
million of cash surrender
value of related life
insurance policies
Interest rate To hedge the possibility of early
policyholder cash surrender when
the amortized cost of underlying
invested assets is greater than their
fair values.
The Company pays a fee and may
receive or pay cash, based on the
difference between the amortized
cost and fair values of underlying
invested assets at the time of
policyholder surrender. These cash
flows will be reported in financing
activities.
Using cash flow hedge accounting, fair values are
reported in other assets or other liabilities, with
changes in fair value reported in accumulated
other comprehensive income and amortized to
other benefit expenses over the life of the
underlying invested assets.
Fair Value Effect on the Financial Statements
Fair values reported in other assets and other comprehensive income were less than $1 million.
Treasury lock Interest rate To hedge the variability of and fix
at inception date, the benchmark
Treasury rate component of future
interest payments on debt to be
issued.
The Company paid the fair value of
the contracts at their expiration and
reported the cash outflow in
operating activities.
Using cash flow hedge accounting, fair values
were reported in short-term investments or other
liabilities, with changes in fair value reported in
accumulated other comprehensive income. The
net cumulative gain or loss from the contracts are
amortized to interest expense over the life of the
debt issued.
Fair Value Effect on the Financial Statements
In the first quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in other comprehensive income, resulting in net
cumulative losses of $26 million. These losses are amortized to interest expense over the life of the debt beginning in the second quarter of 2009.
The amount of gains (losses) reclassified from accumulated other comprehensive income into income was not significant. No gains
(losses) were recognized due to ineffectiveness and no amounts were excluded from the assessment of hedge ineffectiveness.