Cigna 2011 Annual Report Download - page 126

104 CIGNA CORPORATION2011 Form10K
PART II
ITEM 8 Financial Statements and Supplementary Data
the actual account value in the underlying mutual funds and the level
of interest rates when the contractholders elect to receive minimum
income payments. e Company has purchased retrocessional coverage
for a portion of these contracts to reduce a portion of the risks assumed
(“GMIB assets”).
Accounting policy. Because cash ows are aected by equity markets
and interest rates, but are without signicant life insurance risk and are
settled in lump sum payments, the Company accounts for these GMIB
liabilities and assets as written and purchased options at fair value.
ese derivatives are not designated as hedges and their fair values are
reported in other liabilities (GMIB liability) and other assets (GMIB
asset), with changes in fair value reported in GMIB fair value (gain) loss.
Cash ows. Under the terms of these written and purchased contracts,
the Company periodically receives and pays fees based on either
contractholders’ account values or deposits increased at a contractual
rate. e Company will also pay and receive cash depending on changes
in account values and interest rates when contractholders rst elect
to receive minimum income payments. ese cash ows are reported
in operating activities.
Volume of activity. e potential undiscounted future payments for
the written options (GMIB liability, as dened in Note23) was
$1,244million as of December31,2011 and $1,134million as
of December31,2010. e potential undiscounted future receipts
for the purchased options (GMIB asset) was $684million as of
December31,2011 and $624million as of December31,2010.
e following table provides the eect of these derivative instruments
on the nancial statements for the indicated periods:
Fair Value Eect on the Financial Statements (In millions)
Instrument
Other Assets,
including other intangibles
Accounts Payable, Accrued Expenses
and Other Liabilities GMIB Fair Value (Gain) Loss
As of December31, As of December31, For the years ended December31,
2011 2010 2011 2010 2011 2010
Written options (GMIB liability) $ 1,333 $ 903 $ 504 $ 112
Purchased options (GMIB asset) $ 712 $ 480 (270) (57)
TOTAL $ 712 $ 480 $ 1,333 $ 903 $ 234 $ 55
GMDB and GMIB Hedge Programs
Purpose. e Company also uses derivative nancial instruments under
a dynamic hedge program designed to substantially reduce domestic
and international equity market exposures resulting from changes in
variable annuity account values based on underlying mutual funds for
certain reinsurance contracts that guarantee minimum death benets
(“GMDB”). During the rst quarter of 2011, the Company expanded
this hedge program to include a portion (approximately one-quarter)
of the equity market exposures associated with its GMIB business
(“GMDB and GMIB equity hedge program”). e Company also
implemented a dynamic hedge program to reduce the exposure to changes
in interest rate levels on the growth rate for approximately one-third
of its GMDB and one-quarter of its GMIB businesses (“GMDB and
GMIB growth interest rate hedge program”). ese hedge programs
are dynamic because the Company will regularly rebalance the hedging
instruments within established parameters as equity and interest rate
exposures of these businesses change.
e Company manages these hedge programs using exchange-traded
equity, foreign currency, and interest rate futures contracts, as well as
interest rate swap contracts. ese contracts are generally expected to
rise in value as equity markets and interest rates decline, and decline
in value as equity markets and interest rates rise.
Accounting policy. ese hedge programs are not designated as accounting
hedges. Although these hedge programs eectively reduce equity
market, foreign currency, and interest rate exposures, changes in the
fair values of these futures and swap contracts may not exactly oset
changes in the portions of the GMDB and GMIB liabilities covered by
these hedges, in part because the market does not oer contracts that
exactly match the targeted exposure prole. Changes in fair value of
these futures contracts, as well as interest income and interest expense
relating to the swap contracts are reported in other revenues. e fair
values of the interest rate swaps are reported in other assets and other
liabilities. Amounts reecting corresponding changes in liabilities for
GMDB contracts are included in benets and expenses.
Cash ows. e Company receives or pays cash daily in the amount
of the change in fair value of the futures contracts. e Company
periodically exchanges cash ows between variable and xed interest
rates under the interest rate swap contracts. Cash ows relating to these
contracts are included in operating activities.
Volume of activity. e notional value of the equity and currency
futures contracts used in the GMDB and GMIB equity hedge program
was $994million as of December31,2011, and $878million as of
December31,2010. Equity futures consist primarily of S&P500,
S&P400, Russell 2000, NASDAQ, TOPIX (Japanese), EUROSTOXX
and FTSE (British) equity indices. Currency futures consist of Euros,
Japanese yen and British pounds. e notional value of the interest rate
swaps used in the GMDB and GMIB growth interest rate hedge program
was $240million as of December31,2011. e notional value was
$29 million for U.S. Treasury and $598 million for Eurodollar interest
rate futures contracts used by this program as of December31,2011.
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