Cigna 2012 Annual Report Download - page 114

PART II
ITEM 8 Financial Statements and Supplementary Data
median return at each duration. As with the broader curve, Citigroup domestic and foreign GDP growth, employment levels and inflation.
monitors the bond portfolio to ensure that only high quality issues are Based on the Company’s current outlook, the expected return
included. In setting its discount rate for 2012, the Company reviewed assumption is considered reasonable.
alternative indices and determined that they were not materially To measure pension costs, the Company uses a market-related asset
different than the result produced by the Citigroup Above-Median valuation for domestic pension plan assets invested in non-fixed
curve. income investments. The market-related value of these pension assets
Expected long-term rates of return on plan assets were developed recognizes the difference between actual and expected long-term
considering actual long-term historical returns, expected long-term returns in the portfolio over 5 years, a method that reduces the
market conditions, plan asset mix and management’s investment short-term impact of market fluctuations on pension cost. At
strategy, that continues a significant allocation to domestic and December 31, 2012, the market-related asset value was approximately
foreign equity securities as well as real estate, securities partnerships $3.5 billion compared with a market value of approximately
and hedge funds. Expected long-term market conditions take into $3.6 billion.
consideration certain key macroeconomic trends including expected
Benefit payments. The following benefit payments, including expected future services, are expected to be paid in:
Other
Postretirement
(In millions) Pension Benefits Benefits
2013 $ 396 $ 35
2014 $ 342 $ 36
2015 $ 333 $ 36
2016 $ 331 $ 35
2017 $ 332 $ 34
2018-2022 $ 1,630 $ 149
the Company increased its matching contributions to 401(k) plan
B. 401(k) Plans
participants.
The Company sponsors a 401(k) plan in which the Company The Company may elect to increase its matching contributions if the
matches a portion of employees’ pre-tax contributions. Another Company’s annual performance meets certain targets. A substantial
401(k) plan with an employer match was frozen in 1999. Participants amount of the Company’s matching contributions are invested in the
in the active plan may invest in various funds that invest in the Company’s common stock. The Company’s expense for these plans
Company’s common stock, several diversified stock funds, a bond was $78 million for 2012, $72 million for 2011 and $69 million for
fund or a fixed-income fund. In conjunction with the action to freeze 2010.
the domestic defined benefit pension plans, effective January 1, 2010,
Fair Value Measurements
The Company carries certain financial instruments at fair value in the unobservable inputs were significant to the instrument’s fair value,
financial statements including fixed maturities, equity securities, even though the measurement may be derived using inputs that are
short-term investments and derivatives. Other financial instruments both observable (Levels 1 and 2) and unobservable (Level 3).
are measured at fair value under certain conditions, such as when The Company estimates fair values using prices from third parties or
impaired. internal pricing methods. Fair value estimates received from third-
Fair value is defined as the price at which an asset could be exchanged party pricing services are based on reported trade activity and quoted
in an orderly transaction between market participants at the balance market prices when available, and other market information that a
sheet date. A liability’s fair value is defined as the amount that would market participant may use to estimate fair value. The internal pricing
be paid to transfer the liability to a market participant, not the methods are performed by the Company’s investment professionals,
amount that would be paid to settle the liability with the creditor. and generally involve using discounted cash flow analyses,
incorporating current market inputs for similar financial instruments
The Company’s financial assets and liabilities carried at fair value have with comparable terms and credit quality, as well as other qualitative
been classified based upon a hierarchy defined by GAAP. The factors. In instances where there is little or no market activity for the
hierarchy gives the highest ranking to fair values determined using same or similar instruments, fair value is estimated using methods,
unadjusted quoted prices in active markets for identical assets and models and assumptions that the Company believes a hypothetical
liabilities (Level 1) and the lowest ranking to fair values determined market participant would use to determine a current transaction price.
using methodologies and models with unobservable inputs (Level 3). These valuation techniques involve some level of estimation and
An asset’s or a liability’s classification is based on the lowest level of judgment that becomes significant with increasingly complex
input that is significant to its measurement. For example, a financial instruments or pricing models.
asset or liability carried at fair value would be classified in Level 3 if
92 CIGNA CORPORATION - 2012 Form 10-K
NOTE 11