Cigna 2012 Annual Report Download - page 60

PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance As explained further in Note 25 to the Consolidated Financial
with GAAP requires management to make estimates and assumptions Statements, effective February 4, 2013, the Company entered into an
that affect reported amounts and related disclosures in the agreement to reinsure 100% of the Company’s GMDB and GMIB
consolidated financial statements. Management considers an businesses, net of retrocessional arrangements in place prior to
accounting estimate to be critical if: February 4, 2013, up to a specified limit. As a result, the Company
will no longer consider liabilities associated with these contracts to be
it requires assumptions to be made that were uncertain at the time a critical accounting estimate because changes in these estimates are
the estimate was made; and not expected to have a material effect on the Company’s consolidated
results of operations or financial condition.
changes in the estimate or different estimates that could have been
selected could have a material effect on the Company’s consolidated Management believes the current assumptions used to estimate
results of operations or financial condition. amounts reflected in the Company’s consolidated financial statements
are appropriate. However, if actual experience differs from the
Management has discussed the development and selection of its
assumptions used in estimating amounts reflected in the Company’s
critical accounting estimates with the Audit Committee of the
consolidated financial statements, the resulting changes could have a
Company’s Board of Directors and the Audit Committee has reviewed
material adverse effect on the Company’s consolidated results of
the disclosures presented below.
operations, and in certain situations, could have a material adverse
In addition to the estimates presented in the following table, there are effect on the Company’s liquidity and financial condition.
other accounting estimates used in the preparation of the Company’s
See Note 2 to the Consolidated Financial Statements for further
consolidated financial statements, including estimates of liabilities for
information on significant accounting policies that impact the
future policy benefits, as well as estimates with respect to unpaid
Company.
claims and claim expenses, postemployment and postretirement
benefits other than pensions, certain compensation accruals, and
income taxes.
Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Goodwill If the Company does not achieve its earnings objectives or its cost of
capital rises significantly, the assumptions and estimates underlying
At the acquisition date, goodwill represents the excess of the cost of these impairment evaluations could be adversely affected and result in
businesses acquired over the fair value of their net assets. impairment charges that would negatively impact the Company’s
operating results. The fair value estimates of the Company’s reporting
The Company evaluates goodwill for impairment at least annually
units could decrease by 40% to 80% before an indication of
during the third quarter at the reporting unit level, based on
impairment of goodwill occurs. This potential outcome is estimated
discounted cash flow analyses and writes it down through results of
during the Company’s annual testing process, by determining the
operations if impaired.
magnitude of changes to certain assumptions and estimates necessary
Discounted cash flow analyses use assumptions and estimates for the estimated fair value of a reporting unit to approach its carrying
including discount rates and projections of future earnings considering value.
operating plans, revenues, claims, operating expenses, taxes, capital
levels and long-term growth rates.
Goodwill as of December 31 was as follows (in millions):
2012 – $6,001
2011 – $3,164
See Notes 2 (H) and 9 to the Consolidated Financial Statements for
additional discussion of the Company’s goodwill.
38 CIGNA CORPORATION - 2012 Form 10-K
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