Cigna 2013 Annual Report Download - page 90

PART II
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Market Risk
Use of derivatives. We generally use derivative financial
Financial Instruments
instruments to minimize certain market risks.
Our assets and liabilities include financial instruments subject to the See Notes 2(C) and 12 to the Consolidated Financial Statements for
risk of potential losses from adverse changes in market rates and additional information about financial instruments, including
prices. Our primary market risk exposures are: derivative financial instruments.
Interest-rate risk on fixed-rate, medium-term instruments.
Changes in market interest rates affect the value of instruments that
Effect of Market Fluctuations
promise a fixed return and our employee pension liabilities.
The examples that follow illustrate the adverse effect of hypothetical
Foreign currency exchange rate risk of the U.S. dollar primarily to changes in market rates or prices on the fair value of certain financial
the South Korean won, Euro, British pound, Taiwan dollar, Chinese instruments including:
yuan renminbi and Turkish lira. An unfavorable change in exchange
rates reduces the carrying value of net assets denominated in foreign a hypothetical increase in market interest rates, primarily for fixed
currencies. maturities and commercial mortgage loans, partially offset by
liabilities for long-term debt; and
Our Management of Market Risks a hypothetical strengthening of the U.S. dollar to foreign currencies,
primarily for the net assets of foreign subsidiaries denominated in a
We predominantly rely on three techniques to manage our exposure foreign currency.
to market risk:
Management believes that actual results could differ materially from
Investment/liability matching. We generally select investment these examples because:
assets with characteristics (such as duration, yield, currency and
these examples were developed using estimates and assumptions;
liquidity) that correspond to the underlying characteristics of our
related insurance and contractholder liabilities so that we can match changes in the fair values of all insurance-related assets and liabilities
the investments to our obligations. Shorter-term investments have been excluded because their primary risks are insurance rather
support generally shorter-term life and health liabilities. than market risk;
Medium-term, fixed-rate investments support interest-sensitive and
changes in the fair values of investments recorded using the equity
health liabilities. Longer-term investments generally support
method of accounting and liabilities for pension and other
products with longer pay out periods such as annuities and
postretirement and postemployment benefit plans (and related
long-term disability liabilities.
assets) have been excluded, consistent with the disclosure guidance;
Use of local currencies for foreign operations. We generally and
conduct our international business through foreign operating
changes in the fair values of other significant assets and liabilities
entities that maintain assets and liabilities in local currencies. While
such as goodwill, deferred policy acquisition costs, taxes, and various
this technique does not reduce foreign currency exposure on our net
accrued liabilities have been excluded; because they are not financial
assets, it substantially limits exchange rate risk to those net assets.
instruments, their primary risks are other than market risk.
The effects of hypothetical changes in market rates or prices on the fair values of certain of our financial instruments, subject to the exclusions
noted above (particularly insurance liabilities), would have been as follows as of December 31 (the effects of the GMIB business are presented as
though our 2013 reinsurance agreement was effective as of December 31, 2012):
Loss in fair value
Market scenario for certain non-insurance financial instruments
(in millions) 2013 2012
100 basis point increase in interest rates $ 585 $ 685
10% strengthening in U.S. dollar to foreign currencies $ 285 $ 275
The effect of a hypothetical increase in interest rates was determined The effect of a hypothetical strengthening of the U.S. dollar relative to
by estimating the present value of future cash flows using various the foreign currencies held by us was estimated to be 10% of the U.S.
models, primarily duration modeling. The impact of a hypothetical dollar equivalent fair value. Our foreign operations hold investment
increase to interest rates at December 31, 2013 was less than that at assets, such as fixed maturities, cash, and cash equivalents, that are
December 31, 2012 reflecting asset sales (primarily to fund the generally invested in the currency of the related liabilities. Due to the
reinsurance transaction with Berkshire) and an increase in market increase in the amount of these investments in 2013 that are primarily
yields, resulting in a decrease in fair values for certain of our financial denominated in the South Korean won, the effect of a hypothetical
instruments, primarily fixed maturities, commercial mortgage loans, 10% strengthening in U.S. dollar to foreign currencies at
and long-term debt. December 31, 2013 was greater than that effect at December 31,
2012.
58 CIGNA CORPORATION - 2013 Form 10-K
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