Cigna 2014 Annual Report Download - page 121

PART II
ITEM 8. Financial Statements and Supplementary Data
these securities to recorded amounts to validate that current carrying prepayment speeds. Recent trades in the subject security or similar
amounts approximate exit prices. The short-term nature of the securities are assessed when available, and the Company may also
review published research, as well as the issuer’s financial statements,
investments and corroboration of the reported amounts over the
in its evaluation.
holding period support their classification in Level 2.
Other derivatives classified in Level 2 represent over-the-counter Quantitative Information about Unobservable Inputs
instruments such as interest rate and foreign currency swap contracts.
The following tables summarize the fair value and significant
Fair values for these instruments are determined using market
unobservable inputs used in pricing Level 3 securities that were
observable inputs including forward currency and interest rate curves
developed directly by the Company as of December 31, 2014 and
and widely published market observable indices. Credit risk related to
2013. The range and weighted average basis point amounts for fixed
the counterparty and the Company is considered when estimating the
maturity spreads (adjustment to discount rates) and price to earnings
fair values of these derivatives. However, the Company is largely
multiples for equity investments reflect the Company’s best estimates
protected by collateral arrangements with counterparties and
of the unobservable adjustments a market participant would make to
determined that no adjustment for credit risk was required as of
calculate the fair values.
December 31, 2014 or December 31, 2013. Level 2 also includes
exchange-traded interest rate swap contracts. Credit risk related to the Other asset and mortgage-backed securities. The significant
clearinghouse counterparty and the Company is considered minimal unobservable inputs used to value the following other asset and
when estimating the fair values of these derivatives because of upfront mortgage-backed securities are liquidity and weighting of credit
margin deposits and daily settlement requirements. The nature and spreads. When there is limited trading activity for the security, an
use of these other derivatives are described in Note 12. adjustment for liquidity is made as of the measurement date that
considers current market conditions, issuer circumstances and
Level 3 Financial Assets and Financial Liabilities
complexity of the security structure. An adjustment to weight credit
spreads is needed to value a more complex bond structure with
Certain inputs for instruments classified in Level 3 are unobservable multiple underlying collateral and no standard market valuation
(supported by little or no market activity) and significant to their technique. The weighting of credit spreads is primarily based on the
resulting fair value measurement. Unobservable inputs reflect the underlying collateral’s characteristics and their proportional cash flows
Company’s best estimate of what hypothetical market participants supporting the bond obligations. The resulting wide range of
would use to determine a transaction price for the asset or liability at unobservable adjustments in the table below is due to the varying
the reporting date. liquidity and quality of the underlying collateral, ranging from high
The Company classifies certain newly issued, privately-placed, credit quality to below investment grade.
complex or illiquid securities, as well as assets and liabilities relating to
Corporate and government fixed maturities. The significant
GMIB, in Level 3. Approximately 5% of fixed maturities and equity
unobservable input used to value the following corporate and
securities are priced using significant unobservable inputs and
government fixed maturities is an adjustment for liquidity. When
classified in this category.
there is limited trading activity for the security, an adjustment is
Fair values of other asset and mortgage-backed securities, corporate needed to reflect current market conditions and issuer circumstances.
and government fixed maturities are primarily determined using
pricing models that incorporate the specific characteristics of each Equity securities. The significant unobservable input used to value
asset and related assumptions including the investment type and the following equity securities is a multiple of earnings before interest,
structure, credit quality, industry and maturity date in comparison to taxes, depreciation and amortization (EBITDA). These securities are
current market indices, spreads and liquidity of assets with similar comprised of private equity investments with limited trading activity
characteristics. For other asset and mortgage-backed securities, inputs and therefore a ratio of EBITDA is used to estimate value based on
and assumptions for pricing may also include collateral attributes and company circumstances and relative risk characteristics.
Unobservable Adjustment
Unobservable to Discount Rates
As of December 31, 2014
(Fair value in millions) Fair Value Input Range (Weighted Average)
Fixed maturities:
Other asset and mortgage-backed securities $ 417 Liquidity 60 - 370 (140)
Weighting of credit spreads 160 - 2,560 (290)
Corporate and government fixed maturities 344 Liquidity 80 - 930 (262)
Total fixed maturities 761
Equity securities 43 Price-to-earnings multiples 4.2 - 9.8 (8.1)
Subtotal 804
Pricing exemption securities
(1)
53
Total Level 3 securities $ 857
(1) The fair values for these securities use single, unadjusted non-binding broker quotes not developed directly by the Company.
CIGNA CORPORATION - 2014 Form 10-K 89