Cigna 2015 Annual Report Download - page 104

PART II
ITEM 8. Financial Statements and Supplementary Data
Organizational Efficiency Plan
The Company is regularly evaluating ways to deliver its products and recognized a charge in other operating expenses of $60 million pre-tax
services more efficiently and at a lower cost. During the fourth quarter ($40 million after-tax) in the fourth quarter of 2013, primarily for
of 2013, the Company committed to a plan to increase its severance costs. As of December 31, 2015, the remaining balance
organizational efficiency and reduce costs through a series of actions associated with this plan was not material.
including employee headcount reductions. As a result, the Company
Reinsurance
The Company’s insurance subsidiaries enter into agreements with This transaction resulted in an after-tax charge to shareholders’ net
other insurance companies to assume and cede reinsurance. income in the first quarter of 2013 of $507 million ($781 million
Reinsurance is ceded primarily to limit losses from large exposures and pre-tax reported as follows: $727 million in other benefit expenses;
to permit recovery of a portion of direct or assumed losses. $54 million in other operating expenses, including $45 million of
Reinsurance is also used in acquisition and disposition transactions GMIB fair value loss). The payment to Berkshire under the agreement
when the underwriting company is not being acquired. Reinsurance was $2.2 billion and was funded from the sale of investment assets, tax
does not relieve the originating insurer of liability. Therefore, benefits related to the transaction and available parent cash.
reinsured liabilities must continue to be reported along with the
related reinsurance recoverables. The Company regularly evaluates the
GMDB
financial condition of its reinsurers and monitors concentrations of its
credit risk. The Company estimates this liability with an internal model based on
the Company’s experience and future expectations over an extended
period, consistent with the long-term nature of this product. Because
Effective Exit of GMDB and GMIB Business
the product is premium deficient, the Company records increases to
In 2013, the Company entered into an agreement with Berkshire the reserve if it is inadequate based on the model. As a result of the
Hathaway Life Insurance Company of Nebraska (‘‘Berkshire’’) to reinsurance transaction, reserve increases have a corresponding
effectively exit the GMDB and GMIB business via a reinsurance increase in the recorded reinsurance recoverable, provided the
transaction. Berkshire reinsured 100% of the Company’s future claim increased recoverable remains within the overall Berkshire limit
payments in this business, net of retrocessional arrangements existing (including the GMIB assets).
at that time. The reinsurance agreement is subject to an overall limit
with approximately $3.6 billion remaining at December 31, 2015.
Activity in future policy benefit reserves for the GMDB business was as follows:
(In millions) 2015 2014 2013
Balance at January 1, $ 1,270 $ 1,396 $ 1,090
Add: Unpaid claims 16 18 24
Less: Reinsurance and other amounts recoverable 1,186 1,317 42
Balance at January 1, net 100 97 1,072
Add: Incurred benefits 3 3 699
Less: Paid benefits (including the $1,647 payment for Berkshire reinsurance transaction) (3) – 1,674
Ending balance, net 106 100 97
Less: Unpaid claims 18 16 18
Add: Reinsurance and other amounts recoverable 1,164 1,186 1,317
Balance at December 31, $ 1,252 $ 1,270 $ 1,396
Benefits paid and incurred are net of ceded amounts, including the historical account value of the related mutual fund investments on a
impact of the 2013 reinsurance transaction with Berkshire. The contractholder’s anniversary date. Under this type of death benefit,
ending net retained reserve as of December 31, 2015 and the Company is liable to the extent the highest historical anniversary
December 31, 2014 covers ongoing administrative expenses, as well as account value exceeds the fair value of the related mutual fund
the minor claim exposure retained by the Company. investments at the time of a contractholder’s death.
The majority of the exposure arises under annuities that guarantee
that the benefit received at death will be no less than the highest
74 CIGNA CORPORATION - 2015 Form 10-K
NOTE 6
NOTE 7