Cigna 2015 Annual Report Download - page 124

PART II
ITEM 8. Financial Statements and Supplementary Data
Derivative Financial Instruments
The Company uses derivative financial instruments to manage the
Interest Rate Fair Value Hedges.
characteristics of investment assets (such as duration, yield, currency
The Company entered into centrally-cleared interest rate swap
and liquidity) to meet the varying demands of the related insurance
contracts to convert a portion of the interest rate exposure on its
and contractholder liabilities (such as paying claims, investment
long-term debt from fixed to variable rates to more closely align
returns and withdrawals) and to hedge interest rate risk of its
interest expense with interest income received on its cash equivalent
long-term debt. The Company has written and purchased GMIB
and short-term investment balances. The variable rates are
reinsurance contracts in its run-off reinsurance business that are
benchmarked to LIBOR.
accounted for as freestanding derivatives. For information on the
Company’s accounting policy for derivative financial instruments, see Using fair value hedge accounting, the fair values of the swap contracts
Note 2. Derivatives in the Company’s separate accounts are excluded are reported in other assets, including other intangibles or accounts
from the following discussion because associated gains and losses payable, accrued expenses and other liabilities. As the critical terms of
generally accrue directly to separate account policyholders. these swaps match those of the long-term debt being hedged, the
carrying value of the hedged debt is adjusted to reflect changes in its
Collateral and termination features. The Company routinely fair value driven by LIBOR. The effects of those adjustments on other
monitors exposure to credit risk associated with derivatives and operating expenses are offset by the effects of corresponding changes
diversifies the portfolio among approved dealers of high credit quality in the swaps’ fair value, including interest expense for the difference
to minimize this risk. As of December 31, 2015, the Company had between the variable and fixed interest rates.
$16 million in cash on deposit representing the upfront margin
required for the Company’s centrally-cleared derivative instruments. Under the terms of these contracts, the Company provides upfront
Certain of the Company’s over-the-counter derivative instruments margin and settles fair value changes and net interest between variable
contain provisions requiring either the Company or the counterparty and fixed interest rates daily with the clearinghouse. Net interest cash
to post collateral or demand immediate payment depending on the flows are reported in operating activities.
amount of the net liability position and predefined financial strength As of December 31, 2015 and 2014, the notional values of these
or credit rating thresholds. Collateral posting requirements vary by derivative instruments were $750 million.
counterparty. The net asset or liability positions of these derivatives
were not material as of December 31, 2015 or 2014. As of and for the years ended December 31, 2015 and 2014, the
effects of these derivative instruments on the Consolidated Financial
Statements were not material.
Investment Cash Flow Hedges.
The Company uses interest rate, foreign currency, and combination
GMIB.
(interest rate and foreign currency) swap contracts to hedge the
interest and foreign currency cash flows of its fixed maturity bonds to The Company’s run-off reinsurance business has written reinsurance
match associated insurance liabilities. contracts with issuers of variable annuities that provide annuitants
with certain guarantees of minimum income benefits resulting from
Using cash flow hedge accounting, fair values are reported in other the level of variable annuity account values compared with a
long-term investments or accounts payable, accrued expenses and contractually guaranteed amount (‘‘GMIB liabilities’’). According to
other liabilities. Changes in fair value are reported in accumulated the contractual terms of the written reinsurance contracts, payment by
other comprehensive income and amortized into net investment the Company depends on the actual account value in the underlying
income or reported in other realized investment gains and losses as mutual funds and the level of interest rates when the contractholders
interest or principal payments are received. elect to receive minimum income payments. The Company has
Under the terms of these various contracts, the Company periodically purchased retrocessional coverage (‘‘GMIB assets’’) for these contracts,
exchanges cash flows between variable and fixed interest rates or including the agreement with Berkshire in 2013, effectively exiting
between two currencies for both principal and interest. Foreign this business. See Note 7 for further details.
currency and combination swaps are primarily Euros, Australian The fair value effects of GMIB contracts on the financial statements
dollars, Canadian dollars, Japanese yen and British pounds and have are included in Note 10 and their volume of activity is included in
terms for periods of up to six years. Net interest cash flows are Note 23. Cash flows on these contracts are reported in operating
reported in operating activities. activities.
The notional values of these cash flow swaps were $131 million as of
December 31, 2015 and $145 million as of December 31, 2014.
GMDB and GMIB Hedge Programs.
As of and for the years ended December 31, 2015 and 2014, the The Company’s dynamic hedge programs were discontinued at the
effects of these derivative instruments on the Consolidated Financial time of the Berkshire reinsurance transaction in 2013. These hedge
Statements were not material. No amounts were excluded from the programs generated losses (included in other revenues) of $39 million
assessment of hedge effectiveness and no gains or losses were in 2013.
recognized due to hedge ineffectiveness.
94 CIGNA CORPORATION - 2015 Form 10-K
NOTE 12