Cigna 2008 Annual Report Download - page 133

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the guarantee and the differing experience by issuing company of the underlying variable annuity contracts.
• The annuity election rate assumption varies by contract and depends on the annuitant’s age, the relative value of the guarantee,
whether a contractholder has had a previous opportunity to elect the benefit and the differing experience by issuing company of
the underlying variable annuity contracts. Immediately after the expiration of the waiting period, the assumed probability that an
individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect
the benefit, the assumed probability of election is up to 30%. With respect to the second and subsequent election opportunities,
actual data is just beginning to emerge for the Company as well as the industry and the estimates are based on this limited data.
• The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be
required by a hypothetical market participant.
In addition, the company has considered other assumptions related to model, expense and non-performance risk in calculating the
GMIB liability.
The approach for these assumptions, including market-observable reference points, is consistent with that used to estimate the fair
values of these contracts at January 1, 2008. The Company regularly evaluates each of the assumptions used in establishing these
assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital
markets assumptions are expected to change at each valuation date reflecting current observable market conditions. Other assumptions
may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that
impact the net liability. If the emergence of future experience or future assumptions differs from the assumptions used in estimating
these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain
situations, could be material to the Company’s financial condition.
GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other
liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has
purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including
other intangibles. As of December 31, 2008, Standard & Poor’s (S&P) has given a financial strength rating of AA+ to one reinsurer
and a financial strength rating of A- to the parent company that guarantees the receivable from the other reinsurer.
Changes in Level 3 Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the changes in financial assets and financial liabilities classified in Level 3 for the year ended
December 31, 2008. This table excludes separate account assets as changes in fair values of these assets accrue directly to
policyholders. Gains and losses reported in this table may include changes in fair value that are attributable to both observable and
unobservable inputs.
(In millions)
Fixed Maturities &
Equity Securities GMIB Assets GMIB Liabilities GMIB Net
Balance at 1/1/08 $ 732 $ 173 $ (313) $ (140)
Effect of adoption of SFAS No. 157 - 244 (446) (202)
Results of GMIB, excluding adoption effect - 604 (1,092) (488)
Other (21) - - -
Total gains (losses) included in income (21) 848 (1,538) (690)
Losses included in other comprehensive income (17) - - -
Gains required to adjust future policy benefits for settlement annuities (1) 91 - - -
Purchases, issuances, settlements 1 (68) 94 26
Transfers into Level 3 103 - - -
Balance at 12/31/08 $ 889 $ 953 $ (1,757) $ (804)
Total gains (losses) included in income attributable to
instruments held at the reporting date $ (18) $ 848 $ (1,538) $ (690)
(1) Amounts do not accrue to shareholders and are not reflected in the Company's revenues.