Cigna 2008 Annual Report Download - page 97

77
Management believes that actual results could differ materially from these examples because:
• these examples were developed using estimates and assumptions;
• changes in the fair values of all insurance-related assets and liabilities have been excluded because their primary risks are
insurance rather than market risk;
• changes in the fair values of investments recorded using the equity method of accounting and liabilities for pension and other
postretirement and postemployment benefit plans (and related assets) have been excluded, consistent with the disclosure
guidance; and
• changes in the fair values of other significant assets and liabilities such as goodwill, deferred acquisition costs, taxes, and various
accrued liabilities have been excluded; because they are not financial 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 the Company’s financial instruments,
subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as of December 31:
Market scenario for
certain non-insurance
financial instruments Loss in fair value
2008 2007
100 basis point increase in
interest rates $700 million $800 million
10% strengthening in U.S.
dollar to foreign currencies $160 million $150 million
10% decrease in market prices
for equity exposures $50 million $60 million
The effect of a hypothetical increase in interest rates on the fair value of certain of the Company’s financial instruments decreased in
2008 as a result of increased net liabilities for GMIB contracts, along with declining fair values of fixed maturities, partially offset by
a decrease in the duration of long-term debt. Net liabilities for GMIB contracts increased in 2008 primarily due to the adoption of
SFAS No. 157 and declines in the equity markets and interest rates. During 2008, the underlying equity account values from GMIB
contracts decreased by 50% primarily due to equity market declines. Therefore, the current effect of a hypothetical 10% decrease in
market prices for equity exposures at December 31, 2008 is expected to be less than at December 31, 2007. See the “Critical
Accounting Estimates” section of the MD&A beginning on page 49 for further discussion of guaranteed minimum income benefits.
The effect of a hypothetical increase in interest rates was determined by estimating the present value of future cash flows using
various models, primarily duration modeling and, for GMIB contracts, stochastic modeling. The effect of a hypothetical strengthening
of the U.S. dollar relative to the foreign currencies held by the Company was estimated to be 10% of the U.S. dollar equivalent fair
value. The effect of a hypothetical decrease in the market prices of equity exposures was estimated based on a 10% decrease in the
equity mutual fund values underlying guaranteed minimum income benefits reinsured by the Company and a 10% decrease in the
value of equity securities held by the Company. See Note 11 to the Consolidated Financial Statements for additional information.
The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce the effect of equity market
changes on certain reinsurance contracts that guarantee minimum death benefits based on unfavorable changes in underlying variable
annuity account values. The hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX
(Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to the Japanese yen, British
pound and euro would have been a decrease of approximately $140 million in the fair value of the futures contracts outstanding under
this program as of December 31, 2008. A corresponding decrease in liabilities for GMDB contracts would result from the
hypothetical 10% increase in these equity indices and 10% weakening in the U.S. dollar. See Note 7 to the Consolidated Financial
Statements for further discussion of this program and related GMDB contracts.
As noted above, the Company manages its exposures to market risk by matching investment characteristics to its obligations.
Stock Market Performance
The performance of equity markets can have a significant effect on the Company's businesses, including on:
• risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial Statements) and GMIB contracts (see Note
11 to the Consolidated Financial Statements); and
• pension liabilities since equity securities comprise a significant portion of the assets of the Company’s employee pension plans.