Cigna 2009 Annual Report Download - page 59

39
Significant changes in market interest rates affect the value of CIGNA's financial instruments that promise a fixed return or
benefit and the value of particular assets and liabilities.
As an insurer, CIGNA has substantial investment assets that support insurance and contractholder deposit liabilities. Generally low
levels of interest rates on investments, such as those experienced in United States financial markets during recent years, have
negatively impacted the level of investment income earned by the Company in recent periods, and such lower levels of investment
income would continue if these lower interest rates were to continue.
Substantially all of the Company’s investment assets are in fixed interest-yielding debt securities of varying maturities, fixed
redeemable preferred securities and commercial mortgage loans. The value of these investment assets can fluctuate significantly with
changes in market conditions. A rise in interest rates could reduce the value of the Company’s investment portfolio and increase
interest expense if CIGNA were to access its available lines of credit.
The Company is also exposed to interest rate and equity risk based upon the discount rate and expected long-term rate of return
assumptions associated with the Company’s pension and other post-retirement obligations. Sustained declines in interest rates could
have an adverse impact on the funded status of the Company’s pension plans and the Company’s re-investment yield on new
investments.
Changes in interest rates may also impact the discount rate and expected long-term rate of return assumptions associated with the
Company’s guaranteed minimum death benefit liabilities. Significant, sustained declines in interest rates could cause the Company to
reduce these long-term assumptions, resulting in increased liabilities.
In addition, changes in interest rates impact the assumed market returns and the discount rate used in the fair value calculations for the
Company’s liabilities for guaranteed minimum income benefits. Significant interest rate declines could significantly increase the
Company’s liabilities for these contracts.
As the 7-year Treasury rate (claim interest rate) declines, the claim amounts that the Company expects to pay out for the guaranteed
minimum income benefit business increases. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim
interest rate. Significant interest rate declines could significantly increase the Company’s net liabilities for guaranteed minimum
income benefit contracts because of increased exposures.
New accounting pronouncements or guidance could require CIGNA to change the way in which it accounts for operations.
The Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies may issue new
accounting standards or pronouncements, or changes in the interpretation of existing standards or pronouncements, from time to time,
which could have a significant effect on CIGNA's reported results of operations and financial condition.
CIGNA faces risks related to litigation and regulatory investigations.
CIGNA is routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other legal matters arising in the
ordinary course of the business of administering and insuring employee benefit programs. Such legal matters include benefit claims,
breach of contract actions, tort claims, and disputes regarding reinsurance arrangements. In addition, CIGNA incurs and likely will
continue to incur liability for claims related to its health care business, such as failure to pay for or provide health care, poor outcomes
for care delivered or arranged, provider disputes, including disputes over compensation, and claims related to self-funded business.
Also, there are currently, and may be in the future, attempts to bring class action lawsuits against the industry.
Court decisions and legislative activity may increase CIGNA’s exposure for any of these types of claims. In some cases, substantial
non-economic or punitive damages may be sought. CIGNA currently has insurance coverage for some of these potential liabilities.
Other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be
sufficient to cover the entire damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered
by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the
future. It is possible that the resolution of one or more of the legal matters and claims described in this risk factor could result in
losses material to CIGNA's consolidated results of operations, liquidity or financial condition.