Cigna 2010 Annual Report Download - page 101

CIGNA CORPORATION  2010 Form 10K 81
PART II
ITEM 8 Financial Statements and Supplementary Data
over periods from 1 to 30 years. Management revises amortization
periods if it believes there has been a change in the length of time
that an intangible asset will continue to have value. Costs incurred
to renew or extend the terms of these intangible assets are generally
expensed as incurred. See Note 9 for additional information.
J. Separate Account Assets and Liabilities
Separate account assets and liabilities are contractholder funds
maintained in accounts with specifi c investment objectives.  e assets
of these accounts are legally segregated and are not subject to claims
that arise out of any of the Company’s other businesses.  ese separate
account assets are carried at fair value with equal amounts for related
separate account liabilities.  e investment income, gains and losses
of these accounts generally accrue to the contractholders and are not
included in the Company’s revenues and expenses. Fees earned for asset
management services are reported in premiums and fees.
K. Contractholder Deposit Funds
Liabilities for contractholder deposit funds primarily includes deposits
received from customers for investment-related and universal life
products and investment earnings on their fund balances.  ese
liabilities are adjusted to refl ect administrative charges and, for universal
life fund balances, mortality charges. In addition, this caption includes
premium stabilization reserves that are insurance experience refunds for
group contracts that are left with the Company to pay future premiums,
deposit administration funds that are used to fund nonpension
retiree insurance programs, retained asset accounts and annuities or
supplementary contracts without signifi cant life contingencies. Interest
credited on these funds is accrued ratably over the contract period.
L. Future Policy Benefi ts
Future policy benefi ts are liabilities for the present value of estimated
future obligations under long-term life and supplemental health
insurance policies and annuity products currently in force.  ese
obligations are estimated using actuarial methods and primarily consist
of reserves for annuity contracts, life insurance benefi ts, guaranteed
minimum death benefi t (“GMDB”) contracts and certain life, accident
and health insurance products in our International operations.
Obligations for annuities represent specifi ed periodic benefi ts to be paid
to an individual or groups of individuals over their remaining lives.
Obligations for life insurance policies represent benefi ts to be paid to
policyholders, net of future premiums to be received. Management
estimates these obligations based on assumptions as to premiums,
interest rates, mortality and surrenders, allowing for adverse deviation.
Mortality, morbidity, and surrender assumptions are based on either
the Company’s own experience or actuarial tables. Interest rate
assumptions are based on management’s judgment considering the
Company’s experience and future expectations, and range from 1.25%
to 10%. Obligations for the run-off settlement annuity business include
adjustments for investment returns consistent with requirements of
GAAP when a premium defi ciency exists.
Certain reinsurance contracts contain GMDB under variable annuities
issued by other insurance companies.  ese obligations represent the
guaranteed death benefi t in excess of the contractholder’s account values
(based on underlying equity and bond mutual fund investments).  ese
obligations are estimated based on assumptions regarding lapse, partial
surrenders, mortality, interest rates (mean investment performance
and discount rate), market volatility as well as investment returns and
premiums, consistent with the requirements of GAAP when a premium
defi ciency exists. Lapse, partial surrenders, mortality, interest rates
and volatility are based on management’s judgment considering the
Company’s experience and future expectations.  e results of futures
contracts used in the GMDB equity hedge program are refl ected in
the liability calculation as a component of investment returns. See also
Note 7 for additional information.
M. Unpaid Claims and Claims Expenses
Liabilities for unpaid claims and claim expenses are estimates of
payments to be made under insurance coverages (primarily long-term
disability, workers’ compensation and life and health) for reported
claims and for losses incurred but not yet reported.
 e Company develops these estimates for losses incurred but not yet
reported using actuarial principles and assumptions based on historical
and projected claim incidence patterns, claim size, subrogation
recoveries and the length of time over which payments are expected to
be made.  e Company consistently applies these actuarial principles
and assumptions each reporting period, with consideration given to the
variability of these factors, and recognizes the actuarial best estimate of
the ultimate liability within a level of confi dence, as required by actuarial
standards of practice, which require that the liabilities be adequate under
moderately adverse conditions.
 e Company’s estimate of the liability for disability claims reported
but not yet paid is primarily calculated as the present value of expected
benefi t payments to be made over the estimated time period that a
policyholder remains disabled.  e Company estimates the expected
time period that a policyholder may be disabled by analyzing the rate at
which an open claim is expected to close (claim resolution rate). Claim
resolution rates may vary based upon the length of time a policyholder
is disabled, the covered benefi t period, cause of disability, benefi t design
and the policyholder’s age, gender and income level.  e Company uses
historical resolution rates combined with an analysis of current trends
and operational factors to develop current estimates of resolution rates.
 e reserve for the gross monthly disability benefi ts due to a policyholder
is reduced (off set) by the income that the policyholder receives under
other benefi t programs, such as Social Security Disability Income,
worker’s compensation, statutory disability or other group disability
benefi t plans. For awards of such off sets that have not been fi nalized, the
Company estimates the probability and amount of the off set based on
the Company’s experience over the past three to fi ve years.
 e Company discounts certain claim liabilities related to group long-
term disability and workers’ compensation because benefi t payments
may be made over extended periods. Discount rate assumptions are based
on projected investment returns for the asset portfolios that support
these liabilities and range from 3.80% to 7.25%. When estimates
change, the Company records the adjustment in benefi ts and expenses
in the period in which the change in estimate is identifi ed. Discounted
liabilities associated with the long-term disability and certain workers’
compensation businesses were $3.1 billion at December 31, 2010 and
December 31, 2009.