Cigna 2010 Annual Report Download - page 128

CIGNA CORPORATION  2010 Form 10K
108
PART II
ITEM 8 Financial Statements and Supplementary Data
there was no net liability position under such derivative instruments.
See Note 7 for a discussion of derivatives associated with GMDB
contracts and Note 11 for a discussion of derivatives arising from
GMIB contracts.  e eff ects of other derivatives were not material
to the Company’s consolidated results of operations, liquidity or
fi nancial condition for the years ended December 31, 2010 and 2009.
 e following tables present information about the nature and
accounting treatment of the Company’s primary derivative fi nancial
instruments including the Company’s purpose for entering
into specifi c derivative transactions, and their locations in and
eff ect on the fi nancial statements as of and for the periods ended
December 31, 2010 and 2009. Derivatives in the Company’s separate
accounts are excluded from the tables because associated gains and
losses generally accrue directly to policyholders.
Instrument/Volume
ofActivity Primary Risk Purpose Cash Flows Accounting Policy
Derivatives Designated as Accounting Hedges-Cash Flow Hedges
Interest rate swaps—
$153million (2010)
and $160million
(2009) of par value of
related investments
Foreign currency
swaps— $159million
(2010) and
$179million (2009)
of U.S. dollar
equivalent par value
of related investments
Combination swaps
(interest rate and
foreign currency)—
$64million (2010)
and $54million
(2009) of U.S. dollar
equivalent par value
of related investments
Interest rate and
foreign currency To hedge the interest and/or foreign currency cash fl ows of
fi xed maturities and commercial
mortgage loans to match
associated liabilities. Currency
swaps are primarily euros,
Australian dollars, Canadian
dollars and British pounds for
periods of up to 11 years.
 e Company periodically
exchanges cash fl ows between
variable and fi xed interest rates
and/or between two currencies for
both principal and interest. Net
interest cash fl ows are reported
in operating activities.
Using cash fl ow hedge accounting,
fair values are reported in other
long-term investments or other
liabilities and accumulated other
comprehensive income and
amortized into net investment
income or reported in other
realized investment gains and
losses as interest or principal
payments are received.
Fair Value E ect on the Financial Statements (in millions)
Instrument
Other Long-Term Investments Accounts Payable, Accrued Expenses and Other Liabilities
Gain (Loss)
Recognized in Other
Comprehensive Income
(1)
As of December31, As of December31, For the years ended December31,
2010 2009 2010 2009 2010 2009
Interest rate swaps $ 10$8$ -$ -$2$(5)
Foreign currency
swaps 6 4 20 24 10 (24)
Interest rate
and foreign
currency swaps - - 12 6 (7) (12)
TOTAL $16$12$32$30$5$41
(1) Other comprehensive income for foreign currency swaps excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
Purchased options—
$312million
ofcash surrender
value ofrelated life
insurance policies
Interest rate To hedge the possibility of early
policyholder cash surrender when
the amortized cost of underlying
invested assets is greater than their
fair values.
 e Company pays a fee and may
receive or pay cash, based on the
diff erence between the amortized
cost and fair values of underlying
invested assets at the time of
policyholder surrender.  ese cash
fl ows will be reported in fi nancing
activities.
Using cash fl ow hedge accounting,
fair values are reported in other
assets or other liabilities, with
changes in fair value reported in
accumulated other comprehensive
income and amortized to other
benefi t expenses over the life of
the underlying invested assets.
Fair Value E ect on the Financial Statements
Fair values reported in other assets and other comprehensive income were not signifi cant.
Treasury lock Interest rate To hedge the variability of and fi x
at inception date, the benchmark
Treasury rate component of future
interest payments on debt to be
issued.
 e Company paid the fair value
of the contract at the expiration.
Cash fl ows were reported in
operating activities.
Using cash fl ow hedge accounting,
fair values are reported in
other assets or other liabilities,
with changes in fair value
reported in accumulated other
comprehensive income and
amortized to interest expense over
the period of expected cash fl ows.
Fair Value E ect on the Financial Statements
In the fi rst quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in other
comprehensive income, resulting in net cumulative losses of $26 million, to be amortized to interest expense over the life of the
debt. In the second quarter of 2009, the Company issued debt and began amortizing this loss to interest expense over the period
of expected cash fl ows.
 e amount of gains (losses) reclassifi ed from accumulated other
comprehensive income into income was not signifi cant. No gains
(losses) were recognized due to ineff ectiveness and no amounts were
excluded from the assessment of hedge ineff ectiveness.