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CIGNA CORPORATION2010 Form 10K 47
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet Caption/Nature of Critical
Accounting Estimate Assumptions/Approach Used E ect if Di erent Assumptions Used
Investments — Commercial Mortgage Loans —
Valuation Reserves
Recognition of losses from valuation reserves for
impaired commercial mortgage loans
To determine whether a commercial mortgage
loan is impaired, the Company evaluates the
likelihood of collecting all interest and principal
payments in accordance with the contractual
terms of the original loan agreement. When it
is probable that the Company will not collect
amounts due according to the terms of the
original loan agreement, a loan is considered
impaired and the Company must estimate the fair
value of the underlying property to measure an
impairment loss. An impairment loss is recorded
using a valuation allowance for an impaired
commercial mortgage loan’s carrying value in
excess of the estimated fair value of its underlying
property. Changes to valuation reserves are
recorded in Realized investment gains (losses).
See Note 2 (C) to the Consolidated Financial
Statements for additional information regarding
the Company’s accounting policies for
commercial mortgage loans.
e Company’s evaluation of the likelihood
of collecting all contractual payments and the
collateral fair value for commercial mortgage
loans is a qualitative and quantitative process
which is subject to uncertainties.  e Company
carefully evaluates all facts and circumstances for
each loan and its supporting collateral.
When evaluating the likelihood of collecting the
contractual payments of a commercial mortgage
loan, the Company considers factors including:
• fi nancial statements, budgets and operating
plans for the property;
• inspection reports of the property completed
by third party servicers;
• debt service coverage and loan-to-value ratio
of the underlying collateral;
• the borrower’s continuing fi nancial
commitment to the property; and
• conditions and factors pertinent to the
property and its local market.
When it becomes probable that all contractual
payments will not be collected according to
the terms of the original loan agreement, the
Company calculates the estimated fair value
of the underlying property based on a 10-year
discounted cash fl ow analysis. Factors key to this
valuation include the following:
• net operating income of the property;
• rental and growth rates for the property and
its local market;
• capital requirements for the property; and
• current market discount and capitalization
rates.
ese evaluations are based primarily on an in-
depth review of the commercial mortgage loan
portfolio which is completed annually in the third
quarter.  e Company updates this annual review
as material changes in these factors are identifi ed.
e Company recognized impairment losses from
commercial mortgage loan valuation reserves as
follows (in millions, after-tax):
•2010— $15
•2009 — $11
•2008 — $0
See the Investment Assets section of the MD&A
beginning on page 65 for discussion of the
Company’s problem and potential problem
mortgage loans and Note 12 to the Consolidated
Financial Statements for further information
surrounding impaired commercial mortgage
loans.
If loans with carrying values in excess of the fair
value of their underlying property were considered
impaired as of December 31, 2010, shareholders’
net income would decrease by approximately
$11 million after-tax.
If property values declined by 10% across
the commercial mortgage loan portfolio as of
December 31, 2010, approximately 18% of the
portfolio’s loans would have carrying values in
excess of their underlying properties’ fair values
totaling approximately $80 million. And if each
of these loans were considered impaired as of
December 31, 2010, shareholders’ net income
would decrease by approximately $52 million
after-tax.
If underlying property values declined by 10%
for impaired commercial mortgage loans with
valuation reserves as of December 31, 2010,
shareholders’ net income would decrease by
approximately $2 million after-tax.