Cigna 2011 Annual Report Download - page 105

83CIGNA CORPORATION2011 Form10K
PART II
ITEM 8 Financial Statements and Supplementary Data
contracts, the claim mortality assumption depends on age, gender,
and net amount at risk for the policy.
•
e lapse rate assumption is 0% to 24%, depending on contract type,
policy duration and the ratio of the net amount at risk to account value.
During 2011, the Company completed its normal review of reserves
(including assumptions) and recorded additional other benet expenses
of $70million ($45million after-tax) to strengthen GMDB reserves.
e reserve strengthening was driven primarily by:
•
adverse impacts of $34million ($22million after-tax) due to volatile
equity market conditions. Volatility risk is not covered by the hedging
programs. Also, the equity market volatility reduced the eectiveness
of the hedging program for equity market exposures, in part because
the market does not oer futures contracts that exactly match the
diverse mix of equity fund investments held by contractholders.
•
adverse interest rate impacts of $23million ($15million after-tax)
reecting management’s consideration of the anticipated impact of
continuing low current short-term interest rates. is evaluation
also led management to lower the mean investment performance
assumption for equity funds from 5% to 4.75% for those funds not
subject to the growth interest rate hedge program.
•
adverse impacts of overall market declines in the third quarter of
$13million ($8million after-tax), that include an increase in the
provision for expected future partial surrenders and declines in the
value of contractholders’ non-equity investments such as bond funds,
neither of which are included in the hedge programs.
During 2010, the Company performed its periodic review of assumptions
resulting in a charge of $52million pre-tax ($34million after-tax) to
strengthen GMDB reserves. During 2010 current short-term interest
rates had declined from the level anticipated at December31,2009,
leading the Company to increase reserves. is interest rate risk was
not even partially hedged at that time. e Company also updated
the lapse assumption for policies that have already taken or may take
a signicant partial withdrawal, which had a lesser reserve impact.
During 2009, the Company reported a charge of $73million pre-tax
($47million after-tax) to strengthen GMDB reserves. e reserve
strengthening primarily reected an increase in the provision for future
partial surrenders due to market declines, adverse volatility-related impacts
due to turbulent equity market conditions, and interest rate impacts.
Activity in future policy benet reserves for these GMDB contracts
was as follows:
(In millions) 2011 2010 2009
Balance at January1, $ 1,138 $ 1,285 $ 1,609
Add: Unpaid claims 37 36 34
Less: Reinsurance and other amounts recoverable 51 53 83
Balance at January1, net 1,124 1,268 1,560
Add: Incurred benets 138 (20) (122)
Less: Paid benets 105 124 170
Ending balance, net 1,157 1,124 1,268
Less: Unpaid claims 40 37 36
Add: Reinsurance and other amounts recoverable 53 51 53
Balance at December31, $ 1,170 $ 1,138 $ 1,285
Benets paid and incurred are net of ceded amounts. Incurred benets
reect the (favorable) or unfavorable impact of a rising or falling equity
market on the liability, and include the charges discussed above. Losses
or gains have been recorded in other revenues as a result of the GMDB
equity and growth interest rate hedge programs to reduce equity market
and certain interest rate exposures.
e majority of the Company’s exposure arises under annuities that
guarantee that the benet received at death will be no less than the highest
historical account value of the related mutual fund investments on a
contractholder’s anniversary date. Under this type of death benet, the
Company is liable to the extent the highest historical anniversary account
value exceeds the fair value of the related mutual fund investments at
the time of a contractholder’s death. Other annuity designs that the
Company reinsured guarantee that the benet received at death will be:
• the contractholder’s account value as of the last anniversary date
(anniversary reset); or
•
no less than net deposits paid into the contract accumulated at a
specied rate or net deposits paid into the contract.
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