Cigna 2011 Annual Report Download - page 66

44 CIGNA CORPORATION2011 Form10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet Caption/Nature of Critical Accounting Estimate Eect if Dierent Assumptions Used
Valuation of xed maturity investments
Fixed maturities are primarily classied as available for sale and are carried
at fair value with changes in fair value recorded in accumulated other
comprehensive income (loss) within shareholders’ equity.
Fair value is dened as the price at which an asset could be exchanged in an
orderly transaction between market participants at the balance sheet date.
e determination of fair value for a nancial instrument requires
management judgment. e degree of judgment involved generally
correlates to the level of pricing readily observable in the markets. Financial
instruments with quoted prices in active markets or with market observable
inputs to determine fair value, such as public securities, generally require less
judgment. Conversely, private placements including more complex securities
that are traded infrequently are typically measured using pricing models that
require more judgment as to the inputs and assumptions used to estimate
fair value. ere may be a number of alternative inputs to select, based on an
understanding of the issuer, the structure of the security and overall market
conditions. In addition, these factors are inherently variable in nature as they
change frequently in response to market conditions. Approximately two-
thirds of the Company’s xed maturities are public securities, and one-third
are private placement securities.
See Note10 to the Consolidated Financial Statements for a discussion of
the Company’s fair value measurements and the procedures performed by
management to determine that the amounts represent appropriate estimates.
Assessment of “other- than-temporary” impairments of xed maturities
To determine whether a xed maturity’s decline in fair value below its
amortized cost is other than temporary, the Company must evaluate the
expected recovery in value and its intent to sell or the likelihood of a
required sale of the xed maturity prior to an expected recovery. To make
this determination, the Company considers a number of general and specic
factors including the regulatory, economic and market environment, length
of time and severity of the decline, and the nancial health and specic near
term prospects of the issuer.
See Notes2 (C) and 11 to the Consolidated Financial Statements for
additional discussion of the Company’s review of declines in fair value,
including information regarding the Company’s accounting policies for xed
maturities.
Typically, the most signicant input in the measurement of fair value is the
market interest rate used to discount the estimated future cash ows from
the instrument. Such market rates are derived by calculating the appropriate
spreads over comparable U.S. Treasury securities, based on the credit quality,
industry and structure of the asset.
If the spreads used to calculate fair value changed by 100 basis points, the
fair value of the total xed maturity portfolio of $16.2billion would change
by approximately $1.0billion.
For all xed maturities with cost in excess of their fair value, if this excess
was determined to be other-than-temporary, shareholders’ net income for
the year ended December31,2011 would have decreased by approximately
$42million after-tax.
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