Cigna 2013 Annual Report Download - page 110

PART II
ITEM 8. Financial Statements and Supplementary Data
accordingly, expects future claims of approximately $4 billion to be
GMDB
covered by the agreement.
The Company estimates this liability with an internal model using
This transaction resulted in an after-tax charge to shareholders’ net many scenarios and assumptions based on the Company’s experience
income in the first quarter of 2013 of $507 million ($781 million and future expectations over an extended period, consistent with the
pre-tax reported as follows: $727 million in other benefits expense; long-term nature of this product. Because this product is premium
$45 million in GMIB fair value loss; and $9 million in other operating deficient, the Company records increases to the reserve if it is
expenses). The payment to Berkshire under the agreement was inadequate based on the model. Prior to the February 4, 2014
$2.2 billion and was funded from the sale of investment assets, tax reinsurance transaction with Berkshire, any such reserve increases were
benefits related to the transaction and available parent cash. recorded as a charge to shareholders’ net income. Reserve increases
after February 4, 2013 are expected to have a corresponding increase
in the recorded reinsurance recoverable, provided that the increased
Recoverables for GMDB and GMIB Business
recoverable remains within the overall Berkshire limit (including the
The Company had reinsurance recoverables related to the GMDB GMIB asset).
business of $1.3 billion and GMIB assets of $751 million as of The payment attributable to GMDB from the Berkshire reinsurance
December 31, 2013. Approximately 90% of the combined GMDB transaction was approximately $1.6 billion. Because this payment
recoverables and GMIB assets of $2.1 billion are secured by assets in exceeded the recorded reserve on February 4, 2013, the Company
trust, letters of credit, or are not subject to collection risk. recorded a reserve strengthening of $0.7 billion ($0.5 billion after-tax)
Approximately $1.6 billion of the combined GMDB recoverables and in the first quarter of 2013.
GMIB assets relate to the February 4, 2013 reinsurance arrangement
with Berkshire, including approximately $0.7 billion for the cost of The Company’s dynamic hedge programs to reduce equity and
reinsurance (excess of payment over recorded reserves). interest rate exposures were discontinued during the first quarter of
2013 due to the Berkshire reinsurance transaction. These hedge
The following disclosures for the reinsured GMDB and GMIB programs generated losses (included in Other Revenues) of
business provide further context to prior year results, as well as activity $32 million in 2013, $105 million in 2012 and $14 million in 2011.
in the assets and liabilities for these businesses, including the impact of Offsetting amounts were recorded in benefits and expenses. As a result
the reinsurance transaction with Berkshire. of discontinuing the hedge programs, the growth rate assumption for
the underlying equity funds was changed to use long-term historical
averages, resulting in a decrease in the gross reserve liability and the
offsetting reinsurance recoverable.
Activity in future policy benefit reserves for the GMDB business was as follows:
(In millions) 2013 2012 2011
Balance at January 1, $ 1,090 $ 1,170 $ 1,138
Add: Unpaid claims 24 40 37
Less: Reinsurance and other amounts recoverable 42 53 51
Balance at January 1, net 1,072 1,157 1,124
Add: Incurred benefits 699 17 138
Less: Paid benefits (including the $1,647 payment for Berkshire reinsurance transaction) 1,674 102 105
Ending balance, net 97 1,072 1,157
Less: Unpaid claims 18 24 40
Add: Reinsurance and other amounts recoverable 1,317 42 53
Balance at December 31, $ 1,396 $ 1,090 $ 1,170
Benefits paid and incurred are net of ceded amounts. For 2013, after-tax) in 2011 was driven primarily by volatility-related impacts
incurred benefits reflect the February 4, 2013 reinsurance transaction. due to turbulent equity market conditions and adverse interest rate
The ending net retained reserve as of December 31, 2013 covers impacts.
ongoing administrative expenses, as well as claims retained by the The majority of the exposure arises under annuities that guarantee
Company. Incurred benefits reflect the favorable or unfavorable that the benefit received at death will be no less than the highest
impact of a rising or falling equity market on the liability, and historical account value of the related mutual fund investments on a
included reserve strengthening of $43 million ($27 million after-tax) contractholder’s anniversary date. Under this type of death benefit,
in 2012 due primarily to reductions to the lapse rate assumptions and the Company is liable to the extent the highest historical anniversary
adverse interest rate impacts that reflected management’s account value exceeds the fair value of the related mutual fund
consideration of the anticipated impact of continued low short-term investments at the time of a contractholder’s death.
interest rates. Reserve strengthening of $70 million ($45 million
78 CIGNA CORPORATION - 2013 Form 10-K