Cigna 2013 Annual Report Download - page 120

PART II
ITEM 8. Financial Statements and Supplementary Data
backed securities, inputs and assumptions may also include
Level 1 Financial Assets
characteristics of the issuer, collateral attributes, prepayment speeds
Inputs for instruments classified in Level 1 include unadjusted quoted and credit rating.
prices for identical assets in active markets accessible at the
Nearly all of these instruments are valued using recent trades or
measurement date. Active markets provide pricing data for trades
pricing models. Less than 1% of the fair value of investments classified
occurring at least weekly and include exchanges and dealer markets.
in Level 2 represents foreign bonds that are valued using a single
Assets in Level 1 include actively-traded U.S. government bonds and unadjusted market-observable input derived by averaging multiple
exchange-listed equity securities. Given the narrow definition of broker-dealer quotes, consistent with local market practice.
Level 1 and the Company’s investment asset strategy to maximize
Short-term investments are carried at fair value which approximates
investment returns, a relatively small portion of the Company’s
cost. On a regular basis the Company compares market prices for
investment assets are classified in this category.
these securities to recorded amounts to validate that current carrying
amounts approximate exit prices. The short-term nature of the
Level 2 Financial Assets and Financial Liabilities
investments and corroboration of the reported amounts over the
holding period support their classification in Level 2.
Inputs for instruments classified in Level 2 include quoted prices for
similar assets or liabilities in active markets, quoted prices from those Other derivatives classified in Level 2 represent over-the-counter
willing to trade in markets that are not active, or other inputs that are instruments such as interest rate and foreign currency swap contracts.
market observable or can be corroborated by market data for the term Fair values for these instruments are determined using market
of the instrument. Such other inputs include market interest rates and observable inputs including forward currency and interest rate curves
volatilities, spreads and yield curves. An instrument is classified in and widely published market observable indices. Credit risk related to
Level 2 if the Company determines that unobservable inputs are the counterparty and the Company is considered when estimating the
insignificant. fair values of these derivatives. However, the Company is largely
protected by collateral arrangements with counterparties, and
Fixed maturities and equity securities. Approximately 91% of the determined that no adjustment for credit risk was required as of
Company’s investments in fixed maturities and equity securities are December 31, 2013 or December 31, 2012. The nature and use of
classified in Level 2 including most public and private corporate debt these other derivatives are described in Note 12.
and equity securities, federal agency and municipal bonds,
non-government mortgage-backed securities and preferred stocks.
Because many fixed maturities do not trade daily, third-party pricing
Level 3 Financial Assets and Financial Liabilities
services and internal methods often use recent trades of securities with
Certain inputs for instruments classified in Level 3 are unobservable
similar features and characteristics. When recent trades are not
(supported by little or no market activity) and significant to their
available, pricing models are used to determine these prices. These
resulting fair value measurement. Unobservable inputs reflect the
models calculate fair values by discounting future cash flows at
Company’s best estimate of what hypothetical market participants
estimated market interest rates. Such market rates are derived by
would use to determine a transaction price for the asset or liability at
calculating the appropriate spreads over comparable U.S. Treasury
the reporting date.
securities, based on the credit quality, industry and structure of the
asset. Typical inputs and assumptions to pricing models include, but The Company classifies certain newly issued, privately-placed,
are not limited to, a combination of benchmark yields, reported complex or illiquid securities, as well as assets and liabilities relating to
trades, issuer spreads, liquidity, benchmark securities, bids, offers, GMIB, in Level 3.
reference data, and industry and economic events. For mortgage-
Fixed maturities and equity securities. Approximately 7% of fixed maturities and equity securities are priced using significant unobservable
inputs and classified in this category, including:
December 31, December 31,
(In millions) 2013 2012
Other asset and mortgage-backed securities – valued using pricing models $ 603 $ 598
Corporate and government fixed maturities – valued using pricing models 417 596
Corporate fixed maturities – valued at transaction price 111 123
Equity securities – valued at transaction price 59 34
TOTAL $ 1,190 $ 1,351
Fair values of other asset and mortgage-backed securities and characteristics. For other asset and mortgage-backed securities, inputs
corporate and government fixed maturities are primarily determined and assumptions for pricing may also include collateral attributes and
using pricing models that incorporate the specific characteristics of prepayment speeds. Recent trades in the subject security or similar
each asset and related assumptions including the investment type and securities are assessed when available, and the Company may also
structure, credit quality, industry and maturity date in comparison to review published research in its evaluation, as well as the issuer’s
current market indices, spreads and liquidity of assets with similar financial statements. Approximately 10% of fixed maturities classified
88 CIGNA CORPORATION - 2013 Form 10-K