Cigna 2013 Annual Report Download - page 130

PART II
ITEM 8. Financial Statements and Supplementary Data
(for further information, see Note 7). For information on the as paying claims, investment returns, and withdrawals). Derivatives
Company’s accounting policy for derivative financial instruments, see are typically used in this strategy to reduce interest rate and foreign
Note 2. Derivatives in the Company’s separate accounts are excluded currency risks.
from the following discussion because associated gains and losses
generally accrue directly to separate account policyholders.
Investment Cash Flow Hedges.
Collateral and termination features. The Company routinely Purpose. The Company uses interest rate, foreign currency, and
monitors exposure to credit risk associated with derivatives and combination (interest rate and foreign currency) swap contracts to
diversifies the portfolio among approved dealers of high credit quality hedge the interest and foreign currency cash flows of its fixed maturity
to minimize this risk. Certain of the Company’s over-the-counter bonds to match associated insurance liabilities.
derivative instruments contain provisions requiring either the Accounting policy. Using cash flow hedge accounting, fair values are
Company or the counterparty to post collateral or demand immediate reported in other long-term investments or other liabilities. Changes
payment depending on the amount of the net liability position and in fair value are reported in accumulated other comprehensive income
predefined financial strength or credit rating thresholds. Collateral and amortized into net investment income or reported in other
posting requirements vary by counterparty. The net liability positions realized investment gains and losses as interest or principal payments
of these derivatives were not material as of December 31, 2013 or are received.
2012.
Cash flows. Under the terms of these various contracts, the Company
periodically exchanges cash flows between variable and fixed interest
Derivative instruments used in the Company’s
rates and/or between two currencies for both principal and interest.
investment risk management.
Foreign currency swaps are primarily Euros, Australian dollars,
The Company uses derivative financial instruments as a part of its Canadian dollars, Japanese yen, and British pounds, and have terms
investment strategy to manage the characteristics of investment assets for periods of up to eight years. Net interest cash flows are reported in
(such as duration, yield, currency and liquidity) to meet the varying operating activities.
demands of the related insurance and contractholder liabilities (such
Volume of activity. The following table provides the notional values of these derivative instruments as of December 31:
Notional Amount (In millions)
Instrument 2013 2012
Interest rate swaps $45$58
Foreign currency swaps 118 133
Combination interest rate and foreign currency swaps 40 64
TOTAL $ 203 $ 255
The following table provides the effect of these derivative instruments on the financial statements for the indicated periods:
Fair Value Effect on the Financial Statements (In millions)
Accounts Payable, Accrued Gain (Loss) Recognized in
Other Long-Term Expenses Other
Investments and Other Liabilities Comprehensive Income
(1)
For the years ended
As of December 31, As of December 31, December 31,
Instrument 2013 2012 2013 2012 2013 2012
Interest rate swaps $ 2 $ 4 $ – $ – $ (2) $ (3)
Foreign currency swaps 1 1 13 18 1 (3)
Combination interest rate and foreign
currency swaps – – 2 13 10 (2)
TOTAL $ 3 $ 5 $ 15 $ 31 $ 9 $ (8)
(1) Other comprehensive income for foreign currency swaps excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
For the years ended December 31, 2013 and 2012, the amount of As a result, the following disclosures related to derivative instruments
gains (losses) reclassified from accumulated other comprehensive associated with the GMIB and GMDB business are provided for
income into shareholders’ net income was not material. No amounts context, including a description of the derivative accounting for the
were excluded from the assessment of hedge effectiveness and no gains GMIB contracts. Cash flows on derivative instruments associated
(losses) were recognized due to hedge ineffectiveness. with the GMIB and GMDB business are reported in operating
activities.
Derivative instruments associated with the Company’s
Run-off Reinsurance segment.
As described further in Note 7, the Company effectively exited the
As explained in Note 7, the Company entered into an agreement to GMIB business by purchasing additional reinsurance coverage for
effectively exit the GMIB and GMDB business on February 4, 2013.
98 CIGNA CORPORATION - 2013 Form 10-K
Guaranteed Minimum Income Benefits (GMIB).