Cigna 2013 Annual Report Download - page 88

PART II
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial Mortgage Loans
Our commercial mortgage loans are fixed rate loans, diversified by review and subsequent fundings and repayments, the portfolio’s
property type, location and borrower. Loans are secured by high average loan-to-value improved to 64% at December 31, 2013,
quality commercial properties and are generally made at less than 75% decreasing from 65% as of December 31, 2012. The portfolio’s
of the property’s value at origination of the loan. Property value, debt average debt service coverage ratio was estimated to be 1.62 at
service coverage, quality, building tenancy and stability of cash flows December 31, 2013, an improvement from 1.56 as of December 31,
are all important financial underwriting considerations. We hold no 2012.
direct residential mortgage loans and do not securitize or service Commercial real estate capital markets remain most active for well
mortgage loans. leased, quality commercial real estate located in strong institutional
We completed an annual in depth review of our commercial mortgage investment markets. The vast majority of properties securing the
loan portfolio during the second quarter of 2013. This review mortgages in our mortgage portfolio possess these characteristics.
included an analysis of each property’s year-end 2012 financial While commercial real estate fundamentals continued to improve, the
statements, rent rolls, operating plans and budgets for 2013, a physical improvement has varied across geographies and property types.
inspection of the property and other pertinent factors. Based on this
The following table reflects the commercial mortgage loan portfolio as of December 31, 2013, summarized by loan-to-value ratios.
Loan-to-Value Distribution
Amortized Cost
Loan-to-Value Ratios Senior Subordinated Total % of Mortgage Loans
Below 50% $ 260 $ 60 $ 320 14%
50% to 59% 730 – 730 32%
60% to 69% 483 24 507 23%
70% to 79% 192 – 192 8%
80% to 89% 280 32 312 14%
90% to 99% 170 5 175 8%
100% or above 16 – 16 1%
TOTALS $ 2,131 $ 121 $ 2,252 100%
As summarized above, $121 million or 5% of the commercial
Other Long-term Investments
mortgage loan portfolio is comprised of subordinated notes that were
Our other long-term investments include $1,169 million in security
fully underwritten and originated by us using our standard
partnership and real estate funds as well as direct investments in real
underwriting procedures and are secured by first mortgage loans.
estate joint ventures. The funds typically invest in mezzanine debt or
Senior interests in these first mortgage loans were then sold to other
equity of privately held companies (securities partnerships) and equity
institutional investors. This strategy allowed us to effectively utilize
real estate. Given our subordinate position in the capital structure of
our origination capabilities to underwrite high quality loans, limit
these underlying entities, we assume a higher level of risk for higher
individual loan exposures, and achieve attractive risk adjusted yields.
expected returns. To mitigate risk, investments are diversified across
In the event of a default, we would pursue remedies up to and
approximately 95 separate partnerships, and approximately 60 general
including foreclosure jointly with the holders of the senior interest,
partners who manage one or more of these partnerships. Also, the
but would receive repayment only after satisfaction of the senior
funds’ underlying investments are diversified by industry sector or
interest.
property type, and geographic region. No single partnership
The commercial mortgage loan portfolio contains approximately 120 investment exceeds 7% of our securities and real estate partnership
loans, including five impaired loans with a carrying value totaling portfolio.
$112 million that are classified as problem or potential problem loans.
Although the total fair values of investments exceeded their carrying
Two of these loans totaling $31 million are current based on
values as of December 31, 2013, the fair value of our ownership
restructured terms and three loans totaling $81 million, net of
interest in certain funds that are carried at cost was less than carrying
$8 million in reserves, are current. All of the remaining loans continue
value by $30 million. We expect to recover our carrying value over the
to perform under their contractual terms. We have $177 million of
average remaining life of these investments of approximately 4 years.
loans maturing in the next twelve months. Given the quality and
Given the current economic environment, future impairments are
diversity of the underlying real estate, positive debt service coverage
possible; however, management does not expect those losses to have a
and significant borrower cash investment averaging 30%, we remain
material effect on our results of operations, financial condition or
confident that the vast majority of borrowers will continue to perform
liquidity.
as expected under the contract terms.
56 CIGNA CORPORATION - 2013 Form 10-K