The Company reduced its balance sheet exposure in the run-off reinsurance operations by reinsuring its run-off workers’ compensation and personal accident business.
In the International segment, CIGNA continues to expand the product and geographic footprint by executing local strategies that grow supplemental, primary medical and expatriate benefits through: (1) product and channel expansion in its supplemental health, life and accident business in key Asian geographies; (2) the introduction of new expatriate benefits products, that provide greater benefit and geographic flexibility to individual and employers (such as through the Vanbreda International acquisition); and (3) further expansion of distribution capabilities to capitalize on emerging and growing markets globally.
performs regular audits of ceding companies to ensure compliance with agreements as well as to help maximize the collection of receivables from retrocessionaires; and
gains on sales of fixed maturities and equities in 2009 compared with losses in 2008; and
As of December 31, 2010, if contractholder account values invested in underlying bond/money market mutual funds declined by 3% due to bond/money market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders and an increase in unhedged exposure would be approximately $10 million.
Volatility: the degree of variation of future market returns of the underlying mutual fund investments.
The Health Care segment continues to focus on retaining profitable relationships, expanding on those relationships and growing profitable new business by focusing on:
favorable claims experience in the disability insurance business including the favorable after-tax impact of disability reserve studies of $20 million in 2009 compared with $8 million in 2008. The results in 2008 also included a $3 million favorable after-tax impact of a reinsurance settlement. The favorable claims experience and reserve study impacts are largely driven by continued strong disability claims management programs;
During the first quarter of 2010, the Company’s International segment implemented a capital management strategy to permanently invest the earnings of its Hong Kong operation overseas. Income taxes for this operation, and the South Korean operation that implemented a similar strategy in the second quarter of 2009, are recorded at the tax rate of the respective foreign jurisdiction. See the Financial Summary table for the effect of these capital management strategies on International’s adjusted income from operations for each applicable period. The increase in the effect of recording taxes at the tax rates of respective foreign jurisdictions in 2010 primarily reflects higher pre-tax earnings in South Korea and, to a lesser extent, the addition of Hong Kong in 2010.
Policy acquisition expenses increased in 2010, compared with 2009, reflecting business growth and foreign currency movements. Policy acquisition costs decreased in 2009, compared to 2008, reflecting foreign currency movements partially offset by business growth and higher amortization of acquisition costs associated with lower persistency in the supplemental health, life and accident insurance business.
The Company excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable.
The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of December 31, 2010, based on current information. However, it is possible that future developments, which could include but are not limited to worse than expected claim experience and higher than expected volatility, could have a material adverse effect on the Company’s consolidated results of operations and could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to the Company.
The availability of capital resources will be impacted by equity and credit market conditions. Extreme volatility in credit or equity market conditions may reduce the Company’s ability to issue debt or equity securities.
In 2010, the Company acquired Vanbreda International for $412 million. The acquisition was funded from available cash. See Note 3 for further information.
Purchase obligations. As of December 31, 2010, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:
$54 million decline in potential problem bonds due to improved bond performance as well as redemption activity.
The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce the effect of equity market changes on certain reinsurance contracts that guarantee minimum death benefits based on unfavorable changes in underlying variable annuity account values. The hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX (Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to the Japanese yen, British pound and euro would have been a decrease of approximately $80 million in the fair value of the futures contracts outstanding under this program as of December 31, 2010. A corresponding decrease in liabilities for GMDB contracts would result from the hypothetical 10% increase in these equity indices and 10% weakening in the U.S. dollar. See Note 7 to the Consolidated Financial Statements for further discussion of this program and related GMDB contracts.
risks associated with security or interruption of information systems, which could, among other things, cause operational disruption;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
The increase in intangible assets in 2010 primarily relates to the acquisition of Vanbreda International.
Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments. In addition, in 2009, certain fixed income funds priced using their net asset values are classified in Level 3 due to restrictions on their withdrawal.
The Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. This review is performed by the Company’s investment professionals and includes an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimates the current year and future stabilized property income and fair value, and categorizes the investments as loans in good standing, potential problem loans or problem loans. Quality ratings are adjusted between annual reviews if new property information is received or events such as delinquency or a borrower request for restructure cause management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.
Derivatives are reported on the balance sheet at fair value with changes in fair values reported in shareholders’ net income or accumulated other comprehensive income.
Unrecognized tax benefits decreased during 2010 primarily due to the resolution of the disputed federal income tax matter for tax years 2005 and 2006 previously described as contributing to the decline in the valuation allowance.
At the end of 2010, 61 employees held approximately 430,000 strategic performance shares and $11 million of related compensation expense expected to be recognized over the next two years. For strategic performance shares subject to a performance condition, the amount of expense may vary based on actual performance in 2011 and 2012.
The Company’s operating segments generally reflect groups of related products, except for the International segment which is generally based on geography. In accordance with GAAP, operating segments that do not require separate disclosure were combined in “Other Operations”. The Company measures the financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations before after-tax realized investment results.
all annuitants elected to receive their benefit on the next available date (2011 through 2017); and
The Company had indemnification obligations to lenders of up to $168 million as of December 31, 2010 related to borrowings by certain real estate joint ventures which the Company either records as an investment or consolidates. These borrowings, which are nonrecourse to the Company and are secured by the joint ventures’ real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in 2011 through 2017. The Company’s indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of December 31, 2010.
As of December 31, 2010, the Company guaranteed that it would compensate the lessors for a shortfall of up to $44 million in the market value of certain leased equipment at the end of each lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had recorded additional liabilities for these guarantees of $11 million as of December 31, 2010.