Aetna 2006 Annual Report Download - page 82

Page 80
In June 2005, we entered into an agreement with the New York State Insurance Department and other carriers
participating in the pool that modified the mechanism by which the amounts due to (or receivable from) the pool
were to be settled. Under this agreement, we were a net receiver of approximately $14 million in cash from the
pool in satisfaction of all our remaining obligations relating to the pool for the years 1999 through 2004.
Accordingly, in 2005 we released the $89 million liability recorded at December 31, 2004, which combined with
the $14 million cash received to result in a $103 million pretax favorable development of prior period health care
costs. This agreement also eliminates any further payment obligation we have for 2005. We were not subject to a
pooling mechanism for 2006. The New York State Insurance Department has promulgated a new pooling
mechanism for years subsequent to 2006, but this new mechanism will not involve potential payments or recoveries
until 2008.
Guarantees
We have the following guarantee arrangements at December 31, 2006.
ASC Claim Funding Accounts - We have arrangements with certain banks for the processing of claim payments for
our ASC customers. The banks maintain accounts to fund claims of our ASC customers. The customer is
responsible for funding the amount paid by the bank each day. In these arrangements, we guarantee that the banks
will not sustain losses if the responsible ASC customer does not properly fund its account. The aggregate maximum
exposure under these arrangements is $250 million. We could limit our exposure to this guarantee by suspending
the payment of claims for ASC customers that have not adequately funded the amount paid by the bank.
Indemnification Agreements - In connection with certain acquisitions and dispositions of assets and/or businesses,
we have incurred certain customary indemnification obligations to the applicable seller or purchaser, respectively.
In general, we have agreed to indemnify the other party for certain losses relating to the assets or business that we
purchased or sold. Certain portions of our indemnification obligations are capped at the applicable purchase price,
while other arrangements are not subject to such a limit. At December 31, 2006, we do not believe that our future
obligations under any of these agreements will be material to us.
Separate Account assets - Certain Separate Account assets associated with the Large Case Pensions business
represent funds maintained as a contractual requirement to fund specific pension annuities that we have guaranteed.
Contractual obligations in these Separate Accounts were $4.6 billion and $3.9 billion at December 31, 2006 and
2005, respectively. Refer to Note 2 beginning on page 48 for additional information on Separate Accounts.
Contract holders assume all investment and mortality risk and are required to maintain Separate Account balances
at or above a specified level. The level of required funds is a function of the risk underlying the Separate Accounts'
investment strategy. If contract holders do not maintain the required level of Separate Account assets to meet the
annuity guarantees, we would establish an additional liability. Contract holders' balances in the Separate Accounts
at December 31, 2006 exceeded the value of the guaranteed benefit obligation. As a result, we were not required to
maintain an additional liability for our related guarantees at December 31, 2006.
Guaranty Fund Assessments, Market Stabilization and Other Non-Voluntary Risk Sharing Pools
Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to
prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants.
Assessments generally are based on a formula relating to our premiums in the state compared to the premiums of
other insurers. Certain states allow recoverability of assessments as offsets to premium taxes. While we have
historically recovered more than half of guaranty fund assessments through statutorily permitted premium tax
offsets, significant increases in assessments could jeopardize future recovery of these assessments. Some states
have similar laws relating to HMOs. HMOs in certain states in which we do business are subject to assessments,
including market stabilization and other risk sharing pools for which we are assessed charges based on incurred
claims, demographic membership mix and other factors. We establish liabilities for these assessments based on
applicable laws and regulations. In certain states, the ultimate assessments we pay are dependent upon our
experience relative to other entities subject to the assessment and the ultimate liability is not known at the balance
sheet date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants,
we believe we have adequate reserves to cover such assessments.