Aetna 2008 Annual Report Download - page 26

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recovery rates are lower (higher) than our estimates or the actual mortality rates are higher (lower) than our estimates,
our reserves will be lower (higher) than required to cover future life benefit payments. We use standard industry
tables and our historical claim experience to develop our estimated recovery and mortality rates. Claim reserves for
our disability and life claims are sensitive to these assumptions. Our historical experience has been that our recovery
or mortality rates for our life and disability reserves vary by less than one percent during the course of a year. A one
percent less (more) favorable assumption for our recovery or mortality rates would have increased (decreased)
current and future life and disability benefit costs by approximately $6 million pretax for 2008. When establishing
our reserves at December 31, 2008, we have adjusted our estimates of these rates based on recent experience.
We estimate our reserve for claims incurred but not yet reported to us for life products largely based on completion
factors. The completion factors we use are based on our historical experience and reflect judgments and possible
adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and
other factors. If claims are submitted or processed on a faster (slower) pace than historical periods, the actual claims
may be more (less) complete than originally estimated using our completion factors, which may result in reserves
that are higher (lower) than required to cover future life benefit payments. At December 31, 2008, we held
approximately $192 million in reserves for life claims incurred but not yet reported to us.
Long-term Care
We establish a reserve for future policy benefits for our long-term care products at the time each policy is issued
based on the present value of estimated future benefit payments less the present value of estimated future premiums.
In establishing this reserve, we must evaluate assumptions about mortality, morbidity, lapse rates and the rate at
which new claims are submitted to us. We estimate the future policy benefits reserve for long-term care products
using these assumptions and actuarial principles. For long-duration insurance contracts, we use our original
assumptions throughout the life of the policy and do not subsequently modify them unless we deem the reserves to
be inadequate. A portion of our reserves for long-term care products also reflect our estimates relating to future
payments to members currently receiving benefits. These reserves are estimated primarily using recovery and
mortality rates, as described above.
Premium Deficiency Reserves
We recognize a premium deficiency loss when it is probable that expected future policy benefit costs will exceed our
existing reserves plus anticipated future premiums and reinsurance recoveries. Anticipated investment income is
considered in the calculation of expected losses for certain contracts. Any such reserves established would normally
cover expected losses until the next policy renewal dates for the related policies. We did not have any material
premium deficiency reserves for our Group Insurance business at December 31, 2008 or 2007.
Large Case Pensions Discontinued Products Reserve
We discontinued certain Large Case Pensions products in 1993 and established a reserve to cover losses expected
during the run-off period. Since 1993, we have made several adjustments to reduce this reserve that have increased
our net income. These adjustments occurred primarily because our investment experience as well as our mortality
and retirement experience have been better than the experience we projected at the time we discontinued the
products. In 2008, 2007 and 2006, $44 million, $64 million and $115 million, respectively, of reserves were
released for these reasons. There can be no assurance that adjustments to the discontinued products reserve will
occur in the future or that they will increase net income. Future adjustments could negatively impact our operating
results.
Recoverability of Goodwill and Other Acquired Intangible Assets
We have made acquisitions that included a significant amount of goodwill and other intangible assets. Goodwill is
subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value.
Other intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject
to a periodic impairment test. For these impairment evaluations, we use an implied fair value approach, which uses a
discounted cash flow analysis and other valuation methodologies. These impairment evaluations use many
assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to
future earnings. If we do not achieve our earnings objectives, the assumptions and estimates underlying these
impairment evaluations could be adversely affected, which could result in an asset impairment charge that would
negatively impact our operating results.