Aetna 2009 Annual Report Download - page 26

Annual Report – Page 20
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, 2009 or 2008.
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.
There was no release of this reserve in 2009. In 2008 and 2007, $44 million and $64 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 positively or negatively impact our
operating earnings.
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.
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension (“pension”) and other postretirement benefit (“OPEB”) plans for our employees
and retirees. Major assumptions used in the accounting for these plans include the expected return on plan assets and
the discount rate. We select our assumptions based on our information and market indicators, and we evaluate our
assumptions at each annual measurement date (December 31). A change in any of our assumptions would have an
effect on our pension and OPEB plan costs. A discussion of our assumptions used to determine the expected return on
plan assets can be found in Note 11 of Notes to Consolidated Financial Statements beginning on page 67.
The discount rates we used in accounting for our pension and OPEB plans were calculated using a yield curve as of
our annual measurement date. The yield curve consists of a series of individual discount rates, with each discount rate
corresponding to a single point in time, based on high-quality bonds (that is, bonds with a rating of Aa or better from
Moody’ s Investors Service or a rating of AA or better from Standard and Poor’ s). We project the benefits expected to
be paid from each plan at each point in the future based on each participant’ s current service (but reflecting expected
future pay increases). These projected benefit payments are then discounted to the measurement date using the
corresponding rate from the yield curve. A lower discount rate increases the present value of benefit obligations and
increases costs. In 2009, we decreased our assumed discount rate to 5.89% and 5.64% for our pension and OPEB
plans, respectively, from 6.89% and 6.92%, respectively, at the previous measurement date in 2008. A one-percentage