Aetna 2009 Annual Report Download - page 88

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20. Discontinued Products
Prior to 1993, we sold single-premium annuities (“SPAs”) and guaranteed investment contracts (“GICs”), primarily to
employer sponsored pension plans. In 1993, we discontinued selling these products, and now we refer to these
products as discontinued products.
We discontinued selling these products because they were generating losses for us, and we projected that they would
continue to generate losses over their life (which is greater than 30 years); so we established a reserve for anticipated
future losses at the time of discontinuance. This reserve represents the present value (at the risk-free rate of return at
the time of discontinuance, consistent with the duration of the liabilities) of the difference between the expected cash
flows from the assets supporting these products and the cash flows expected to be required to meet the obligations of
the outstanding contracts. Because we projected anticipated cash shortfalls in our discontinued products, at the time
of discontinuance we established a receivable from Large Case Pensions’ continuing products (which is eliminated in
consolidation).
Key assumptions in setting this reserve include future investment results, payments to retirees, mortality and
retirement rates and the cost of asset management and customer service. In 1997, we began the use of a bond default
assumption to reflect historical default experience. In 1995, we modified the mortality tables used in order to reflect a
more up-to-date 1994 Uninsured Pensioner’ s Mortality table. Other than these changes, since 1993 there have been
no significant changes to the assumptions underlying the reserve.
We review the adequacy of this reserve quarterly based on actual experience. As long as our expectation of future
losses remains consistent with prior projections, the results of the discontinued products are applied to the reserve and
do not affect net income. However, if actual or expected future losses are greater than we currently estimate, we may
have to increase the reserve, which could adversely impact net income. If actual or expected future losses are less
than we currently estimate, we may have to decrease the reserve, which could favorably impact net income. The
reserve for anticipated future losses is included in future policy benefits on our balance sheet.
As a result of this review, the reserve at December 31, 2009 reflects management’ s best estimate of anticipated future
losses. In the years ended December 31, 2008 and 2007, $44 million ($29 million after tax) and $64 million ($42
million after tax) of the reserve, respectively, was released due to favorable mortality and retirement experience
compared to assumptions we previously made in estimating the reserve. The 2007 reserve reduction was also due to
favorable investment performance.
The activity in the reserve for anticipated future losses on discontinued products in 2009, 2008 and 2007 was as follows
(pretax):
(Millions) 2009 2008 2007
Reserve, beginning of period 790.4$ 1,052.3$ 1,061.1$
Operating (loss) income (34.8) (93.4) 28.5
Cumulative effect of new accounting standard as of April 1, 2009
(1)
42.1 - -
Net realized capital (losses) gains (8.5) (124.7) 27.0
Reserve reduction - (43.8) (64.3)
Reserve, end of period 789.2$ 790.4$ 1,052.3$
(1) The adoption of new accounting guidance for other-than-temporary impairments of debt securities resulted in a cumulative effect
adjustment at April 1, 2009. Refer to Note 2 beginning on page 48 for additional information. This amount is not reflected in
accumulated other comprehensive loss and retained earnings in our shareholders’ equity since the results of discontinued
products do not impact our results of operations.
During the year ended December 31, 2009, our discontinued products reflected an operating loss and net realized
capital losses, both attributable to the unfavorable investment conditions that existed from the latter half of 2008
through the second quarter of 2009. We have evaluated the operating losses and net realized capital losses in 2009
against our expectations of future cash flows assumed in estimating the reserve and do not believe an adjustment to the
reserve is required at December 31, 2009.
Annual Report – Page 82