Aetna 2011 Annual Report Download - page 29

Annual Report- Page 23
recoveries primarily related to our Group Insurance segment. 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 premium deficiency reserves
for our Health Care or Group Insurance business at December 31, 2011 or 2010.
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 resulting in a reduction to 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 2011, 2010 or 2009. 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 net income.
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, except for
the valuation of business acquired which amortizes in proportion to estimated premiums over the expected life of
the acquired contracts, 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. There were no impairment losses
recognized in any of the three years ended December 31, 2011.
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension (“pension”) and OPEB plans for our employees and retirees. Effective
December 31, 2010, our employees will no longer earn future pension service credits in the Aetna Pension Plan,
although the Aetna Pension Plan will continue to operate and account balances will continue to earn annual interest
credits.
Major assumptions used in the accounting for our defined benefit 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, for each year presented). 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 90.
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 consisted 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 an average rating of
AA based on ratings from Standard and Poor's and Fitch Ratings, and the equivalent ratings from Moody's Investors
Service). 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 benefit income. In 2011, we decreased our weighted
average discount rate to 4.98% and 4.78% for our pension and OPEB plans, respectively, from 5.50% and 5.20%,
respectively, at the previous measurement date in 2010. A one-percentage point decrease in the assumed discount
rate would decrease our annual pension costs by approximately $2 million after-tax and would have a negligible
effect on our annual OPEB costs.