Aetna 2012 Annual Report Download

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2012
Aetna Annual Report,
Financial Report to Shareholders

Table of contents

  • Page 1
    2012 Aetna Annual Report, Financial Report to Shareholders

  • Page 2

  • Page 3

  • Page 4
    ... to their health care information. Using only a smartphone, our members can check medical symptoms, find a doctor, get a cost estimate, make an appointment, pay a bill and check their health savings account balance. In the doctor's office, Aetna patients can update their medical history by...

  • Page 5
    ... communities in 2012. Our mission is to empower people to live healthier lives, and our employees live this mission every day. Thank you for demonstrating your trust in us. I am confident that our strategy, solutions and technology will create greater value for health care consumers and help...

  • Page 6

  • Page 7
    ... on our business, cash flows, financial condition and/or operating results. Selected Financial Data - We provide selected annual financial data for the most recent five years. Consolidated Financial Statements - We include our consolidated balance sheets at December 31, 2012 and 2011 and the related...

  • Page 8
    ... and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans and medical management capabilities, Medicaid health care management services and health information technology services. Our customers...

  • Page 9
    ... debt. Coventry is a diversified managed health care company that offers a full portfolio of risk and fee-based products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans, group and individual health insurance, coverage for specialty services such as workers...

  • Page 10
    ... Accountable Care Solutions ("ACS") offerings. Our ACS solutions are focused on growing membership in our medical products through provider collaborations that are designed to lower costs. Prodigy Health Group In June 2011, we acquired Prodigy, a third-party administrator of self-funded health care...

  • Page 11
    ..., will take on additional business responsibilities and lead Aetna's Local and Regional Businesses, a new organization within Aetna. Frank G. McCauley, Executive Vice President, Commercial Businesses, will retire from Aetna during 2013. • • • Voluntary Early Retirement Program In July 2011...

  • Page 12
    ... time due to occur in 2014, including health insurance exchanges (also known as health insurance marketplaces) ("Insurance Exchanges"), Medicare minimum medical loss ratios ("MLRs"), the individual coverage mandate, guaranteed issue, rating limits in the individual and small group markets, and new...

  • Page 13
    ...®, consumer-directed health plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account (which may be funded by the plan sponsor and/or the member in the case of HSAs). We also offer Medicare and Medicaid products and services...

  • Page 14
    ...) Premiums: Commercial Medicare Medicaid Total premiums Fees and other revenue Net investment income Net realized capital gains Total revenue Health care costs Operating expenses: Selling expenses General and administrative expenses Total operating expenses Amortization of other acquired intangible...

  • Page 15
    ... of prior-years' health care cost estimates. Refer to our discussion of Commercial results below for additional information. We calculate our medical benefit ratio ("MBR") by dividing health care costs by premiums. Our MBRs by product for the last three years were: 2012 Commercial Medicare Medicaid...

  • Page 16
    ... Missouri. These increases more than offset the decline in premium from other membership losses. During 2011, our Medicaid premiums were $358 million higher than 2010 as we added approximately 73 thousand medical members. Other Sources of Revenue Health Care fees and other revenue for 2012 increased...

  • Page 17
    ... sales in the Commercial ASC business. Total pharmacy benefit management services membership decreased at December 31, 2012 compared to December 31, 2011 primarily due to a decrease in Commercial enrollment which was partially offset by growth in our Medicaid and Medicare businesses. GROUP INSURANCE...

  • Page 18
    ... for 2011, and 92.0% for 2010. LARGE CASE PENSIONS Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services...

  • Page 19
    ...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 to Large Case Pensions customers, and now we refer to these products as discontinued products...

  • Page 20
    ...-experience-rated products. These investments are legally segregated and are not subject to claims that arise out of our business and only support Aetna's future policy benefit obligations under that group annuity contract. Refer to Note 2 of Notes to Consolidated Financial Statements beginning on...

  • Page 21
    ... 31, 2012, 2011 and 2010, respectively, of experience-rated pension contracts supported by our general account assets could be withdrawn or transferred to other plan investment options at the direction of plan participants, without market value adjustment, subject to plan, contractual and income tax...

  • Page 22
    ... liabilities where appropriate. We manage credit risk by seeking to maintain high average quality ratings and diversified sector exposure within our debt securities portfolio. In connection with our investment and risk management objectives, we also use derivative financial instruments whose market...

  • Page 23
    ... of highly marketable debt securities and mortgage loans, and execute purchases and sales of these investments with the objective of having adequate funds available to satisfy our maturing liabilities. Overall cash flows are used primarily for claim and benefit payments, contract withdrawals...

  • Page 24
    ... $2.7 billion of cash provided by our November 2012 long-term debt financing for the proposed acquisition of Coventry as well as our May 2012 long-term debt financing, partially offset by share repurchases, net repayments of long-term and short-term debt and dividend payments. Refer to Note 14...

  • Page 25
    ... at the close of business on April 11, 2013. Prior to February 2011, our policy had been to pay an annual dividend of $.04 per share. During 2012 and 2011 our Board declared the following cash dividends: Dividend Amount Date Declared February 3, 2011 May 20, 2011 September 23, 2011 December 2, 2011...

  • Page 26
    ... outstanding during 2012 was $721 million. We expect to issue approximately $500 million of commercial paper in 2013 to finance a portion of the cash purchase price for the proposed Coventry acquisition. Our debt to capital ratio (calculated as the sum of all short- and long-term debt outstanding...

  • Page 27
    ... of Coventry. The table below does not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable at December 31, 2012 (for example, the timing and volume of future services provided under fee-for-service arrangements...

  • Page 28
    ...-rated products. These investments are legally segregated and are not subject to claims that arise out of our business and only support Aetna's future policy benefit obligations under that group annuity contract. Refer to Notes 2 and 19 of Notes to Consolidated Financial Statements beginning...

  • Page 29
    ...-to-consumer marketing by pharmaceutical companies, clusters of high-cost cases, claim intensity, changes in the regulatory environment, health care provider or member fraud and numerous other factors also contribute to the cost of health care and our health care cost trend rate. For each reporting...

  • Page 30
    ... insurance liabilities other than health care costs payable for benefit claims primarily related to our Group Insurance segment. We refer to these liabilities as other insurance liabilities. These liabilities primarily relate to our life, disability and long-term care products. Annual Report...

  • Page 31
    ... rates selected for both our life and disability reserves would have increased current and future life and disability benefit costs by approximately $38 million pretax for 2012. For disability claims and a portion of our life claims, we must estimate the timing of benefit payments, which takes...

  • Page 32
    ... 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, 2012 or 2011. Large Case Pensions Discontinued Products Reserve We discontinued certain Large Case...

  • Page 33
    ..., in each of 2012 and 2011, we made $60 million in voluntary cash contributions to the Aetna Pension Plan. Our non-qualified supplemental pension plan and OPEB plans do not have minimum funding requirements. Refer to Note 11 of Notes to Consolidated Financial Statements beginning on page 107 for...

  • Page 34
    ...derived from premiums and fees billed to customers in the Health Care and Group Insurance businesses. In Health Care, revenue is recognized based on customer billings, which reflect contracted rates per employee and the number of covered employees recorded in our records at the time the billings are...

  • Page 35
    ... in 2014, including health insurance exchanges (also known as health insurance marketplaces) ("Insurance Exchanges"), Medicare minimum medical loss ratios ("MLRs"), the individual coverage mandate, guaranteed issue, rating limits in the individual and small group markets, and new Annual Report- Page...

  • Page 36
    ..., but the effect could be materially adverse. The expansion of health care coverage contemplated by Health Care Reform will be funded in part by significant fees, assessments and taxes on us and other health insurers, health plans and other market participants and individuals beginning in 2014, as...

  • Page 37
    ... in 2013. Our effective income tax rate will increase significantly in 2014 as a result of the non-deductibility of the health insurer fee. Multiple insurance reforms beginning in 2014, including rating limits and minimum benefit requirements, guaranteed issue and renewability of coverage in...

  • Page 38
    ... increases in our premium rates in our individual and small group Health Care businesses for 2014 and beyond in order to adequately price for projected medical cost trends, the expanded coverages and rating limits required by Health Care Reform and the significant assessments, fees and taxes...

  • Page 39
    ... Insurance and other claims, including timeliness and accuracy of payment; Member rights and responsibilities; Sales and marketing activities; Quality assurance procedures; Collection, access, use and/or disclosure of medical and other information; In-network and out-of-network health care provider...

  • Page 40
    ... increases in our premium rates in our individual and small group Health Care businesses for 2014 and beyond in order to adequately price for projected medical cost trends, the expanded coverages and rating limits required by Health Care Reform and the significant assessments, fees and taxes...

  • Page 41
    ... periods in connection with product and market withdrawals. The law further limits exclusions based on pre-existing conditions for individuals covered under group policies to the extent the individuals had prior creditable coverage within a specified time frame. Like Health Care Reform, HIPAA is...

  • Page 42
    ...identify unreported deceased policyholders and make other changes to their claim payment and related escheat practices. For additional information on these life insurance matters, refer to "Life and Disability Insurance" beginning on page 46. • Other legislative and/ or regulatory measures which...

  • Page 43
    ... designs and funding options, including consumer driven health plans and/or health savings accounts. Restricting the ability of health plans to establish member financial responsibility. Further regulating individual insurance coverage by restricting or mandating premium rate levels, restricting our...

  • Page 44
    ... could increase our liability exposure and could result in greater state regulation of our operations. The Employee Retirement Income Security Act of 1974 The provision of services to certain employee benefit plans, including certain Health Care, Group Insurance and Large Case Pensions benefit plans...

  • Page 45
    ... Coventry acquisition and are seeking to substantially grow our Medicare business over the next several years. The expansion of the Medicare markets we serve and Medicare products we offer and the Medicare-related provisions of Health Care Reform increase our exposure to changes in government policy...

  • Page 46
    ... to allocate and adjust premium payments to our and other companies' Medicare plans by considering the applicable health status of Medicare members as supported by information maintained and provided by health care providers. We collect claim and encounter data from providers and generally rely on...

  • Page 47
    ..., in order to receive the enhanced federal Medicaid funding provided in Health Care Reform, states must expand their Medicaid programs effective January 1, 2014, to cover the full Medicaid expansion population specified by Health Care Reform. Health Care Reform also includes a "maintenance of effort...

  • Page 48
    ... requirements for health and other insurance companies and HMOs based on the RBC Model Act. These RBC requirements are intended to assess the capital adequacy of life and health insurers and HMOs, taking into account the risk characteristics of a company's investments and products. The RBC Model Act...

  • Page 49
    ...of our risk adjustment payments under certain of our Medicare Advantage contracts. For additional information on these Medicare matters, refer to "Medicare" beginning on page 39. New York is one of over 35 states that are investigating life insurers' claims payment and related escheat practices, and...

  • Page 50
    ... of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a health care provider, improper marketing, and violations of patient privacy rights. Companies involved in public health care programs such as Medicare, Medicaid and...

  • Page 51
    ... order pharmacy is located in Missouri, and the specialty pharmacy and our second mail order pharmacy are located in Florida. Our Pharmacies dispense pharmaceuticals throughout the U.S. and are participating providers in Medicare, Medicare Part D and various Medicaid programs. The pharmacy practice...

  • Page 52
    ...requests for information from a number of states, including New York, and certain of our subsidiaries are being audited, with respect to our life insurance claim payment and related escheat practices. Consumer Protection Laws Certain of our businesses participate in direct-to-consumer activities and...

  • Page 53
    ...&A and elsewhere in the Annual Report and our Annual Report on Form 10-K is forward-looking within the meaning of the 1995 Act or SEC rules. This information includes, but is not limited to: the "Outlook for 2013" on page 6, "Risk Management and Market-Sensitive Instruments" beginning on page 16 and...

  • Page 54
    ...these events or circumstances could have a material adverse effect on our business, cash flows, financial condition or operating results. In that case, the trading price of our common stock could decline materially, among other effects on us. The continuing public policy debate on Health Care Reform...

  • Page 55
    ...; Addressing possible differences in business backgrounds, corporate cultures and management philosophies; Consolidating the companies' corporate, administrative and information technology infrastructure; Coordinating sales, distribution, marketing and provider network management efforts; Managing...

  • Page 56
    ... anticipated benefits of the proposed acquisition. The risk, and adverse effect, of such disruptions could be exacerbated by a delay in completion of the proposed acquisition or termination of the Merger Agreement. Lawsuits have been filed and other lawsuits may be filed against Coventry and Aetna...

  • Page 57
    ... resources will be greater than the amount of cash flows required to service the indebtedness of Aetna or Coventry individually prior to the incurrence of the acquisition-related indebtedness. The increased levels of indebtedness will also reduce funds available for Aetna's investments in product...

  • Page 58
    ... traditional Insured health care and related benefits products in the U.S. may be limited. In order to profitably grow our business in the future, we need to diversify the sources of our revenue and earnings and transform our business model through investments in consumer engagement, technology and...

  • Page 59
    ... acquire and develop new personnel, products and systems to serve existing and new markets and enhance our existing information technology, control and compliance processes and systems to deliver the new products and, in the case of international operations, meet country-specific customer and member...

  • Page 60
    ...of increases in health care and other benefit costs that exceed our projections and of Health Care Reform assessments, fees and taxes. Premium rates generally must be filed with state insurance regulators and are subject to their approval, either before or after rates take effect. Health Care Reform...

  • Page 61
    ... increases in our premium rates in our individual and small group Health Care businesses for 2014 and beyond in order to adequately price for projected medical cost trends, the expanded coverages and rating limits required by Health Care Reform and the significant assessments, fees and taxes...

  • Page 62
    ... 2014, including health insurance exchanges ("Insurance Exchanges"), Medicare minimum MLRs, the individual coverage mandate, guaranteed issue, rating limits in the individual and small group markets, and new industry-wide assessments, fees and taxes. While the federal government has issued a number...

  • Page 63
    ...'s or our own business practices and/or products, including social media activities. This risk will increase further as we raise premium rates by more than we have in recent years to price for the expanded benefits required by, and the fees, assessments and taxes imposed by, Health Care Reform or to...

  • Page 64
    ... taxes and financial assessments; Changing the tax treatment of health or related benefits; and/or Regulating business practices (including by requiring us to include specified high-cost providers in our networks). Our Medicare, Medicaid, dual eligible and specialty and mail order pharmacy products...

  • Page 65
    ... 2013. There continues to be a heightened review by federal and state regulators of the health and related benefits industry's business and reporting practices, including utilization management and payment of providers with whom the payor does not have a contract and other health and life insurance...

  • Page 66
    ... participate, including support services for ACO's, dual eligible programs, HIT (such as Accountable Care Solutions, Medicity and ActiveHealth) and Insured Medicaid. We also significantly expanded our Medicare Supplement, HSA and FSA and low cost claims administration businesses through acquisitions...

  • Page 67
    ... the risks of our core business of providing managed care and health insurance products. The following are some of the PBM and pharmacy related risks that could have a material adverse effect on our business, cash flows, financial condition or operating results: • • • • • Federal and...

  • Page 68
    ... the closing of the proposed Coventry acquisition. With our acquisition of Medicity in January 2011 and our current focus on consumer engagement, ACOs and collaborative provider networks and optimizing our business platforms, we have increased our commitment to HIT products and solutions, a business...

  • Page 69
    ... exchanges and changing customer demands. For example, the federal government has mandated that by October 2014 the health and related benefits industry, including health insurers, providers and laboratories, upgrade to an updated and expanded set of standardized diagnosis and procedure codes...

  • Page 70
    ... revenues for 2012 and 2011, respectively. While we generally have increased our premium rates for Insured business under contract in 2013, our health care premiums are priced in advance and generally fixed for one-year periods. Accordingly, cost increases in excess of health care or other benefit...

  • Page 71
    ... criteria, product design, negotiation of favorable provider contracts and medical management programs. Government-imposed limitations on Medicare and Medicaid reimbursement also have caused the private sector to bear a greater share of increasing health care and other benefits costs over time. The...

  • Page 72
    ... or payments to us in Medicare, Medicaid, dual eligible, SCHIP and/or other federal and state government health care coverage programs. • Causing unanticipated increases and volatility in utilization of medical and/or other covered services by our members and/or increases in medical unit...

  • Page 73
    .... For the government-funded health program business we obtain, such as Medicare, Medicaid and dual eligible business and our government customers in our Commercial business, our revenues are dependent on annual funding by the federal government and/or applicable state or local governments, and both...

  • Page 74
    ... with CMS and to assess the quality of services we provide to our Medicare members. CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage plans according to their members' health severity as supported by data provided by health care providers. As required under CMS...

  • Page 75
    ... risks or threats in the future. As we expand our HIT business, including through our acquisition and growth of ACS, Medicity, and Active Health, increase the amount of information we make available to members and consumers on mobile devices, expand our use of social media and expand internationally...

  • Page 76
    ... is dependent upon providing quality customer service operations (such as call center operations, claim processing, outsourced PBM functions, mail order pharmacy prescription delivery, specialty pharmacy prescription delivery, customer case installation and on-line access and tools) that meet or...

  • Page 77
    ...This risk is heightened as our business model evolves to a more consumer-centric focus, such as competing for sales on Insurance Exchanges. In addition, there have been a number of investigations regarding the marketing practices of brokers and agents selling health care and other insurance products...

  • Page 78
    ... business, cash flows, and operating results, and, in the event of extreme circumstances, our financial condition or viability. Other than obtaining insurance coverage for our facilities and limited reinsurance of our Health Care and/or Group Insurance liabilities, there are few, if any, commercial...

  • Page 79
    ... heightened in our Medicare, Medicaid and dual eligible programs, where we could have liability for or suffer penalties due to the noncompliance of such third parties. For more information on these matters, see "Our business activities are highly regulated; Health Care Reform as well as new laws or...

  • Page 80
    ... our policy liabilities and surplus and is comprised largely of debt securities of issuers located in the U.S. As a result, the income we earn from our investment portfolio is largely driven by the level of interest rates in the U.S., and to a lesser extent the international financial markets; and...

  • Page 81
    Certain Risks relating to Coventry. Following completion of the proposed acquisition, Aetna will be subject to the risks described in (i) Part I, Item 1A in Coventry's Annual Report on Form 10-K for the year ended December 31, 2011 and filed with the SEC on February 28, 2012, (ii) Part II, Item 1A ...

  • Page 82
    Selected Financial Data (Millions, except per common share data) Revenue Net income Net realized capital gains (losses), net of tax Total assets Short-term debt Long-term debt Shareholders' equity Per common share data: Cumulative annual dividends declared Net income: Basic Diluted (1) $ 2012 36,...

  • Page 83
    .... Health care costs have been reduced by Insured member co-payments related to our mail order and specialty pharmacy operations of $127 million, $130 million and $148 million for 2012, 2011 and 2010 respectively. Refer to accompanying Notes to Consolidated Financial Statements. Annual Report...

  • Page 84
    ...827.2 Represents unrealized losses on the non-credit related component of impaired debt securities that we do not intend to sell and subsequent changes in the fair value of any previously impaired debt security. Refer to accompanying Notes to Consolidated Financial Statements. Annual Report- Page...

  • Page 85
    ... Other acquired intangible assets, net Property and equipment, net Other long-term assets Separate Accounts assets Total assets Liabilities and shareholders' equity: Current liabilities: Health care costs payable Future policy benefits Unpaid claims Unearned premiums Policyholders' funds Collateral...

  • Page 86
    ... for benefit plans, including tax benefits Repurchases of common shares Dividends declared Balance at December 31, 2011 Net income Other comprehensive income Common shares issued for benefit plans, including tax benefits Repurchases of common shares Dividends declared Balance at December 31, 2012...

  • Page 87
    ...contracts Withdrawals of investment contracts Common shares issued under benefit plans Stock-based compensation tax benefits Common shares repurchased Dividends paid to shareholders Collateral on interest rate swaps Net cash provided by (used for) financing activities Net increase (decrease) in cash...

  • Page 88
    ... new long-term care customers. Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. Large Case Pensions...

  • Page 89
    ... rather than sales, the adoption of this accounting guidance did not have an impact on our financial position or operating results. Deferred Acquisition Costs Effective January 1, 2012, we prospectively adopted new guidance for costs associated with acquiring or renewing insurance contracts. This...

  • Page 90
    ... consolidated financial statements: health care costs payable, other insurance liabilities, recoverability of goodwill and other acquired intangible assets, measurement of defined benefit pension and other postretirement benefit plans, otherthan-temporary impairment of debt securities and revenue...

  • Page 91
    ... on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) are reflected in our operating results. Experience-rated products are products in the Large Case Pensions business where the contract holder...

  • Page 92
    ... and equity securities and alternative investments on the trade date. We reflect purchases and sales of mortgage loans and investment real estate on the closing date. Realized capital gains and losses on investments supporting Large Case Pensions' experience-rated and discontinued products are not...

  • Page 93
    ... fee-for-service medical, dental and pharmacy claims, capitation costs and other amounts due to health care providers pursuant to risk-sharing arrangements related to Health Care's POS, PPO, HMO, Indemnity, Medicare and Medicaid products. Unpaid health care claims include our estimate of payments...

  • Page 94
    ... date. Future policy benefits Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in the Large Case Pensions business and long-duration group life and long-term care insurance contracts in the Group Insurance business. Reserves for limited payment...

  • Page 95
    ... of acquiring, servicing and measuring the profitability of such contracts. We did not have any premium deficiency reserves at December 31, 2012 or 2011. Health Care Contract Acquisition Costs Health care benefits products included in the Health Care segment are cancelable by either the customer or...

  • Page 96
    ... debt. Coventry is a diversified managed health care company that offers a full portfolio of risk and feebased products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans, group and individual health insurance, coverage for specialty services such as workers...

  • Page 97
    ... of these acquisitions was funded using available resources. Refer to Note 7 on page 93 for additional information. • Medicity Inc. In January 2011, we acquired Medicity, a health information exchange company, for approximately $490 million, net of cash acquired. We recorded goodwill related to...

  • Page 98
    ...average market price of Aetna common shares during the period (i.e., the awards are anti-dilutive). Approximately 8.3 million, 12.4 million and 18.6 million stock appreciation rights ("SARs") were not included in the calculation of diluted EPS for 2012, 2011 and 2010, respectively. The stock options...

  • Page 99
    ... significant acquisitions during 2011. In accordance with applicable accounting guidance, we allocated the amount paid to the fair value of the net assets acquired, with any excess amounts recorded as goodwill. The increase in goodwill in 2012 and 2011 is as follows: (Millions) Balance, beginning of...

  • Page 100
    ... over the expected life of the acquired contracts in proportion to estimated premium. We estimate annual pretax amortization for other acquired intangible assets over the next five years to be as follows: (Millions) 2013 2014 2015 2016 2017 $ 129.4 107.4 91.4 84.4 75.1 Annual Report- Page 94

  • Page 101
    ... Large Case Pensions segment supporting non-experience-rated products. These investments are legally segregated and are not subject to claims that arise out of our business and only support Aetna's future policy benefit obligations under that group annuity contract. Refer to Notes 2 and 19 beginning...

  • Page 102
    ..., 2012 and 2011 of $9.6 million and $7.4 million, respectively. Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results (refer to Note 20 beginning on page 131 for additional information on our accounting for discontinued products...

  • Page 103
    ... Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At December 31, 2012, our residential mortgage-backed securities had an average quality rating of AAA and a weighted average duration of 2.2 years. Our commercial mortgage...

  • Page 104
    ... of time the investments have been in that position: Less than 12 months (Millions) December 31, 2012 Debt securities: U.S. government securities States, municipalities and political subdivisions U.S. corporate securities Foreign securities Residential mortgage-backed securities Commercial mortgage...

  • Page 105
    ... Total Fair Value Unrealized Losses Net realized capital gains for the three years ended December 31, 2012, 2011 and 2010, excluding amounts related to experience-rated contract holders and discontinued products, were as follows: (Millions) OTTI losses on debt securities Portion of OTTI losses on...

  • Page 106
    ...earnings. Our maximum exposure to loss as a result of our investment in these partnerships is our investment balance at December 31, 2012 and 2011 of approximately $215 million and $175 million, respectively, and the risk of recapture of tax credits related to the real estate partnerships previously...

  • Page 107
    ..., respectively, primarily related to third party interests in our investment holdings. The non-controlling entities' share of these interests was included in accrued expenses and other current liabilities. Net income attributable to these interests was $2 million for 2012 and 2011 and $4 million...

  • Page 108
    ... market information or by using a matrix pricing model. These financial assets and liabilities would then be classified as Level 2. If quoted market prices are not available, we determine fair value using broker quotes or an internal analysis of each investment's financial performance and cash...

  • Page 109
    ..., there is no active market; therefore, we classify these securities as Level 3 because we price these securities through an internal analysis of each investment's financial statements and cash flow projections. Significant unobservable inputs consist of earnings and revenue multiples, discount for...

  • Page 110
    ...our balance sheets at December 31, 2012 and 2011 were as follows: (Millions) December 31, 2012 Assets: Debt securities: U.S. government securities States, municipalities and political subdivisions U.S. corporate securities Foreign securities Residential mortgage-backed securities Commercial mortgage...

  • Page 111
    ...investments supporting our experience-rated and discontinued products, which do not impact our operating results. The change in the balance of Level 3 financial assets during 2011 was as follows: Commercial Mortgagebacked Securities $ 36.9 3.4 1.9 - - - (12.7) - $ $ 29.5 - $ $ (Millions) Beginning...

  • Page 112
    ... the right under such contracts to delay payment of withdrawals that may ultimately result in paying an amount different than that determined to be payable on demand. Long-term debt: Fair values are based on quoted market prices for the same or similar issued debt or, if no quoted market prices are...

  • Page 113
    ...two pension plans, and OPEB plans that provide certain health care and life insurance benefits for retired employees, including those of our former parent company. On August 31, 2010, we announced that pension eligible employees will no longer earn future pension service credits in our tax-qualified...

  • Page 114
    ... a non-qualified supplemental pension plan that, prior to January 1, 2007, had been used to provide benefits for wages above the Internal Revenue Code wage limits applicable to tax qualified pension plans (such as the Aetna Pension Plan). Effective January 1, 2007, no new benefits accrue under the...

  • Page 115
    The funded status of our pension and OPEB plans at the measurement date for 2012 and 2011 were as follows: (Millions) Benefit obligation Fair value of plan assets Funded status Pension Plans 2012 2011 (6,665.8) $ (6,130.3) 5,805.0 5,296.8 (860.8) $ (833.5) OPEB Plans 2012 2011 (292.4) $ (312.7) 62.1...

  • Page 116
    ... 7.50 N/A Pension Plans 2011 5.50% 7.50 N/A 2010 5.67% 8.00 4.51 2012 4.78% 4.25 - OPEB Plans 2011 5.20% 5.50 - 2010 5.64% 5.50 - Discount rate Expected long-term return on plan assets Rate of increase in future compensation levels We assume different health care cost trend rates for medical costs...

  • Page 117
    ...the Company in 2013. Expected benefit payments, which reflect future employee service, as appropriate, of the pension and OPEB plans to be paid for each of the next five years and in the aggregate for the next five years thereafter at December 31, 2012 were as follows: (Millions) 2013 2014 2015 2016...

  • Page 118
    ... securities Total debt securities Equity securities and common/collective trusts: U.S. Domestic International Common/collective trusts Domestic real estate Total equity securities and common/collective trusts Other investments: Real estate Other assets Total pension investments (1) (1) Level...

  • Page 119
    ... Pension Assets during 2011 were as follows: 2011 Beginning balance Actual return on plan assets Purchases, sales and settlements Transfers out of Level 3 Ending balance $ Real Estate 395.3 $ 49.4 (11.5) - 433.2 $ Other 204.3 $ 14.9 13.9 (.7) 232.4 $ Total 599.6 64.3 2.4 (.7) 665.6 $ Annual Report...

  • Page 120
    ...follows: (Millions) Equity securities Debt securities Real estate/other Target 2012 Allocation 10% 5-15% 85% 80-90% 5% 0-10% Target 2011 Allocation 9% 5-15% 87% 80-90% 4% 0-10% The Aetna Pension Plan invests in a diversified mix of assets intended to maximize long-term returns while recognizing the...

  • Page 121
    ... volatility of our stock price and implied volatility from traded options on our stock. The risk-free interest rate for periods within the expected life of the stock option or SAR is based on the benchmark five-year U.S. Treasury rate in effect on the date of grant. The dividend yield assumption is...

  • Page 122
    ... stock option and SAR transactions during 2012, 2011 and 2010 were as follows: Weighted Average Exercise Price $ (1) (Millions, except exercise price and remaining life) 2010 Outstanding, beginning of year Granted Exercised Expired or forfeited Outstanding, end of year Exercisable, end of year 2011...

  • Page 123
    ... risk-free interest rates for periods within the expected life of the MSUs are based on a constant maturity yield curve, a 22 month interpolated and two-year U.S. Treasury rate, each in effect on the date of grant for the the MSUs granted during 2012, 2011 and 2010, respectively. The dividend yield...

  • Page 124
    ...: (Millions) Income before income taxes Tax rate Application of the tax rate Tax effect of: Valuation allowance Other, net Income taxes 2012 $ 2,545.4 $ 35% 890.9 - (3.4) 887.5 2011 3,077.8 $ 35% 1,077.2 - 14.9 1,092.1 2010 2,644.2 35% 925.5 (36.6) (11.5) 877.4 $ $ $ Annual Report- Page 118

  • Page 125
    ..., 2012 and 2011 were as follows: (Millions) Deferred tax assets: Reserve for anticipated future losses on discontinued products Employee and postretirement benefits Investments, net Deferred policy acquisition costs Insurance reserves Net operating losses Severance and facilities Litigation-related...

  • Page 126
    ...The related $4.8 million pretax loss is recorded in accumulated other comprehensive loss, net of tax, and is being amortized as an increase to interest expense over the first 10, 20 and 60 semi-annual interest payments associated with the respective 2012 Coventry-related senior notes. Annual Report...

  • Page 127
    ... with issuing the 2011 senior notes and upon termination of the swaps, paid $8.9 million to the swap counterparty. The related $8.9 million pretax loss is recorded in accumulated other comprehensive loss, net of tax, and is being amortized as an increase to interest expense over the ten-year life of...

  • Page 128
    ...at the close of business on April 11, 2013. Prior to February 2011, our policy had been to pay an annual dividend of $.04 per share. In 2012 and 2011 our Board declared the following cash dividends: Date Declared February 3, 2011 May 20, 2011 September 23, 2011 December 2, 2011 February 24, 2012 May...

  • Page 129
    .... Prior to completion of the proposed Coventry acquisition, Aetna is not permitted to declare, set aside or pay any dividend or other distribution other than a regular cash dividend to shareholders in the ordinary course of business consistent with past practice. During 2012, our insurance and HMO...

  • Page 130
    ... liability for our related guarantees at December 31, 2012. • • 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...

  • Page 131
    ... will be released from claims relating to our out-of-network reimbursement practices from the beginning of the applicable settlement class period through the date the New Jersey District Court preliminarily approves the settlement. The settlement class period for health plan members begins on March...

  • Page 132
    ... and to assess the quality of services we provide to Medicare beneficiaries. CMS uses various payment mechanisms to allocate and adjust premium payments to our and other companies' Medicare plans by considering the applicable health status of Medicare members as supported by information maintained...

  • Page 133
    ... and past business practices, including our overall claims processing and payment practices, our business practices with respect to our small group products, student health products or individual customers (such as market withdrawals, rating information, premium increases and medical benefit ratios...

  • Page 134
    ...$18 million, respectively. 19. Segment Information Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. Our Corporate Financing segment is not a business segment; it is added to our business segments in order to reconcile to our consolidated...

  • Page 135
    ... financial information of our segment operations for 2012, 2011 and 2010 were as follows: (Millions) 2012 Revenue from external customers Net investment income Interest expense Depreciation and amortization expense Income taxes (benefits) Operating earnings (loss) Segment assets 2011 Revenue...

  • Page 136
    ... from our liability insurers related to certain litigation we settled in 2003. Revenues from external customers by product in 2012, 2011 and 2010 were as follows: (Millions) Health care premiums Health care fees and other revenue Group life Group disability Group long-term care Large case pensions...

  • Page 137
    .... 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 to Large Case Pensions customers, and now we refer to these products as...

  • Page 138
    ...: (Millions) 2013 2014 2015 2016 2017 Thereafter $ 52.9 51.7 50.3 48.8 47.2 727.6 Assets and liabilities supporting discontinued products at 2012 and 2011 were as follows: (1) (Millions) Assets: Debt and equity securities available for sale Mortgage loans Other investments Total investments Other...

  • Page 139
    ...Health Plans, Inc. The sale of Missouri Care is related to our proposed acquisition of Coventry. On February 19, 2013, our Board declared a cash dividend of $.20 per common share that will be paid on April 26, 2013, to shareholders of record at the close of business on April 11, 2013. Annual Report...

  • Page 140
    Also on February 19, 2013, our Board approved a new share repurchase program that authorizes us to repurchase up to $750 million of our common stock. Annual Report- Page 134

  • Page 141
    ... with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, management assessed the effectiveness of our ICOFR at December 31, 2012. In making this assessment, management used the...

  • Page 142
    ... Hartford, CT 06103 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Aetna Inc.: We have audited the accompanying consolidated balance sheets of Aetna Inc. and subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated...

  • Page 143
    ...in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company' s assets that could have a material effect on the financial statements. Because...

  • Page 144
    ... common stock data) 2012 Total revenue Income before income taxes Income taxes Net income Net income per share - basic (1) Net income per share - diluted (1) Dividends declared per share Common stock prices, high Common stock prices, low 2011 Total revenue Income before income taxes Income taxes Net...

  • Page 145
    ..., 2007 through December 31, 2012. The graph assumes a $100 investment in shares of our common stock on December 31, 2007. (1) At December 31, 2012, the companies included in the MSHPI were: Aetna Inc., Centene Corporation, CIGNA Corporation, Coventry Health Care, Inc., Health Net, Inc., Humana Inc...

  • Page 146
    ...President National Businesses, Chief Financial Officer and Chief Enterprise Risk Officer * * The Company has announced that Shawn M. Guertin will succeed Mr. Zubretsky as the Company' s Chief Financial Officer and Chief Enterprise Risk Officer effective February 25, 2013. Corporate Secretary Judith...

  • Page 147
    ... of Aetna Inc. ("Aetna" or the "Company") will be held on Friday, May 17, 2013, at the InterContinental Tampa in Tampa, Florida Corporate Headquarters 151 Farmington Avenue Hartford, CT 06156 Phone: 860-273-0123 Stock Exchange Listing Aetna' s common shares are listed on the New York Stock Exchange...

  • Page 148
    ... a website to service registered shareholder accounts. Registered shareholders may contact Computershare to inquire about replacement dividend checks, address changes, stock transfers and other account matters. Computershare Investment Plan ("CIP") Current shareholders and new investors can purchase...

  • Page 149
    ... options, stock appreciation rights, market stock units, restricted stock units, performance stock units) or who own shares acquired through the Employee Stock Purchase Plan ("ESPP") should address all questions to UBS Financial Services, Inc. regarding their accounts, outstanding grants or shares...

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