Aetna 2012 Annual Report Download - page 28

Annual Report- Page 22
We maintain capital levels in our operating subsidiaries at or above targeted and/or required capital levels and
dividend amounts in excess of these levels to meet our liquidity requirements, including the payment of interest on
debt and shareholder dividends. In addition, at our discretion, we use these funds for other purposes such as
funding share and debt repurchase programs, investments in new businesses and other purposes we consider
advisable.
At December 31, 2012, we held investments of approximately $929.2 million related to the conversion of an
existing group annuity contract from a participating to a non-participating contract, which are included in our total
investments of the 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 of Notes to Consolidated Financial
Statements beginning on page 82 and 128 for additional information.
Off-Balance Sheet Arrangements
We do not have any guarantees or other off-balance sheet arrangements that we believe, based on historical
experience and current business plans, are reasonably likely to have a material impact on our current or future
operating results, financial condition or cash flows. Refer to Notes 8 and 18 of Notes to Consolidated Financial
Statements beginning on page 95 and 124, respectively, for additional detail of our variable interest entities and
guarantee arrangements, respectively, at December 31, 2012.
Solvency Regulation
The National Association of Insurance Commissioners (the “NAIC”) utilizes risk-based capital (“RBC”) standards
for insurance companies that are designed to identify weakly-capitalized companies by comparing each company's
adjusted surplus to its required surplus (the “RBC Ratio”). The RBC Ratio is designed to reflect the risk profile of
insurance companies. Within certain ratio ranges, regulators have increasing authority to take action as the RBC
Ratio decreases. There are four levels of regulatory action, ranging from requiring an insurer to submit a
comprehensive financial plan for increasing its RBC to the state insurance commissioner to requiring the state
insurance commissioner to place the insurer under regulatory control. At December 31, 2012, the RBC Ratio of
each of our primary insurance subsidiaries was above the level that would require regulatory action. The RBC
framework described above for insurers has been extended by the NAIC to health organizations, including HMOs.
Although not all states had adopted these rules at December 31, 2012, at that date, each of our active HMOs had a
surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would
require regulatory action under the NAIC's RBC rules. External rating agencies use their own RBC standards when
they determine a company's rating.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance with GAAP. The application of GAAP requires
management to make estimates and assumptions that affect our consolidated financial statements and related notes.
The accounting estimates described below are those we consider critical in preparing our consolidated financial
statements. We use information available to us at the time the estimates are made; however, as described below,
these estimates could change materially if different information or assumptions were used. Also, these estimates
may not ultimately reflect the actual amounts of the final transactions that occur.
Health Care Costs Payable
Approximately 90% of health care costs payable are estimates of the ultimate cost of claims that have been incurred
but not yet reported to us and of those which have been reported to us but not yet paid (collectively “IBNR”) at both
December 31, 2012 and 2011. The remainder of health care costs payable is primarily comprised of pharmacy and
capitation payables and accruals for state assessments. We develop our estimate of IBNR using actuarial principles
and assumptions that consider numerous factors. Of those factors, we consider the analysis of historical and
projected claim payment patterns (including claims submission and processing patterns) and the assumed health
care cost trend rate to be the most critical assumptions. In developing our estimate of IBNR, we consistently apply
these actuarial principles and assumptions each period, with consideration to the variability of related factors.