Aetna 2012 Annual Report Download - page 33

Annual Report- Page 27
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 2012, we decreased our weighted
average discount rate to 4.17% and 3.94% for our pension and OPEB plans, respectively, from 4.98% and 4.78%,
respectively, at the previous measurement date in 2011. A one-percentage point decrease in the assumed discount
rate would decrease our annual pension costs by approximately $5 million after-tax and would have a negligible
effect on our annual OPEB costs.
At December 31, 2012, our pension and OPEB plans had aggregate actuarial losses of $2.9 billion. Accumulated
actuarial losses are primarily due to investment losses in 2008 and higher liabilities caused by lower discount rates
used to determine the present value of future plan obligations. The accumulated actuarial loss is amortized over the
expected life of pension plan participants (estimated to be up to 32 years at December 31, 2012 for the Aetna
Pension Plan) and the expected life of OPEB plan participants (estimated to be up to 16 years at December 31,
2012) to the extent the loss is outside of a corridor established in accordance with GAAP. The corridor is
established based on the greater of 10% of the plan assets or 10% of the projected benefit obligation. At December
31, 2012, $2.2 billion of the actuarial loss was outside of the corridor, which will result in amortization of
approximately $50 million after-tax in our 2013 pension and OPEB expense.
The expected return on plan assets and discount rate assumptions discussed above impacted the reported net
periodic benefit costs and benefit obligations of our pension and OPEB plans, but did not impact the required
contributions to these plans, if any. Minimum funding requirements for the Aetna Pension Plan were met in 2012
and 2011, and we were not required to make cash contributions for either of those years. However, 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 additional information
on our defined benefit pension and other postretirement benefit plans.
Other-Than-Temporary Impairment of Debt Securities
We regularly review our debt securities to determine whether a decline in fair value below the carrying value is
other than temporary. If a decline in fair value is considered other than temporary, the cost basis or carrying amount
of the debt security is written down. The write-down is then bifurcated into its credit and non-credit related
components. The credit-related component is included in our operating results. The non-credit related component is
included in other comprehensive income if we do not intend to sell the debt security and is included in our operating
results if we intend to sell the debt security. We analyze all facts and circumstances we believe are relevant for each
investment when performing this analysis, in accordance with applicable accounting guidance promulgated by the
Financial Accounting Standards Board and the U.S. Securities and Exchange Commission (the “SEC”).
Among the factors we consider in evaluating whether a decline is other-than-temporary are whether the decline in
fair value results from a change in the quality of the debt security itself, whether the decline results from a
downward movement in the market as a whole, and the prospects for realizing the carrying value of the debt
security based on the investment's current and short-term prospects for recovery. For unrealized losses determined
to be the result of market conditions (for example, increasing interest rates and volatility due to conditions in the
overall market) or industry-related events, we determine whether we intend to sell the debt security or if it is more
likely than not that we will be required to sell the debt security before recovery of its cost basis. If either case is
true, we recognize an other-than-temporary impairment, and the cost basis/carrying amount of the debt security is
written down to fair value.