Aetna 2013 Annual Report Download - page 33

Annual Report- Page 27
Premium Deficiency Reserves on our Health Care and Group Insurance products
We recognize a premium deficiency loss when it is probable that expected future health care costs or expected
future policy benefit costs will exceed our existing reserves plus anticipated future premiums and reinsurance
recoveries. 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, 2013 or 2012.
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 net income attributable to Aetna. 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. In 2013, $86.0 million pretax, of the reserve was released as a result of
favorable investment performance as well as favorable retirement experience compared to assumptions we
previously made in estimating the reserve. There was no release of this reserve in 2012 or 2011. There can be no
assurance that adjustments to the discontinued products reserve will occur in the future or that they will increase net
income attributable to Aetna. Future adjustments could positively or negatively impact net income attributable to
Aetna.
Recoverability of Goodwill and Other Acquired Intangible Assets
We have made acquisitions that included a significant amount of goodwill and other intangible assets. When we
complete an acquisition, we apply the acquisition method of accounting, which among other things, requires the
recognition of goodwill (which represents the excess cost of the acquisition over the fair value of net assets acquired
and identified 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 are 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, 2013, 2012 or
2011.
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension plans (“pension plans”) and other postretirement employee benefit (“OPEB”)
plans for our employees and retirees. Effective December 31, 2010, our employees 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. Employees covered by our non-qualified supplemental
pension plan stopped accruing benefits effective January 1, 2007, although interest credits continue to be credited
on these cash balance accounts.
Major assumptions used in the accounting for our pension plans include the expected return on plan assets, if
applicable, 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 114.
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