Aetna 2014 Annual Report Download

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2014
Aetna Annual Report,
Financial Report to Shareholders

Table of contents

  • Page 1
    2014 Aetna Annual Report, Financial Report to Shareholders

  • Page 2

  • Page 3

  • Page 4
    ... and Chief Executive Officer To our shareholders: 2014 was a highly successful year for Aetna. We experienced strong growth in our core businesses and continued to benefit from the Coventry acquisition. Our annual operating revenues of $57.9 billion increased 23 percent from 2013 and set a company...

  • Page 5
    ...year, our 2014 results demonstrate strong financial fundamentals and execution against our growth strategies. We look forward to 2015 and believe Aetna's future has never been brighter. Thank you for joining us on our journey. We are grateful for your support and continued investment in Aetna. Mark...

  • 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, 2014 and 2013 and the related...

  • Page 8
    ... Advantage and Medicare supplement plans, workers' compensation administrative services and health information technology products and services, such as Accountable Care Solutions ("ACS"). On May 7, 2013 (the "Acquisition Date"), we acquired Coventry Health Care, Inc. ("Coventry"). Our customers...

  • Page 9
    ... strategies, including partially funding the Coventry acquisition, funding other acquisitions, and investing in our Government, Healthagen® and Consumer businesses; repurchasing our common stock; repurchasing our long-term debt; and increasing our shareholder dividend. During 2014, 2013 and 2012...

  • Page 10
    ... members benefit from a tax subsidy. The availability of funding for the ACA's risk corridor program is a second example of this uncertainty. In May 2014, the Centers for Medicare & Medicaid Services ("CMS") published a final rule on Public Exchanges. The final rule provides that payments to health...

  • Page 11
    ... purchase price was not material. bSwift LLC In November 2014, we acquired bSwift for approximately $400 million. bSwift provides a technology platform that offers a retail shopping experience for health insurance exchanges and employees nationwide and benefit administration technology and services...

  • Page 12
    ... data analytics services, medical stop loss insurance, workers' compensation administrative services and products that provide access to our provider networks in select geographies. We separately track premiums and health care costs for Government businesses (which represents our combined Medicare...

  • Page 13
    ... Government 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 assets Total benefits...

  • Page 14
    ... for additional information. We calculate our medical benefit ratio ("MBR") by dividing health care costs by health care premiums. Our MBRs by product for the last three years were: 2014 Commercial Government Total 80.2% 84.9% 82.2% 2013 80.1% 87.5% 82.9% 2012 81.1% 84.9% 82.2% Annual Report- Page...

  • Page 15
    ...to 2013 due primarily to the inclusion of fees mandated by the ACA in 2014, the inclusion of Coventry's general and administrative expenses for the full year and increased investment spend to support our growth initiatives, primarily in our Government, Healthagen® and Consumer businesses, partially...

  • Page 16
    ... Medicaid Total Medical Membership Consumer-Directed Health Plans (1) Dental: Total Dental Membership Pharmacy: Commercial Medicare PDP (stand-alone) Medicare Advantage PDP Medicaid Total Pharmacy Benefit Management Services (1) 2013 Total 19,822 1,140 462 2,124 23,548 Insured 6,045 968 386 1,216...

  • Page 17
    ... absence management services offered to employers, which include short-term and long-term disability administration and leave management. Group Insurance also includes long-term care products that were offered primarily on an Insured basis, which provide benefits covering the cost of care in private...

  • Page 18
    ... ratio in 2014 is primarily due to higher underwriting margins, reflecting improved experience in both our life and disability products. The increase in our group benefit ratio in 2013 is primarily due to the fourth quarter 2013 charge related to changes in our life insurance claim payment practices...

  • Page 19
    ... net of tax Operating earnings (1) (1) 2014 $ 21.7 (1.0) - $ 20.7 $ $ 2013 68.8 8.3 (55.9) 21.2 $ $ 2012 17.4 .4 - 17.8 In 1993, we discontinued the sale of our fully guaranteed large case pension products and established a reserve for anticipated future losses on these products, which we review...

  • Page 20
    ...2012, 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 provisions. Annual...

  • Page 21
    ... within our debt securities portfolio. In connection with our investment and risk management objectives, we also use derivative financial instruments whose market value is at least partially determined by, among other things, levels of or changes in interest rates (short-term or long-term), duration...

  • Page 22
    ... portfolio 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, operating expenses...

  • Page 23
    ... funded from the sale of investments (which are reported as cash provided by investing activities). Refer to the Consolidated Statements of Cash Flows on page 78 for additional information. (Millions) Cash flows from operating activities Health Care and Group Insurance Large Case Pensions Net cash...

  • Page 24
    .... The increase in interest expense during 2013 compared to 2012 reflects the inclusion of Coventry's long-term debt on and after the Acquisition Date as well as higher average long-term debt levels as a result of the Coventry-related senior notes that were issued in November 2012. We are a member of...

  • Page 25
    ...not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable at December 31, 2014 (for example, the timing and volume of future services provided under fee-for-service arrangements and future membership levels for capitated...

  • Page 26
    ...-rated products. Although these investments are not accounted for as separate accounts assets, they are legally segregated and are not subject to claims that arise out of our business and only support Aetna's future policy benefits obligations under that group annuity contract. Off-Balance Sheet...

  • Page 27
    ...in health care practices, inflation, new technologies, increases in the cost of prescription drugs (including specialty pharmacy drugs), direct-to-consumer marketing by pharmaceutical companies, clusters of high-cost cases, claim intensity, changes in the regulatory environment, health care provider...

  • Page 28
    ...long-term care products. Life and Disability The liabilities for our life and disability products reflect benefit claims that have been reported to us but not yet paid, estimates of claims that have been incurred but not yet reported to us, and future policy benefits earned under insurance contracts...

  • Page 29
    ...) than our actual future portfolio returns, our reserves may be higher (lower) than necessary. The discount rates we selected for life insurance waiver of premiums and long-term disability reserves at December 31, 2014 were consistent with the rates used at December 31, 2013 and 2012. Based on our...

  • Page 30
    ... 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, 2014 or 2013. Large Case Pensions Discontinued Products Reserve We discontinued certain...

  • Page 31
    ... information on our defined benefit pension and other postretirement employee benefit plans, including our current funding strategy. 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...

  • Page 32
    ... 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 prepared. Billings are generally sent monthly for coverage during the following month. In Group Insurance, premium for group life and disability...

  • Page 33
    ... regulatory approvals to price and market many of our products. Supervisory agencies, including CMS, and the Center for Consumer Information and Insurance Oversight ("CCIIO"), as well as state health, insurance, managed care and Medicaid departments and state boards of pharmacy have broad authority...

  • Page 34
    ... Supreme Court concerning whether the Internal Revenue Service may make tax credits available as a form of subsidy to individuals who purchase health insurance through Public Exchanges established by the federal government ("Federal Exchanges"). We will continue to enroll and insure members through...

  • Page 35
    ... and Medicare Insured products, specifies required benefit designs, limits individual and small group rating and pricing practices, encourages additional competition (including potential incentives for new market entrants) and significantly increases federal and state oversight of health plans...

  • Page 36
    ...required benefits, sales and marketing activities, health care provider rates of payment, restrictions on health plans' ability to limit providers' participation in their networks and/or remove providers from their networks, pharmacy and pharmacy benefit management operations and financial condition...

  • Page 37
    ...limit the level of margin we can earn in our Insured business while leaving us exposed to medical costs that are higher than those reflected in our pricing. In addition, we requested significant increases in our premium rates in our individual and small group Health Care businesses for 2014 and 2015...

  • Page 38
    ... such information with a non-affiliated third party. The GLBA regulations apply to health, life and disability insurance. Like HIPAA, GLBA sets a "floor" standard, allowing states to adopt more stringent requirements governing privacy protection. While there is no over-arching federal data security...

  • Page 39
    ... consumer wellness tools and clinical decision support tools, which may require compliance with U.S. Food and Drug Administration ("FDA") requirements in relation to some of these products, solutions and/or tools. Imposing payment levels for services rendered to our members by health care providers...

  • Page 40
    ...Federal Employees Health Benefits ("FEHB") Program Our subsidiaries contract with the Office of Personnel Management (the "OPM") to provide managed health care services under the FEHB program in their service areas. These contracts with the OPM and applicable government regulations establish premium...

  • Page 41
    ...requirements applicable to us and other participants in Medicare programs are complex, expensive to comply with and subject to change. For example, in the second quarter of 2014, CMS issued a final rule implementing the Health Care Reform requirements that Medicare Advantage and PDP plans report and...

  • Page 42
    .... The federal government and certain states are also considering proposals and legislation for Medicaid and dual eligible program reforms or redesigns, including further program, population and/or geographic expansions of risk-based managed care, changes to benefits, reimbursement, or payment levels...

  • Page 43
    ... Medicaid products, dual eligible products and Children's Health Insurance Program ("CHIP") contracts also are subject to federal and state regulations and oversight by state Medicaid agencies regarding the services we provide to Medicaid enrollees, payment for those services, network requirements...

  • Page 44
    ...and marketing to new members of all Aetna Medicare Advantage and Standalone PDP contracts. A significant number of states are investigating life insurers' claims payment and related escheat practices. For additional information on these life insurance matters, refer to "Life and Disability Insurance...

  • Page 45
    ... Claims Act or similar state laws. Product Design and Administration and Sales Practices State and/or federal regulatory scrutiny of life and health insurance company and HMO product design and administration and marketing and advertising practices, including the filing of insurance policy forms...

  • Page 46
    ..., administration of, and/or changes to drug formularies, maximum allowable cost list pricing, average wholesale prices and/or clinical programs; disclosure of data to third parties; drug utilization management practices; the level of duty a PBM owes its customers; configuration of pharmacy networks...

  • Page 47
    ... of the Social Security Administration's Death Master File to identify additional potentially unclaimed death benefits and locate applicable beneficiaries. As a result of these changes, in the fourth quarter of 2013, we increased our estimated liability for unpaid life insurance claims with respect...

  • Page 48
    ...this MD&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 2015" on page 4, "Risk Management and Market-Sensitive Instruments" beginning on page...

  • Page 49
    ... services by Public Exchange product members. There can be no assurance regarding the accuracy of the health care benefit cost, membership or other projections reflected in our Public Exchange product pricing. CMS's final Medicare Advantage and PDP premium rates for 2015 are significantly below 2014...

  • Page 50
    ... strategy includes effectively investing our capital and human resources in appropriate strategic projects, current operations and acquisitions to respond to changing dynamics in the health and related benefits industry, including the shift toward the direct-to-consumer marketing and operating model...

  • Page 51
    ...available for Medicare, Medicaid, or dual eligible programs, changing the tax treatment of health or related benefits, or significantly altering Health Care Reform, such as eliminating or reducing funding for Health Care Reform's risk corridors. The likelihood of adverse changes is increasing due to...

  • Page 52
    ... in April 2013 and eliminated funding for certain Health Care Reform programs. These reductions could adversely affect us, our customers and our providers. In addition, the final Medicare Advantage and PDP premium rates for 2015 reflect a significant reduction in 2015 premiums compared to 2014, and...

  • Page 53
    ... have a history of "unreasonable" rate increases. We have requested significant increases in our premium rates in our individual and small group Health Care businesses for 2015 and expect to continue to request significant increases in those rates for 2016 and beyond in order to adequately price for...

  • Page 54
    ... assessments, fees and taxes in their premiums or fees. Our business activities are highly regulated. Our Medicare, Medicaid, mail order pharmacy, Public Exchange and certain other products are subject to particularly extensive and complex regulations. If we fail to comply with applicable laws and...

  • Page 55
    ... each year. Our Medicare, Medicaid, dual eligible, Public Exchange, specialty pharmacy and mail order pharmacy products are more highly regulated than our other Health Care products. The laws and regulations governing participation in Medicare, Medicaid and dual eligible programs are complex, are...

  • Page 56
    ... level of review by federal, state and international regulators of the health and related benefits industry's business and reporting practices, including premium rate increases, provider network adequacy, pharmacy formulary tiering, pharmacy network structures, utilization management and payment...

  • Page 57
    ... a consumer business. Over the last several years we have entered into new product lines, including Insurance Exchanges, dual eligible programs, support services for ACOs, recruitment for clinical trials and HIT. • Acquisitions: Our 2013 acquisition of Coventry significantly expanded our Medicare...

  • Page 58
    ... 2009, we settled a matter with the New York Attorney General that caused us to transition to different databases to determine the amount we pay non-participating providers under certain benefit plan designs. While we currently have insurance coverage for some potential liabilities, other potential...

  • Page 59
    ... premium payments to our and other companies' Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by health care providers. We collect claim and encounter data from providers and generally rely on providers...

  • Page 60
    ... to CMS' final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015, appear to equate each Medicare Advantage risk adjustment data error with an "overpayment" without reconciliation to the principles underlying the fee for service...

  • Page 61
    ... care coverage programs that are funded in whole or in part by the federal government, including the Medicare, Medicaid, and dual eligible programs, CHIP and the Federal Employees Health Benefits Program and subsidies for qualified individuals and families purchasing health insurance through Public...

  • Page 62
    ... increase utilization of medical and/or other covered services, as well as changes in members' behavior and healthcare utilization patterns and provider billing practices. Our health care and other benefit costs also can be affected by changes in our business mix, products, contracts with providers...

  • Page 63
    ... dental provider organizations, various specialty service providers (including pharmacy benefit management services providers), health care consultants, integrated health care delivery organizations, third-party administrators, HIT companies and, for certain plans, programs sponsored by the federal...

  • Page 64
    ...pharmacy drugs such as hepatitis C treatments), direct-to-consumer marketing by pharmaceutical companies, the increasing influence of social media, inflation and government-imposed limitations on Medicare and Medicaid reimbursements to health plans and providers, which have caused the private sector...

  • Page 65
    ...customers also determine the premium levels and other aspects of Medicare, Medicaid and dual eligible programs that affect the number of persons eligible for or enrolled in these programs, the services provided to enrollees under the programs, and our administrative and health care and other benefit...

  • Page 66
    ...to allow members to pay insurers less for certain high cost drugs than the amounts assumed in pricing of their Public Exchange products. For additional information on certain of the medical cost trend, pricing and economic conditions risks associated with our Insurance Exchange and other Health Care...

  • Page 67
    ... our customers. A change in our health care product mix may impact our profit margins. Our health care products that involve greater potential risk generally tend to be more profitable than administrative services contract products. Individuals and small employer groups are more likely to purchase...

  • Page 68
    ...to manage our general and administrative expenses to competitive levels while delivering improved customer and member service and expanding our marketplace presence and accomplishing our strategic initiatives, including creating a consumer business. Controlling general and administrative expenses is...

  • Page 69
    ... of the Coventry, InterGlobal and bSwift acquisitions. Our businesses depend in large part on these systems to adequately price our products and services; accurately establish reserves, process claims and report financial results; and interact with providers, employer plan sponsors, members and...

  • Page 70
    ... the Coventry acquisition), strategic alliances, joint ventures and multi-year strategic projects (including creating our consumer business and implementing new provider support programs), simultaneously. Our existing business partnership relationships and a limited budget of human resources and...

  • Page 71
    ... and/or our financial exposure to businesses we have sold. • • • • • • Risks Related to Customer Perceptions of our Products and Services In order to be competitive in the growing marketplace for direct-to-consumer sales and on public and private health insurance exchanges, we will...

  • Page 72
    ...or our own products and/or business practices (including social media activities). This risk will increase further as we continue to implement significant increases in premium rates to price for the expanded benefits required by, and the fees, assessments and taxes imposed by, Health Care Reform and...

  • Page 73
    ... support these value-based contracts. These arrangements are designed to give providers incentives to engage in population health management and optimize delivery of health care to our members. These arrangements also may allow us to expand into new geographies, target new customer groups, increase...

  • Page 74
    ... our products and services. Our customers, particularly our self-insured customers, also consider our hospital and other medical provider discounts when evaluating our products and services. For certain of our businesses, we must maintain provider networks that satisfy applicable access to care and...

  • Page 75
    .... These third parties include our PBM services suppliers, information technology system providers, independent practice associations, accountable care organizations and call center and claim and billing service providers. Certain of these third parties provide us with significant portions of our...

  • Page 76
    ... or expropriation of assets and pricing constraints. Our international products need to meet country-specific customer and member preferences as well as country-specific legal requirements, including those related to privacy, data storage, location, protection and security. Annual Report- Page 70

  • Page 77
    ..., including investments in our businesses, our operations (such as information technology and other strategic and capital projects), dividends, acquisitions, share and/or debt repurchases, reinsurance or other capital uses, impacts our financial strength, claims paying ability and credit ratings...

  • Page 78
    .... Even though our employees stopped earning future pension service credits in the Aetna Pension Plan effective December 31, 2010, the Aetna Pension Plan continues to operate. Therefore, unfavorable investment performance, interest rate changes or changes in estimates of benefit costs, if significant...

  • Page 79
    ... uncertainties regarding Aetna's future financial condition and results of operations. We acquired Coventry Health Care, Inc. ("Coventry") in May 2013, which impacts the comparability of financial results for the years ended December 31, 2014 and 2013 to prior periods. Annual Report- Page 73

  • Page 80
    .... Health care costs have been reduced by Insured member co-payments related to our mail order and specialty pharmacy operations of $107 million, $110 million and $127 million for 2014, 2013 and 2012, respectively. Refer to accompanying Notes to Consolidated Financial Statements. Annual Report...

  • Page 81
    ... security. During 2014, we recorded a non-cash pension settlement charge of $72.5 million ($111.6 million pretax) in connection with our taxqualified noncontributory defined benefit pension plan (the "Aetna Pension Plan"). We did not record any non-cash pension settlement charges during 2013 or 2012...

  • Page 82
    ... 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 payable under securities loan and repurchase agreements Short term...

  • Page 83
    ..., 2012 Net income (loss) Other (decreases) increases in noncontrolling interest Other comprehensive income (Note 9) Common shares issued to acquire Coventry Common shares issued for benefit plans, including tax benefits Repurchases of common shares Dividends declared Balance at December 31, 2013 Net...

  • Page 84
    ... of long-term debt Pension settlement charge Changes in assets and liabilities: Accrued investment income Premiums due and other receivables Income taxes Other assets and other liabilities Health care and insurance liabilities Other, net Net cash provided by operating activities Cash flows...

  • Page 85
    ...and data analytics services, medical stop loss insurance, workers' compensation administrative services and products that provide access to our provider network in select geographies. Group Insurance primarily includes group life insurance and group disability products. Group life insurance products...

  • Page 86
    ...by Health Insurers Effective January 1, 2014, we adopted new accounting guidance relating to the recognition and income statement reporting of the mandated fee to be paid to the federal government by health insurers. This guidance applies to the new health insurer fee ("HIF") included in Health Care...

  • Page 87
    ..., measurement of defined benefit pension and other postretirement employee benefit plans, other-than-temporary impairment of debt securities and revenue recognition, and allowance for estimated terminations and uncollectible accounts. We use information available to us at the time estimates are made...

  • Page 88
    ... when purchased. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these investments. Investments Debt and Equity Securities Debt and equity securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and...

  • Page 89
    ... or paid related to a recognized asset or liability; or a foreign currency fair value or cash flow hedge. Net Investment Income and Realized Capital Gains and Losses Net investment income on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other...

  • Page 90
    ...' accounts are reflected in policyholders' funds, and the reserve for anticipated future losses is reflected in future policy benefits on our balance sheets. Unrealized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products...

  • Page 91
    ...The discount rates are consistent with those used for investment decisions and take into account the operating plans and strategies of the Health Care and Group Insurance segments. Certain other key assumptions utilized, including changes in membership, revenue, health care costs, operating expenses...

  • Page 92
    ... 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 93
    ... year. Other premium revenue for group life, long-term care and disability products is recognized as income, net of allowances for termination and uncollectible accounts, over the term of the coverage. Other premium revenue for Large Case Pensions' limited payment pension and annuity contracts is...

  • Page 94
    ... for performing certain claim processing and member services for health and disability members and are recognized as revenue over the period the service is provided. Fees and other revenue also includes fees related to our workers' compensation administrative services products and services. Some of...

  • Page 95
    ... Health Care Reform risk corridor payable. We will perform a final reconciliation and settlement with HHS of the 2014 Cost Sharing Subsidy and 3Rs during 2015. Accounting for the Medicare Part D Prescription Drug Program Plans ("PDPs") We were selected by the Centers for Medicare & Medicaid Services...

  • Page 96
    ... to align Coventry's presentation to Aetna's accounting policies. • Elimination of revenue and directly identifiable costs related to the sale of Aetna's Missouri Medicaid business, Missouri Care, Incorporated ("Missouri Care"), to WellCare Health Plans, Inc. on March 31, 2013. Annual Report- Page...

  • Page 97
    ... Disposition In connection with the acquisition of Coventry, on March 31, 2013, we completed the sale of Missouri Care to WellCare Health Plans, Inc. The sale price was not material, and the transaction did not have a material impact on our financial condition or operating results. 4. Earnings...

  • Page 98
    ... 2014, 2013 and 2012, selling expenses (which include broker commissions, the variable component of our internal sales force compensation and premium taxes) and general and administrative expenses were as follows: (Millions) Selling expenses General and administrative expenses: Salaries and related...

  • Page 99
    ... to the acquisition of bSwift is considered preliminary, pending the final allocation of the applicable purchase price. At both December 31, 2014 and 2013, approximately $113 million was assigned to the Group Insurance segment, with the remainder assigned to the Health Care segment. Other acquired...

  • Page 100
    ... accounts assets, they are legally segregated and are not subject to claims that arise out of our business and only support Aetna's future policy benefits obligations under that group annuity contract. Refer to Notes 2 and 19 beginning on pages 80 and 132 for additional information. Annual Report...

  • Page 101
    ...information on our accounting for discontinued products). At December 31, 2014, debt and equity securities with a fair value of approximately $3.6 billion, gross unrealized capital gains of $391.3 million and gross unrealized capital losses of $16.7 million and, at December 31, 2013, debt and equity...

  • Page 102
    ... the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At December 31, 2014, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted...

  • Page 103
    ... are the debt and equity securities we held at December 31, 2014 and 2013 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position: Less than 12 months (Millions) December 31, 2014 Debt securities: U.S. government securities States...

  • Page 104
    ... losses on debt or equity securities that impacted our operating results during 2014, 2013 or 2012. Excluding amounts related to experience-rated and discontinued products, proceeds from the sale of debt securities and the related gross realized capital gains and losses for 2014, 2013 and 2012...

  • Page 105
    ...) 1 2 to 4 5 6 and 7 Total $ $ 2014 59.7 $ 1,443.4 18.6 40.5 1,562.2 $ 2013 69.2 1,399.6 30.6 50.2 1,549.6 At December 31, 2014 scheduled mortgage loan principal repayments were as follows: (Millions) 2015 2016 2017 2018 2019 Thereafter $ 127.6 188.3 220.5 171.2 100.3 763.0 Annual Report- Page 99

  • Page 106
    ....4 86.1 954.0 (37.7) 916.3 $ $ 2012 763.7 122.4 70.7 956.8 (34.6) 922.2 Net investment income includes $289.1 million, $293.5 million and $324.2 million for 2014, 2013 and 2012, respectively, related to investments supporting our experience-rated and discontinued products. Annual Report- Page 100

  • Page 107
    ...' equity included the following activity in accumulated other comprehensive loss in 2014, 2013 and 2012: Net Unrealized Gains (Losses) Securities Foreign Currency Previously and Impaired (1) All Other Derivatives $ 58.2 (.9) 57.3 (47.2) 24.1 (23.1) 34.2 .9 (.2) .7 34.9 (2) (2) (Millions) Balance at...

  • Page 108
    ... employee benefit ("OPEB") plans included the following activity in accumulated other comprehensive loss in 2014, 2013 and 2012: Pension Plans Unrecognized Net Actuarial Losses $ (1,778.3) (130.4) 45.7 (1,863.0) 550.1 49.0 (1,263.9) (460.0) 102.9 (1,621.0) Unrecognized Prior Service Credits...

  • Page 109
    ... quoted market prices of debt securities with similar characteristics, or discounted cash flows to estimate fair value. We review these prices to ensure they are based on observable market inputs that include, but are not limited to, quoted prices for similar assets in active markets, quoted prices...

  • Page 110
    ... value on a recurring basis in our balance sheets at December 31, 2014 and 2013 were as follows: (Millions) December 31, 2014 Assets: Debt securities: U.S. government securities States, municipalities and political subdivisions U.S. corporate securities Foreign securities Residential mortgage-backed...

  • Page 111
    ... primarily on a matrix pricing model, which uses quoted market prices of debt securities with similar characteristics. Gross transfers into Level 3 during 2014 and 2013 primarily were due to quoted prices for certain securities no longer being available in active markets. Annual Report- Page 105

  • Page 112
    ...upon demand. However, we have 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...

  • Page 113
    ... shares of unlisted companies. Separate Accounts Measured at Fair Value in our Balance Sheets Separate Accounts assets in our Large Case Pensions business represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets...

  • Page 114
    ... Assets (1) $ $ .3 $ .3 $ Financial Instruments 10.2 $ 10.2 $ Cash Collateral Received - $ - $ Net Amount 10.5 10.5 $ $ 49.1 $ 49.1 $ 13.3 $ 13.3 $ (47.1) $ (47.1) $ 15.3 15.3 There were no amounts offset in our balance sheets at December 31, 2014 or December 31, 2013. Annual Report- Page...

  • Page 115
    ... cash balance accounts; and the plan may continue to be used to credit special pension arrangements. In addition, we currently provide certain medical and life insurance benefits for retired employees, including those of our former parent company. We provide subsidized health care benefits...

  • Page 116
    ... difference between the fair value of plan assets and the plan's benefit obligation is referred to as the plan's funded status. This funded status is an accounting-based calculation and is not indicative of our mandatory funding requirements, which are described on page 18. Annual Report- Page 110

  • Page 117
    ... 2013 were as follows: Pension Plans (Millions) Benefit obligation Fair value of plan assets Funded status $ $ 2014 (6,504.8) $ 6,147.0 (357.8) $ 2013 (5,965.3) 6,157.8 192.5 $ $ OPEB Plans 2014 (277.2) $ 58.5 (218.7) $ 2013 (260.9) 61.1 (199.8) The amounts in accumulated other comprehensive loss...

  • Page 118
    ... plans were as follows: 2014 4.96% 7.00 N/A Pension Plans 2013 4.17% 7.00 N/A 2012 4.98% 7.50 N/A 2014 4.73% 5.30 - OPEB Plans 2013 3.94% 4.10 - 2012 4.78% 4.25 - Discount rate Expected long-term return on plan assets Rate of increase in future compensation levels We assume different health care...

  • Page 119
    ... The fair values of private equity and hedge fund limited partnerships are estimated based on the net asset value of the investment fund provided by the general partner or manager of the investments, the financial statements of which generally are audited. Management considers observable market data...

  • Page 120
    Pension Assets with changes in fair value measured on a recurring basis at December 31, 2014 were as follows: (Millions) Debt securities: U.S. government securities States, municipalities and political subdivisions U.S. corporate securities Foreign securities Residential mortgage-backed securities ...

  • Page 121
    ... of debt securities. Excludes $176.8 million of cash and cash equivalents and other payables. The changes in the balances of Level 3 Pension Assets during 2014 and 2013 were as follows: 2014 Real Estate Beginning balance Actual return on plan assets Purchases, sales and settlements Ending balance...

  • Page 122
    ... benefits and liability hedging attributes that are desirable, especially in falling interest rate environments. At December 31, 2014, target investment allocations for the Aetna Pension Plan were: 38% in equity securities, 48% in debt securities, 7% in real estate, 4% in private equity limited...

  • Page 123
    ...based Employee Incentive Plans Our stock-based employee compensation plans (collectively, the "Plans") provide for awards of stock options, SARs, PSARs, restricted stock units ("RSUs"), MSUs, PSUs, deferred contingent common stock and the ability for employees to purchase common stock at a discount...

  • Page 124
    ... rate Dividend yield Initial price $ 5.72 35.8% 1.74% 1.36% 72.26 We estimate the grant date fair value of SARs using a modified Black-Scholes option pricing model. We did not grant a material number of SARs in 2013 or 2012. The expected term is based on historical equity award activity. Volatility...

  • Page 125
    ... during 2014, 2013 and 2012 were as follows: Number of Stock Options, SARs and PSARs 26.3 .1 (6.7) (.3) 19.4 19.4 19.4 .7 (9.3) (.3) 10.5 9.8 $ Weighted Average Exercise Price 35.18 44.79 22.73 43.02 39.34 39.34 39.34 63.32 36.58 47.11 43.27 41.77 Weighted Average Remaining Contractual Life...

  • Page 126
    ... in 2013 had a grant date per PSAR fair value of $18.64. That grant date fair value was calculated using the assumptions noted in the following table: Dividend yield Expected settlement period (in years) Volatility Risk-free interest rate Initial price 1.25% 6.12 40.4% .6% 64.25 $ Annual Report...

  • Page 127
    During 2014, 2013 and 2012, the following activity occurred under the Plans: (Millions) $ Cash received from stock option exercises Intrinsic value of options/SARs exercised and stock units vested Tax benefits realized for the tax deductions from stock options and SARs exercised and stock units ...

  • Page 128
    ...Deferred tax assets: Employee and postretirement benefits Insurance reserves Reserve for anticipated future losses on discontinued products Net operating losses Investments, net Debt fair value adjustments Severance and facilities Deferred policy acquisition costs Litigation-related settlement Other...

  • Page 129
    ... Debt The carrying value of our long-term debt at December 31, 2014 and 2013 was as follows: (Millions) Senior notes, 6.3%, due 2014 (1) Senior notes, 6.125%, due 2015 Senior notes, 6.0%, due 2016 Senior notes, 5.95%, due 2017 Senior notes, 1.75%, due 2017 Senior notes, 1.5%, due 2017 Senior notes...

  • Page 130
    ... interest expense over the first 20 semi-annual interest payments associated with the $375 million of 4.75% senior notes due 2044. 2012 In 2012, we repurchased approximately $200 million par value of our outstanding senior notes and recorded a loss on the early extinguishment of this long-term debt...

  • Page 131
    ...including accelerated share repurchase agreements, and through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The activity under Board authorized share repurchase programs in 2014, 2013 and 2012 was as follows: Shares Purchased Purchase Not to Exceed...

  • Page 132
    ... distributions that may be paid to their equity holders. The additional regulations applicable to our HMO and insurance company subsidiaries are not expected to affect our ability to service our debt, meet our other financing obligations or pay dividends. Under applicable regulatory requirements, at...

  • Page 133
    ... fifty percent of our group term life and group accidental death and dismemberment insurance policies. During 2013 and 2012, we entered into agreements to reinsure certain Health Care insurance policies. We entered into these contracts to reduce the risk of catastrophic loss which in turn reduces...

  • Page 134
    ... to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under Health Care Reform. In 2009, the Pennsylvania Insurance Commissioner (the "Commissioner") placed long-term care insurer Penn Treaty Network...

  • Page 135
    ...would have paid up to $120 million to fund claims submitted by health plan members and health care providers who were members of the settlement classes. These payments also would have funded the legal fees of plaintiffs' counsel and the costs of administering the settlement. Annual Report- Page 129

  • Page 136
    ... premium payments to our and other companies' Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by health care providers. We collect claim and encounter data from providers and generally rely on providers...

  • Page 137
    ...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), executive compensation matters and travel and entertainment expenses...

  • Page 138
    ... pharmacy benefit management practices (including the use of narrow networks and the placement of drugs in formulary tiers), sales practices, and claim payment practices (including payments to out-of-network providers and payments on life insurance policies). As a leading national health and related...

  • Page 139
    Summarized financial information of our segment operations for 2014, 2013 and 2012 were as follows: (Millions) 2014 Revenue from external customers Net investment income Interest expense Depreciation and amortization expense Income taxes (benefits) Operating earnings (loss) Segment assets 2013 ...

  • Page 140
    ... of tax Pension settlement charge, net of tax Release of litigation-related reserve, net of tax Charge for changes in our life insurance claim payment practices, net of tax Reduction of reserve for anticipated future losses on discontinued products, net of tax Reversal of allowance and gain on sale...

  • Page 141
    ...external customers by product in 2014, 2013 and 2012 were as follows: (Millions) Health care premiums Health care fees and other revenue Group life Group disability Group long-term care Large case pensions, excluding group annuity contract conversion premium Group annuity contract conversion premium...

  • Page 142
    ...equity securities. In 2012, our discontinued products reflected operating losses and net realized capital gains, primarily attributable to gains from the sale of debt securities partially offset by losses from other investments. We evaluated these 2014 results against the expectations of future cash...

  • Page 143
    ... liabilities supporting discontinued products at 2014 and 2013 were as follows: (1) (Millions) Assets: Debt and equity securities available for sale Mortgage loans Other investments Total investments Other assets Collateral received under securities loan agreements Current and deferred income taxes...

  • Page 144
    ... 31, 2014, 2013 and 2012, respectively. Participant-directed withdrawals from our discontinued products were not significant in the years ended ended December 31, 2014, 2013 or 2012. Cash required to fund these distributions was provided by earnings and scheduled payments on, and sales of, invested...

  • Page 145
    ...Aetna's Board of Directors engages KPMG LLP, an independent registered public accounting firm, to audit our consolidated financial statements and express their opinion thereon. Members of that firm also have the right of full access to each member of management in conducting their audits. The report...

  • Page 146
    ... 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, 2014 and 2013, and the related consolidated...

  • Page 147
    ... 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 of its inherent limitations...

  • Page 148
    ... Net income attributable to Aetna per share - diluted (1) Dividends declared per share Common stock prices, high Common stock prices, low 2013 Total revenue Income before income taxes Income taxes Net income including non-controlling interests Less: Net income (loss) attributable to non-controlling...

  • Page 149
    ... total return on the published Standard & Poor's Supercomposite Managed Health Care Index ("S&P MHCI") from December 31, 2009 through December 31, 2014. The graph assumes a $100 investment in shares of our common stock on December 31, 2009. (1) At December 31, 2014, the companies included...

  • Page 150
    ...Juan Trippe Professor in the Practice of International Trade, Finance and Business Yale University Joseph P. Newhouse John D. MacArthur Professor of Health Policy and Management Harvard University Betsy Z. Cohen Founder, Strategic Advisor and Former Chief Executive Officer The Bancorp, Inc. Ellen...

  • Page 151
    ..., officers and employees (and information regarding any amendments or waivers relating to Aetna's Directors, executive officers and principal financial and accounting officers or persons performing similar functions); Independence Standards for Directors; Corporate Governance Guidelines; Board of...

  • Page 152
    ... checks, address changes, stock transfers and other account matters. Computershare CIP ("CIP") Current shareholders and new investors can purchase Aetna common shares and reinvest cash dividends through the CIP sponsored by Computershare. Contacting Computershare by mail: Computershare Trust Company...

  • Page 153
    ..., stock appreciation rights, market stock units, restricted stock units, performance stock units, performance stock appreciation rights) or who own shares acquired through the Employee Stock Purchase Plan ("ESPP") should address all questions to UBS Financial Services, Inc. regarding their accounts...

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