Aetna 2015 Annual Report Download

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2015
Aetna Annual Report,
Financial Report to Shareholders

Table of contents

  • Page 1
    2015 Aetna Annual Report, Financial Report to Shareholders

  • Page 2

  • Page 3

  • Page 4
    ... our Medicare Advantage and Medicare Supplement products. The sustained growth in our Medicare businesses speaks directly to our top tier Star Ratings and continued investments in programs that our customers value. Our Medicaid business also performed very well and grew by more than 175,000 members...

  • Page 5
    ... create for consumers and shareholders. As we continue our work to build a healthier world, we believe that Aetna has never been better positioned to enable more healthy days for our members. We appreciate your support and continued investment in Aetna. Mark T. Bertolini Chairman and CEO April 2016

  • Page 6

  • Page 7
    ...December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years 2013 through 2015. Notes to Consolidated Financial Statements Reports of Management and our Independent Registered Public Accounting Firm - We...

  • Page 8
    ...insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid health care management services, Medicare Advantage and Medicare supplement plans, workers' compensation administrative services...

  • Page 9
    ...course operating activities; support our growth strategies, including partially funding the Coventry acquisition, funding other acquisitions, and investing in our Government and Healthagen® (including Consumer) businesses; repurchase our common stock; repurchase our long-term debt; and increase our...

  • Page 10
    ... in Commercial and Medicare products, the individual coverage mandate, guaranteed issue, rating limits in individual and small group products, significant new industry-wide fees, assessments and taxes, enhanced premium rate review and disclosure processes, reduced Medicare Advantage payment rates to...

  • Page 11
    ... & Medicaid Services ("CMS") issued its Final Notice detailing final 2016 Medicare Advantage benchmark payment rates (the "Final Notice"). We project that the benchmark rates in the Final Notice will increase funding for our Medicare Advantage business by 1% in 2016 compared to 2015. Health Care...

  • Page 12
    ... Consolidated Financial Statements beginning on page 143. 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 to reconcile our segment reporting...

  • Page 13
    .... We also offer Medicare and Medicaid products and services and other medical products, such as medical management and data analytics services, medical stop loss insurance, workers' compensation administrative services and products that provide access to our provider networks in select geographies...

  • Page 14
    ... result of higher membership in our Commercial Insured business, the effects of pricing actions designed to recover fees and taxes mandated by the ACA and higher premium rates, as well as the full-year impact of the May 2013 acquisition of Coventry. Our Commercial MBRs increased 10 basis points over...

  • Page 15
    ...ASC membership. Health Care fees and other revenue for 2014 increased $689 million compared to 2013 due primarily to higher average fee yields and growth in our Commercial ASC membership, as well as the inclusion of Coventry's service businesses for the full year. General and Administrative Expenses...

  • Page 16
    ... Medicare Supplement Medicaid (1) Total Medical Membership Consumer-Directed Health Plans (2) Dually-Eligible for Medicare and Medicaid (1) Dental: Total Dental Membership Pharmacy: Commercial Medicare PDP (stand-alone) Medicare Advantage PDP Medicaid (1) Total Pharmacy Benefit Management Services...

  • Page 17
    ... to Aetna for Group Insurance Net realized capital losses (gains), net of tax Amortization of other acquired intangible assets, net of tax Charge for changes in life insurance claim payment practices, net of tax Reversal of allowance and gain on sale of reinsurance recoverable, net of tax Operating...

  • Page 18
    ... life and disability products. 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
    ... assumptions and other important information, in Note 21 of Notes to Consolidated Financial Statements beginning on page 146. The operating summary for Large Case Pensions above includes revenues and expenses related to our discontinued products, with the exception of net realized capital gains and...

  • Page 20
    The risks associated with investments supporting experience-rated pension and annuity products in our Large Case Pensions business are assumed by the contract holders and not by us (subject to, among other things, certain minimum guarantees). Assets supporting experience-rated products may be ...

  • Page 21
    ... sector exposure 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...

  • Page 22
    ... are reported as cash provided by investing activities). Refer to the Consolidated Statements of Cash Flows on page 86 for additional information. (Millions) Cash flows from operating activities Health Care and Group Insurance Large Case Pensions Net cash provided by operating activities Cash flows...

  • Page 23
    ... Acquisition. Refer to Note 15 of Notes to Consolidated Financial Statements beginning on page 131 for additional information on these transactions. Other Liquidity Information From time to time, we use short-term commercial paper borrowings, repurchase agreements and cash advances from the Federal...

  • Page 24
    ...as the maximum tax deductibility of such amounts. Refer to Note 12 of Notes to Consolidated Financial Statements beginning on page 118 for additional information regarding our current funding strategy for the Aetna Pension Plan. Refer to Note 2 beginning on page 88 for additional information on fees...

  • 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, 2015 (for example, the timing and volume of future services provided under fee-for-service arrangements and future membership levels for capitated...

  • Page 26
    ... are not subject to claims that arise out of our business. Refer to Note 8 beginning on page 103 for additional information on investments related to the 2012 conversion of an existing group annuity contract from a participating to a non-participating contract. Off-Balance Sheet Arrangements We do...

  • Page 27
    ...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 or member...

  • 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
    ... new claims would be submitted to us. We estimated the future policy benefits reserve for long-term care products using these assumptions and actuarial principles. For long-term care insurance contracts, we use our original assumptions throughout the life of the policy and do not subsequently modify...

  • Page 30
    ... 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...

  • Page 31
    ... Terminations and Uncollectible Accounts Our revenue is principally 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...

  • Page 32
    ... for group life and disability products is recognized as revenue, net of allowances for uncollectible accounts, over the term of coverage. Amounts received before the period of coverage begins are recorded as unearned premiums. Health Care billings may be subsequently adjusted to reflect enrollment...

  • Page 33
    ... in Commercial and Medicare products, the individual coverage mandate, guaranteed issue, rating limits in individual and small group products, significant new industry-wide fees, assessments and taxes, enhanced premium rate review and disclosure processes, reduced Medicare Advantage payment rates to...

  • Page 34
    ... for 2017 and two year delay of the "Cadillac" tax on high-cost employer-sponsored health coverage; the October 2015 PACE, which leaves groups with 51 to 100 employees within the large group category for each state unless the state exercises its option to include these groups within the small group...

  • Page 35
    ... and taxes, as well as required changes to small group and other products (including capping member cost sharing or co-payments or otherwise limiting members' financial responsibility for health care or other covered services they utilize), provider network composition requirements, pharmacy benefit...

  • 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 position...

  • 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 2015 and 2016...

  • Page 38
    ...March 2013, including Medicare spending cuts of not more than 2% of total program costs per year through 2024. We project that CMS's Medicare Advantage benchmark payment rates for 2016 will increase funding for our Medicare Advantage businesses by 1% in 2016 compared to 2015. This 2016 rate increase...

  • Page 39
    ... programs in which we participate, including Medicare and Medicaid programs. Restricting or mandating health plan or life insurer claim processing, review, payment and/or related procedures. Mandating coverage for additional conditions and/or specified procedures, drugs or devices (for example, high...

  • Page 40
    ...and individual life insurance payment practices and the pre-emptive effect of ERISA on state laws. 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, is...

  • Page 41
    ... for bonus payments in 2017. Our enrollment weighted average 2016 star rating was 4.2. Based on our membership at December 31, 2015, 85% of our Medicare Advantage members were in plans with 2016 star ratings of at least 4.0 stars. CMS will release updated stars ratings in October 2016 that will...

  • Page 42
    ... managed care, changes to benefits, reimbursement, or payment levels, eligibility criteria, provider network adequacy requirements (including requiring the inclusion of specified high cost providers in our networks) and program structure. In some states, current Medicaid and dual eligible funding...

  • Page 43
    .... Our workers' compensation business includes the comparison of medical claims data against the applicable state's fee schedule pricing, including applicable regulations and clinical guidelines. State fee schedules, which typically represent the maximum reimbursement for medical services provided to...

  • Page 44
    ... 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 and/or Medicaid are...

  • Page 45
    ... and Sales Practices State and/or federal regulatory scrutiny of health care benefit and life insurance product design and administration and marketing and advertising practices, including the filing of insurance policy forms, the adequacy of provider networks, the accuracy of provider directories...

  • Page 46
    ... 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; the operations...

  • Page 47
    ... authority in the areas of consumer privacy and data security with a focus on web-based, mobile products and "big data." As a result of the widely-reported large scale U.S. commercial data breaches during 2014 and 2015, the FTC and state regulators have increased their enforcement activity...

  • Page 48
    ...&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 2016" on page 5, "Risk Management and Market-Sensitive Instruments" beginning on page 15 and...

  • Page 49
    .... Our 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...

  • Page 50
    ...and new customers with existing and new products, our consumer business, which began serving members on January 1, 2016, and enhance our existing customer service, information technology, control and compliance processes and systems. The future performance of our businesses will depend in large part...

  • Page 51
    ...of the benefits of having completed the Proposed Acquisition, Aetna would be subject to a number of risks, including the following: • We may experience negative reactions from the financial markets, including negative impacts on our stock and bond prices, and from our customers, providers, vendors...

  • Page 52
    ... the companies' operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes; • addressing possible differences in business backgrounds, corporate cultures and management philosophies; • consolidating the companies' corporate...

  • Page 53
    ... her title, authority or responsibilities, compensation and benefits or primary office location. Furthermore, if key employees of Aetna or Humana depart or are at risk of departing, including because of issues relating to the uncertainty and difficulty of integration, financial security or a desire...

  • Page 54
    ... price to acquire Aetna than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable by Aetna in certain circumstances. Lawsuits have been filed and other lawsuits may be filed against Humana, Aetna and their respective boards of directors...

  • Page 55
    ... on our cash resources will be greater than the amount of cash flows required to service the indebtedness of Aetna or Humana individually prior to the Proposed Acquisition. The increased levels of indebtedness could also reduce funds available for our investments in product development as well as...

  • Page 56
    ... inclusion of these assessments, fees and taxes in our premiums also could adversely affect our ability to grow and/or maintain our medical membership", beginning on page 55; "Our business activities are highly regulated. Our Medicare, Medicaid, specialty and mail order pharmacy, Public Exchange and...

  • Page 57
    ...small group and other products (including capping member cost sharing or copayments or otherwise limiting members' financial responsibility for health care or other covered services they utilize), provider network composition requirements, pharmacy benefit and drug coverage requirements, Health Care...

  • Page 58
    ... for 2017 and two year delay of the "Cadillac" tax on high-cost employer-sponsored health coverage; the October 2015 PACE, which leaves groups with 51 to 100 employees within the large group category for each state unless the state exercises its option to include these groups within the small group...

  • Page 59
    ... April 2013 and eliminated funding for certain Health Care Reform programs. These reductions could adversely affect us, our customers and our providers. Medicare Advantage payment rates to health plans have been cut over the last several years, with additional reductions to be phased in through 2017...

  • Page 60
    ... rebate requirements limit the level of margin we can earn in our Commercial Insured and Medicare Insured businesses, while leaving us exposed to medical costs that are higher than those reflected in our pricing. Refer to "Revenue Recognition" in Note 2 of Notes to Consolidated Financial Statements...

  • Page 61
    ... billion 2018 HIF in our premium rates beginning with 2017 medical customer renewals that have member months in 2018 because of the HIF suspension for 2017. In addition, our ability to reflect Health Care Reform assessments, fees and taxes in our Medicare rates is limited; and our ability to reflect...

  • Page 62
    ...because completion of the Proposed Acquisition will increase significantly the proportion of our total Health Care revenues, membership and medical costs that are derived from Medicare, Medicaid and dual eligible products. Our products providing PBM and specialty and mail order pharmacy services are...

  • Page 63
    ...including premium rate increases, provider network adequacy, provider network directories, pharmacy formulary tiering, pharmacy network structures, utilization management and payment of providers with whom the payor does not have a contract and other health and life insurance claim payment practices...

  • Page 64
    ...the risks of providing Commercial managed care and health insurance products and increase significantly our exposure to other risks. For additional information about these risks, see: • "Our business activities are highly regulated. Our Medicare, Medicaid, specialty and mail order pharmacy, Public...

  • Page 65
    ... have a material adverse effect on our business. Upon completion of the Proposed Acquisition, our exposure to these risks will increase significantly. Compliance with future laws, regulations and/or judicial decisions may reduce our profitability and limit our growth", beginning on page 55; "We may...

  • Page 66
    ... our contracts with CMS and to assess the quality of the services we provide to our Medicare members. 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...

  • Page 67
    ...of Medicare Advantage plans for various contract years, including certain of the Company's plans for certain contract years, to validate coding practices and supporting medical record documentation maintained by health care providers and the resulting risk adjusted premium payments to the plans. CMS...

  • Page 68
    ... employees, which has caused us to incur additional expenses and given rise to litigation against us. These risks are particularly high in our Medicare, Medicaid and dual eligible programs, where third parties perform pharmacy benefit management, medical management and other member related services...

  • Page 69
    ... 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, product designs, contracts with providers, medical management, underwriting, rating and/or claims processing...

  • Page 70
    ...the Blue Cross and Blue Shield Association. Additional competitors in our businesses include other types of medical and dental provider organizations, various specialty service providers (including pharmacy benefit management services providers), health care consultants, financial services companies...

  • Page 71
    (including Fidelity Investments), integrated health care delivery organizations (networks of providers who also coordinate administrative services for and assume insurance risk of their members), third-party administrators, HIT companies and, for certain plans, programs sponsored by the federal or ...

  • Page 72
    ... revenues from government-funded health and other programs, including our Medicare, Medicaid and dual eligible businesses and our government customers in our Commercial business, are dependent on annual funding by the federal government and/or applicable state or local governments. Upon completion...

  • Page 73
    ... programs provide us with less protection in 2016 than 2015 and will provide us with less protection in 2017 than 2016), the health status and quantity of Public Exchange membership and utilization of medical and/or other covered services by Public Exchange product members. The premium rates for...

  • Page 74
    ... processing patterns and/or procedures, changes in membership and product mix, changes in the utilization of medical and/or other covered services, changes in medical cost trends, changes in our medical management practices and the introduction of new benefits and products. We estimate health care...

  • Page 75
    ... changes and marketing practices. As a result of Health Care Reform, the declining number of commercially insured people and other factors, our ability to grow profitably through the sale of traditional Insured health care and related benefits products in the United States may be limited. In order...

  • Page 76
    ... to reduce variable costs in the short term is limited. We attempt to manage general and administrative expenses by, among other things, reducing the number of products we offer and controlling costs for salaries and related benefits, information technology and other general and administrative...

  • Page 77
    ...we will add a significant number of new systems upon the completion of the Proposed Acquisition. 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...

  • Page 78
    ... sales personnel, who frequently work with independent brokers, consultants and agents who assist in the production and servicing of business. The independent brokers, consultants and agents generally are not dedicated to us exclusively and may frequently recommend and/or market health care benefits...

  • Page 79
    ... may be targeting the higher margin portions of our business. These risks may be enhanced if employers shift to defined contribution health care benefits plans and make greater utilization of Private Exchanges or encourage their employees to purchase health insurance on the Public Exchanges. We can...

  • Page 80
    ... retain membership is dependent upon providing cost effective, 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...

  • Page 81
    ... other health care benefits providers. Our relationships with providers are affected by the rates we pay them for services rendered to our members (including financial incentives to deliver quality services in a cost-effective manner), by our business practices and processes, by our acquisitions and...

  • Page 82
    ... or to secure new cost-effective health care provider contracts, including as a result of our efforts to integrate our provider networks following the completion of the Proposed Acquisition, may result in a loss of or inability to grow membership, higher health care or other benefits costs (which...

  • Page 83
    ... to maintain our current business standards, controls, information technology systems, policies, procedures and performance; We may finance future acquisitions and other inorganic growth strategies by issuing common stock for some or all of the purchase price, which would dilute the ownership...

  • Page 84
    ... 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 licensing, privacy, data storage, location, protection and security. Our international operations increase our...

  • Page 85
    ... 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 issued...

  • Page 86
    ...large number of current employees and retirees. 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...

  • Page 87
    ... Financial Data (Millions, except per common share data) Total revenue Net income attributable to Aetna Net realized capital (losses) gains, net of tax Total assets Short-term debt Long-term debt Total Aetna shareholders' equity Per common share data: Cumulative annual dividends declared (1) Net...

  • Page 88
    .... Health care costs have been reduced by Insured member co-payments related to our mail order and specialty pharmacy operations of $117 million, $107 million and $110 million for 2015, 2014 and 2013, respectively. Refer to accompanying Notes to Consolidated Financial Statements. Annual Report...

  • Page 89
    ... plan (the "Aetna Pension Plan"). We did not record any non-cash pension settlement charges during 2015 or 2013. Refer to Note 12 beginning on page 118 for additional information on the pension settlement charge. Refer to accompanying Notes to Consolidated Financial Statements. Annual Report...

  • Page 90
    ...' equity: Current liabilities: Health care costs payable Future policy benefits Unpaid claims Unearned premiums Policyholders' funds Collateral payable under securities lending and repurchase agreements Short-term debt Current portion of long-term debt Accrued expenses and other current liabilities...

  • Page 91
    ...acquire Coventry Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings Repurchases of common shares Dividends declared Balance at December 31, 2013 Net income Other increases... Refer to accompanying Notes to Consolidated Financial Statements. Annual Report-...

  • Page 92
    ... activities Cash flows from financing activities: Repayment of long-term debt Issuance of long-term debt Net (repayment) issuance of short-term debt (Withdrawals) net of deposits and interest credited to investment contracts Common shares issued under benefit plans, net Stock-based compensation tax...

  • Page 93
    ... 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 94
    ... made to 2013 and 2014 financial information to conform with 2015 presentation. New Accounting Standards Accounting for Investments in Qualified Affordable Housing Projects Effective January 1, 2015, we were permitted to make an accounting policy election to adopt new accounting guidance relating to...

  • Page 95
    .... Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Effective January 1, 2016, we adopted new accounting guidance related to the accounting for share-based payments when the terms of an award provide...

  • Page 96
    ...applicable to certain of our investments that reside in our separate accounts and employee benefit plans. The adoption of this new guidance will not have a material impact on our financial position or operating results. Disclosures about Short-Duration Insurance Contracts Effective December 31, 2016...

  • Page 97
    ...investment portfolio to other institutions for short periods of time using securities lending transactions and repurchase agreements. In connection with our securities lending program, we have exposure to interest rate risk on the changes in the value of our investments pledged as collateral as well...

  • Page 98
    ... 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 99
    ... statements of income and is credited to contract holders' accounts or the reserve for anticipated future losses through a charge to current and future benefits. Realized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products...

  • Page 100
    ... market-participant view. 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...

  • Page 101
    ... claims experience under the contracts through the balance sheet 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...

  • Page 102
    ... 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 103
    ... terms of these guarantees and record it as an offset to our ASC fees. In addition, fees and other revenue also include charges assessed against contract holders' funds for contract fees, participant fees and asset charges related to pension and annuity products in the Large Case Pensions business...

  • Page 104
    ... employer groups in 2015, 2014 and 2013. Under these annual contracts, CMS pays us a portion of the premium, a portion of, or a capitated fee for, catastrophic drug costs and a portion of the health care costs for low-income Medicare beneficiaries and provides a risk-sharing arrangement to limit our...

  • Page 105
    ... provides benefit administration technology and services to employers. We recorded goodwill related to this transaction of $329 million, none of which will be tax deductible. All of the goodwill related to this acquisition was assigned to our Health Care segment. Acquisition of the InterGlobal Group...

  • Page 106
    ... applicable tax impact. • Conforming adjustments 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...

  • Page 107
    ... and 2013 are as follows: (Millions) Stock appreciation rights ("SARs") (1) Other stock-based compensation awards (1) (2) 2015 .5 .8 2014 .3 1.2 2013 1.7 1.8 (2) SARs are excluded from the calculation of diluted EPS if the exercise price is greater than the average market price of Aetna common...

  • Page 108
    ... of the change in health care costs payable during 2015, 2014 and 2013: (Millions) Health care costs payable, beginning of the period Less: Reinsurance recoverables Health care costs payable, beginning of the period, net Acquisition of businesses Add: Components of incurred health care costs Current...

  • Page 109
    ... of these contracts are expensed as incurred. VOBA is being amortized 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) 2016 2017 2018...

  • Page 110
    ... investments of our Large Case Pensions segment supporting non-experiencerated 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 our future policy benefits...

  • Page 111
    ...the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At December 31, 2015, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 4.5 years. Our commercial...

  • Page 112
    ...$402.7 million, respectively, related to experience-rated and discontinued products. We reviewed the securities in the tables above and concluded that these are performing assets generating investment income to support the needs of our business. In performing this review, we considered factors such...

  • Page 113
    ...sale of debt securities and the related gross realized capital gains and losses for 2015, 2014 and 2013 were as follows: (Millions) Proceeds on sales Gross realized capital gains Gross realized capital losses $ 2015 5,256.2 80.6 76.3 $ 2014 4,727.7 91.1 35.5 $ 2013 6,524.8 113.9 100.0 Annual Report...

  • Page 114
    ... indicators: (In Millions, except credit ratings indicator) 1 2 to 4 5 and 6 7 Total $ $ 2015 65.8 $ 1,466.9 21.0 - 1,553.7 $ 2014 59.7 1,443.4 31.2 27.9 1,562.2 At December 31, 2015 scheduled mortgage loan principal repayments were as follows: (Millions) 2016 2017 2018 2019 2020 Thereafter $ 126...

  • Page 115
    ... $293.5 million for 2015, 2014 and 2013, respectively, related to investments supporting our experience-rated and discontinued products. 9. Health Care Reform's Reinsurance, Risk Adjustment and Risk Corridor Our net receivable (payable) related to the 3Rs risk management programs at December 31...

  • Page 116
    ... in interest expense and were not material during 2015, 2014 or 2013. Refer to Note 15 of Notes to Consolidated Financial Statements beginning on page 131 for additional information. Reclassifications out of accumulated other comprehensive income for pension and OPEB plan expenses are reflected...

  • Page 117
    ... employee benefit ("OPEB") plans included the following activity in accumulated other comprehensive loss in 2015, 2014 and 2013: Pension Plans Unrecognized Net Actuarial Losses $ (1,863.0) 550.1 49.0 (1,263.9) (460.0) 102.9 (1,621.0) 22.2 40.0 (1,558.8) Unrecognized Prior Service Credits...

  • Page 118
    ... is no active market; therefore, we classify these securities in 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 lack...

  • Page 119
    ...21,342.7 Level 1 Level 2 Level 3 Total December 31, 2014 Assets: Debt securities: U.S. government securities States, municipalities and political subdivisions U.S. corporate securities Foreign securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed...

  • Page 120
    ... supporting our experience-rated and discontinued products, which do not impact our operating results. The changes in the balances of Level 3 financial assets during 2014 were as follows: U.S. corporate securities $ 31.2 (4.0) (2.0) (.4) 42.9 (1.5) (2.3) (5.7) $ 58.2 $ $ (Millions) Beginning...

  • Page 121
    ...are carried on our balance sheets at adjusted cost or contract value. Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates that reflect the rates at which similar loans would be made to similar borrowers. These rates reflect our assessment of the...

  • Page 122
    ... 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 123
    ... of Separate Accounts financial assets between Levels 1 and 2. Offsetting Financial Assets and Liabilities Certain financial assets and liabilities are offset in our balance sheets or are subject to master netting arrangements or similar agreements with the applicable counterparty. Financial assets...

  • Page 124
    ... 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. During both 2015 and 2014 we did not make any contribution to the Aetna Pension Plan. During 2013 we made a voluntary cash contribution...

  • Page 125
    ... the beginning and ending balances of the fair value of plan assets during 2015 and 2014 for our pension and OPEB plans: Pension Plans (Millions) Fair value of plan assets, beginning of year Actual return on plan assets Employer contributions Settlements paid Benefits paid Fair value of plan assets...

  • Page 126
    ..., while the Non-qualified Pension Plan had benefit obligations in excess of the fair value of plan assets. Below is the funded status of each of our Pension Plans: Aetna Pension Plan (Millions) Benefit obligation Fair value of plan assets Funded status $ $ 2015 (5,713.5) $ 5,801.9 88.4 $ 2014...

  • Page 127
    ... plans were as follows: 2015 4.12% 7.00 N/A Pension Plans 2014 4.96% 7.00 N/A 2013 4.17% 7.00 N/A 2015 4.02% 5.30 - OPEB Plans 2014 4.73% 5.30 - 2013 3.94% 4.10 - Discount rate Expected long-term return on plan assets Rate of increase in future compensation levels We assume different health care...

  • Page 128
    ... 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, 2015 were as follows: (Millions) 2016 2017 2018 2019 2020 2021-2025 Pension Plans...

  • Page 129
    ... changes in fair value measured on a recurring basis at December 31, 2015 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 Commercial mortgage...

  • Page 130
    ...million of debt securities. Excludes $228.4 million of cash and cash equivalents and other payables. The changes in the balances of Level 3 Pension Assets during 2015 and 2014 were as follows: 2015 Real Estate Beginning balance Actual return on plan assets Purchases, sales and settlements Transfers...

  • Page 131
    ...-average dividend generation. Fixed income investments provide diversification benefits and liability hedging attributes that are desirable, especially in falling interest rate environments. At December 31, 2015, target investment allocations for the Aetna Pension Plan were: 38% in equity securities...

  • Page 132
    ...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 133
    ...We did not grant a material number of SARs in 2013. The grant date fair value was calculated using a modified Black-Scholes option pricing model using the following assumptions: 2015 Expected term (in years) Volatility Risk-free interest rate Dividend yield Initial price $ 6.48 33.4% 1.81% 1.13% 100...

  • Page 134
    ... during 2015, 2014 and 2013 were as follows: Number of Stock Options, SARs and PSARs 19.4 .7 (9.3) (.3) 10.5 9.8 10.5 1.4 (3.7) (.1) 8.1 6.1 $ Weighted Average Exercise Price 39.34 63.32 36.58 47.11 43.27 41.77 43.27 72.36 40.5 46.94 49.37 42.86 Weighted Average Remaining Contractual Life...

  • Page 135
    ... from stock options to repurchase our common stock in the open market in the same period. In 2015, 2014 and 2013 we recorded share-based compensation expense of $181 million, $164 million and $127 million, respectively, in general and administrative expenses. We also recorded related tax benefits of...

  • Page 136
    ... the amount computed by applying the statutory federal income tax rate to income before income taxes as follows: (Millions) Income before income taxes Tax rate Application of the tax rate Tax effect of: Health insurer fee State income taxes Other, net Income taxes 2015 $ 4,235.6 $ 35% 1,482.5 299...

  • Page 137
    .... We participate in the Compliance Assurance Process (the "CAP") with the Internal Revenue Service (the "IRS"). Under the CAP, the IRS undertakes audit procedures during the tax year and as the return is prepared for filing. The IRS has concluded its CAP audit of our 2014 tax return as well as all...

  • Page 138
    ...other comprehensive loss, net of tax, and is being amortized as a reduction to interest expense over the first 20 semi-annual interest payments associated with the $375 million of 4.75% senior notes due 2044. Cash Flow Hedges In 2015 and 2016, we entered into various interest rate swaps and treasury...

  • Page 139
    ...500 million. We designated these swaps as cash flow hedges against interest rate exposure related to the forecasted future issuance of fixed-rate debt to be primarily used to refinance long-term debt maturing in 2017. On September 30, 2015, we modified the timing of the forecasted future issuance of...

  • Page 140
    ... termination of Humana's Existing Credit Agreement and our having used commercially reasonable efforts to issue senior notes to provide funds to pay for the cash portion of the consideration payable under the Merger Agreement, to pay Aetna's fees and expenses related to the Proposed Acquisition and...

  • Page 141
    ... rate, (ii) the federal funds effective rate plus 0.50% per annum and (iii) LIBOR for an interest period of one month plus 1.00% per annum), plus, in each case, the applicable LIBOR margin or base rate margin depending upon the ratings of our long-term senior unsecured debt. The minimum and maximum...

  • Page 142
    ...(as defined in the applicable agreement) by Aetna, subject to certain exceptions and baskets, including an exception permitting the payment of regular cash dividends. During 2015, our insurance and HMO subsidiaries paid approximately $2.3 billion of dividends to the Company. Annual Report- Page 136

  • Page 143
    ... consequently are accounted for using deposit accounting. In May 2013, we entered into two agreements with unrelated reinsurers to reinsure a portion of our Medicare Advantage business and a portion of our group Commercial Insured Health Care business, respectively. These contracts did not qualify...

  • Page 144
    ... of loss reinsurance coverage on a portion of our group Commercial Insured Health Care business. 19. Commitments and Contingencies Guarantees We have the following significant guarantee and indemnification arrangements at December 31, 2015. • ASC Claim Funding Accounts - We have arrangements...

  • Page 145
    ... assessments. Litigation and Regulatory Proceedings Out-of-Network Benefit Proceedings We are named as a defendant in several purported class actions and individual lawsuits arising out of our practices related to the payment of claims for services rendered to our members by health care providers...

  • Page 146
    ...related diagnosis codes that determine the members' health status and the resulting risk-adjusted premium payments to us. In that regard, CMS has instituted risk adjustment data validation ("RADV") audits of various Medicare Advantage plans, including certain of the Company's plans, to Annual Report...

  • Page 147
    ... 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, as well as the Annual Report...

  • Page 148
    ... the placement of drugs in formulary tiers), sales practices, customer service practices, vendor oversight and claim payment practices (including payments to out-of-network providers and payments on life insurance policies). As a leading national health and related benefits company, we regularly are...

  • Page 149
    ... investments and real estate partnerships Total $ 2016 142 $ 142 284 $ 2017 115 $ 96 211 $ 2018 92 $ 83 175 $ 2019 62 $ 59 121 $ 2020 38 58 96 20. Segment Information Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. The acquired...

  • Page 150
    ... (loss) Segment assets 2013 Revenue from external customers Net investment income Interest expense Depreciation and amortization expense Income taxes (benefits) Operating earnings (loss) Segment assets (1) Health Care $ 57,202.6 $ 408.4 - 671.1 1,908.1 (1) Group Insurance 2,240.4 $ 237.9 - .2 38...

  • Page 151
    ... of long-term debt, net 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...

  • Page 152
    ...external customers by product in 2015, 2014 and 2013 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 153
    ..., which could favorably impact net income attributable to Aetna. As a result of this review, $55.9 million ($86.0 million pretax) of the reserve was released during 2013. This reserve release was primarily due to favorable investment performance as well as favorable retirement experience compared to...

  • Page 154
    ... are distinguished from assets supporting continuing products. At the time of discontinuance, a receivable from Large Case Pensions' continuing products was established on the discontinued products balance sheet. This receivable represented the net present value of anticipated cash shortfalls in the...

  • Page 155
    ...and 2013, respectively. Participant-directed withdrawals from our discontinued products were not significant in the years ended December 31, 2015, 2014 or 2013. Cash required to fund these distributions was provided by earnings and scheduled payments on, and sales of, invested assets. Annual Report...

  • Page 156
    ...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 157
    ...One Financial Plaza 755 Main Street 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, 2015 and...

  • Page 158
    ...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 of...

  • Page 159
    ...income attributable to Aetna Net income attributable to Aetna per share - basic (1) Net income attributable to Aetna per share - diluted (1) Dividends declared per share Common stock prices, high Common stock prices, low 2014 Total revenue Income before income taxes Income taxes Net income including...

  • Page 160
    ... companies included in the S&P MHCI were: Aetna Inc., Anthem, Inc. (formerly WellPoint, Inc.), Centene Corporation, Cigna Corporation, Health Net, Inc., Humana Inc., Magellan Health, Inc., Molina Healthcare, Inc., UnitedHealth Group Incorporated and WellCare Health Plans, Inc. Shareholder returns...

  • Page 161
    ... M. Guertin Executive Vice President, Chief Financial Officer and Chief Enterprise Risk Officer Thomas W. Weidenkopf Executive Vice President, Chief Human Resources Officer Karen S. Lynch President Corporate Secretary Judith H. Jones Vice President and Corporate Secretary Annual Report- Page 155

  • Page 162
    .... Aetna's Annual Report on Form 10-K provides additional details about the Company's business as well as other financial information not included in this Annual Report, Financial Report to Shareholders. To receive a copy of the Annual Report on Form 10-K without charge, call 1-800-237-4273 or mail...

  • Page 163
    .... Registered shareholders may contact Computershare to inquire about replacement dividend 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...

  • Page 164
    ... (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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