Aetna 2015 Annual Report Download - page 26

Annual Report- Page 20
debt and shareholder dividends. In addition, at our discretion, we use these funds for other purposes such as
funding share and debt repurchase programs, investments in new businesses and other purposes we consider
advisable.
At December 31, 2015 and 2014, we held investments of $690 and $778 million, respectively, that are not
accounted for as Separate Accounts assets but are legally segregated and 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 not have any guarantees or other off-balance sheet arrangements that we believe, based on historical
experience and current business plans, are reasonably likely to have a material impact on our current or future
operating results, financial position or cash flows (other than the guarantees described in Note 19 of Notes to
Consolidated Financial Statements beginning on page 138) at December 31, 2015. In addition, refer to Note 8 of
Notes to Consolidated Financial Statements beginning on page 103 for additional detail of our variable interest
entities at December 31, 2015.
Solvency Regulation
The National Association of Insurance Commissioners (the “NAIC”) utilizes risk-based capital (“RBC”) standards
for insurance companies that are designed to identify weakly-capitalized companies by comparing each company’s
adjusted surplus to its required surplus (the “RBC Ratio”). The RBC Ratio is designed to reflect the risk profile of
insurance companies. Within certain ratio ranges, regulators have increasing authority to take action as the RBC
Ratio decreases. There are four levels of regulatory action, ranging from requiring an insurer to submit a
comprehensive financial plan for increasing its RBC to the state insurance commissioner to requiring the state
insurance commissioner to place the insurer under regulatory control. At December 31, 2015, the RBC Ratio of
each of our primary insurance subsidiaries was above the level that would require regulatory action. The RBC
framework described above for insurers has been extended by the NAIC to health organizations, including HMOs.
Although not all states had adopted these rules at December 31, 2015, at that date, each of our active HMOs had a
surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would
require regulatory action under the NAIC’s RBC rules. External rating agencies use their own RBC standards when
they determine a company’s rating.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance with GAAP. The application of GAAP requires
management to make estimates and assumptions that affect our consolidated financial statements and related notes.
The accounting estimates described below are those we consider critical in preparing our consolidated financial
statements. We use information available to us at the time the estimates are made; however, as described below,
these estimates could change materially if different information or assumptions were used. Also, these estimates
may not ultimately reflect the actual amounts that occur.
Health Care Costs Payable
At December 31, 2015 and 2014, 92% and 95%, respectively, of health care costs payable are estimates of the
ultimate cost of claims that have been incurred but not yet reported to us and of those which have been reported to
us but not yet paid (collectively “IBNR”). The remainder of health care costs payable is primarily comprised of
pharmacy and capitation payables and accruals for state assessments. We develop our estimate of IBNR using
actuarial principles and assumptions that consider numerous factors. Of those factors, we consider the analysis of
historical and projected claim payment patterns (including claims submission and processing patterns) and the
assumed health care cost trend rate (the year-over-year change in per member per month health care costs) to be the
most critical assumptions. In developing our estimate of IBNR, we consistently apply these actuarial principles and
assumptions each period, with consideration to the variability of related factors.
We analyze historical claim payment patterns by comparing claim incurred dates (i.e., the date services were
provided) to claim payment dates to estimate “completion factors.” We estimate completion factors by aggregating