Aetna 2015 Annual Report Download - page 30

Annual Report- Page 24
Large Case Pensions Discontinued Products Reserve
We discontinued certain Large Case Pensions products in 1993 and established a reserve to cover losses expected
during the run-off period. Since 1993, we have made several adjustments resulting in a reduction to this reserve
that have increased net income attributable to Aetna. These adjustments occurred primarily because our investment
experience as well as our mortality and retirement experience have been better than the experience we projected at
the time we discontinued the products. There was no adjustment of this reserve in 2015 or 2014. In 2013, $86
million pretax, of the reserve was released as a result of favorable investment performance as well as favorable
retirement experience compared to assumptions we previously made in estimating the reserve. There can be no
assurance that adjustments to the discontinued products reserve will occur in the future. Future adjustments could
positively or negatively impact net income attributable to Aetna.
Recoverability of Goodwill and Other Acquired Intangible Assets
We have made acquisitions that included a significant amount of goodwill and other intangible assets. When we
complete an acquisition, we apply the acquisition method of accounting, which among other things, requires the
recognition of goodwill (which represents the excess cost of the acquisition over the fair value of net assets acquired
and identified intangible assets). Goodwill is subject to an annual (or under certain circumstances more frequent)
impairment test based on its estimated fair value. Other intangible assets that meet certain criteria are amortized
over their useful lives, except for the valuation of business acquired which amortizes in proportion to estimated
premiums over the expected life of the acquired contracts, and are also subject to a periodic impairment test. For
these impairment evaluations, we use an implied fair value approach, which uses a discounted cash flow analysis
and other valuation methodologies. These impairment evaluations use many assumptions and estimates in
determining an impairment loss, including certain assumptions and estimates related to future earnings. If we do
not achieve our earnings objectives, the assumptions and estimates underlying these impairment evaluations could
be adversely affected, which could result in an asset impairment charge that would negatively impact our operating
results. There were no impairment losses recognized in any of the three years ended December 31, 2015, 2014 or
2013.
Measurement of Defined Benefit Pension and Other Postretirement Employee Benefit Plans
We sponsor defined benefit pension plans (“pension plans”) and OPEB plans for our employees and retirees.
Effective December 31, 2010, our employees no longer earn future pension service credits in the Aetna Pension
Plan, although the Aetna Pension Plan will continue to operate and account balances will continue to earn annual
interest credits. Employees covered by our non-qualified supplemental pension plan stopped accruing benefits
effective January 1, 2007, although interest credits continue to be credited on these cash balance accounts.
Major assumptions used in the accounting for our pension plans include the expected return on plan assets, if
applicable, mortality rates and the discount rate. We select our assumptions based on our information and market
indicators, and we evaluate our assumptions at each annual measurement date (December 31, for each year
presented). A change in any of our assumptions would have an effect on our pension and OPEB plan costs. A
discussion of our assumptions used to determine the expected return on plan assets and mortality rates can be found
in Note 12 of Notes to Consolidated Financial Statements beginning on page 118.
The discount rates we used in accounting for our pension and OPEB plans were calculated using a yield curve as of
our annual measurement date. Each yield curve consisted of a series of individual discount rates, with each
discount rate corresponding to a single point in time, based on high-quality bonds (that is, bonds with an average
rating of AA based on ratings from Standard & Poor’s and Fitch, and the equivalent ratings from Moody’s). We
project the benefits expected to be paid from each plan at each point in the future based on each participant’s current
service (but reflecting expected future pay increases). These projected benefit payments are then discounted to the
measurement date using the corresponding rate from the yield curve. A lower discount rate increases the present
value of benefit obligations. In 2015, we increased our weighted average discount rate to 4.50% for our pension
plans from the 4.12% used at the measurement date in 2014. In 2015, we increased our weighted average discount
rate on OPEB plans to 4.39% from the 4.02% used at the measurement date in 2014. A one-percentage point
decrease in the assumed discount rate would decrease our annual pension costs by $5 million after-tax and would
have a negligible effect on our annual OPEB costs.