Aetna 2006 Annual Report Download - page 23

Ratings
As of February 26, 2007, the credit ratings of Aetna Inc. and Aetna Life Insurance Company (“ALIC”) from the
respective nationally recognized statistical rating organizations (“Rating Agencies”) were as follows:
Moody's Investors Standard
A.M. Best Fitch Service & Poor's
Aetna Inc. (senior debt)
(1)
bbb+ A- A3 A-
Aetna Inc. (commercial paper)
(1)
AMB-2 F2 P-2 A-2
ALIC (financial strength)
(1)
A AA- Aa3 A+
(1) The stated outlook from all Rating Agencies for the senior debt and financial strength ratings of Aetna Inc. and ALIC, respectively,
is stable.
Solvency Regulation
The National Association of Insurance Commissioners (“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 (“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 insurers to submit a
comprehensive plan to the state insurance commissioner to requiring the state insurance commissioner to place the
insurer under regulatory control. At December 31, 2006, 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, 2006, 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 as part of determining 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 of the final transactions that occur.
Health Care Costs Payable
Health care costs payable include 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”). At December
31, 2006 and 2005, our IBNR reserves represented approximately 78% and 79%, respectively, of total health care
costs payable. The remainder of health care costs payable is primarily comprised of pharmacy and capitation
payables and accruals for state assessments. We develop our IBNR estimates 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 to be the most critical assumptions. In developing our estimate of health care costs payable, we
consistently apply these actuarial principles and assumptions each period, with consideration to the variability of
related factors.
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