Aetna 2006 Annual Report Download - page 28

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Premium Deficiency Reserves
In cases where we project future policy benefit costs will exceed our existing reserves plus anticipated future
premiums, we establish premium deficiency reserves for the amount of the expected loss in excess of expected
future premiums. Anticipated investment income is considered in the calculation of expected losses for certain
contracts. Any such reserves established would normally cover expected losses until the next policy renewal dates
for the related policies. We did not have any material premium deficiency reserves for our Group Insurance
business at December 31, 2006.
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 to reduce this reserve that have increased
our net income. 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. In 2006, $115 million ($75 million after tax) and in 2005, $67 million ($43 million after tax) of reserves
were released for these reasons. There were no reserve adjustments in 2004. There can be no assurance that
adjustments to the discontinued products reserve will occur in the future or that they will increase net income.
Future adjustments could negatively impact our operating results.
Recoverability of Goodwill and Other Acquired Intangible Assets
We have made previous acquisitions that included a significant amount of goodwill and other 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 continue to be amortized over their useful
lives and are also subject to an 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.
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension (“pension”) and other postretirement benefit (“OPEB”) plans. Refer to Note
12 of Notes to Consolidated Financial Statements beginning on page 67 for additional information. Major
assumptions used in the accounting for these plans include the expected return on plan assets 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 (historically September 30). A change in any of our assumptions would have an
effect on our pension and OPEB plan costs.
Our expected return on plan assets assumption is based on many factors, including forecasted capital market real
returns over a long-term horizon, forecasted inflation rates, historical compounded asset returns and patterns and
correlations on those returns. Expectations for modest increases in interest rates, normal inflation trends and
average capital market real returns led us to an expected return on pension plan assets assumption of 8.5% for 2006
and 8.75% for 2005 and an expected return on OPEB plan assets assumption of 5.7% for 2006 and 6.5% for 2005.
Our expected return on pension plan assets is based on asset range allocations assumptions of 60% – 70% U.S. and
international public and private equity securities, 20% – 30% fixed income securities and 5% – 15% real estate and
other assets. We regularly review actual asset allocations and periodically rebalance our investments to the mid-
point of our targeted allocation ranges when we consider it appropriate. At December 31, 2006, our actual asset
allocations were consistent with our asset allocation assumptions. A one-percentage point increase/decrease in our
expected return on plan assets assumption would decrease/increase our annual pension costs by approximately $35
million after tax and would decrease/increase our annual OPEB costs by approximately $.5 million after tax.
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. The yield curve consists 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 a rating of Aa or better
from Moody’ s Investors Service or a rating of AA or better from Standard and Poor’ 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