Aetna 2006 Annual Report Download - page 55

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Reinsurance
We utilize reinsurance agreements primarily to facilitate the acquisition or disposition of certain insurance
contracts. Ceded reinsurance agreements permit the recovery of a portion of our losses from reinsurers, although
they do not discharge our primary liability as direct insurer of the risks reinsured. Only those reinsurance
recoverables deemed probable of recovery are reflected as assets. In the normal course of business, we enter into
agreements with other insurance companies under which we assume reinsurance, primarily related to our group
life and health products (refer to Note 17 beginning on page 78 for additional information). We do not transfer
any portion of the financial risk associated with our HMO products to third parties, except in areas that we
participate in state-mandated health insurance pools.
Goodwill
We evaluate goodwill for impairment (at the reporting unit level) annually, or more frequently if circumstances
indicate a possible impairment, by comparing an estimate of the fair value of the applicable reporting unit to its
carrying value, including goodwill. If the carrying value exceeds fair value, we compare the implied fair value of
the applicable goodwill with the carrying amount of that goodwill to measure the amount of goodwill impairment,
if any. Our reporting units with goodwill are our Health Care and Group Insurance segments. Impairments, if any,
would be classified as an operating expense. During the fourth quarter of 2006, 2005 and 2004, we performed
annual impairment tests, in conjunction with our annual planning process, and determined there were no
impairment losses related to goodwill.
Our annual impairment tests were based on an evaluation of future discounted cash flows. These evaluations
utilized the best information available to us at the time, including supportable assumptions and projections we
believe are reasonable. Collectively, these evaluations were our best estimates of projected future cash flows. Our
discounted cash flow evaluations used a range of discount rates that corresponds to our weighted-average cost of
capital. This discount rate range is consistent with that used for investment decisions and takes into account the
specific and detailed operating plans and strategies of the Health Care and Group Insurance reporting units. Certain
other key assumptions utilized, including changes in membership, revenue, health care costs, operating expenses
and effective tax rates, are based on estimates consistent with those utilized in our annual planning process that we
believe are reasonable. If we do not achieve our earnings objectives, the assumptions and estimates underlying
these goodwill impairment evaluations could be adversely affected, and we may impair a portion of our goodwill,
which would adversely affect our operating results in the period of impairment.
Property and Equipment and Other Acquired Intangible Assets
We report property and equipment and other acquired intangible assets at historical cost, net of accumulated
depreciation or amortization. At both December 31, 2006 and 2005, the historical cost of property and equipment
was approximately $.9 billion, and the related accumulated depreciation was approximately $.6 billion.
Depreciation and amortization is calculated primarily using the straight-line method over the estimated useful lives
of the respective assets ranging from three to forty years.
We regularly evaluate whether events or changes in circumstances indicate that the carrying amount of property
and equipment and other acquired intangible assets may not be recoverable. If it is determined that an asset may
not be recoverable, we estimate the future undiscounted cash flows expected to result from future use of the asset
and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying
amount of the asset, an impairment loss will be recognized for the amount by which the carrying amount of the
asset exceeds its fair value.
Separate Accounts
Separate Account assets and liabilities in the Large Case Pensions business represent funds maintained to meet
specific objectives of contract holders who bear the investment risk. These assets and liabilities are carried at fair
value. Investment income and capital gains and losses accrue directly to such contract holders. The assets of each
account are legally segregated and are not subject to claims arising from our other businesses. Deposits,
withdrawals, net investment income and realized and unrealized capital gains and losses on Separate Account
assets are not reflected in the Consolidated Statements of Income or Cash Flows. Management fees charged to
contract holders are included in fees and other revenue and recognized over the period earned.