Aetna 2006 Annual Report Download - page 56

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In 1996, we entered into a contract with UBS Realty Investors, LLC (formerly known as Allegis Realty Investors,
LLC) whereby mortgage loan and real estate Separate Account assets would transition out of our business. This
transition is expected to occur within the next two years. The impact of this transition will be a reduction of
Separate Account assets and corresponding liabilities as shown in the Consolidated Balance Sheets. While the
value of Separate Account assets was approximately $11.8 billion at December 31, 2006, their value at the time of
transition cannot be predicted. This transition is not expected to materially impact our results of operations or cash
flows.
Health Care and Other Insurance Liabilities
Health care costs payable consist principally of unpaid fee-for-service medical, dental and pharmacy claims,
capitation costs and other amounts due to health care providers pursuant to risk-sharing arrangements related to
Health Care’ s POS, HMO, PPO, Indemnity and Medicare products. Unpaid health care claims include our
estimate of payments we will make on claims reported to us but not yet paid and for health care services rendered
to members but not yet reported to us as of the balance sheet date. Also included in these estimates is the cost of
services that will continue to be rendered after the balance sheet date if we are obligated to pay for such services in
accordance with contractual or regulatory requirements. Such estimates are developed using actuarial principles
and assumptions which consider, among other things, historical and projected claim submission and processing
patterns, medical cost trends, historical utilization of health care services, claim inventory levels, changes in
membership and product mix, seasonality and other relevant factors. We reflect changes in estimates in health
care costs in the Consolidated Statements of Income in the period they are determined. Capitation costs represent
contractual monthly fees paid to participating physicians and other medical providers for providing medical care.
Amounts due under risk-sharing arrangements are based on the terms of the underlying contracts with the
providers and consider claims experience under the contracts through the balance sheet date.
Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in the Large
Case Pensions business and long-duration group life and long-term care insurance contracts in the Group
Insurance business. Reserves for limited payment contracts are computed in accordance with actuarial principles
and are based upon assumptions reflecting anticipated mortality, retirement, expense and interest rate experience.
Such assumptions generally vary by plan, year of issue and policy duration. Assumed interest rates on such
contracts ranged from 2.0% to 11.3% in both 2006 and 2005. We periodically review mortality assumptions
against both industry standards and our experience. Reserves for group life and long-term care contracts represent
our estimate of the present value of future benefits to be paid to or on behalf of policyholders less the present value
of future net premiums. Assumed interest rates on such contracts ranged from 2.5% to 8.8% in 2006 and 2.5% to
9.5% in 2005. Our estimate of the present value of future benefits is based upon mortality, morbidity and interest
rate assumptions.
Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life
insurance contracts in the Group Insurance business, including an estimate for claims incurred but not yet reported
to us as of the balance sheet date. Reserves associated with certain short-duration group disability and term life
insurance contracts are based upon our estimate of the present value of future benefits, which is based on assumed
investment yields and assumptions regarding mortality, morbidity and recoveries from government programs (e.g.,
social security). We develop our reserves for claims incurred but not yet reported to us using actuarial principles
and assumptions which consider, among other things, contractual requirements, claim incidence rates, claim
recovery rates, seasonality and other relevant factors. We discount certain claim liabilities related to group long-
term disability and premium waiver contracts. The discounted unpaid claim liabilities were $1.4 billion at
December 31, 2006 and 2005. The undiscounted value of these unpaid claim liabilities was $2.1 billion at
December 31, 2006 and 2005. The discount rates generally reflect our expected investment returns for the
investments supporting these liabilities and ranged from 6.0% to 6.1% in 2006 and 6.1% to 6.2% in 2005. The
discount rates for retrospectively-rated contracts are set at contractually specified levels. Our estimates of unpaid
claims are subject to change due to changes in the underlying experience of the insurance contracts, changes in
investment yields or other factors, and these changes are recorded in current and future benefits in the
Consolidated Statements of Income in the period they are determined.