Aetna 2006 Annual Report Download - page 57

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Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts in the Large Case
Pensions business and customer funds associated with group life and health contracts in the Health Care and
Group Insurance businesses. Reserves on such contracts are equal to cumulative deposits less withdrawals and
charges plus credited interest thereon, net of experience-rated adjustments. In 2006, interest rates for pension and
annuity investment contracts ranged from 3.3% to 9.6% and interest rates for group life and health contracts
ranged from 1.0% to 4.5%. In 2005, interest rates for pension and annuity investment contracts ranged from 3.3%
to 9.6% and interest rates for group life and health contracts ranged from .8% to 4.6%. Reserves on contracts
subject to experience rating reflect our rights as well as the rights of policyholders and plan participants.
We review health care and insurance liabilities periodically. We reflect any necessary adjustments during the
current period in results of operations. While the ultimate amount of claims and related expenses are dependent on
future developments, it is management’ s opinion that the liabilities that have been established are adequate to
cover such costs. The health care and insurance liabilities that are expected to be paid within one year from the
balance sheet date are classified as current liabilities in the Consolidated Balance Sheets.
Health Care Contract Acquisition Costs
Health care products included in the Health Care segment are cancelable by either the customer or the member
monthly upon written notice. Acquisition costs related to our prepaid health care and health indemnity contracts
are expensed as incurred.
Premium Deficiency
We evaluate our health care and group insurance contracts to determine if it is probable that a loss will be
incurred. We would recognize a premium deficiency loss when it is probable that expected future claims,
including maintenance costs (for example, claim processing costs), will exceed existing reserves plus anticipated
future premiums and reinsurance recoveries on existing contracts. Anticipated investment income is considered in
the calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium
deficiency losses, contracts are grouped in a manner consistent with our method of acquiring, servicing and
measuring the profitability of such contracts. We did not have any material premium deficiency reserves at
December 31, 2006 and 2005.
Revenue Recognition
Health care premiums associated with our prepaid and other health care plans are recognized as income in the
month in which the enrollee is entitled to receive health care services. Health care premiums are reported net of an
allowance for estimated terminations and uncollectable amounts. Other premium revenue for group life, long-term
care and disability products is recognized as income, net of allowances for termination and uncollectable accounts,
over the term of the coverage. Other premium revenue for Large Case Pensions’ limited payment pension and
annuity contracts is recognized as revenue in the period received. Premiums related to unexpired contractual
coverage periods are reported as unearned premiums in the Consolidated Balance Sheets.
The balance of the allowance for estimated terminations and uncollectable accounts on premiums receivable was
$90 million and $69 million at December 31, 2006 and 2005, respectively, and is reflected as a reduction of
premiums receivable on the Consolidated Balance Sheets. The balance of the allowance for uncollectable accounts
on other receivables was $66 million and $57 million at December 31, 2006 and 2005, respectively, and is reflected
as a reduction of other receivables on the Consolidated Balance Sheets.
Some of our contracts allow for premiums to be adjusted to reflect actual experience. Such adjustments are
reasonably estimable (based on actual experience of the customer emerging under the contract and the terms of the
underlying contract) and are recognized as the experience emerges.