Aetna 2006 Annual Report Download - page 80

In December 2002, we entered into an interest rate swap agreement to convert the fixed rate of 8.5% on $200
million of our senior notes to a variable rate of three-month LIBOR plus 254.0 basis points. In December 2001, we
entered into an interest rate swap agreement to convert the fixed rate of 8.5% on $350 million of our senior notes to
a variable rate of three-month LIBOR plus 159.5 basis points. Based on the terms of the swap agreements, they
qualified as fair value hedges. In May 2005, we sold both of these interest rate swap agreements. At the time of
the sale of the interest rate swap agreements, the cumulative fair value adjustment of the debt on the Consolidated
Balance Sheet was a gain of $7.8 million. As a result of the sale, we were amortizing the cumulative fair value
adjustment over the life of the applicable senior notes as a reduction of interest expense until we recognized the
remaining deferred gain in 2006 in connection with the redemption of the $700 million, 8.5% senior notes (refer to
Note 13 on page 75).
16. Dividend Restrictions and Statutory Surplus
Our business operations are conducted through subsidiaries that principally consist of HMOs and insurance
companies. In addition to general state law restrictions on payments of dividends and other distributions to
shareholders applicable to all corporations, HMOs and insurance companies are subject to further regulations that,
among other things, may require such companies to maintain certain levels of equity, and restrict the amount of
dividends and other distributions that may be paid to their parent corporations. These regulations generally are
not directly applicable to Aetna, as a holding company, since Aetna is not an HMO or insurance company. The
additional regulations applicable to our HMO and insurance company subsidiaries are not expected to affect our
ability to service our debt or to pay dividends or the ability of any of our subsidiaries to service its debt or other
financing obligations.
Under regulatory requirements, the amount of dividends that may be paid to Aetna by our insurance and HMO
subsidiaries without prior approval by regulatory authorities as calculated at December 31, 2006 is approximately
$1.4 billion in the aggregate. There are no such restrictions on distributions from Aetna to its shareholders.
The combined statutory net income for the years ended and combined statutory capital and surplus at December
31, 2006, 2005 and 2004 for our insurance and HMO subsidiaries, were as follows:
(Millions) 2006 2005 2004
Statutory net income 1,500.9$ 1,568.3$ 1,276.6$
Statutory capital and surplus 4,704.0 4,547.3 4,001.6
17. Reinsurance
We utilize reinsurance agreements primarily to facilitate the acquisition or disposition of certain insurance
contracts. These reinsurance agreements permit us to recover a portion of losses from reinsurers, although they do
not discharge our primary liability as direct insurer of the risks reinsured. Failure of reinsurers to indemnify us
could result in losses, however we do not expect charges for unrecoverable reinsurance to have a material effect on
our results of operations or financial position. We evaluate the financial condition of our reinsurers and monitor
concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of our
reinsurers. At December 31, 2006, reinsurance recoverables consisted primarily of amounts due from third parties
that maintain independent agency ratings that are consistent with those companies that are considered to have a
strong ability to meet their obligations.
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