Aetna 2009 Annual Report Download - page 59

Annual Report – Page 53
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 both 2009 and 2008.
Our estimate of the present value of future benefits under such contracts is based upon mortality, morbidity and
interest rate assumptions.
Unpaid claims
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 IBNR 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 the U.S. Social Security Administration. We develop our reserves
for IBNR 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 $1.8 billion and $1.6 billion at December 31, 2009 and 2008, respectively. The undiscounted value of these
unpaid claim liabilities was $2.4 billion and $2.5 billion at December 31, 2009 and 2008, respectively. The discount
rates generally reflect our expected investment returns for the investments supporting these liabilities and ranged from
5.8% to 6.3% in 2009 and 6.0% to 6.4% in 2008. 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 our statements of income in the period they are determined.
Policyholders’ funds
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 for such contracts are equal to cumulative deposits less withdrawals and charges plus
credited interest thereon, net of experience-rated adjustments. In 2009, interest rates for pension and annuity
investment contracts ranged from 3.5% to 10.5% and interest rates for group life and health contracts ranged from 0%
to 4.2%. In 2008, interest rates for pension and annuity investment contracts ranged from 3.3% to 9.7% and interest
rates for group life and health contracts ranged from .1% to 4.7%. Reserves for 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 our balance sheets.
Premium Deficiency Reserves
We evaluate our insurance contracts to determine if it is probable that a loss will be incurred. We 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, 2009 or 2008.
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.
Revenue Recognition
Health care premiums 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