Financial Report to Shareholders
Page | Description | |
2 — 41 | Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) —MD&A provides a review of our operating results for the years 2004 through 2006, as well as our financial condition at December 31, 2006 and 2005. This MD&A should be read in conjunction with our consolidated financial statements and notes thereto. MD&A is comprised of the following: |
2 | Overview– We begin our MD&A with an overview of earnings and cash flows for the years 2004 through 2006, as well as our outlook for 2007. In this section, we also discuss new accounting standards and significant changes to our management and Board of Directors. | ||
5 | Health Care– We provide a quantitative and qualitative discussion about the factors affecting Health Care revenues and operating earnings in this section. | ||
10 | Group Insurance- We provide a quantitative and qualitative discussion about the factors affecting Group Insurance revenues and operating earnings in this section. | ||
11 | Large Case Pensions– We provide a quantitative and qualitative discussion about the factors affecting Large Case Pensions operating earnings, including the results of discontinued products in this section. | ||
14 | Corporate Interest– We discuss changes in corporate interest expense in this section. | ||
14 | Investments– As an insurer, we have substantial investment portfolios that support our liabilities. In this section, we provide a quantitative and qualitative discussion of our investments, realized capital gains and losses and our evaluation of the risk of our market-sensitive instruments. | ||
17 | Liquidity and Capital Resources– In this section, we discuss our cash flows, financing resources, contractual obligations and other key matters that may affect our liquidity and cash flow activities. | ||
21 | Critical Accounting Estimates– In this section we discuss the accounting estimates we consider critical in preparing our financial statements, including why we consider them critical and the key assumptions used in making these estimates. | ||
28 | Regulatory Environment– In this section, we provide a discussion of the regulatory environment in which we operate. | ||
34 | Forward-Looking Information/Risk Factors– We conclude MD&A with a discussion of certain risks and uncertainties that, if developed into actual events, could have a material adverse impact on our business, financial condition or results of operations. |
42 | Selected Financial Data– We provide selected annual financial data for the most recent five years. | |
43 | Consolidated Financial Statements– Includes our consolidated balance sheets at December 31, 2006 and 2005 and the related consolidated statements of income, shareholders’ equity and cash flow for each of the years in the three-year period ended December 31, 2006. These financial statements should be read in conjunction with the accompanying Notes to Consolidated Financial Statements. | |
47 | Notes to Consolidated Financial Statements | |
89 | Reports of Management and our Independent Registered Public Accounting Firm– We include a report from management on its responsibilities for internal control over financial reporting and financial statements, the oversight of our Audit Committee and KPMG LLP’s opinions on our consolidated financial statements and internal control over financial reporting. | |
92 | Quarterly Data (unaudited)– We provide selected quarterly financial data for each of the quarters in 2006 and 2005. |
Page 1
(Millions) | 2006 | 2005 | 2004 | |||||||||
Revenue: | ||||||||||||
Health Care | $ | 22,240.5 | $ | 19,616.1 | $ | 17,200.6 | ||||||
Group Insurance | 2,152.1 | 2,141.8 | 1,960.1 | |||||||||
Large Case Pensions | 753.1 | 734.0 | 743.4 | |||||||||
Total revenue | 25,145.7 | 22,491.9 | 19,904.1 | |||||||||
Net income | 1,701.7 | 1,573.3 | 2,154.8 | |||||||||
Operating earnings: | ||||||||||||
Health Care(1) | 1,572.7 | 1,427.7 | 992.3 | |||||||||
Group Insurance(1) | 132.7 | 127.7 | 123.3 | |||||||||
Large Case Pensions(1) | 38.9 | 33.2 | 31.3 | |||||||||
Cash flows from operations | 1,688.3 | 1,720.3 | 1,283.9 | |||||||||
(1) | Our discussion of operating results for our reportable business segments is based on operating earnings, which is a non-GAAP measure of net income (the term “GAAP” refers to U.S. generally accepted accounting principles). Refer to Use of Non-GAAP Measures in this MD&A on page 5 for a discussion of non-GAAP measures. Refer to pages 6, 11 and 12 for a reconciliation of operating earnings to net income for Health Care, Group Insurance and Large Case Pensions, respectively. |
Page 2
Our goals for 2007 are to profitably grow market share in targeted geographic areas and customer bases; to profitably grow operating earnings; to demonstrate superior medical cost, quality and clinical integration for our customers; to achieve competitive operating expenses; to use technology to enhance our competitive position; and to deliver best-in-class service for all our constituents. Our 2007 outlook is as follows:
Page 3
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“FAS”) No. 123 Revised,“Share-Based Payment”(“FAS 123R”). FAS 123R requires us to expense the fair value of all share-based compensation awards issued to employees and non-employees. Stock-based compensation expense is measured at the grant date, based on the fair value of the award. The expense is recognized over the requisite service period, which primarily is the vesting period, except for retirement eligible individuals for whom a majority of the expense is recognized in the year of grant. We applied the modified-retrospective approach of adopting FAS 123R and accordingly, all prior period financial information was adjusted to reflect our stock compensation activity since 1995. We recorded stock-based compensation expense, included in general and administrative expenses, of $61 million ($94 million pretax) and $90 million ($139 million pretax), representing $.10 per common share and $.15 per common share, for the years ended December 31, 2005 and 2004, respectively. Stock-based compensation expense is recorded in each of our segments (primarily Health Care and Group Insurance).
Effective October 1, 2006, Chief Executive Officer and President Ronald A. Williams was appointed Chairman succeeding John W. Rowe, M.D. who retired from Aetna and Aetna’s Board on that date. In connection with his retirement, Dr. Rowe and Aetna entered into a consulting agreement on terms previously disclosed.
Effective June 29, 2006, Frank M. Clark, Chairman and CEO of Commonwealth Edison Company, was appointed to our Board. With the addition of Mr. Clark, the Board consists of 12 members. Mr. Clark also serves as a member of the Board’s Committee on Compensation and Organization and its Medical Affairs Committee.
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The discussion of our results of operations that follows is presented based on our reportable segments in accordance with FAS No. 131,Disclosures about Segments of an Enterprise and Related Information, and is consistent with our segment disclosure included in Note 19 of Notes to Consolidated Financial Statements beginning on page 82. Each segment’s discussion of results is based on operating earnings, which is the measure reported to our Chief Executive Officer for purposes of assessing the segment’s financial performance and making operating decisions, such as allocating resources to the segment. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions.
Page 5
(Millions) | 2006 | 2005 | 2004 | |||||||||
Premiums: | ||||||||||||
Commercial Risk(1) | $ | 17,356.5 | $ | 15,919.6 | $ | 13,924.1 | ||||||
Medicare | 1,787.7 | 1,005.1 | 938.7 | |||||||||
Medicaid | 9.3 | — | — | |||||||||
Total premiums | 19,153.5 | 16,924.7 | 14,862.8 | |||||||||
Fees and other revenue | 2,743.7 | 2,385.8 | 2,051.6 | |||||||||
Net investment income | 334.2 | 295.0 | 262.1 | |||||||||
Net realized capital gains | 9.1 | 10.6 | 24.1 | |||||||||
Total revenue | 22,240.5 | 19,616.1 | 17,200.6 | |||||||||
Health care costs(2) | 15,301.0 | 13,107.9 | 11,637.7 | |||||||||
Operating expenses: | ||||||||||||
Selling expenses | 867.4 | 763.3 | 630.9 | |||||||||
General and administrative expenses(3) | 3,618.6 | 3,424.9 | 3,289.0 | |||||||||
Total operating expenses | 4,486.0 | 4,188.2 | 3,919.9 | |||||||||
Amortization of other acquired intangible assets | 80.4 | 57.4 | 42.5 | |||||||||
Total benefits and expenses | 19,867.4 | 17,353.5 | 15,600.1 | |||||||||
Income before income taxes | 2,373.1 | 2,262.6 | 1,600.5 | |||||||||
Income taxes | 847.6 | 827.9 | 592.6 | |||||||||
Net income | $ | 1,525.5 | $ | 1,434.7 | $ | 1,007.9 | ||||||
(1) | Commercial Risk includes all health care risk products, except Medicare and Medicaid. | |
(2) | The percentage of health care costs related to capitated arrangements (a fee arrangement where we pay providers a monthly fixed fee for each member, regardless of the medical services provided to the member) was 5.9% for 2006 compared to 7.9% for 2005 and 9.1% for 2004. | |
(3) | Includes salaries and related benefit expenses of $2.2 billion in 2006, $2.1 billion in 2005 and $2.0 billion in 2004. |
(Millions, after tax) | 2006 | 2005 | 2004 | |||||||||
Net income | $ | 1,525.5 | $ | 1,434.7 | $ | 1,007.9 | ||||||
Other items included in net income: | ||||||||||||
Net realized capital gains | (8.0 | ) | (7.0 | ) | (15.6 | ) | ||||||
Physician class action settlement insurance-related charge(1) | 47.1 | — | — | |||||||||
Debt refinancing charge(2) | 8.1 | — | — | |||||||||
Operating earnings | $ | 1,572.7 | $ | 1,427.7 | $ | 992.3 | ||||||
(1) | As a result of a trial court’s ruling in 2006, we concluded that a $72.4 million pretax receivable from third party insurers related to certain litigation we settled in 2003 was no longer probable of collection for accounting purposes. As a result, we wrote off this receivable in 2006. We believe this charge neither relates to the ordinary course of our business nor reflects our underlying business performance, and therefore, we have excluded it from operating earnings in 2006. | |
(2) | In connection with the issuance of $2.0 billion of our senior notes in 2006, we redeemed all $700 million of our 8.5% senior notes due 2041. In connection with this redemption, we wrote off debt issuance costs associated with the 8.5% senior notes due 2041 and recognized the deferred gain from the interest rate swaps that had hedged the 8.5% senior notes due 2041 (in May 2005, we sold these interest rate swaps; the resulting gain from which was to be amortized over the remaining life of the 8.5% senior notes due 2041). As a result of these transactions, we recorded an $8.1 million ($12.4 million pretax) net charge in 2006. We believe this charge neither relates to the ordinary course of our business nor reflects our underlying business performance, and therefore, we have excluded it from operating earnings in 2006. |
Operating earnings for 2006 increased $145 million from 2005, which had increased $435 million from 2004. The increase in operating earnings reflects growth in premiums and fees and other revenue and improved operating expense efficiencies (total operating expenses divided by total revenue). The growth in premiums and fees and other revenue resulted from increases in membership levels (refer to “Membership”) and rate increases for renewing membership. Furthermore, growth in premiums and fees and other revenue reflects our recent acquisitions. Refer to Note 3 of Notes to Consolidated Financial Statements on page 57 for a discussion of our acquisitions. Our growth in premiums in 2006 also benefited from our new Medicare Part D Prescription Drug Plan (“PDP”) product, which we began offering effective January 1, 2006.
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Commercial Risk premiums increased approximately $1.4 billion in 2006 compared to 2005, and increased approximately $2.0 billion in 2005 compared to 2004. The increase in 2006 reflects premium rate increases on renewing business, and the increase in 2005 reflects increases in membership levels (refer to Membership beginning on page 9) and increases in premium rates on renewing business.
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Commercial Risk health care costs (included in health care costs on page 6) | $ | 13,769.1 | $ | 12,244.1 | $ | 10,828.8 | ||||||
Approximate favorable development of prior period health care cost estimates: | ||||||||||||
Favorable development of prior period health care cost estimates | 16.0 | 130.0 | 78.0 | |||||||||
Release of reserves related to participation in the New York Market Stabilization Pool | — | 103.0 | — | |||||||||
Subtotal approximate favorable development of prior period health care cost estimates | 16.0 | 233.0 | 78.0 | |||||||||
Adjusted Commercial Risk health care costs | $ | 13,785.1 | $ | 12,477.1 | $ | 10,906.8 | ||||||
Our Medicare Advantage contracts with the federal government are renewable for a one-year period on a calendar-year basis. In 2006, we offered a Medicare Advantage option in all of the markets we served in 2005. In addition, we expanded into select markets in 2006 and now offer Medicare Advantage in 161 counties in 13 states and Washington D.C. We intend to provide Medicare Advantage products to all these markets in 2007. Also in 2006, we were a national provider of PDP, and we have been selected to be a national provider of PDP in 2007. Beginning in 2007, we will offer private fee-for-service Medicare plans (“PFFS”) in select markets for individuals and nationally for employer groups. PFFS compliments our PDP product, forming an integrated national fully insured product.
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Medicare health care costs (included in health care costs on page 6) | $ | 1,523.5 | $ | 863.9 | $ | 809.0 | ||||||
Approximate favorable development of prior period health care cost estimates | 2.0 | 17.0 | 12.0 | |||||||||
Adjusted Medicare health care costs | $ | 1,525.5 | $ | 880.9 | $ | 821.0 | ||||||
Fees and other revenue for 2006 increased $358 million compared to 2005, reflecting ASC membership growth (refer to Membership below), ASC rate increases and other revenue from our recent acquisitions. Fees and other revenue for 2005 increased $334 million compared to 2004, reflecting ASC membership growth (refer to Membership below), ASC rate increases, sales of add-on services and other revenue from our recent acquisitions.
Health Care’s membership as of December 31, 2006 and 2005 was as follows:
2006 | 2005 | |||||||||||||||||||||||
(Thousands) | Risk | ASC | Total | Risk | ASC | Total | ||||||||||||||||||
Medical: | ||||||||||||||||||||||||
Commercial | 5,088 | 10,053 | 15,141 | 5,115 | 9,406 | 14,521 | ||||||||||||||||||
Medicare Advantage | 123 | — | 123 | 101 | — | 101 | ||||||||||||||||||
Medicare Health Support Program(1) | — | 17 | 17 | — | 19 | 19 | ||||||||||||||||||
Medicaid | 22 | 130 | 152 | — | 114 | 114 | ||||||||||||||||||
Total Medical Membership | 5,233 | 10,200 | 15,433 | 5,216 | 9,539 | 14,755 | ||||||||||||||||||
Consumer-Directed Health Plans(2) | 676 | 453 | ||||||||||||||||||||||
Dental | 5,057 | 8,415 | 13,472 | 5,078 | 8,020 | 13,098 | ||||||||||||||||||
Pharmacy: | ||||||||||||||||||||||||
Commercial | 9,161 | 8,885 | ||||||||||||||||||||||
Medicare PDP (stand-alone) | 314 | — | ||||||||||||||||||||||
Medicare Advantage PDP | 115 | — | ||||||||||||||||||||||
Total Pharmacy Benefit Management Services | 9,590 | 8,885 | ||||||||||||||||||||||
Mail Order(3) | 625 | 560 | ||||||||||||||||||||||
Total Pharmacy | 10,215 | 9,445 | ||||||||||||||||||||||
(1) | Represents members who participate in a CMS pilot program under which we provide disease and case management services to selected Medicare fee-for-service beneficiaries in exchange for a fee. | |
(2) | Represents members in consumer-directed health plans included in Commercial medical membership above. | |
(3) | Represents members who purchased medications through our mail order pharmacy operations during the fourth quarter of 2006 and 2005, respectively, and are included in pharmacy membership above. |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Premiums: | ||||||||||||
Life | $ | 1,257.6 | $ | 1,329.1 | $ | 1,226.4 | ||||||
Disability | 401.5 | 379.7 | 315.1 | |||||||||
Long-term care | 102.8 | 94.9 | 83.4 | |||||||||
Total premiums | 1,761.9 | 1,803.7 | 1,624.9 | |||||||||
Fees and other revenue | 84.6 | 31.6 | 30.6 | |||||||||
Net investment income | 294.1 | 293.1 | 274.1 | |||||||||
Net realized capital gains | 11.5 | 13.4 | 30.5 | |||||||||
Total revenue | 2,152.1 | 2,141.8 | 1,960.1 | |||||||||
Current and future benefits | 1,646.8 | 1,708.0 | 1,531.1 | |||||||||
Operating expenses: | ||||||||||||
Selling expenses | 85.3 | 80.2 | 69.1 | |||||||||
General and administrative expenses(1) | 232.3 | 166.2 | 158.8 | |||||||||
Total operating expenses | 317.6 | 246.4 | 227.9 | |||||||||
Amortization of other acquired intangible assets | 5.2 | — | — | |||||||||
Total benefits and expenses | 1,969.6 | 1,954.4 | 1,759.0 | |||||||||
Income before income taxes | 182.5 | 187.4 | 201.1 | |||||||||
Income taxes | 48.6 | 51.0 | 58.0 | |||||||||
Net income | $ | 133.9 | $ | 136.4 | $ | 143.1 | ||||||
(1) | Includes salaries and related benefit expenses of $132.8 million in 2006, $106.6 million in 2005 and $93.4 million in 2004. |
Page 10
(Millions, after tax) | 2006 | 2005 | 2004 | |||||||||
Net income | $ | 133.9 | $ | 136.4 | $ | 143.1 | ||||||
Other items included in net income: | ||||||||||||
Net realized capital gains | (7.4 | ) | (8.7 | ) | (19.8 | ) | ||||||
Acquisition-related software charge(1) | 6.2 | — | — | |||||||||
Operating earnings | $ | 132.7 | $ | 127.7 | $ | 123.3 | ||||||
(1) | As a result of the acquisition of Broadspire Disability in 2006 (refer to Note 3 of Notes to Consolidated Financial Statements on page 57), we acquired certain software which eliminated the need for similar software we had been developing internally. As a result, we ceased our own software development and impaired amounts previously capitalized, resulting in a $6.2 million ($8.3 million pretax) charge to net income, reflected in general and administrative expenses for 2006. This charge does not reflect the underlying business performance of Group Insurance, and therefore, we have excluded it from operating earnings in 2006. |
Group Insurance’s membership as of December 31, 2006 and 2005 was as follows:
(Thousands) | 2006 | 2005 | ||||||
Life | 10,070 | 10,812 | ||||||
Disability(1) | 4,801 | 2,571 | ||||||
Long-term care | 216 | 235 | ||||||
Total | 15,087 | 13,618 | ||||||
(1) | Includes approximately 2.1 million members acquired in the Broadspire Disability acquisition on March 31, 2006. |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Premiums | $ | 194.1 | $ | 199.3 | $ | 189.0 | ||||||
Net investment income | 536.4 | 514.9 | 526.3 | |||||||||
Other revenue | 11.0 | 11.5 | 11.9 | |||||||||
Net realized capital gains | 11.6 | 8.3 | 16.2 | |||||||||
Total revenue | 753.1 | 734.0 | 743.4 | |||||||||
Current and future benefits | 672.2 | 656.5 | 660.4 | |||||||||
General and administrative expenses(1) | 17.0 | 18.1 | 19.9 | |||||||||
Reduction of reserve for anticipated future losses on discontinued products | (115.4 | ) | (66.7 | ) | — | |||||||
Total benefits and expenses | 573.8 | 607.9 | 680.3 | |||||||||
Income before income taxes | 179.3 | 126.1 | 63.1 | |||||||||
Income taxes | 56.7 | 44.1 | 21.3 | |||||||||
Net income | $ | 122.6 | $ | 82.0 | $ | 41.8 | ||||||
Assets under management:(2) | ||||||||||||
Fully guaranteed discontinued products | $ | 4,352.3 | $ | 4,466.9 | $ | 4,584.2 | ||||||
Experience-rated(3) | 4,752.7 | 4,268.1 | 4,509.4 | |||||||||
Non-guaranteed(4) | 14,857.0 | 12,229.6 | 10,632.9 | |||||||||
Total assets under management | $ | 23,962.0 | $ | 20,964.6 | $ | 19,726.5 | ||||||
(1) | Includes salaries and related benefit expenses of $13.7 million in 2006, $14.6 million in 2005 and $14.3 million in 2004. | |
(2) | Excludes net unrealized capital gains of $200.2 million, $362.6 million and $558.8 million at December 31, 2006, 2005 and 2004, respectively. Refer to Note 2 of Notes to Consolidated Financial Statements beginning on page 48 for information on expected future reductions in these assets. | |
(3) | The increase in experience-rated assets under management in 2006 primarily reflects additional deposits to fund guaranteed benefits. | |
(4) | The increases in non-guaranteed assets under management in 2006 and 2005 primarily reflect additional deposits and investment appreciation. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Net income | $ | 122.6 | $ | 82.0 | $ | 41.8 | ||||||
Other items included in net income: | ||||||||||||
Net realized capital gains | (8.7 | ) | (5.4 | ) | (10.5 | ) | ||||||
Reduction of reserve for anticipated future losses on discontinued products(1) | (75.0 | ) | (43.4 | ) | — | |||||||
Operating earnings | $ | 38.9 | $ | 33.2 | $ | 31.3 | ||||||
(1) | In 1993, we discontinued the sale of our fully guaranteed large case pension products and established a reserve for anticipated future losses on these products, which we review quarterly. Changes in this reserve are recognized when deemed appropriate. We reduced the reserve for anticipated future losses on discontinued products by $75.0 million ($115.4 million pretax) in 2006 and $43.4 million ($66.7 million pretax) in 2005. There was no reserve release or charge in 2004. We believe excluding any changes to the reserve for anticipated future losses on discontinued products provides more useful information as to our continuing products and is consistent with the treatment of the results of operations of these discontinued products, which are credited/charged to the reserve and do not affect our results of operations. |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Scheduled contract maturities and benefit payments(1) | $ | 361.3 | $ | 379.6 | $ | 731.5 | ||||||
Contract holder withdrawals other than scheduled contract maturities and benefit payments(2) | 202.2 | 45.6 | 81.9 | |||||||||
Participant-directed withdrawals(2) | 16.9 | 18.4 | 25.7 | |||||||||
(1) | Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. | |
(2) | Approximately $515.5 million, $674.4 million and $638.7 million at December 31, 2006, 2005 and 2004, respectively, of experience-rated pension contracts allowed for unscheduled contract holder withdrawals, subject to timing restrictions and formula-based market value adjustments. Further, approximately $127.8 million, $312.4 million and $339.0 million at December 31, 2006, 2005 and 2004, respectively, of experience-rated pension contracts supported by general account assets could be withdrawn or transferred to other plan investment options at the direction of plan participants, without market value adjustment, subject to plan, contractual and income tax provisions. |
We discontinued the sale of our fully guaranteed large case pension products (single-premium annuities (“SPAs”) and guaranteed investment contracts (“GICs”)) in 1993. We established a reserve for anticipated future losses on these products based on the present value of the difference between the expected cash flows from the assets supporting these products and the cash flows expected to be required to meet our obligations under these products.
(Millions) | 2006 | 2005 | 2004 | |||||||||
Interest margin (deficit)(1) | $ | 6.3 | $ | (12.1 | ) | $ | (23.1 | ) | ||||
Net realized capital gains | 25.1 | 14.3 | 24.4 | |||||||||
Interest earned on receivable from continuing products | 18.8 | 19.9 | 19.6 | |||||||||
Other, net | 9.7 | 9.2 | 9.2 | |||||||||
Results of discontinued products, after tax | $ | 59.9 | $ | 31.3 | $ | 30.1 | ||||||
Results of discontinued products, pretax | $ | 80.6 | $ | 39.1 | $ | 44.0 | ||||||
Net realized capital gains from bonds, after tax (included above) | $ | 14.7 | $ | 6.4 | $ | 12.8 | ||||||
(1) | The interest margin (deficit) is the difference between earnings on invested assets and interest credited to contract holders. |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Reserve for anticipated future losses on discontinued products, beginning of period | $ | 1,052.2 | $ | 1,079.8 | $ | 1,035.8 | ||||||
Operating income (loss) | 38.6 | 12.4 | (6.6 | ) | ||||||||
Net realized capital gains | 38.6 | 22.0 | 37.5 | |||||||||
Mortality and other | 3.4 | 4.7 | 13.1 | |||||||||
Tax benefits(1) | 43.7 | — | — | |||||||||
Reserve reduction | (115.4 | ) | (66.7 | ) | — | |||||||
Reserve for anticipated future losses on discontinued products, end of period | $ | 1,061.1 | $ | 1,052.2 | $ | 1,079.8 | ||||||
(1) | Amount represents tax credits primarily from tax advantaged investments which were reclassified from deferred tax liabilities within the liabilities supporting discontinued products. |
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2006 | 2005 | |||||||||||||||||||||||
(Millions) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||||||
Debt securities available for sale: | ||||||||||||||||||||||||
Available for use in current operations | $ | 13,293.8 | $ | — | $ | 13,293.8 | $ | 13,216.9 | $ | — | $ | 13,216.9 | ||||||||||||
Loaned securities | 1,018.1 | — | 1,018.1 | 1,115.7 | — | 1,115.7 | ||||||||||||||||||
On deposit, as required by regulatory authorities | — | 555.0 | 555.0 | — | 522.4 | 522.4 | ||||||||||||||||||
Debt securities available for sale | 14,311.9 | 555.0 | 14,866.9 | 14,332.6 | 522.4 | 14,855.0 | ||||||||||||||||||
Equity securities available for sale | 32.8 | 38.3 | 71.1 | 34.5 | 26.7 | 61.2 | ||||||||||||||||||
Short-term investments | 110.6 | — | 110.6 | 114.8 | — | 114.8 | ||||||||||||||||||
Mortgage loans | 207.4 | 1,380.8 | 1,588.2 | 86.7 | 1,460.8 | 1,547.5 | ||||||||||||||||||
Other investments | 3.0 | 1,247.3 | 1,250.3 | 10.1 | 1,320.2 | 1,330.3 | ||||||||||||||||||
Total investments | $ | 14,665.7 | $ | 3,221.4 | $ | 17,887.1 | $ | 14,578.7 | $ | 3,330.1 | $ | 17,908.8 | ||||||||||||
Debt securities represented 83% at both December 31, 2006 and 2005 of our total invested assets and supported the following types of products:
(Millions) | 2006 | 2005 | ||||||
Supporting discontinued products | $ | 3,107.6 | $ | 3,342.9 | ||||
Supporting experience-rated products | 1,672.8 | 1,920.8 | ||||||
Supporting remaining products | 10,086.5 | 9,591.3 | ||||||
Total debt securities | $ | 14,866.9 | $ | 14,855.0 | ||||
2006 | 2005 | |||||||||||||||||||||||
Debt | Equity | Debt | Equity | |||||||||||||||||||||
(Millions) | Securities | Securities | Total | Securities | Securities | Total | ||||||||||||||||||
Supporting discontinued and experience-rated products | $ | 149.8 | $ | 37.9 | $ | 187.7 | $ | 199.3 | $ | 26.6 | $ | 225.9 | ||||||||||||
Supporting remaining products | 4.2 | .4 | 4.6 | 2.4 | .2 | 2.6 | ||||||||||||||||||
Total non-traded securities | $ | 154.0 | $ | 38.3 | $ | 192.3 | $ | 201.7 | $ | 26.8 | $ | 228.5 | ||||||||||||
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2006 | 2005 | |||||||||||||||
(Millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||
Supporting discontinued and experience-rated products(1) | $ | 1,414.1 | $ | 42.1 | $ | 1,246.1 | $ | 37.1 | ||||||||
Supporting remaining products(2) | 5,053.0 | 96.5 | 4,718.0 | 92.5 | ||||||||||||
Total | $ | 6,467.1 | $ | 138.6 | $ | 5,964.1 | $ | 129.6 | ||||||||
(1) | At December 31, 2006 and 2005, below investment grade and non-rated debt and equity securities in an unrealized loss position of $1.0 million and $5.7 million, respectively, and related fair values of $36.8 million and $79.7 million, respectively, related to securities supporting experience-rated and discontinued products. | |
(2) | At December 31, 2006 and 2005, below investment grade and non-rated debt and equity securities in an unrealized loss position of $4.6 million and $9.2 million, respectively, and related fair values of $159.8 million and $224.2 million, respectively, related to securities supporting remaining products. |
Our mortgage loan investments supported the following types of products:
(Millions) | 2006 | 2005 | ||||||
Supporting discontinued products | $ | 650.6 | $ | 644.9 | ||||
Supporting experience-rated products | 304.3 | 320.8 | ||||||
Supporting remaining products | 633.3 | 581.8 | ||||||
Total mortgage loans | $ | 1,588.2 | $ | 1,547.5 | ||||
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We manage interest rate risk by seeking to maintain a tight match between the durations of our assets and liabilities where appropriate. We manage credit risk by seeking to maintain high average quality ratings and diversified sector exposure within our debt securities portfolio. In connection with our investment and risk management objectives, we also use derivative financial instruments whose market value is at least partially determined by, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. Our use of these derivatives is generally limited to hedging purposes and has principally consisted of using interest rate swap agreements, warrants, forward contracts and futures contracts. These instruments, viewed separately, subject us to varying degrees of interest rate, equity price and credit risk. However, when used for hedging, we expect these instruments to reduce overall risk. Refer to Liquidity and Capital Resources below and Note 15 of Notes to Consolidated Financial Statements beginning on page 76 for additional information.
Generally, we meet our operating requirements by maintaining appropriate levels of liquidity in our investment portfolio and using overall cash flows from premiums, deposits and income received on investments. We monitor the duration of our portfolio of debt securities (which is highly marketable) and mortgage loans, and execute purchases and sales of these investments with the objective of having adequate funds available to satisfy our maturing liabilities. Overall cash flows are used primarily for claim and benefit payments, contract withdrawals and operating expenses.
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Cash flows from operating activities | ||||||||||||
Health Care and Group Insurance(1) | $ | 1,917.6 | $ | 1,894.4 | $ | 884.5 | ||||||
Large Case Pensions | (279.0 | ) | (242.9 | ) | (266.8 | ) | ||||||
Net cash provided by operating activities of continuing operations | 1,638.6 | 1,651.5 | 617.7 | |||||||||
Discontinued Operations | 49.7 | 68.8 | 666.2 | |||||||||
Net cash provided by operating activities | 1,688.3 | 1,720.3 | 1,283.9 | |||||||||
Cash flows from investing activities | ||||||||||||
Health Care and Group Insurance | (931.3 | ) | (1,009.3 | ) | (546.1 | ) | ||||||
Large Case Pensions | 378.0 | 299.2 | 613.5 | |||||||||
Net cash (used for) provided by investing activities | (553.3 | ) | (710.1 | ) | 67.4 | |||||||
Net cash used for financing activities | (1,447.6 | ) | (1,213.6 | ) | (1,388.7 | ) | ||||||
Net decrease in cash and cash equivalents | $ | (312.6 | ) | $ | (203.4 | ) | $ | (37.4 | ) | |||
(1) | Includes corporate interest. |
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During each of 2006 and 2005, our common stock split two-for-one. All share and per share amounts in this MD&A and the accompanying Consolidated Financial Statements and related notes have been adjusted to reflect both stock splits. Refer to Note 1 of Notes to Consolidated Financial Statements beginning on page 47 for additional information about these two stock splits.
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 those companies to maintain certain levels of equity (referred to as surplus) and restrict the amount of dividends and other distributions that may be paid to their parent corporations. These regulations are not directly applicable to Aetna as a holding company, since Aetna is not an HMO or an insurance company. The additional regulations applicable to our HMO and insurance company subsidiaries are not expected to affect our ability to service our debt, meet our other financing obligations or pay dividends, or the ability of any of our subsidiaries to service other financing obligations, if any. Under regulatory requirements, at December 31, 2006, the amount of dividends that our insurance and HMO subsidiaries could pay to Aetna without prior approval by regulatory authorities was approximately $1.4 billion in the aggregate.
We do not have guarantees or other off-balance sheet arrangements that we believe, based on historical experience and current business plans, are reasonably likely to have a material impact on our current or future results of operations, financial condition or cash flows. Refer to Notes 8 and 18 of Notes to Consolidated Financial Statements beginning on page 60 and 79, respectively, for additional detail of our variable interest entities and guarantee arrangements, respectively, at December 31, 2006.
The following table summarizes certain estimated future obligations by period at December 31, 2006, under our various contractual obligations. The table below does not include future payment of claims to health care providers or pharmacies because certain terms are not determinable at December 31, 2006 (for example, the timing and volume of future services provided under fee-for-service arrangements and the level of future membership levels for capitated arrangements). We believe that funds from future operating cash flows, together with cash, investments and other funds available under our credit agreements or from public or private financing sources, will be sufficient to meet our existing commitments as well as our liquidity needs associated with future operations, including strategic transactions.
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(Millions) | 2007 | 2008 - 2009 | 2010 - 2011 | Thereafter | Total | |||||||||||||||
Long-term debt obligations(1) | $ | 159.3 | $ | 318.6 | $ | 1,175.1 | $ | 3,046.9 | $ | 4,699.9 | ||||||||||
Operating lease obligations(2) | 164.1 | 244.3 | 107.2 | 96.7 | 612.3 | |||||||||||||||
Purchase obligations(3) | 339.1 | 303.4 | 81.4 | 3.8 | 727.7 | |||||||||||||||
Other liabilities reflected on the | ||||||||||||||||||||
Consolidated Balance Sheet:(4) | ||||||||||||||||||||
Future policy benefits(5) | 774.1 | 1,276.4 | 1,030.0 | 4,079.8 | 7,160.3 | |||||||||||||||
Unpaid claims(5) | 583.2 | 352.5 | 244.4 | 532.6 | 1,712.7 | |||||||||||||||
Policyholders’ funds(6) | 515.1 | 155.1 | 108.3 | 472.3 | 1,250.8 | |||||||||||||||
Other long-term liabilities(7) | 1,760.6 | 139.2 | 123.9 | 280.9 | 2,304.6 | |||||||||||||||
Total | $ | 4,295.5 | $ | 2,789.5 | $ | 2,870.3 | $ | 8,513.0 | $ | 18,468.3 | ||||||||||
(1) | Debt payments include interest payments and exclude the cumulative fair value adjustment amount associated with terminated interest rate swap agreements. Debt payments could be accelerated upon violation of debt covenants, the likelihood of which we believe is remote. Refer to Note 13 of Notes to Consolidated Financial Statements on page 75 for additional information. | |
(2) | We did not have any material capital lease obligations at December 31, 2006. | |
(3) | Purchase obligations include investment commitments and purchase obligations with a total minimum remaining commitment in excess of $1 million at December 31, 2006. We do not consider ordinary course of business contracts with no specified fixed or minimum quantities to be purchase obligations. | |
(4) | Payments of other long-term liabilities exclude Separate Account liabilities of approximately $18.2 billion. Separate Account liabilities represent funds maintained to meet specific investment objectives of contract holders who bear the investment risk. These liabilities are supported by assets that are legally segregated (i.e., Separate Account assets) and are not subject to claims that arise out of our business. The timing of the related cash flows is unpredictable due to contract holder discretion. | |
(5) | Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in our Large Case Pensions business and long-duration group paid-up life and long-term care insurance contracts in our Group Insurance business. Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life insurance contracts, including an estimate for claims incurred but not reported as of December 31, 2006. Refer to Note 2 of Notes to Consolidated Financial Statements beginning on page 48 for additional information. Estimated payments for reserves for future policy benefits and unpaid claims are computed in accordance with actuarial standards and certain reserves are based on the present value of future net payments. Future policy benefits and unpaid claims also include certain reserves ceded to other independent insurance companies through reinsurance contracts. Reserves for contracts subject to reinsurance have been excluded from the table above. The reinsurance carrier, not us, is responsible for cash flows associated with the reinsured contract. Our reinsured reserves are supported by reinsurance recoverables included in total assets. In the event of insolvency of the reinsurance carrier, we would be responsible for cash flows. We monitor the solvency of our reinsurance carriers and do not believe the risk of insolvency is significant. Approximately $1.1 billion (of which, approximately $27 million is included in current liabilities) of ceded insurance liabilities have been excluded from the table above. | |
(6) | Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts in our Large Case Pensions business and customer funds associated with group life and health contracts in our Health Care and Group Insurance businesses (refer to Note 2 in the Notes to Consolidated Financial Statements beginning on page 48 for additional information). Policyholders’ funds include approximately $186 million related to reserves ceded to other independent insurance companies through reinsurance contracts. Reserves for contracts subject to reinsurance have been excluded from the table above. The reinsurance carrier, not us, is responsible for cash flows associated with the reinsured contract. Our reinsured reserves are supported by reinsurance recoverables included in total assets. In the event of insolvency of the reinsurance carrier, we would be responsible for cash flows. We monitor the solvency of our reinsurance carriers and do not believe the risk of insolvency is significant. Customer funds associated with group life and health contracts of approximately $374 million have been excluded from the table above because such funds may be used primarily at the customer’s discretion to offset future premiums and/or refunds, and the timing of the related cash flows cannot be determined. Additionally, net unrealized capital gains on debt and equity securities supporting experience-rated products of $53 million have been excluded from the table above. | |
(7) | Other long-term liabilities include the following liabilities excluded from the table above: |
• | Employee-related benefit obligations of approximately $711 million including our pension, other postretirement and post- employment benefit obligations and certain deferred compensation arrangements. These liabilities do not necessarily represent future cash payments we will be required to make, or such payment patterns cannot be determined. However, the payments for other long-term liabilities include anticipated voluntary pension contributions to our defined pension plan of approximately $45 million in 2007 and the expected benefit payments of approximately $551 million for the next ten years for our nonqualified pension plan and our post-retirement benefit plans, which we primarily fund when paid by the plans. | ||
• | Deferred gains of approximately $100 million related to prior cash payments which will be recognized in our earnings in the future in accordance with GAAP. | ||
• | Net unrealized capital gains on debt and equity securities of $130 million supporting discontinued products. | ||
• | Minority interests of approximately $44 million consisting of subsidiaries less than 100% owned by us. This amount does not represent future cash payments we will be required to make. |
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As of February 26, 2007, the credit ratings of Aetna Inc. and Aetna Life Insurance Company (“ALIC”) from the respective nationally recognized statistical rating organizations (“Rating Agencies”) were as follows:
Moody's Investors | Standard | |||||||
A.M. Best | Fitch | Service | & Poor’s | |||||
Aetna Inc. (senior debt)(1) | bbb+ | A- | A3 | A- | ||||
Aetna Inc. (commercial paper)(1) | AMB-2 | F2 | P-2 | A-2 | ||||
ALIC (financial strength)(1) | A | AA- | Aa3 | A+ | ||||
(1) | The stated outlook from all Rating Agencies for the senior debt and financial strength ratings of Aetna Inc. and ALIC, respectively, is stable. |
The National Association of Insurance Commissioners (“NAIC”) utilizes risk-based capital (“RBC”) standards for insurance companies that are designed to identify weakly capitalized companies by comparing each company’s adjusted surplus to its required surplus (“RBC Ratio”). The RBC Ratio is designed to reflect the risk profile of insurance companies. Within certain ratio ranges, regulators have increasing authority to take action as the RBC Ratio decreases. There are four levels of regulatory action, ranging from requiring insurers to submit a comprehensive plan to the state insurance commissioner to requiring the state insurance commissioner to place the insurer under regulatory control. At December 31, 2006, the RBC Ratio of each of our primary insurance subsidiaries was above the level that would require regulatory action. The RBC framework described above for insurers has been extended by the NAIC to health organizations, including HMOs. Although not all states had adopted these rules at December 31, 2006, at that date, each of our active HMOs had a surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would require regulatory action under the NAIC’s RBC rules. External rating agencies use their own RBC standards as part of determining a company’s rating.
Health care costs payable include estimates of the ultimate cost of claims that have been incurred but not yet reported to us and of those which have been reported to us but not yet paid (collectively “IBNR”). At December 31, 2006 and 2005, our IBNR reserves represented approximately 78% and 79%, respectively, of total health care costs payable. The remainder of health care costs payable is primarily comprised of pharmacy and capitation payables and accruals for state assessments. We develop our IBNR estimates using actuarial principles and assumptions that consider numerous factors. Of those factors, we consider the analysis of historical and projected claim payment patterns (including claims submission and processing patterns) and the assumed health care cost trend rate to be the most critical assumptions. In developing our estimate of health care costs payable, we consistently apply these actuarial principles and assumptions each period, with consideration to the variability of related factors.
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Completion Factors(1) | Health Care Cost Trend Rates(2) | |||||||||||
(Decrease) Increase | Decrease (Increase) in | (Decrease) Increase | Decrease (Increase) in | |||||||||
in Factor | Results of Operations | in Factor | Results of Operations | |||||||||
(4 | %) | $ | (110.4 | ) | ||||||||
(.75%) | $ | 56.9 | (3 | %) | (82.8 | ) | ||||||
(.5%) | 37.9 | (2 | %) | (55.2 | ) | |||||||
(.25%) | 18.9 | (1 | %) | (27.6 | ) | |||||||
.25% | (18.9 | ) | 1 | % | 27.6 | |||||||
.5% | (37.7 | ) | 2 | % | 55.2 | |||||||
.75% | (56.5 | ) | 3 | % | 82.8 | |||||||
4 | % | 110.4 | ||||||||||
(1) | Reflects estimated impact of a (decrease) increase in weighted average completion factors prior to the most recent three months. An increase in the completion factor results in a decrease in the remaining estimated reserves for claims. | |
(2) | Reflects estimated impact of a (decrease) increase in health care cost trend rates for the most recent three months. |
(Millions) | 2006 | 2005 | ||||||
Commercial Risk | $ | 1,793.1 | $ | 1,737.3 | ||||
Medicare | 128.7 | 79.5 | ||||||
Medicaid | 5.7 | .2 | ||||||
Total health care costs payable | $ | 1,927.5 | $ | 1,817.0 | ||||
In cases where we project future health care costs will exceed our existing reserves plus anticipated future premiums, we establish premium deficiency reserves for the amount of the expected loss in excess of expected future premiums. Anticipated investment income is considered in the calculation of expected losses for certain contracts. Any such reserves established would normally cover expected losses until the next policy renewal dates for the related policies. We did not have any material premium deficiency reserves for our Health business at December 31, 2006.
We establish insurance liabilities other than health care costs payable for benefit claims related to our Group Insurance segment. We refer to these liabilities as other insurance liabilities. These liabilities relate to our life, disability and long-term care products.
The liabilities for our life and disability products reflect benefit claims that have been reported to us but not yet paid, estimates of claims that have been incurred but not yet reported to us and future policy benefits earned under insurance contracts. We develop these reserves and the related benefit expenses are developed using actuarial principles and assumptions that consider, among other things, discount, recovery and mortality rates (each discussed below). Completion factors are also evaluated when estimating our reserves for claims incurred but not yet reported for life products. We also consider the benefit payments from the U.S. Social Security Administration for which our disability members may be eligible and which may offset our liability for disability claims (this is known as the Social Security offset). Each period, we estimate these factors, to the extent relevant, based primarily on historical data, and use these estimates to determine the assumptions underlying our reserve calculations. Given the extensive degree of judgment and uncertainty used in developing these estimates, it is possible that our estimates could develop either favorably or unfavorably.
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We establish a reserve for future policy benefits for our long-term care products at the time each policy is issued based on the present value of future benefit payments less the present value of future premiums. In establishing this reserve, we must evaluate assumptions about mortality, morbidity, lapse rates and the rate at which new claims are submitted to us. We estimate the future policy benefits reserve for long-term care products using these assumptions and actuarial principles. For long-duration insurance contracts, we use our original assumptions throughout the life of the policy and do not subsequently modify them unless we deem the reserves to be inadequate. A portion of our reserves for long-term care products also reflect our estimates relating to future payments to members currently receiving benefits. These reserves are estimated primarily using recovery and mortality rates, as described above.
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In cases where we project future policy benefit costs will exceed our existing reserves plus anticipated future premiums, we establish premium deficiency reserves for the amount of the expected loss in excess of expected future premiums. Anticipated investment income is considered in the calculation of expected losses for certain contracts. Any such reserves established would normally cover expected losses until the next policy renewal dates for the related policies. We did not have any material premium deficiency reserves for our Group Insurance business at December 31, 2006.
We discontinued certain Large Case Pensions products in 1993 and established a reserve to cover losses expected during the run-off period. Since 1993, we have made several adjustments to reduce this reserve that have increased our net income. These adjustments occurred primarily because our investment experience as well as our mortality and retirement experience have been better than the experience we projected at the time we discontinued the products. In 2006, $115 million ($75 million after tax) and in 2005, $67 million ($43 million after tax) of reserves were released for these reasons. There were no reserve adjustments in 2004. There can be no assurance that adjustments to the discontinued products reserve will occur in the future or that they will increase net income. Future adjustments could negatively impact our operating results.
We have made previous acquisitions that included a significant amount of goodwill and other intangible assets. Goodwill is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Other intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test. For these impairment evaluations, we use an implied fair value approach, which uses a discounted cash flow analysis and other valuation methodologies. These impairment evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. If we do not achieve our earnings objectives, the assumptions and estimates underlying these impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact our operating results.
We sponsor defined benefit pension (“pension”) and other postretirement benefit (“OPEB”) plans. Refer to Note 12 of Notes to Consolidated Financial Statements beginning on page 67 for additional information. Major assumptions used in the accounting for these plans include the expected return on plan assets and the discount rate. We select our assumptions based on our information and market indicators, and we evaluate our assumptions at each annual measurement date (historically September 30). A change in any of our assumptions would have an effect on our pension and OPEB plan costs.
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We periodically review our debt and equity securities to determine whether a decline in fair value below the carrying value is other-than-temporary. If a decline in market value is considered other-than-temporary, the cost basis/carrying amount of the security is written down, and the amount of the write-down is included in earnings. This analysis requires significant diligence and involves judgment. We analyze all facts and circumstances we believe are relevent for each investment when performing this analysis, in accordance with the guidance of FAS No. 115, FSP 115-1 and SAB 59.
• | forecasted recovery period, based on our internal credit analysts’ expectations, as well as research performed by external rating agencies; | ||
• | whether the expected investment return is sufficient relative to other funding sources; | ||
• | our projected cash flow and capital requirements. |
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Our revenue is principally derived from premiums and fees billed to customers in the Health Care and Group Insurance businesses. In Health Care, revenue is recognized based on customer billings, which reflect contracted rates per employee and the number of covered employees recorded in our records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. In Group Insurance, premium for group life and disability products is recognized as revenue, net of allowances for uncollectable accounts, over the term of coverage. Amounts received before the period of coverage begins are recorded as unearned premiums.
The federal and state governments continue to enact and seriously consider many legislative and regulatory proposals that have or could materially impact various aspects of the health care system. For example, proposals that would address the issues of affordability and availability of health insurance, including ways to reduce the number of uninsured, are currently pending in many states and have been advanced by a number of presidential candidates. The proposals vary, and include individual insurance requirements, the expansion of eligibility under existing Medicaid programs, minimum medical cost ratios for health plans, mandatory issuance of insurance coverage and requiring health plans and insurers to set premiums based only on age and home address. While certain of these measures would adversely affect us, at this time we cannot predict the extent of this impact.
• | Grant, suspend and revoke our licenses to transact business; | ||
• | Regulate many aspects of the products and services we offer; | ||
• | Assess fines, penalties and/or sanctions; | ||
• | Monitor our solvency and reserve adequacy; and | ||
• | Regulate our investment activities on the basis of quality, diversification and other quantitative criteria. |
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The federal and state governments have adopted laws and regulations that govern our business activities in various ways. These laws and regulations restrict how we conduct our business and result in additional burdens and costs to us. Areas of governmental regulation include:
• | Licensure | ||
• | Policy forms, including plan design and disclosures | ||
• | Premium rates and rating methodologies | ||
• | Medical cost ratios | ||
• | Underwriting rules and procedures | ||
• | Benefit mandates | ||
• | Eligibility requirements | ||
• | Service areas | ||
• | Market conduct | ||
• | Utilization review activities | ||
• | Payment of claims, including timeliness and accuracy of payment | ||
• | Member rights and responsibilities | ||
• | Sales and marketing activities | ||
• | Quality assurance procedures | ||
• | Disclosure of medical and other information | ||
• | Provider rates of payment | ||
• | Surcharges on provider payments | ||
• | General assessments | ||
• | Provider contract forms | ||
• | Pharmacy operations | ||
• | Required participation in coverage arrangements for high-risk insureds, either directly or through an assessment or other risk pooling mechanism | ||
• | Delegation of risk and other financial arrangements | ||
• | Producer licensing and compensation | ||
• | Financial condition (including reserves) and | ||
• | Corporate governance. |
Pricing and underwriting regulation by states limits the underwriting and rating practices of Aetna and other health insurers, particularly for small employer groups. These laws and regulations vary by state. In general they apply to certain business segments and limit our ability to set prices or renew business, or both, based on specific characteristics of the group or the group’s prior claim experience.
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The regulations under the administrative simplification provisions of HIPAA also impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. The law authorizes the U.S. Department of Health and Human Services (“HHS”) to issue standards for electronic transactions, as well as privacy and security of medical records and other individually identifiable health information (“Administrative Simplification”).
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There has been a continuing trend of increased health care regulation at both the federal and state levels. The federal government and many states have enacted or are considering additional legislation or regulation related to health care plans. Legislation, regulation and initiatives relating to this trend include among other things, the following:
• | Amending or supplementing ERISA to impose greater requirements on the administration of employer-funded benefit plans or limit the scope of current ERISA pre-emption, which would among other things expose us and other health plans to expanded liability for punitive and other extra-contractual damages. |
• | Imposing assessments on (or to be collected by) health plans or health carriers, which may or may not be passed onto their customers. These assessments may include assessments for insolvency, assessments for uninsured or high-risk pools, assessments for uncompensated care, or assessments to defray provider medical malpractice insurance costs. |
• | Mandating minimum medical cost ratios. |
• | Extending malpractice and other liability exposure for decisions made by health plans. |
• | Mandating coverage for certain conditions and/or specified procedures, drugs or devices (e.g., infertility treatment and experimental pharmaceuticals). |
• | Mandating direct access to specialists for patients with chronic conditions, and direct access to OB/GYNs, chiropractors or other practitioners. |
• | Mandating expanded employer and consumer disclosures and notices. |
• | Mandating expanded coverage for emergency services. |
• | Prohibiting or limiting certain types of financial arrangements with providers, including among other things incentives based on utilization of services. |
• | Imposing substantial penalties for failure to pay claims within specified time periods. |
• | Regulating the composition of provider networks, such as any willing provider and pharmacy laws (which generally provide that providers and pharmacies cannot be denied participation in a managed care plan where the providers and pharmacies are willing to abide by the terms and conditions of that plan). |
• | Imposing payment level limits for out-of-network care. |
• | Exempting physicians from the antitrust laws that prohibit price fixing, group boycotts and other horizontal restraints on competition. |
• | Restricting health plan claim processing, review, payment and related procedures. |
• | Requiring the application of treatment and financial parity between mental health benefits and medical benefits within the same health plan. |
• | Extending benefits available to workers who lose their jobs and other uninsured individuals. |
• | Mandating liberalized definitions of medical necessity. |
• | Mandating internal and external grievance and appeal procedures (including expedited decision making and access to external claim review). |
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• | Enabling the creation of new types of health plans or health carriers, which in some instances would not be subject to the regulations or restrictions that govern our operations. |
• | Allowing individuals and small groups to collectively purchase health care coverage without any other affiliations. |
• | Imposing requirements and restrictions on operations of pharmacy benefit managers, including restricting or eliminating the use of formularies for prescription drugs. |
• | Making health plans responsible for provider payments in the event of financial failure by a capitated physician group or other intermediary. |
• | Creating or expanding state-sponsored health benefit purchasing pools, in which we may be required to participate. |
• | Creating a single payer system where the government oversees or manages the provision of health care coverage. |
• | Imposing employer or individual health coverage mandates. |
Various state legislatures and the U.S. Congress continue to debate legislation containing various patient protection initiatives, including provisions that could expose us to unlimited economic damages and certain punitive damages, for making a determination denying benefits or for delaying members’ receipt of benefits as a result of “medical necessity” and other coverage determinations. We cannot predict whether these measures will be enacted into law in 2007 or what form any such legislation might take.
The provision of services to certain employee benefit plans, including certain Health Care, Group Insurance and Large Case Pensions benefit plans, is subject to ERISA, a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor (the “DOL”). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third-party claims administration services for benefit plans.
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As a result of funding reforms contained in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Medicare Act”), we elected to expand our participation in the Medicare Advantage program in selected markets in 2005, 2006 and 2007. We are encouraged that these funding reforms will allow further expansion within the Medicare Advantage program, although it is not possible to predict the longer term adequacy of reimbursement under this program.
A number of states, including Pennsylvania and Connecticut, regulate affiliated groups of HMOs and insurers such as the Company under holding company statutes. These laws may require us and our subsidiaries to maintain certain levels of equity. Holding company laws and regulations generally require insurance companies and HMOs within an insurance holding company system to register with the insurance department of each state where they are domiciled and to file reports with those states’ insurance departments regarding capital structure, ownership, financial condition, intercompany transactions and general business operations. In addition, various notice or prior regulatory approval requirements apply to transactions between insurance companies, HMOs and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. For information regarding restrictions on certain payments of dividends or other distributions by HMO and insurance company subsidiaries of our company, refer to Note 16 of Notes to Consolidated Financial Statements beginning on page 78.
Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. Assessments generally are based on a formula relating to our premiums in the state compared to the premiums of other insurers. While we historically have recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future recovery of these assessments. Some states have similar laws relating to HMOs.
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We own two mail-order pharmacy facilities and one specialty pharmacy facility. One mail order pharmacy is located in Missouri and the specialty pharmacy and our second mail order pharmacy are located in Florida. These facilities dispense pharmaceuticals throughout the U.S. The pharmacy practice is generally regulated at the state level by state boards of pharmacy. Each of our pharmacies is licensed in the state where it is located, as well as in the states that require registration or licensure with the state’s board of pharmacy or similar regulatory body. Loss or suspension of any such licenses could have a material effect on our pharmacy business and/operating results.
• | Expects | • | Intends | • | Seeks | • | Will | • | Potential | |||||||||
• | Projects | • | Plans | • | Estimates | • | Should | • | Continue | |||||||||
• | Anticipates | • | Believes | • | May |
You should carefully consider each of the following risks and all of the other information set forth in this MD&A or elsewhere in our Annual Report or our Form 10-K. These risks and other factors may affect forward-looking statements, including those in this MD&A or made by us elsewhere, such as in investor calls or conference presentations. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Competitive factors and ongoing changes in the health benefits industry create pressure to contain premium price increases despite being faced with increasing medical costs. Our customer contracts are subject to negotiation as customers seek to contain their costs, and customers may elect to reduce benefits in order to limit increases in their benefit costs or self-insure; such elections may result in reduced membership in our more profitable Risk products and lower premiums for our Risk products, although such elections also may reduce our health care costs. Alternatively, our customers may purchase different types of products from us that are less profitable, or move to a competitor to obtain more favorable premiums. Our membership is also concentrated in certain geographic areas, and increased competition in those geographic areas could therefore have a disproportionate adverse effect on our operating results. Among other factors, we compete on the basis of overall cost, plan design, customer service, quality and
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Our profitability depends in large part on our ability to appropriately manage future health care costs through underwriting criteria, product design, negotiation of favorable provider contracts and medical management programs. The aging of the population and other demographic characteristics, advances in medical technology and other factors continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Medicaid reimbursements have also caused the private sector to assume a greater share of increasing health care costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs, direct-to-consumer marketing by pharmaceutical companies, clusters of high cost cases, changes in the regulatory environment, health care provider or member fraud and numerous other factors affecting the cost of health care can be beyond any health plan’s control and may adversely affect our ability to manage health care costs, as well as our business, financial condition and operating results.
We continue to be vigilant in our pricing and have generally increased our premiums for new and renewal Risk business in 2007. Premiums in the health business are generally fixed for one-year periods. Accordingly, future cost increases in excess of medical cost projections reflected in our pricing cannot be recovered in the contract year through higher premiums. As a result, our profits are particularly sensitive to the accuracy of our forecasts of increases in health care and other benefit costs, which we make before we renew or place new business and are dependent on our ability to anticipate and detect medical cost trends. There can be no assurance regarding the accuracy of the health care or other benefit cost projections we assumed for pricing purposes, including the impact of external events over which we have no control. If the rate of increase in medical costs in 2007 were to exceed the levels we projected for pricing purposes, our operating results would be materially adversely affected.
Our ability to attract and retain membership is dependent upon providing quality customer service operations (such as call center operations, claim processing, mail order pharmacy prescription delivery, specialty pharmacy prescription delivery and customer case installation) that meet or exceed our customers’ expectations. Failure to provide service that meets our customers’ expectations can affect our ability to retain or grow profitable membership which can adversely affect our operating results.
We operate in a highly competitive environment and in an industry that is subject to significant ongoing changes from market pressures brought about by customer demands, as well as business consolidations, strategic alliances, legislative and regulatory changes and marketing practices. These factors require us to differentiate our products and services by anticipating changes in customer preferences and delivering products and services that demonstrate value to our customers. Failure to anticipate changes in customer preferences and deliver products and services that demonstrate value to our customers can affect our ability to retain or grow profitable membership which can adversely affect our operating results.
Our businesses depend in large part on our information and other technology systems for processing claims and interacting with providers, employer plan sponsors and members, and our business strategy involves providing customers with easy to use products that leverage information to meet the needs of those customers. Our success is dependent in large part on maintaining the effectiveness of existing technology systems and on continuing to develop and enhance technology systems that support our business processes in a cost and resource efficient
Page 35
Various factors particular to the health and related benefits industry including, among others, the rapid evolution of the business model, shifts in public policy, consumerism, pricing actions by competitors, competitor consolidation and a shrinking number of commercially insured people may impact our business model. We also face the potential of competition from existing or new companies that have not historically been in the health or group insurance industries. For example, the GLBA gives banks and other financial institutions the ability to affiliate with insurance companies, which may lead to new competitors with significant financial resources in the insurance and health benefits fields. If we are unable to anticipate, detect and deploy meaningful responses to these external factors, our business and operating results may be adversely affected.
Our profitability depends in part on our ability to drive our general and administrative expenses to competitive levels through controlling salaries and related benefits and information technology and other general and administrative costs, while being able to attract and retain key employees, maintain robust management practices and controls and implement improvements in technology.
Our operations have generated significant capital in recent periods, and we have the ability to raise additional capital. In deploying our capital to fund our investments in operations (including information technology projects), share repurchases, potential acquisitions or other capital uses, we would be adversely affected if we do not appropriately balance the risks and opportunities that are inherent in each method of deploying our capital.
It is not possible to predict with certainty or eliminate the impact of fundamental public policy changes that could adversely affect us. Examples of these changes include policy changes that would fundamentally change the dynamics of our industry, such as the federal or one or more state governments assuming a larger role in the health care industry. Legislative proposals that would significantly reform the health care system are currently pending in many states and have been advanced by a number of candidates running for president in 2008. Our operating results could be adversely affected by such changes even if we correctly predict their occurrence.
We would be adversely affected if we fail to adequately plan for succession of our senior management and other key executives. While we have succession plans in place and we have employment arrangements with certain key executives, these do not guarantee that the services of these executives will continue to be available to us.
We maintain large amounts of personal health and financial information and other sensitive data about our members in the ordinary course of our business. Our business therefore depends substantially on our members’ and customers’ willingness to entrust us with their health related and other sensitive information. Events that negatively affect that trust, including failing to maintain appropriate safeguards to keep sensitive information secure, whether as a result of our action or inaction or that of one of our vendors, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and/or penalties, any of which could adversely affect our business, operating results or financial condition.
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As a large company operating in a complex industry, we encounter a variety of risks. The risks we face include, among other matters, the range of industry, competitive, regulatory, financial, operational or external risks identified in this Risk Factors discussion. In recent periods, we have devoted additional resources to developing and integrating enterprise-wide risk management processes. Failure to identify, prioritize and appropriately manage or mitigate these risks, including risk concentrations across different industries, segments and geographies, can affect our profitability, our ability to retain or grow business, or, in the event of extreme circumstances, our financial condition or viability.
Our products are sold primarily through our sales personnel, who frequently work with independent brokers and consultants who assist in the production and servicing of business. Our sales would be adversely affected if we are unable to attract or retain sales personnel or if we do not adequately provide support, training and education to this sales network regarding our product portfolio, which is complex.
Our management will need to continue to focus on simultaneously executing multiple strategic and operational projects and initiatives, including, among other things, addressing rising medical costs, achieving profitable membership growth, further improving the efficiency of our operations, managing certain significant technology projects, further improving relations with health care providers, negotiating customer or provider contracting changes, and implementing other business process improvements. The future performance of our business will depend in large part on our ability to design and implement these initiatives, some of which will occur over several years. If these initiatives do not achieve their objectives or result in increased medical costs, our operating results could be adversely affected.
Our profitability is dependent in part upon our ability to contract competitively while maintaining favorable relationships with hospitals, physicians and other health benefits providers. That ability is affected by the rates we pay providers for services rendered to our members, our business practices and processes, provider payment and other provider relations practices, as well as factors not associated with us that impact these providers. The sufficiency and quality of our networks of available providers is also an important factor when customers consider our products and services. The failure to maintain or to secure new cost-effective health care provider contracts may result in a loss in membership and/or higher medical costs, which could adversely affect our operating results.
The health benefits industry is subject to negative publicity, which can arise either from actual or perceived shortfalls regarding the industry’s or our business practices and/or products. The risk of negative publicity is particularly high in an election year. This risk may be increased as we offer new products, such as products with limited benefits, targeted at market segments, such as the uninsured, beyond those in which we traditionally have operated. Negative publicity may further increase our costs of doing business and adversely affect our profitability by:
• | Adversely affecting the Aetna brand particularly, | ||
• | Adversely affecting our ability to market our products and/or services, | ||
• | Requiring us to change our products and/or services, or | ||
• | Increasing the regulatory and legislative requirements with which we must comply. |
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Health care costs payable reflect estimates of the ultimate cost of claims that have been incurred but not yet reported to us and claims that have been reported to us but not yet paid. Health care costs payable are estimated periodically, and any resulting adjustments are reflected in current-period operating results within health care costs. Health care costs payable are based on a number of factors, including those derived from historical claim experience. A large portion of health care claims are not submitted to us until after the end of the quarter in which services are rendered by providers to our members. As a result, an extensive degree of judgment is used in this estimation process, considerable variability is inherent in such estimates, and the adequacy of the estimate is highly sensitive to changes in medical claims payment patterns and changes in medical cost trends. A worsening (or improvement) of medical cost trend or changes in claim payment patterns from those that were assumed in estimating health care costs payable at December 31, 2006 would cause these estimates to change in the near term, and such a change could be material. Refer to our discussion of Health Care results and Critical Accounting Estimates-Health Care Costs Payable on pages 5 and 21, respectively, for more information.
Our products and services and our operations require a large number of employees. We would be adversely affected if our retention, development, succession and other human resource management techniques are not aligned with our strategic objectives.
Extreme events, including terrorism, can affect the U.S. economy in general, our industry and us specifically. Such events could materially adversely affect our business and operating results, and in the event of extreme circumstances, our financial condition or viability. Other than obtaining insurance coverage for our facilities, there are few, if any, commercial options through which to transfer the exposure from terrorism away from us. In particular, in the event of bioterrorism attacks, epidemics or other extreme events, we could face significant health care (including behavioral health) and disability costs depending on the government’s actions and the responsiveness of public health agencies and other insurers. In addition, our life insurance members and our employees and those of our vendors are concentrated in certain large, metropolitan areas which may be exposed to these events. We could also be adversely affected if we do not maintain adequate procedures to ensure disaster recovery and business continuity during and after such events.
Failure to demonstrate that our products and processes (such as disease management and patient safety programs, provider credentialing and other quality of care and information management initiatives) lead to access by our members to quality care by providers or by us would adversely affect our ability to differentiate our product and/or service offerings from those of competitors and could adversely affect our results of operations.
Page 38
We are growing by expanding into certain segments and subsegments of the healthcare marketplace. Some of the segments and subsegments we have targeted for growth include Medicare, Medicaid, individual, public sector and labor customers who are not subject to ERISA’s limits on state law remedies. In addition, we are entering into businesses in which we previously did not participate, including mail order pharmacy, specialty pharmacy and ActiveHealth. These businesses may increase the risks we face from litigation and other adverse legal proceedings. For example, we are dispensing medications at our mail order and specialty pharmacies directly to members.
Our business is subject to extensive regulation and oversight by state and federal governmental authorities. The federal and many state governments have enacted and continue to consider legislative and regulatory changes related to health products. We must monitor these changes and timely implement any revisions to our business processes that these changes require. At this time, we are unable to predict the impact of future changes, although we anticipate that some of these measures, if enacted, could adversely affect our health operations including:
• | Affecting premium rates, | ||
• | Reducing our ability to manage medical costs, | ||
• | Increasing medical costs and operating expenses, | ||
• | Increasing our exposure to lawsuits and other adverse legal proceedings, | ||
• | Regulating levels and permitted lines of business, | ||
• | Imposing financial assessments, and/or | ||
• | Regulating business practices. |
Page 39
Ineffective integration of our businesses and processes may adversely affect our ability to compete by, among other things, increasing our costs relative to competitors. This integration task may be made more complex by significant acquisitions, and our strategy includes effectively investing our capital in appropriate acquisitions in addition to share repurchases or current operations to seek to generate returns. In addition to integration risks, some additional risks we face with respect to acquisitions include:
• | The acquired business may not perform as projected; | ||
• | We may assume liabilities, including those that were not disclosed to us; | ||
• | We may be unable to successfully integrate acquired businesses and other processes to realize anticipated economic and other benefits on a timely basis, which could result in substantial costs or delays or other operational or financial problems; | ||
• | Acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures; | ||
• | We may finance future acquisitions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of our shareholders; | ||
• | We may also incur additional debt related to future acquisitions; and | ||
• | We could be competing with other firms, some of which may have greater financial and other resources and a greater tolerance for risk, to acquire attractive companies. |
As an insurer, we have substantial investment portfolios of assets that support our policy liabilities. The investment income we earn from our investment portfolios is driven by the level of interest rates in the U.S., and to a lesser extent the overseas, financial markets. Generally speaking, lower interest rates, such as those experienced in the U.S. financial markets in the early part of this decade, will negatively affect our investment income. Although we seek, within guidelines we deem appropriate, to match the duration of our assets and liabilities and to manage our credit exposures, a failure to adequately do so could materially adversely affect our results of operations and our financial condition. Financial market conditions also affect our capital gains or losses from investments.
Although we take steps to monitor and regulate the performance of independent third parties who provide services to us or to whom we delegate selected functions, these arrangements may make our operations vulnerable if those third parties fail to satisfy their obligations to us, whether because of our failure to adequately monitor and regulate their performance, or changes in their own financial condition or other matters outside our control. In recent years, certain third parties to whom we delegated selected functions, such as independent practice associations and specialty services providers, have experienced financial difficulties, including bankruptcy, which may subject us to increased costs and potential health benefits provider network disruptions, and in some cases cause us to incur duplicative claims expense. Certain legislative authorities have in recent periods also discussed or proposed legislation that would restrict outsourcing and, if enacted, could materially increase our costs. We also could become overly dependent on key vendors, which could cause us to lose core competencies if not properly monitored.
We have a pension plan that covers a large number of current employees and retirees. Unfavorable investment performance, interest rate changes or changes in estimates of benefit costs, if significant, could adversely affect our operating results or financial condition by significantly increasing our pension plan expense and obligations.
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We are increasing our focus on the non-Commercial part of our Health Care business as part of our business diversification efforts. In government-funded health programs such as Medicare and Medicaid, the government payor determines the premium levels. If the government payor reduces the premium levels or increases premiums by less than our costs increase and we cannot offset the impact of these actions with supplemental premiums and changes in benefit plans, then our business and operating results could be materially adversely affected. In addition, premiums for certain federal government employee groups are subject to retroactive adjustments by the federal government. Twelve percent of our consolidated revenues, and 13% of the revenues of the Health Care business, were derived from the federal government in 2006. Any such adjustments could materially adversely affect our business and results of operations.
• | Failure of our prevention and control mechanisms related to employee compliance with internal policies, including data system security, and/or unethical conduct by managers and/or employees; | ||
• | Health benefits provider fraud that is not prevented or detected and impacts our medical costs or those of our self-insured customers; and | ||
• | Financial loss from inadequate insurance coverage due to self insurance levels or unavailability of insurance and reinsurance coverage for credit or other reasons; | ||
• | A significant failure of internal control over financial reporting; | ||
• | Failure of our corporate governance policies or procedures. |
Page 41
For the Years Ended December 31, | ||||||||||||||||||||
(Millions, except per common share data) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Revenue | $ | 25,145.7 | $ | 22,491.9 | $ | 19,904.1 | $ | 17,976.4 | $ | 19,878.7 | ||||||||||
Income from continuing operations | 1,685.6 | 1,573.3 | 1,124.8 | 892.9 | 361.2 | |||||||||||||||
Net income (loss) | 1,701.7 | 1,573.3 | 2,154.8 | 892.9 | (2,554.5 | ) | ||||||||||||||
Net realized capital gains, net of tax | 24.1 | 21.1 | 45.9 | 42.0 | 22.3 | |||||||||||||||
Assets | 47,626.4 | 44,433.3 | 42,214.1 | 41,018.2 | 40,127.1 | |||||||||||||||
Short-term debt | 45.0 | — | — | — | — | |||||||||||||||
Long-term debt | 2,442.3 | 1,605.7 | 1,609.7 | 1,613.7 | 1,633.2 | |||||||||||||||
Shareholders’ equity | 9,145.1 | 10,188.7 | 9,161.8 | 7,992.0 | 7,059.6 | |||||||||||||||
Per common share data: | ||||||||||||||||||||
Dividends declared | $ | .04 | $ | .02 | $ | .01 | $ | .01 | $ | .01 | ||||||||||
Earnings (loss) per share: | ||||||||||||||||||||
Income from continuing operations: | ||||||||||||||||||||
Basic | 3.09 | 2.72 | 1.86 | 1.46 | .61 | |||||||||||||||
Diluted | 2.96 | 2.60 | 1.79 | 1.41 | .59 | |||||||||||||||
Net income (loss): | ||||||||||||||||||||
Basic | 3.12 | 2.72 | 3.56 | 1.46 | (4.29 | ) | ||||||||||||||
Diluted | 2.99 | 2.60 | 3.43 | 1.41 | (4.17 | ) | ||||||||||||||
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For the Years Ended December 31, | ||||||||||||
(Millions, except per common share data) | 2006 | 2005 | 2004 | |||||||||
Revenue: | ||||||||||||
Health care premiums | $ | 19,153.5 | $ | 16,924.7 | $ | 14,862.8 | ||||||
Other premiums | 1,956.0 | 2,003.0 | 1,813.9 | |||||||||
Fees and other revenue * | 2,839.3 | 2,428.9 | 2,094.1 | |||||||||
Net investment income | 1,164.7 | 1,103.0 | 1,062.5 | |||||||||
Net realized capital gains | 32.2 | 32.3 | 70.8 | |||||||||
Total revenue | 25,145.7 | 22,491.9 | 19,904.1 | |||||||||
Benefits and expenses: | ||||||||||||
Health care costs ** | 15,301.0 | 13,107.9 | 11,637.7 | |||||||||
Current and future benefits | 2,319.0 | 2,364.5 | 2,191.5 | |||||||||
Operating expenses: | ||||||||||||
Selling expenses | 952.7 | 843.5 | 700.0 | |||||||||
General and administrative expenses | 3,867.9 | 3,609.2 | 3,467.7 | |||||||||
Total operating expenses | 4,820.6 | 4,452.7 | 4,167.7 | |||||||||
Interest expense | 148.3 | 122.8 | 104.7 | |||||||||
Amortization of other acquired intangible assets | 85.6 | 57.4 | 42.5 | |||||||||
Reduction of reserve for anticipated future losses on discontinued products | (115.4 | ) | (66.7 | ) | — | |||||||
Total benefits and expenses | 22,559.1 | 20,038.6 | 18,144.1 | |||||||||
Income from continuing operations before income taxes | 2,586.6 | 2,453.3 | 1,760.0 | |||||||||
Income taxes | 901.0 | 880.0 | 635.2 | |||||||||
Income from continuing operations | 1,685.6 | 1,573.3 | 1,124.8 | |||||||||
Discontinued operations, net of tax (Note 21) | 16.1 | — | 1,030.0 | |||||||||
Net income | $ | 1,701.7 | $ | 1,573.3 | $ | 2,154.8 | ||||||
Earnings per common share: | ||||||||||||
Basic: | ||||||||||||
Income from continuing operations | $ | 3.09 | $ | 2.72 | $ | 1.86 | ||||||
Discontinued operations, net of tax | .03 | — | 1.70 | |||||||||
Net income | $ | 3.12 | $ | 2.72 | $ | 3.56 | ||||||
Diluted: | ||||||||||||
Income from continuing operations | $ | 2.96 | $ | 2.60 | $ | 1.79 | ||||||
Discontinued operations, net of tax | .03 | — | 1.64 | |||||||||
Net income | $ | 2.99 | $ | 2.60 | $ | 3.43 | ||||||
* | Fees and other revenue includes administrative services contract member co-payment revenue and plan sponsor reimbursements related to our mail order and specialty pharmacy operations of $38.0 million, $21.3 million and $14.7 million (net of pharmaceutical and processing costs of $1.4 billion, $884.5 million and $632.7 million) for 2006, 2005 and 2004, respectively. | |
** | Health care costs have been reduced by fully insured member co-payment revenue related to our mail order and specialty pharmacy operations of $96.2 million, $78.5 million and $59.5 million for 2006, 2005 and 2004, respectively. |
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As of December 31, | ||||||||
(Millions) | 2006 | 2005 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 880.0 | $ | 1,192.6 | ||||
Investment securities | 13,437.2 | 13,366.2 | ||||||
Other investments | 210.4 | 96.8 | ||||||
Premiums receivable, net | 363.1 | 349.2 | ||||||
Other receivables, net | 530.1 | 366.7 | ||||||
Accrued investment income | 183.1 | 184.9 | ||||||
Collateral received under securities loan agreements | 1,054.3 | 1,138.8 | ||||||
Loaned securities | 1,018.1 | 1,115.7 | ||||||
Deferred income taxes | 120.8 | — | ||||||
Other current assets | 506.7 | 423.8 | ||||||
Total current assets | 18,303.8 | 18,234.7 | ||||||
Long-term investments | 1,840.6 | 1,869.3 | ||||||
Mortgage loans | 1,380.8 | 1,460.8 | ||||||
Reinsurance recoverables | 1,107.4 | 1,143.7 | ||||||
Goodwill | 4,603.6 | 4,523.2 | ||||||
Other acquired intangible assets, net | 691.6 | 724.9 | ||||||
Property and equipment, net | 283.6 | 272.8 | ||||||
Deferred income taxes | 342.4 | 68.7 | ||||||
Other long-term assets | 868.7 | 1,602.8 | ||||||
Separate Accounts assets | 18,203.9 | 14,532.4 | ||||||
Total assets | $ | 47,626.4 | $ | 44,433.3 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Health care costs payable | $ | 1,927.5 | $ | 1,817.0 | ||||
Future policy benefits | 786.0 | 806.1 | ||||||
Unpaid claims | 598.3 | 582.5 | ||||||
Unearned premiums | 185.6 | 156.9 | ||||||
Policyholders’ funds | 567.6 | 757.7 | ||||||
Collateral payable under securities loan agreements | 1,054.3 | 1,138.8 | ||||||
Short-term debt | 45.0 | — | ||||||
Current portion of long-term debt | — | 450.0 | ||||||
Income taxes payable | 42.6 | 36.7 | ||||||
Deferred income taxes | — | 10.4 | ||||||
Accrued expenses and other current liabilities | 1,896.1 | 1,860.7 | ||||||
Total current liabilities | 7,103.0 | 7,616.8 | ||||||
Future policy benefits | 7,463.7 | 7,642.1 | ||||||
Unpaid claims | 1,174.6 | 1,144.9 | ||||||
Policyholders’ funds | 1,296.4 | 1,304.2 | ||||||
Long-term debt, less current portion | 2,442.3 | 1,155.7 | ||||||
Other long-term liabilities | 797.4 | 848.5 | ||||||
Separate Accounts liabilities | 18,203.9 | 14,532.4 | ||||||
Total liabilities | 38,481.3 | 34,244.6 | ||||||
Commitments and contingencies (Note 18) | ||||||||
Shareholders’ equity: | ||||||||
Common stock and additional paid-in capital ($.01 par value, 2.8 billion shares authorized, 516.0 million shares issued and outstanding in 2006; 1.4 billion shares authorized, 566.5 million shares issued and outstanding in 2005) | 366.2 | 2,414.7 | ||||||
Retained earnings | 9,404.6 | 7,723.7 | ||||||
Accumulated other comprehensive (loss) income | (625.7 | ) | 50.3 | |||||
Total shareholders’ equity | 9,145.1 | 10,188.7 | ||||||
Total liabilities and shareholders’ equity | $ | 47,626.4 | $ | 44,433.3 | ||||
Page 44
Common | ||||||||||||||||||||||||
Number of | Stock and | Accumulated | ||||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||||||
Shares | Paid-in | Retained | Comprehensive | Shareholders’ | Comprehensive | |||||||||||||||||||
(Millions) | Outstanding | Capital | Earnings | (Loss) Income | Equity | Income | ||||||||||||||||||
Balance at December 31, 2003 | 610.3 | $ | 4,387.1 | $ | 4,012.9 | $ | (408.0 | ) | $ | 7,992.0 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 2,154.8 | — | 2,154.8 | $ | 2,154.8 | |||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||
Net unrealized losses on securities * | — | — | — | (41.9 | ) | (41.9 | ) | |||||||||||||||||
Net foreign currency gains | — | — | — | 1.5 | 1.5 | |||||||||||||||||||
Net derivative gains * | — | — | — | 1.2 | 1.2 | |||||||||||||||||||
Pension liability adjustment | — | — | — | (94.3 | ) | (94.3 | ) | |||||||||||||||||
Other comprehensive loss | — | — | — | (133.5 | ) | (133.5 | ) | (133.5 | ) | |||||||||||||||
Total comprehensive income | $ | 2,021.3 | ||||||||||||||||||||||
Common shares issued for benefit plans, including tax benefit | 40.2 | 649.2 | — | — | 649.2 | |||||||||||||||||||
Repurchases of common shares | (64.5 | ) | (1,494.8 | ) | — | — | (1,494.8 | ) | ||||||||||||||||
Dividends declared ($.01 per share) | — | — | (5.9 | ) | — | (5.9 | ) | |||||||||||||||||
Balance at December 31, 2004 | 586.0 | 3,541.5 | 6,161.8 | (541.5 | ) | 9,161.8 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 1,573.3 | — | 1,573.3 | $ | 1,573.3 | |||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Net unrealized losses on securities * | — | — | — | (141.6 | ) | (141.6 | ) | |||||||||||||||||
Net foreign currency gains | — | — | — | .7 | .7 | |||||||||||||||||||
Net derivative losses * | — | — | — | (.3 | ) | (.3 | ) | |||||||||||||||||
Pension liability adjustment | — | — | — | 733.0 | 733.0 | |||||||||||||||||||
Other comprehensive income | — | — | — | 591.8 | 591.8 | 591.8 | ||||||||||||||||||
Total comprehensive income | $ | 2,165.1 | ||||||||||||||||||||||
Common shares issued for benefit plans, including tax benefit | 22.3 | 542.3 | — | — | 542.3 | |||||||||||||||||||
Repurchases of common shares | (41.8 | ) | (1,669.1 | ) | — | — | (1,669.1 | ) | ||||||||||||||||
Dividends declared ($.02 per share) | — | — | (11.4 | ) | — | (11.4 | ) | |||||||||||||||||
Balance at December 31, 2005 | 566.5 | 2,414.7 | 7,723.7 | 50.3 | 10,188.7 | |||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 1,701.7 | — | 1,701.7 | $ | 1,701.7 | |||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||
Net unrealized losses on securities * | — | — | — | (37.6 | ) | (37.6 | ) | |||||||||||||||||
Net foreign currency losses | — | — | — | (.4 | ) | (.4 | ) | |||||||||||||||||
Net derivative gains * | — | — | — | 8.7 | 8.7 | |||||||||||||||||||
Pension liability adjustment | — | — | — | 5.7 | 5.7 | |||||||||||||||||||
Other comprehensive loss: | — | — | — | (23.6 | ) | (23.6 | ) | (23.6 | ) | |||||||||||||||
Total comprehensive income | $ | 1,678.1 | ||||||||||||||||||||||
Adjustment to initially recognize the funded status of pension and OPEB plans (Note 2) | — | — | — | (652.4 | ) | (652.4 | ) | |||||||||||||||||
Common shares issued for benefit plans, including tax benefit | 9.8 | 281.5 | — | — | 281.5 | |||||||||||||||||||
Repurchases of common shares | (60.3 | ) | (2,330.0 | ) | — | — | (2,330.0 | ) | ||||||||||||||||
Dividends declared ($.04 per share) | — | — | (20.8 | ) | — | (20.8 | ) | |||||||||||||||||
Balance at December 31, 2006 | 516.0 | $ | 366.2 | $ | 9,404.6 | $ | (625.7 | ) | $ | 9,145.1 | ||||||||||||||
* | Net of reclassification adjustments (refer to Note 10 on page 65). |
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For the Years Ended December 31, | ||||||||||||
(Millions) | 2006 | 2005 | 2004 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 1,701.7 | $ | 1,573.3 | $ | 2,154.8 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Discontinued operations | (16.1 | ) | — | (1,030.0 | ) | |||||||
Physician class action settlement insurance-related charge | 72.4 | — | — | |||||||||
Depreciation and amortization | 270.4 | 204.4 | 182.2 | |||||||||
Amortization of net investment premium | 18.7 | 22.6 | 45.5 | |||||||||
Equity in earnings of affiliates, net | (102.2 | ) | (44.2 | ) | (23.2 | ) | ||||||
Stock-based compensation expense | 73.7 | 94.1 | 138.9 | |||||||||
Net realized capital gains | (32.2 | ) | (32.3 | ) | (70.8 | ) | ||||||
Changes in assets and liabilities: | ||||||||||||
Accrued investment income | 1.8 | 13.7 | 22.9 | |||||||||
Premiums due and other receivables | (61.2 | ) | (95.6 | ) | 34.0 | |||||||
Income taxes | 29.9 | 390.5 | 149.4 | |||||||||
Other assets and other liabilities | (205.7 | ) | (251.6 | ) | (621.7 | ) | ||||||
Health care and insurance liabilities | (106.1 | ) | (223.7 | ) | (366.3 | ) | ||||||
Other, net | (6.5 | ) | .3 | 2.0 | ||||||||
Net cash provided by operating activities of continuing operations | 1,638.6 | 1,651.5 | 617.7 | |||||||||
Discontinued operations (Note 21) | 49.7 | 68.8 | 666.2 | |||||||||
Net cash provided by operating activities | 1,688.3 | 1,720.3 | 1,283.9 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sales and investment maturities of: | ||||||||||||
Debt securities available for sale | 10,380.1 | 10,604.7 | 9,471.7 | |||||||||
Other investments | 1,457.5 | 1,302.9 | 2,495.9 | |||||||||
Cost of investments in: | ||||||||||||
Debt securities available for sale | (10,678.6 | ) | (10,108.5 | ) | (9,469.3 | ) | ||||||
Other investments | (1,260.9 | ) | (1,130.0 | ) | (2,231.1 | ) | ||||||
Increase in property, equipment and software | (290.5 | ) | (271.6 | ) | (190.3 | ) | ||||||
Cash used for acquisitions, net of cash acquired | (160.9 | ) | (1,107.6 | ) | (9.5 | ) | ||||||
Net cash (used for) provided by investing activities | (553.3 | ) | (710.1 | ) | 67.4 | |||||||
Cash flows from financing activities: | ||||||||||||
Net issuance of short-term debt | 45.0 | — | — | |||||||||
Proceeds from issuance of long-term debt, net of issuance costs | 1,978.9 | — | — | |||||||||
Repayment of long-term debt | (1,150.0 | ) | — | — | ||||||||
Deposits and interest credited for investment contracts | 28.2 | 41.6 | 54.5 | |||||||||
Withdrawals of investment contracts | (211.8 | ) | (54.5 | ) | (423.2 | ) | ||||||
Common shares issued under benefit plans | 115.8 | 271.3 | 316.0 | |||||||||
Stock-based compensation tax benefits | 89.6 | 173.1 | 152.9 | |||||||||
Common shares repurchased | (2,322.5 | ) | (1,650.0 | ) | (1,493.0 | ) | ||||||
Dividends paid to shareholders | (20.8 | ) | (11.4 | ) | (5.9 | ) | ||||||
Other, net | — | 16.3 | 10.0 | |||||||||
Net cash used for financing activities | (1,447.6 | ) | (1,213.6 | ) | (1,388.7 | ) | ||||||
Net decrease in cash and cash equivalents | (312.6 | ) | (203.4 | ) | (37.4 | ) | ||||||
Cash and cash equivalents, beginning of period | 1,192.6 | 1,396.0 | 1,433.4 | |||||||||
Cash and cash equivalents, end of period | $ | 880.0 | $ | 1,192.6 | $ | 1,396.0 | ||||||
Page 46
• | Health Careconsists of medical, pharmacy benefits management, dental and vision plans offered on both a Risk basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk). Medical plans include point-of-service (“POS”), health maintenance organization (“HMO”), preferred provider organization (“PPO”) and indemnity benefit (“Indemnity”) products. Medical plans also include health savings accounts (“HSAs”) and Aetna HealthFund®, consumer-directed plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account (which may be funded by the plan sponsor and/or the member in the case of HSAs). We also offer specialty products, such as medical management and data analytics services, behavioral health plans and stop loss insurance, as well as products that provide access to our provider network in select markets. | ||
• | Group Insuranceprimarily includes group life insurance products offered on a Risk basis, including basic group term life insurance, group universal life, supplemental or voluntary programs and accidental death and dismemberment coverage. Group Insurance also includes group disability products offered on both a Risk and an ASC basis which consist primarily of short-term and long-term disability insurance (and products which combine both), as well as long-term care products, which provide benefits offered to cover the cost of care in private home settings, adult day care, assisted living or nursing facilities, primarily on a Risk basis. As a result of the Broadspire Disability acquisition on March 31, 2006 (refer to Note 3 on page 57), Group Insurance also includes absence management services, including short-term and long-term disability administration and leave management, to employers. | ||
In 2006, we announced our intention to exit the long-term care insurance market and no longer solicit or accept new long-term care customers. Over the next two to three years, we expect to work with our customers on an orderly transition of this product to other carriers. This decision did not have a material impact on our financial condition or results of operations. | |||
• | Large Case Pensionsmanages a variety of retirement products (including pension and annuity products) primarily for tax qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products (refer to Note 20 beginning on page 84 for additional information). |
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The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of Aetna and the subsidiaries that we control. All significant intercompany balances have been eliminated in consolidation. Certain reclassifications have been made to the 2005 and 2004 financial information to conform to the 2006 presentation.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“FAS”) No. 123 Revised, “Share-Based Payment” (“FAS 123R”), which is a revision of FAS 123, “Accounting for Stock-Based Compensation.” FAS 123R also supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends FAS 95, “Statement of Cash Flows.”
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2005 | 2004 | |||||||||||||||
Retrospectively | Previously | Retrospectively | Previously | |||||||||||||
(Millions, except per common share data) | Applied | Reported | Applied | Reported | ||||||||||||
Income from continuing operations before income taxes | $ | 2,453.3 | $ | 2,547.4 | $ | 1,760.0 | $ | 1,898.9 | ||||||||
Income from continuing operations | 1,573.3 | 1,634.5 | 1,124.8 | 1,215.1 | ||||||||||||
Net income | 1,573.3 | 1,634.5 | 2,154.8 | 2,245.1 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | 2.72 | 2.82 | 3.56 | 3.71 | ||||||||||||
Diluted | 2.60 | 2.70 | 3.43 | 3.58 | ||||||||||||
Net cash provided by operating activities | 1,720.3 | 1,893.4 | 1,283.9 | 1,436.8 | ||||||||||||
Net cash used for financing activities | (1,213.6 | ) | (1,386.7 | ) | (1,388.7 | ) | (1,541.6 | ) | ||||||||
Net Deferred | Common Stock | |||||||||||
Income Tax | and Additional | Retained | ||||||||||
(Millions) | Asset (Liability) | Paid In Capital | Earnings | |||||||||
At December 31, 2005 | ||||||||||||
Retrospectively applied | $ | 58.3 | $ | 2,414.7 | $ | 7,723.7 | ||||||
Previously reported | (25.5 | ) | 1,885.1 | 8,169.5 | ||||||||
At December 31, 2004 | ||||||||||||
Retrospectively applied | 576.4 | 3,541.5 | 6,161.8 | |||||||||
Previously reported | 496.0 | 3,076.5 | 6,546.4 | |||||||||
At December 31, 2003 | ||||||||||||
Retrospectively applied | 681.6 | 4,387.1 | 4,012.9 | |||||||||
Previously reported | 613.6 | 4,024.8 | 4,307.2 | |||||||||
We adopted FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” on December 31, 2006. FAS 158 requires the recognition of an asset or liability for each of our pension and other postretirement benefit (“OPEB”) plans equal to the difference between the fair value of plan assets and the benefit obligation as of the latest measurement date, which we refer to as the plan’s funded status. The difference between each plan’s funded status and its existing balance sheet position prior to the adoption of FAS 158 is recognized, net of tax, as a component of accumulated other comprehensive income.
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Effective January 1, 2006, we adopted FASB Staff Position (“FSP”) No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” An impairment of an investment occurs when the fair value of the investment is less than its amortized cost. This FSP provides accounting guidance regarding the determination of when an impairment of debt or equity securities should be considered other-than-temporary, as well as the subsequent accounting for these investments. The adoption of this FSP did not have a material impact on our financial position or results of operations.
Certain Financial Instruments
In February 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 155, “Accounting for Certain Hybrid Financial Instruments,” which clarifies when certain financial instruments and features of financial instruments must be treated as derivatives and reported on the balance sheet at fair value with changes in fair value reported in net income. We will implement FAS 155 beginning with financial instruments acquired on or after January 1, 2007, which is the effective date of FAS 155. Also, in January 2007, the FASB released Statement 133 Implementation Issue B40, "Embedded Derivatives: Application ofParagraph 13(b) to Securitized Interests In Prepayable Financial Assets” (“DIG B40”). DIG B40 provides a narrow exception to the provisions of FAS 155 specific to financial instruments that contain embedded derivatives related to underlying prepayable financial assets. As a result of this exception, we do not expect the adoption of FAS 155 to have a material effect on our financial position or results of operations.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by defining criteria that a tax position on an individual matter must meet before that position is recognized in the financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, interim period accounting, disclosures and transition. We will adopt FIN 48 beginning January 1, 2007, which is its effective date. We do not expect the adoption of FIN 48 to have a material impact on our financial position or results of operation.
In September 2006, the FASB issued FAS 157 “Fair Value Measurements.” FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 does not require new fair value measurements. We will adopt FAS 157 on its effective date, January 1, 2008. We do not expect the adoption of FAS 157 to have a material impact on our financial position or results of operations.
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The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. We consider the following accounting estimates critical in the preparation of our Consolidated Financial Statements: Health Care Costs Payable, Other Insurance Liabilities, Recoverability of Goodwill and Other Intangible Assets, Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans, Other-Than-Temporary Impairment of Investment Securities and Revenue Recognition. We use information available to us at the time estimates are made; however, these estimates could change materially if different information or assumptions were used. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur.
Cash and cash equivalents include cash on hand and other debt securities with a maturity of three months or less when purchased. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these investments.
Investment Securities
Investment securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds, money market instruments and other debt and equity securities. We have determined that our investment securities are available for use in current operations and, accordingly, we classify such securities as current without regard to contractual maturity dates. We have classified our investment securities as available-for-sale and carry them at fair value. Refer to Note 15 beginning on page 76 for additional information on how we estimate the fair value of our investment securities. The cost for mortgage-backed and other asset-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. We regularly review our debt and equity securities to determine whether a decline in fair value below the carrying value is other-than-temporary. If a decline in fair value is considered other-than-temporary, the cost basis/carrying amount of the security is written down, and the amount of the write-down is included in results of operations for the period in which the write-down occurs. We do not accrue interest on debt securities when management believes the collection of interest is unlikely.
Long-term investments consist primarily of equity securities subject to restrictions on disposition, limited partnerships, restricted assets and investment real estate. Restricted assets consist of debt securities on deposit as required by regulatory authorities. Limited partnerships are accounted for under the equity method unless we control the entity, in which case we consolidate the entity. We invest in real estate for the production of income. We carry the value of our investment real estate at depreciated cost, including capital additions, net of write-downs for other-than-temporary declines in fair value. Depreciation is calculated using the straight-line method based on the estimated useful life of each asset. If any of our properties is considered held-for-sale, we carry it at the lower of its carrying value or fair value less estimated selling costs. We generally estimate the fair value using a discounted future cash flow analysis in conjunction with comparable sales information. At the time of the sale, we record the difference between the sales price and the carrying value as a realized capital gain or loss.
We engage in securities lending by lending certain securities from our portfolio to other institutions for short periods of time. We require collateral from borrowers, primarily cash in the amount of 102% to 105% of the fair value of the loaned security. The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair value of the loaned securities fluctuates. The collateral is retained and invested by a lending agent according to our guidelines to generate additional income for us.
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We carry the value of our mortgage loan investments on the balance sheet at the unpaid principal balance, net of impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default within 3 years) or a restructured loan. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the loan and the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in our portfolio and do not aggregate loans for the purpose of applying this policy. We record full or partial charge-offs of loans at the time an event occurs affecting the legal status of the loan, typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of debt. Interest income on an impaired loan is accrued to the extent we deem it collectable and the loan continues to perform under its original or restructured terms. Interest income on problem loans is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal. Mortgage loans with a maturity date or a committed prepayment date of less than one year from the balance sheet date are reported in other investments on the Consolidated Balance Sheets.
We make limited use of derivatives in order to manage interest rate, foreign exchange and price risk. The derivatives we use consist primarily of futures contracts, forward contracts, interest rate swaps and warrants. Derivatives are reflected at fair value in our Consolidated Balance Sheets in other investments. The fair value of derivatives is based on quoted market prices, dealer quotes or internal price estimates believed to be comparable to dealer quotes.
Net investment income and realized capital gains and losses on investments supporting Health Care’s and Group Insurance’s liabilities and Large Case Pensions’ products (other than experience-rated and discontinued products) are reflected in our results of operations. Realized capital gains and losses are determined on a specific identification basis. Unrealized capital gains and losses are reflected in shareholders’ equity, net of related income taxes, as a component of accumulated other comprehensive income. We reflect purchases and sales of debt and equity securities on the trade date. We reflect purchases and sales of mortgage loans and investment real estate on the closing date.
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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.
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.
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.
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.
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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.
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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.
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.
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 on the Consolidated Balance Sheets.
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On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act expanded Medicare, primarily by adding a voluntary prescription drug benefit for Medicare eligible individuals beginning in 2006. We were selected by the Centers for Medicare and Medicaid Services (“CMS”) to be a national provider of PDP in all 50 states to both individuals and employer groups beginning in 2006 and again in 2007. Under these annual contracts, CMS pays us a portion of the premium, a portion of, or a capitated fee for, catastrophic drug costs and a portion of the health care costs for low-income Medicare beneficiaries and provides a risk sharing arrangement to limit our exposure to unexpected expenses.
We allocate to the business segments centrally incurred costs associated with specific internal goods or services provided to us, such as employee services, technology services and rent, based on a reasonable method for each specific cost (such as membership, usage, headcount, compensation or square footage occupied). Interest expense on third-party borrowings is not allocated to the reporting segments since it is not used as a basis for measuring the operating performance of the segments. Such amounts are reflected in Corporate Interest in segment financial information. (Refer to Note 19 beginning on page 82 for additional information.)
We are taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. We recognize deferred income tax assets and liabilities for the differences between the financial and income tax reporting basis of assets and liabilities based on enacted tax rates and laws. Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. Deferred income tax expense or benefit primarily reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax results of revenues and expenses currently taxable or deductible.
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• | Broadspire Disabilityoperates as a third party administrator, offering absence management services, including short and long-term disability administration and leave management, to employers. We acquired Broadspire Disability from Broadspire Services, Inc. and Broadspire Management Services, Inc. for approximately $161 million in March 2006. A portion of the purchase price was placed in escrow pending the outcome of certain future events, of which approximately $10 million has not been reflected in our purchase accounting at December 31, 2006 as we cannot currently determine the outcome of the contingency. | ||
• | Aetna Behavioral Health– In December 2005, we purchased the assets and operations of Magellan Health Services, Inc. (“Magellan”) that had previously been used to provide behavioral health care services to our members. The transaction is a result of an agreement we negotiated with Magellan in March 2003. The purchase price was not material to our financial condition. | ||
• | Aetna Specialty Pharmacy, LLC (“ASP”) was launched as a joint venture with Priority Health Care Corporation (“PHCC”) in 2004 to better serve our members with conditions that required specialty pharmaceuticals. As a result of a change in control in PHCC, in December 2005 we exercised our option to purchase the remaining interest in ASP from PHCC. The purchase price was not material to our financial condition. | ||
• | HMS Healthcare, Inc. (“HMS”)is a regional health care network with operations in Michigan, Colorado and other states that we acquired in July 2005 for approximately $394 million. | ||
• | Active Health Management, Inc. (“ActiveHealth”)is a health management and health care data analytics company that we acquired in May 2005 for approximately $405 million. | ||
• | Strategic Resource Company (“SRC”)administers group limited benefit products for part-time and hourly workers. In January 2005, we acquired 100% of the stock of SRC and reinsured the contracts administered by SRC for approximately $248 million. A portion of the purchase price was placed in escrow pending the outcome of certain future events, of which approximately $22 million has not been reflected in our purchase accounting at December 31, 2006 as we cannot currently determine the outcome of the contingency. |
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(Millions, except per common share data) | 2006 | 2005 | 2004 | |||||||||
Income from continuing operations | $ | 1,685.6 | $ | 1,573.3 | $ | 1,124.8 | ||||||
Weighted average shares used to compute basic EPS | 546.2 | 579.0 | 605.6 | |||||||||
Dilutive effect of stock options, stock appreciation rights and other(1) | 22.9 | 27.0 | 23.1 | |||||||||
Weighted average shares used to compute diluted EPS | 569.1 | 606.0 | 628.7 | |||||||||
Basic EPS | $ | 3.09 | $ | 2.72 | $ | 1.86 | ||||||
Diluted EPS | $ | 2.96 | $ | 2.60 | $ | 1.79 | ||||||
(1) | Approximately 5.3 million stock appreciation rights (with exercise prices ranging from $38.43 to $52.11) were not included in the calculation of diluted earnings per common share for 2006 as their exercise prices were greater than the average market price during 2006. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Selling expenses | $ | 952.7 | $ | 843.5 | $ | 700.0 | ||||||
General and administrative expenses: | ||||||||||||
Salaries and related benefits | 2,305.3 | (1) | 2,247.2 | 2,155.4 | (2) | |||||||
Other general and administrative expenses | 1,562.6 | 1,362.0 | 1,312.3 | |||||||||
Total general and administrative expenses | 3,867.9 | 3,609.2 | 3,467.7 | |||||||||
Total operating expenses | $ | 4,820.6 | $ | 4,452.7 | $ | 4,167.7 | ||||||
(1) | Salaries and related benefits for 2006 include a severance charge of $27.1 million related to ongoing initiatives to streamline our organization, align our resources and reduce general and administrative expenses. | |
(2) | Salaries and related benefits for 2004 include a curtailment benefit of $31.8 million related to the elimination of the dental subsidy for all retirees. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Health care costs payable, beginning of the period | $ | 1,817.0 | $ | 1,927.1 | $ | 1,888.7 | ||||||
Less: Reinsurance recoverables | 5.5 | 5.6 | 6.5 | |||||||||
Health care costs payable, beginning of the period — net | 1,811.5 | 1,921.5 | 1,882.2 | |||||||||
Acquisition of businesses | — | 18.6 | — | |||||||||
Add: Components of incurred health care costs | ||||||||||||
Current year | 15,495.4 | 13,534.6 | 11,925.9 | |||||||||
Prior years(1) | (194.4 | )(2) | (426.7 | )(2) | (288.2 | )(2) | ||||||
Total incurred health care costs | 15,301.0 | 13,107.9 | 11,637.7 | |||||||||
Less: Claims paid | ||||||||||||
Current year | 13,761.9 | 11,745.8 | 10,097.2 | |||||||||
Prior years | 1,426.8 | 1,490.7 | 1,501.2 | |||||||||
Total claims paid | 15,188.7 | 13,236.5 | 11,598.4 | |||||||||
Health care costs payable, end of period — net | 1,923.8 | 1,811.5 | 1,921.5 | |||||||||
Add: Reinsurance recoverables | 3.7 | 5.5 | 5.6 | |||||||||
Health care costs payable, end of the period | $ | 1,927.5 | $ | 1,817.0 | $ | 1,927.1 | ||||||
(1) | In 2006, the components of incurred health care costs (current year and prior years) for the years 2005 and 2004 were conformed to the 2006 presentation. Total incurred health care costs in 2005 and 2004 did not change from amounts previously reported. Negative amounts reported for incurred health care costs related to prior years results from claims being settled for amounts less than originally estimated. | |
(2) | Includes $18 million for 2006, $250 million for 2005 (including $103 million related to the release of reserves related to the New York Market Stabilization Pool (refer to Note 18 on page 79 for additional information)) and $90 million for 2004 of favorable development of prior period health care cost estimates that affected results of operations. The favorable development of prior period health care cost estimates in 2006 was primarily a result of lower than expected health care cost trends (the rate of increase in per member health care costs). In 2005 and 2004, the favorable development of prior period health care cost estimates was primarily the result of the actual claim submission time being shorter than we anticipated as well as lower than expected health care cost trends. |
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(Millions) | 2006 | 2005 | ||||||
Balance, beginning of the period | $ | 4,523.2 | $ | 3,687.8 | ||||
Goodwill acquired: | ||||||||
Broadspire Disability | 99.0 | — | ||||||
ActiveHealth | (10.1 | )(1) | 309.1 | |||||
HMS | (9.1 | )(1) | 290.8 | |||||
SRC | — | 139.8 | ||||||
Other | .6 | 95.7 | (2) | |||||
Balance, end of the period | $ | 4,603.6 | $ | 4,523.2 | ||||
(1) | In 2006, we determined that additional net operating loss carry forwards are available to us from the ActiveHealth and HMS acquisitions. As a result, goodwill was reduced in 2006 as we recognized deferred tax assets for these net operating loss carry forwards. | |
(2) | Primarily includes goodwill recorded related to the 2005 acquisitions of certain assets from Magellan and the remaining interest in ASP. Refer to Note 3 on page 57 for additional information. |
Accumulated | Amortization | |||||||||||||
(Millions) | Cost | Amortization | Net Balance | Period (Years) | ||||||||||
2006 | ||||||||||||||
Other acquired intangible assets: | ||||||||||||||
Provider networks | $ | 696.2 | $ | 282.0 | $ | 414.2 | 12-25 | |||||||
Customer lists | 250.6 | (1) | 51.3 | 199.3 | 4-10 | |||||||||
Technology | 56.5 | (1) | 21.3 | 35.2 | 3-5 | |||||||||
Other | 31.4 | (1) | 10.8 | 20.6 | 3-12 | |||||||||
Trademarks | 22.3 | — | 22.3 | Indefinite | ||||||||||
Total other acquired intangible assets | $ | 1,057.0 | $ | 365.4 | $ | 691.6 | ||||||||
2005 | ||||||||||||||
Other acquired intangible assets: | ||||||||||||||
Customer lists | $ | 1,132.4 | (2) | $ | 937.5 | $ | 194.9 | 4-9 | ||||||
Provider networks | 696.2 | (2) | 253.2 | 443.0 | 12-25 | |||||||||
Technology | 44.1 | (2) | 6.2 | 37.9 | 3-5 | |||||||||
Other | 29.9 | (2) | 3.1 | 26.8 | 3-12 | |||||||||
Trademarks | 22.3 | (2) | — | 22.3 | Indefinite | |||||||||
Total other acquired intangible assets | $ | 1,924.9 | $ | 1,200.0 | $ | 724.9 | ||||||||
(1) | As a result of our acquisitions in 2006, we assigned $37.2 million to customer list assets, $12.4 million to technology assets and $2.7 million to other assets. | |
(2) | As a result of our acquisitions in 2005, we assigned $213.4 million to customer list assets, $16.0 million to provider network assets, $40.1 million to technology assets, $29.9 million to other assets and $22.3 million to trademark assets. |
Page 59
(Millions) | ||||
2007 | $ | 87.2 | ||
2008 | 79.8 | |||
2009 | 68.8 | |||
2010 | 65.0 | |||
2011 | 60.3 | |||
2006 | 2005 | |||||||||||||||||||||||
(Millions) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||||||
Debt securities available for sale: | ||||||||||||||||||||||||
Available for use in current operations | $ | 13,293.8 | (1) | $ | — | $ | 13,293.8 | $ | 13,216.9 | (1) | $ | — | $ | 13,216.9 | ||||||||||
Loaned securities | 1,018.1 | — | 1,018.1 | 1,115.7 | — | 1,115.7 | ||||||||||||||||||
On deposit, as required by regulatory authorities | — | 555.0 | (3) | 555.0 | — | 522.4 | (3) | 522.4 | ||||||||||||||||
Debt securities available for sale | 14,311.9 | 555.0 | 14,866.9 | 14,332.6 | 522.4 | 14,855.0 | ||||||||||||||||||
Equity securities available for sale | 32.8 | (1) | 38.3 | (3) | 71.1 | 34.5 | (1) | 26.7 | (3) | 61.2 | ||||||||||||||
Short-term investments | 110.6 | (1) | — | 110.6 | 114.8 | (1) | — | 114.8 | ||||||||||||||||
Mortgage loans | 207.4 | (2) | 1,380.8 | 1,588.2 | 86.7 | (2) | 1,460.8 | 1,547.5 | ||||||||||||||||
Other investments | 3.0 | (2) | 1,247.3 | (3) | 1,250.3 | 10.1 | (2) | 1,320.2 | (3) | 1,330.3 | ||||||||||||||
Total investments | $ | 14,665.7 | $ | 3,221.4 | $ | 17,887.1 | $ | 14,578.7 | $ | 3,330.1 | $ | 17,908.8 | ||||||||||||
(1) | Included in investment securities on the Consolidated Balance Sheets totaling $13.4 billion for each of 2006 and 2005. | |
(2) | Included in other investments on the Consolidated Balance Sheets totaling $210.4 million and $96.8 million for 2006 and 2005, respectively. | |
(3) | Included in long-term investments on the Consolidated Balance Sheets totaling $1.8 billion and $1.9 billion for 2006 and 2005, respectively. |
Debt and equity securities available for sale (including loaned securities) at December 31, 2006 were as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Millions) | Cost | Gains | Losses | Value | ||||||||||||
2006 | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. government securities | $ | 1,506.7 | $ | 24.0 | $ | 10.4 | $ | 1,520.3 | ||||||||
States, municipalities and political subdivisions | 1,613.2 | 17.3 | 8.7 | 1,621.8 | ||||||||||||
U.S. corporate securities | 5,937.0 | 188.0 | 59.0 | 6,066.0 | ||||||||||||
Foreign securities | 2,054.0 | 107.7 | 20.1 | 2,141.6 | ||||||||||||
Mortgage-backed and other asset-backed securities(1) | 2,950.8 | 52.8 | 36.9 | 2,966.7 | ||||||||||||
Redeemable preferred securities | 528.8 | 25.1 | 3.4 | 550.5 | ||||||||||||
Total debt securities | 14,590.5 | 414.9 | 138.5 | 14,866.9 | ||||||||||||
Equity securities | 65.5 | 5.7 | .1 | 71.1 | ||||||||||||
Total debt and equity securities | $ | 14,656.0 | $ | 420.6 | $ | 138.6 | $ | 14,938.0 | ||||||||
(1) | Includes approximately $148.7 million of subordinate and residual certificates at December 31, 2006 from a 1997 commercial mortgage loan securitization that we retained. |
Page 60
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Millions) | Cost | Gains | Losses | Value | ||||||||||||
2005 | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. government securities | $ | 1,342.0 | $ | 22.2 | $ | 12.2 | $ | 1,352.0 | ||||||||
States, municipalities and political subdivisions | 1,464.6 | 23.1 | 7.7 | 1,480.0 | ||||||||||||
U.S. corporate securities | 6,182.0 | 335.3 | 50.5 | 6,466.8 | ||||||||||||
Foreign securities | 2,238.9 | 159.0 | 15.1 | 2,382.8 | ||||||||||||
Mortgage-backed and other asset-backed securities(1) | 2,883.3 | 58.0 | 43.9 | 2,897.4 | ||||||||||||
Redeemable preferred securities | 250.7 | 25.3 | — | 276.0 | ||||||||||||
Total debt securities | 14,361.5 | 622.9 | 129.4 | 14,855.0 | ||||||||||||
Equity securities | 50.9 | 10.5 | .2 | 61.2 | ||||||||||||
Total debt and equity securities | $ | 14,412.4 | $ | 633.4 | $ | 129.6 | $ | 14,916.2 | ||||||||
(1) | Includes approximately $137.4 million of subordinate and residual certificates at December 31, 2005 from a 1997 commercial mortgage loan securitization that we retained. |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Millions) | Cost | Gains | Losses | Value | ||||||||||||
2006 | ||||||||||||||||
Supporting discontinued products | $ | 2,965.7 | $ | 167.1 | $ | 25.2 | $ | 3,107.6 | ||||||||
Supporting experience-rated products | 1,620.9 | 68.8 | 16.9 | 1,672.8 | ||||||||||||
Supporting remaining products | 10,003.9 | 179.0 | 96.4 | 10,086.5 | ||||||||||||
Total available for sale debt securities | $ | 14,590.5 | $ | 414.9 | $ | 138.5 | $ | 14,866.9 | ||||||||
2005 | ||||||||||||||||
Supporting discontinued products | $ | 3,093.3 | $ | 269.7 | $ | 20.1 | $ | 3,342.9 | ||||||||
Supporting experience-rated products | 1,817.9 | 119.7 | 16.8 | 1,920.8 | ||||||||||||
Supporting remaining products | 9,450.3 | 233.5 | 92.5 | 9,591.3 | ||||||||||||
Total available for sale debt securities | $ | 14,361.5 | $ | 622.9 | $ | 129.4 | $ | 14,855.0 | ||||||||
Fair | ||||
(Millions) | Value | |||
Due to mature: | ||||
One year or less | $ | 654.2 | ||
After one year, through five years | 2,930.7 | |||
After five years, through ten years | 3,358.2 | |||
After ten years | 4,957.0 | |||
Mortgage-backed securities | 2,446.0 | |||
Other asset-backed securities | 520.8 | |||
Total | $ | 14,866.9 | ||
Page 61
Supporting discontinued | Supporting remaining | |||||||||||||||||||||||
and experience-rated products | products | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Millions) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Due to mature: | ||||||||||||||||||||||||
Less than one year | $ | 16.2 | $ | .2 | $ | 228.8 | $ | .9 | $ | 245.0 | $ | 1.1 | ||||||||||||
One year through five years | 161.7 | 5.2 | 1,393.4 | 16.2 | 1,555.1 | 21.4 | ||||||||||||||||||
After five years through ten years | 504.8 | 11.6 | 1,128.3 | 19.0 | 1,633.1 | 30.6 | ||||||||||||||||||
Greater than ten years | 670.1 | 23.5 | 1,586.7 | 44.0 | 2,256.8 | 67.5 | ||||||||||||||||||
Mortgage-backed securities | 59.7 | 1.6 | 713.8 | 16.3 | 773.5 | 17.9 | ||||||||||||||||||
Total | $ | 1,412.5 | $ | 42.1 | $ | 5,051.0 | $ | 96.4 | $ | 6,463.5 | $ | 138.5 | ||||||||||||
Less than 12 months | Greater than 12 months(1) | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Millions) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
2006 | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
U.S. government securities | $ | 721.5 | $ | 5.2 | $ | 269.8 | $ | 5.2 | $ | 991.3 | $ | 10.4 | ||||||||||||
State, municipalities and political subdivisions | 329.8 | 2.4 | 321.6 | 6.3 | 651.4 | 8.7 | ||||||||||||||||||
U.S. corporate securities | 1,127.7 | 13.6 | 1,219.1 | 45.4 | 2,346.8 | 59.0 | ||||||||||||||||||
Foreign securities | 278.0 | 4.5 | 376.0 | 15.6 | 654.0 | 20.1 | ||||||||||||||||||
Mortgage-backed and other asset-backed securities | 406.5 | 2.6 | 1,246.9 | 34.3 | 1,653.4 | 36.9 | ||||||||||||||||||
Redeemable preferred securities | 166.6 | 3.4 | — | — | 166.6 | 3.4 | ||||||||||||||||||
Total debt securities | 3,030.1 | 31.7 | 3,433.4 | 106.8 | 6,463.5 | 138.5 | ||||||||||||||||||
Equity securities | 2.6 | .1 | 1.0 | — | 3.6 | .1 | ||||||||||||||||||
Total debt and equity securities | $ | 3,032.7 | $ | 31.8 | $ | 3,434.4 | $ | 106.8 | $ | 6,467.1 | $ | 138.6 | ||||||||||||
2005 | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
U.S. government securities | $ | 506.6 | $ | 5.2 | $ | 326.4 | $ | 7.0 | $ | 833.0 | $ | 12.2 | ||||||||||||
State, municipalities and political subdivisions | 623.1 | 5.8 | 76.8 | 1.9 | 699.9 | 7.7 | ||||||||||||||||||
U.S. corporate securities | 1,805.0 | 43.1 | 226.0 | 7.4 | 2,031.0 | 50.5 | ||||||||||||||||||
Foreign securities | 569.0 | 13.0 | 84.4 | 2.1 | 653.4 | 15.1 | ||||||||||||||||||
Mortgage-backed and other asset-backed securities | 1,149.0 | 21.8 | 593.7 | 22.1 | 1,742.7 | 43.9 | ||||||||||||||||||
Total debt securities | 4,652.7 | 88.9 | 1,307.3 | 40.5 | 5,960.0 | 129.4 | ||||||||||||||||||
Equity securities | 4.1 | .2 | — | — | 4.1 | .2 | ||||||||||||||||||
Total debt and equity securities | $ | 4,656.8 | $ | 89.1 | $ | 1,307.3 | $ | 40.5 | $ | 5,964.1 | $ | 129.6 | ||||||||||||
(1) | At December 31, 2006 and 2005, debt and equity securities in an unrealized loss position for greater than twelve months of $33.6 million and $7.2 million, respectively, and related fair value of $814.1 million and $185.9 million, respectively, related to discontinued and experience-rated products. |
Page 62
At December 31, 2006 and 2005, our mortgage loan balances, net of specific impairment reserves, by geographic region and property type were as follows:
(Millions) | 2006 | 2005 | ||||||
South Atlantic | $ | 439.6 | $ | 373.3 | ||||
Middle Atlantic | 232.4 | 308.7 | ||||||
New England | 92.4 | 100.7 | ||||||
South Central | 105.9 | 69.1 | ||||||
North Central | 278.4 | 259.0 | ||||||
Pacific and Mountain | 439.5 | 436.7 | ||||||
Total | $ | 1,588.2 | $ | 1,547.5 | ||||
(Millions) | 2006 | 2005 | ||||||
Office | $ | 557.5 | $ | 578.3 | ||||
Retail | 271.1 | 227.9 | ||||||
Apartment | 235.5 | 239.7 | ||||||
Hotel/motel | 21.6 | 25.5 | ||||||
Industrial | 442.6 | 421.6 | ||||||
Mixed use | 59.8 | 54.4 | ||||||
Other | .1 | .1 | ||||||
Total | $ | 1,588.2 | $ | 1,547.5 | ||||
(Millions) | ||||
2007 | $ | 168.4 | ||
2008 | 26.4 | |||
2009 | 67.6 | |||
2010 | 106.8 | |||
2011 | 113.5 | |||
Thereafter | 1,105.5 | |||
We do not have any material relationships with VIEs which would require consolidation. We have relationships with certain real estate and hedge fund partnerships that are considered VIEs. However, we would not be considered the primary beneficiary of these investments. We record the amount of our investment in these partnerships as investment real estate and other long-term assets on our Consolidated Balance Sheets and recognize our share of partnership income or losses in earnings. Our maximum exposure to loss as a result of our investment in these partnerships is our investment balance at December 31, 2006 and 2005 of approximately $96 million and $124 million, respectively, and the risk of recapture of tax credits related to the real estate partnerships previously recognized, which we do not believe is significant. The real estate partnerships construct, own and manage low-income housing developments and had total assets of approximately $1.9 billion at December 31, 2006 and 2005. The hedge fund partnerships had total assets of approximately $70 billion and $123 million at December 31, 2006 and 2005, respectively.
Sources of net investment income in 2006, 2005 and 2004 were as follows:
(Millions) | 2006 | 2005 | 2004 | |||||||||
Debt securities | $ | 811.0 | $ | 838.2 | $ | 872.4 | ||||||
Mortgage loans | 136.9 | 136.8 | 133.2 | |||||||||
Cash equivalents and other short-term investments | 112.7 | 59.2 | 30.3 | |||||||||
Other | 139.1 | 107.0 | 65.1 | |||||||||
Gross investment income | 1,199.7 | 1,141.2 | 1,101.0 | |||||||||
Less: Investment expenses | (35.0 | ) | (38.2 | ) | (38.5 | ) | ||||||
Net investment income(1) | $ | 1,164.7 | $ | 1,103.0 | $ | 1,062.5 | ||||||
(1) | Includes amounts related to experience-rated contract holders of $135.1 million, $143.6 million and $156.4 million in 2006, 2005 and 2004, respectively. Interest credited to experience-related contract holders is included in current and future benefits in our Consolidated Statements of Income. |
Page 63
(Millions) | 2006 | 2005 | 2004 | |||||||||
Debt securities | $ | 17.3 | $ | 15.8 | $ | 57.0 | ||||||
Equity securities | 3.8 | .8 | 13.0 | |||||||||
Derivatives | 7.8 | (2.9 | ) | .2 | ||||||||
Real estate | 4.7 | 15.2 | 1.3 | |||||||||
Other | (1.4 | ) | 3.4 | (.7 | ) | |||||||
Pretax net realized capital gains | $ | 32.2 | $ | 32.3 | $ | 70.8 | ||||||
(Millions) | 2006 | 2005 | 2004 | |||||||||
Proceeds on sales | $ | 10,057.6 | $ | 10,324.9 | $ | 9,269.4 | ||||||
Gross realized capital gains | 88.0 | 66.5 | 101.5 | |||||||||
Gross realized capital losses | 70.9 | 53.8 | 44.0 | |||||||||
Page 64
Net Unrealized Gains (Losses) | Minimum | Total Other | ||||||||||||||||||
Foreign | Pension and | Comprehensive | ||||||||||||||||||
(Millions) | Securities | Currency | Derivatives | OPEB plans | Income (Loss) | |||||||||||||||
Balance at December 31, 2003 | $ | 287.6 | $ | 9.8 | $ | (2.0 | ) | $ | (703.4 | ) | $ | (408.0 | ) | |||||||
Net unrealized losses on securities ($ (40.0) pretax) | (26.0 | ) | — | — | — | (26.0 | ) | |||||||||||||
Net foreign currency gains ($2.4 pretax) | — | 1.5 | — | — | 1.5 | |||||||||||||||
Net derivative gains ($1.2 pretax) | — | — | .8 | — | .8 | |||||||||||||||
Pension liability adjustment ($(145.0) pretax) | — | — | — | (94.3 | ) | (94.3 | ) | |||||||||||||
Reclassification to earnings ($(23.9) pretax) | (15.9 | ) | — | .4 | — | (15.5 | ) | |||||||||||||
Balance at December 31, 2004 | 245.7 | 11.3 | (.8 | ) | (797.7 | ) | (541.5 | ) | ||||||||||||
Net unrealized losses on securities ($ (223.9) pretax) | (145.5 | ) | — | — | — | (145.5 | ) | |||||||||||||
Net foreign currency gains ($1.1 pretax) | — | .7 | — | — | .7 | |||||||||||||||
Net derivative losses ($(4.0) pretax) | — | — | (2.6 | ) | — | (2.6 | ) | |||||||||||||
Pension liability adjustment ($1,127.7 pretax) | — | — | — | 733.0 | 733.0 | |||||||||||||||
Reclassification to earnings ($9.6 pretax) | 3.9 | — | 2.3 | — | 6.2 | |||||||||||||||
Balance at December 31, 2005 | 104.1 | 12.0 | (1.1 | ) | (64.7 | ) | 50.3 | |||||||||||||
Net unrealized losses on securities ($(53.7) pretax) | (34.9 | ) | — | — | — | (34.9 | ) | |||||||||||||
Net foreign currency losses ($(.6) pretax) | — | (.4 | ) | — | — | (.4 | ) | |||||||||||||
Net derivative gains ($24.9 pretax) | — | — | 16.2 | — | 16.2 | |||||||||||||||
Pension liability adjustment ($8.8 pretax) | — | — | — | 5.7 | (1) | 5.7 | ||||||||||||||
Reclassification to earnings ($(15.7) pretax) | (2.7 | ) | — | (7.5 | ) | — | (10.2 | ) | ||||||||||||
Adjustment to initially recognize the funded status of pension and OPEB plans | — | — | — | (652.4 | )(2) | (652.4 | ) | |||||||||||||
Balance at December 31, 2006 | $ | 66.5 | $ | 11.6 | $ | 7.6 | $ | (711.4 | ) | $ | (625.7 | ) | ||||||||
(1) | The amount recognized reflects the $8.8 million pretax charge to record the minimum pension liability adjustment of the pension plan in accordance with the provisions of FAS 87,“Employers’ Accounting for Pensions”(“FAS 87”), prior to the adoption of FAS 158. | |
(2) | The amount recognized reflects the $943.5 million pretax and $60.2 million pretax adjustment to reflect the funded status of the pension and OPEB plans, respectively, in accordance with FAS 158 (refer to Note 2 beginning on page 48 for additional information on FAS 158). |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Current taxes: | ||||||||||||
Federal | $ | 798.1 | $ | 645.0 | $ | 413.2 | ||||||
State | 50.8 | 52.1 | 39.5 | |||||||||
Total current taxes | 848.9 | 697.1 | 452.7 | |||||||||
Deferred taxes (benefits): | ||||||||||||
Federal | 50.5 | 184.0 | 195.1 | |||||||||
State | 1.6 | (1.1 | ) | (12.6 | ) | |||||||
Total deferred income taxes | 52.1 | 182.9 | 182.5 | |||||||||
Total income taxes | $ | 901.0 | $ | 880.0 | $ | 635.2 | ||||||
Page 65
(Millions) | 2006 | 2005 | ||||||
Deferred tax assets: | ||||||||
Reserve for anticipated future losses on discontinued products | $ | 286.1 | $ | 219.1 | ||||
Employee and postretirement benefits | 191.8 | — | ||||||
Deferred policy acquisition costs | 51.8 | 49.2 | ||||||
Investments, net | 101.5 | 97.6 | ||||||
Net operating loss carry forwards | 54.5 | 28.2 | ||||||
Insurance reserves | 62.5 | 66.2 | ||||||
Other | 73.1 | 88.7 | ||||||
Total gross assets | 821.3 | 549.0 | ||||||
Less: Valuation allowance | 20.1 | 15.7 | ||||||
Assets, net of valuation allowance | 801.2 | 533.3 | ||||||
Deferred tax liabilities: | ||||||||
Goodwill and other acquired intangible assets | 171.4 | 166.8 | ||||||
Accumulated other comprehensive income | 46.1 | 61.9 | ||||||
Depreciation and amortization | 120.5 | 101.9 | ||||||
Employee and postretirement benefits | — | 121.5 | ||||||
Other | — | 22.9 | ||||||
Total gross liabilities | 338.0 | 475.0 | ||||||
Net deferred tax asset(1) | $ | 463.2 | $ | 58.3 | ||||
(1) | Includes $120.8 million and $(10.4) million classified as current assets (liabilities) at December 31, 2006 and 2005, respectively, and $342.4 million and $68.7 million classified as noncurrent assets at December 31, 2006 and 2005, respectively. |
Page 66
We sponsor various noncontributory defined benefit plans, including two pension plans that cover substantially all employees and other postretirement plans (“OPEB”) that provide certain health care, dental and life insurance benefits for retired employees, including those of our former parent company.
Page 67
Pension Plans | OPEB Plans | |||||||||||||||
(Millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Benefit obligation, beginning of year | $ | 5,044.4 | $ | 4,699.7 | $ | 476.4 | $ | 494.6 | ||||||||
Service cost | 97.8 | 92.7 | .3 | .4 | ||||||||||||
Interest cost | 283.1 | 273.9 | 25.4 | 28.2 | ||||||||||||
Actuarial (gain) loss | (26.1 | ) | 240.1 | (34.6 | ) | 16.9 | ||||||||||
Plan amendments | — | — | (26.5) | (1) | (13.8 | ) | ||||||||||
Benefits paid | (277.7 | ) | (262.0 | ) | (47.8 | ) | (49.9 | ) | ||||||||
Benefit obligation, end of year | $ | 5,121.5 | $ | 5,044.4 | $ | 393.2 | $ | 476.4 | ||||||||
(1) | Represents a change in benefit plan offerings to current retirees participating in the retiree health plan. The reduction in the benefit obligation will be recognized as a component of future net periodic benefit costs. |
Pension Plans | OPEB Plans | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Discount rate | 5.98 | % | 5.77 | % | 5.85 | % | 5.59 | % | ||||||||
Rate of increase in future compensation levels | 4.51 | 4.51 | — | — | ||||||||||||
Pension Plans | OPEB Plans | |||||||||||||||
(Millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Fair value of plan assets, beginning of year | $ | 4,821.7 | $ | 4,221.2 | $ | 70.9 | $ | 70.2 | ||||||||
Actual return of plan assets | 523.4 | 597.6 | 3.3 | 2.7 | ||||||||||||
Employer contributions | 269.0 | 264.9 | 44.4 | 47.9 | ||||||||||||
Benefits paid | (277.7 | ) | (262.0 | ) | (47.8 | ) | (49.9 | ) | ||||||||
Fair value of plan assets, end of year | $ | 5,336.4 | $ | 4,821.7 | $ | 70.8 | $ | 70.9 | ||||||||
Page 68
Pension Plans | OPEB Plans | |||||||||||||||
(Millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Benefit obligation | $ | (5,121.5 | ) | $ | (5,044.4 | ) | $ | (393.2 | ) | $ | (476.4 | ) | ||||
Fair value of plan assets | 5,336.4 | 4,821.7 | 70.8 | 70.9 | ||||||||||||
Funded status | $ | 214.9 | $ | (222.7 | ) | $ | (322.4 | ) | $ | (405.5 | ) | |||||
Pension Plans | OPEB Plans | |||||||||||||||
(Millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Funded status at September 30 | $ | 214.9 | $ | (222.7 | ) | $ | (322.4 | ) | $ | (405.5 | ) | |||||
Unrecognized net actuarial losses | 1,012.1 | 1,228.2 | 116.7 | 157.6 | ||||||||||||
Unrecognized prior service cost | 22.1 | 27.7 | (56.5 | ) | (32.0 | ) | ||||||||||
Contributions made in the fourth quarter | 5.3 | 5.8 | 10.8 | 13.4 | ||||||||||||
Amount recognized in accumulated other | ||||||||||||||||
comprehensive income (loss)(1) | (1,034.2 | ) | (99.5 | ) | (60.2 | ) | — | |||||||||
Net amount of assets and liabilities recognized at December 31 | $ | 220.2 | $ | 939.5 | $ | (311.6 | ) | $ | (266.5 | ) | ||||||
(1) | The amount recognized in accumulated comprehensive income (loss) is a pretax amount that reflects the cumulative charge to record the minimum pension liability in accordance with FAS 87 prior to the adoption of FAS 158 of $90.7 million in 2006 and $99.5 million in 2005, as well as a $943.5 million and $60.2 million adjustment to reflect the funded status of the pension and OPEB plans, respectively, in accordance with FAS 158 in 2006. |
Pension Plans | OPEB Plans | |||||||||||||||
(Millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Prepaid pension asset(1) | $ | 478.5 | $ | 1,199.6 | $ | — | $ | — | ||||||||
Accrued benefit liabilities(2) | (258.3 | ) | (260.1 | ) | (311.6 | ) | (266.5 | ) | ||||||||
Net amount of assets and liabilities recognized at | ||||||||||||||||
December 31 | $ | 220.2 | $ | 939.5 | $ | (311.6 | ) | $ | (266.5 | ) | ||||||
(1) | Included in other long-term assets on our Consolidated Balance Sheets. | |
(2) | Includes $21.5 million and $32.3 million for the pension and OPEB plans, respectively, that are reflected in other current liabilities and $236.8 million and $279.3 million for the pension and OPEB plans, respectively, that are reflected in long-term liabilities on our Consolidated Balance Sheet at December 31, 2006. All amounts in 2005 were reflected in other long-term liabilities on our Consolidated Balance Sheet. |
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Pension Plans | OPEB Plans | |||||||||||||||||||||||
(Millions) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||||||
Service cost | $ | 97.8 | $ | 92.7 | $ | 75.9 | $ | .3 | $ | .4 | $ | .4 | ||||||||||||
Interest cost | 283.1 | 273.9 | 261.4 | 25.4 | 28.2 | 24.7 | ||||||||||||||||||
Expected return on plan assets | (410.7 | ) | (370.2 | ) | (310.6 | ) | (4.0 | ) | (4.5 | ) | (4.4 | ) | ||||||||||||
Amortization (accretion) of prior service cost | 5.7 | 5.3 | 5.6 | (2.1 | ) | (1.3 | ) | (1.3 | ) | |||||||||||||||
Recognized net actuarial loss | 77.3 | 74.5 | 64.2 | 7.1 | 5.8 | 2.5 | ||||||||||||||||||
Net periodic benefit cost before curtailment benefit | 53.2 | 76.2 | 96.5 | 26.7 | 28.6 | 21.9 | ||||||||||||||||||
Curtailment benefit | — | (2.3 | )(1) | — | — | — | (31.8 | )(2) | ||||||||||||||||
Net periodic benefit cost (income) | $ | 53.2 | $ | 73.9 | $ | 96.5 | $ | 26.7 | $ | 28.6 | $ | (9.9 | ) | |||||||||||
(1) | Reflects a plan amendment eliminating the accrual of new benefits under the Supplemental Pension Plan, as discussed above. | |
(2) | Reflects a plan amendment eliminating the dental subsidy for all retirees, as discussed above. |
Pension Plans | OPEB Plans | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Discount rate | 5.77 | % | 6.00 | % | 6.25 | % | 5.59 | % | 6.00 | % | 6.25 | % | ||||||||||||
Expected long-term return on plan assets | 8.50 | 8.75 | 8.75 | 5.70 | 6.50 | 6.50 | ||||||||||||||||||
Rate of increase in future compensation levels | 4.51 | 3.00 | 3.25 | — | — | — | ||||||||||||||||||
Pension Plans | OPEB Plans | |||||||||||||||||||||||
Target | Target | |||||||||||||||||||||||
(Millions) | 2006 | 2005 | Allocation | 2006 | 2005 | Allocation | ||||||||||||||||||
Equity securities | 66 | % | 68 | % | 60-70 | % | 11 | % | 10 | % | 5-15 | % | ||||||||||||
Debt securities | 26 | 25 | 20-30 | 87 | 87 | 80-90 | ||||||||||||||||||
Real estate/other | 8 | 7 | 5-15 | 2 | 3 | 2-10 | ||||||||||||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
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(Millions) | Pension Plans | OPEB Plans | ||||||
2007 | $ | 289.7 | $ | 36.6 | ||||
2008 | 294.7 | 35.7 | ||||||
2009 | 301.1 | 34.9 | ||||||
2010 | 306.6 | 34.1 | ||||||
2011 | 413.9 | 33.1 | ||||||
2012-2016 | 1,798.2 | 145.6 | ||||||
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Substantially all of our employees are eligible to participate in a defined contribution retirement savings plan under which designated contributions, which may be invested in our common stock or certain other investments, are matched by us. We provide for a match of up to 50% of the first 6% of eligible pay contributed to the plan. The matching contributions are made in cash and invested according to each participant’s investment elections. During 2006, 2005 and 2004, we made $40 million, $36 million and $33 million, respectively, in matching contributions. The plan trustee held approximately 13 million shares of our common stock for plan participants at December 31, 2006. At December 31, 2006, approximately 34 million shares of our common stock were reserved for issuance under our 401(k) plan.
Stock-Based Compensation Plans —Our stock-based compensation plans (the “Plans”) provide for awards of stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), deferred contingent common stock and the ability for employees to purchase common stock at a discount. At December 31, 2006, approximately 99 million common shares were available for issuance under the Plans.
2006 | 2005 | 2004 | ||||||||||
Dividend yield | .1 | % | .1 | % | .1 | % | ||||||
Expected volatility | 30.9 | % | 31.3 | % | 34.0 | % | ||||||
Risk-free interest rate | 4.6 | % | 3.7 | % | 3.3 | % | ||||||
Expected term | 4.5 years | 4.5 years | 4.0 years | |||||||||
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Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of Stock | Exercise | Contractual | Intrinsic | |||||||||||||
(Millions, except exercise price) | Options and SARs(1) | Price | Life (Years) | Value | ||||||||||||
2004 | ||||||||||||||||
Outstanding, beginning of year | 91.7 | $ | 8.74 | 6.4 | $ | 747.8 | ||||||||||
Granted | 15.3 | 19.47 | — | — | ||||||||||||
Exercised | (37.7 | ) | 8.45 | — | 515.8 | |||||||||||
Expired or forfeited | (1.7 | ) | 13.61 | — | — | |||||||||||
Outstanding, end of year | 67.6 | $ | 11.22 | 6.6 | $ | 1,350.9 | ||||||||||
Exercisable, end of year | 50.9 | $ | 11.51 | 6.3 | $ | 1,001.2 | ||||||||||
2005 | ||||||||||||||||
Outstanding, beginning of year | 67.6 | $ | 11.22 | 6.6 | $ | 1,350.9 | ||||||||||
Granted | 8.9 | 33.61 | — | — | ||||||||||||
Exercised | (21.6 | ) | 11.34 | — | 573.5 | |||||||||||
Expired or forfeited | (1.1 | ) | 14.49 | — | — | |||||||||||
Outstanding, end of year | 53.8 | $ | 14.78 | 6.2 | $ | 1,742.2 | ||||||||||
Exercisable, end of year | 43.0 | $ | 12.77 | 5.8 | $ | 1,480.3 | ||||||||||
2006 | ||||||||||||||||
Outstanding, beginning of year | 53.8 | $ | 14.78 | 6.2 | $ | 1,742.2 | ||||||||||
Granted | 5.5 | 49.84 | — | — | ||||||||||||
Exercised | (9.5 | ) | 11.17 | — | 309.2 | |||||||||||
Expired or forfeited | (.7 | ) | 28.72 | — | — | |||||||||||
Outstanding, end of year | 49.1 | $ | 19.22 | 5.5 | $ | 1,213.5 | ||||||||||
Exercisable, end of year | 38.8 | $ | 13.27 | 4.9 | $ | 1,161.3 | ||||||||||
(1) | There were no SARs transactions prior to January 1, 2006. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Cash received from stock option exercises | $ | 105.8 | $ | 253.0 | $ | 316.0 | ||||||
Intrinsic value (the excess of stock price on the date of exercise over the exercise price) | 309.2 | 573.5 | 515.8 | |||||||||
Tax benefits realized for the tax deductions from stock options exercised(1) | 108.2 | 202.5 | 190.4 | |||||||||
Fair value of stock options and SARs vested | 71.0 | 63.5 | 101.9 | |||||||||
(1) | No SARs were exercised during these periods. |
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Outstanding | Exercisable | |||||||||||||||||||||||||||||||
Weighted | ||||||||||||||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||||||||||||||
Remaining | Average | Aggregate | Average | Aggregate | ||||||||||||||||||||||||||||
Number | Contractual | Exercise | Intrinsic | Number | Exercise | Intrinsic | ||||||||||||||||||||||||||
Range of Exercise Prices | Outstanding | Life (Years) | Price | Value | Exercisable | Price | Value | |||||||||||||||||||||||||
Stock options | ||||||||||||||||||||||||||||||||
$0.00-$5.21 | 1.2 | 2.6 | $ | 4.95 | $ | 45.9 | 1.2 | $ | 4.95 | $ | 45.9 | |||||||||||||||||||||
5.21-10.42 | 13.9 | 4.1 | 8.22 | 486.1 | 13.9 | 8.22 | 486.1 | |||||||||||||||||||||||||
10.42-15.63 | 12.5 | 4.7 | 10.61 | 408.6 | 12.5 | 10.61 | 408.6 | |||||||||||||||||||||||||
15.63-20.84 | 8.0 | 6.3 | 19.36 | 190.9 | 8.0 | 19.36 | 190.2 | |||||||||||||||||||||||||
20.84-26.06 | .3 | 7.3 | 21.92 | 6.3 | .3 | 21.90 | 5.5 | |||||||||||||||||||||||||
26.06-31.27 | — | (1) | 7.9 | 27.54 | — | (1) | — | (1) | 27.54 | — | (1) | |||||||||||||||||||||
31.27-36.48 | 7.6 | 7.2 | 33.38 | 74.1 | 2.5 | 33.38 | 24.8 | |||||||||||||||||||||||||
36.48-41.69 | .4 | 8.9 | 39.43 | 1.6 | .1 | 38.88 | .2 | |||||||||||||||||||||||||
41.69-46.90 | — | (1) | 8.6 | 42.16 | — | (1) | — | (1) | 42.16 | — | (1) | |||||||||||||||||||||
46.90-52.11 | 5.2 | 8.0 | 50.20 | — | .3 | 50.21 | — | |||||||||||||||||||||||||
$0.00- $52.11 | 49.1 | 5.5 | $ | 19.22 | $ | 1,213.5 | 38.8 | $ | 13.27 | $ | 1,161.3 | |||||||||||||||||||||
(1) | Amounts rounded to zero. |
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
RSUs | Fair Value | |||||||
RSUs at beginning of year | -(1) | (2) | $ | 34.18 | ||||
Granted | .8 | 50.05 | ||||||
Vested | — | (1) | 40.29 | |||||
Forfeited | — | (1) | 50.21 | |||||
RSUs at end of year | .8 | $ | 49.52 | |||||
(1) | Amounts rounded to zero. | |
(2) | There were no material RSU transactions prior to January 1, 2006. |
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(Millions) | 2006 | 2005 | ||||||
Senior notes, 7.375%, due 2006(1) | $ | — | $ | 450.0 | ||||
Senior notes, 5.75%, due 2011 | 449.6 | — | ||||||
Senior notes, 7.875%, due 2011 | 448.4 | 448.1 | ||||||
Senior notes, 6.0%, due 2016 | 745.8 | — | ||||||
Senior notes, 6.625%, due 2036 | 798.5 | — | ||||||
Senior notes, 8.50%, due 2041(2) | — | 707.6 | ||||||
Total long-term debt | 2,442.3 | 1,605.7 | ||||||
Less current portion of long-term debt(1) | — | (450.0 | ) | |||||
Long-term debt, less current portion | $ | 2,442.3 | $ | 1,155.7 | ||||
(1) The 7.375% senior notes were repaid in February 2006. | |
(2) The 8.50% senior notes were redeemed and repaid in June 2006. |
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14. | Capital Stock |
Shares Purchased | |||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||
Number of | Purchase | ||||||||||||||||||||||||||||||||
Shares | Not to | ||||||||||||||||||||||||||||||||
(Millions) | Authorized | Exceed | Shares | Cost | Shares | Cost | Shares | Cost | |||||||||||||||||||||||||
Authorization date: | |||||||||||||||||||||||||||||||||
September 29, 2006 | N/A | (1) | 750.0 | 4.2 | $ | 179.1 | — | $ | — | — | $ | — | |||||||||||||||||||||
April 28, 2006 | N/A | (1) | 820.0 | 21.7 | 820.0 | — | — | — | — | ||||||||||||||||||||||||
January 27, 2006 | N/A | (1) | 750.0 | 20.4 | 750.0 | — | — | — | — | ||||||||||||||||||||||||
September 29, 2005 | N/A | (1) | 750.0 | 14.0 | 580.9 | 3.6 | 169.1 | — | — | ||||||||||||||||||||||||
February 25, 2005 | N/A | (1) | 750.0 | — | — | 17.8 | 750.0 | — | — | ||||||||||||||||||||||||
September 24, 2004 | N/A | (1) | 750.0 | — | — | 20.4 | 750.0 | — | — | ||||||||||||||||||||||||
April 30, 2004 | N/A | (1) | 750.0 | — | — | — | — | 30.4 | 750.0 | ||||||||||||||||||||||||
December 5, 2003(2) | 40.0 | 750.0 | — | — | — | — | 34.0 | 743.0 | |||||||||||||||||||||||||
Total repurchases | 60.3 | $ | 2,330.0 | (3) | 41.8 | $ | 1,669.1 | 64.4 | $ | 1,493.0 | |||||||||||||||||||||||
Repurchase authorization remaining as of December 31, | N/A | (1) | $ | 570.9 | N/A | (1) | $ | 580.9 | N/A | (1) | $ | 750.0 | |||||||||||||||||||||
(1) | The 2006, 2005 and 2004 Board authorizations do not limit the number of shares of common stock that may be repurchased. | |
(2) | The December 5, 2003 Board authorization replaced the June 27, 2003 authorization. | |
(3) | Approximately $27 million of the 2006 repurchases were settled in early January 2007. |
15. | Financial Instruments |
The carrying values and estimated fair values of certain of our financial instruments at December 31, 2006 and 2005 were as follows:
2006 | 2005 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(Millions) | Value | Value | Value | Value | ||||||||||||
Assets: | ||||||||||||||||
Debt securities | $ | 14,866.9 | $ | 14,866.9 | $ | 14,885.0 | $ | 14,885.0 | ||||||||
Equity securities | 71.1 | 71.1 | 61.2 | 61.2 | ||||||||||||
Mortgage loans | 1,588.2 | 1,618.6 | 1,547.5 | 1,599.9 | ||||||||||||
Derivatives | 3.1 | 4.6 | 3.9 | 6.3 | ||||||||||||
Liabilities: | ||||||||||||||||
Investment contract liabilities: | ||||||||||||||||
With a fixed maturity | 81.7 | 82.2 | 93.2 | 95.1 | ||||||||||||
Without a fixed maturity | 549.8 | 481.9 | 696.4 | 579.0 | ||||||||||||
Derivatives | — | 3.8 | .7 | 3.0 | ||||||||||||
Long-term debt | 2,442.3 | 2,575.2 | 1,605.7 | 1,674.4 | ||||||||||||
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• | With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, us for similar contracts. |
• | Without a fixed maturity: Fair value is estimated as the amount payable to the contract holder upon demand. However, we have the right under such contracts to delay payment of withdrawals that may ultimately result in paying an amount different than that determined to be payable on demand. |
We are using interest rate swap agreements to manage certain exposures related to changes in interest rates on investments supporting experience-rated and discontinued products in the Large Case Pensions business. The use of these derivatives does not impact our results of operations.
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16. | Dividend Restrictions and Statutory Surplus |
(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 |
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Percentage | ||||||||||||||||||||
Ceded to | Assumed | of Amount | ||||||||||||||||||
Direct | Other | from Other | Net | Assumed | ||||||||||||||||
(Millions) | Amount | Companies | Companies | Amount | to Net | |||||||||||||||
2006(1) | ||||||||||||||||||||
Accident and Health Insurance-HMO(2) | $ | 12,516.0 | $ | — | $ | — | $ | 12,516.0 | — | % | ||||||||||
Accident and Health Insurance-Other(3) | 7,118.3 | 3.0 | 27.6 | 7,142.9 | .4 | |||||||||||||||
Life Insurance(4) | 1,444.0 | 54.3 | 60.9 | 1,450.6 | 4.2 | |||||||||||||||
Total premiums | $ | 21,078.3 | $ | 57.3 | $ | 88.5 | $ | 21,109.5 | .4 | % | ||||||||||
2005(1) | ||||||||||||||||||||
Accident and Health Insurance-HMO(2) | $ | 11,640.8 | $ | — | $ | — | $ | 11,640.8 | — | % | ||||||||||
Accident and Health Insurance-Other(3) | 5,609.8 | 8.8 | 157.5 | 5,758.5 | 2.7 | |||||||||||||||
Life Insurance(4) | 1,482.2 | 62.1 | 108.3 | 1,528.4 | 7.1 | |||||||||||||||
Total premiums | $ | 18,732.8 | $ | 70.9 | $ | 265.8 | $ | 18,927.7 | 1.4 | % | ||||||||||
2004(1) | ||||||||||||||||||||
Accident and Health Insurance-HMO(2) | $ | 10,894.6 | $ | — | $ | — | $ | 10,894.6 | — | % | ||||||||||
Accident and Health Insurance-Other(3) | 4,361.9 | 8.8 | 13.6 | 4,366.7 | .3 | |||||||||||||||
Life Insurance(4) | 1,408.4 | 79.0 | 86.0 | 1,415.4 | 6.1 | |||||||||||||||
Total premiums | $ | 16,664.9 | $ | 87.8 | $ | 99.6 | $ | 16,676.7 | .6 | % | ||||||||||
(1) | Excludes intercompany transactions. | |
(2) | Includes Commercial HMO (includes premiums related to POS members who access primary care physicians and referred care through an HMO Network), Medicare HMO and Medicaid HMO business. | |
(3) | Includes all other medical, dental and Group Insurance products offered by us, except life insurance and HMO products. | |
(4) | Includes premiums for the Large Case Pensions business. |
18. | Commitments and Contingent Liabilities |
Page 79
We have the following guarantee arrangements at December 31, 2006.
Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. Assessments generally are based on a formula relating to our premiums in the state compared to the premiums of other insurers. Certain states allow recoverability of assessments as offsets to premium taxes. While we have historically recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future recovery of these assessments. Some states have similar laws relating to HMOs. HMOs in certain states in which we do business are subject to assessments, including market stabilization and other risk sharing pools for which we are assessed charges based on incurred claims, demographic membership mix and other factors. We establish liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments we pay are dependent upon our experience relative to other entities subject to the assessment and the ultimate liability is not known at the balance sheet date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants, we believe we have adequate reserves to cover such assessments.
Page 80
Managed Care Class Action Litigation
From 1999 through early 2003, we were involved in purported class action lawsuits as part of a wave of similar actions targeting the health care payor industry and, in particular, the conduct of business by managed care companies. These cases, brought on behalf of health care providers (the “Provider Cases”), alleged generally that we and other defendant managed care organizations engaged in coercive behavior or a variety of improper business practices in dealing with health care providers and conspired with one another regarding this purported wrongful conduct.
We have received subpoenas and other requests for information from the New York Attorney General, the Connecticut Attorney General, other attorneys general and various insurance and other regulators with respect to an industry wide investigation into certain insurance brokerage practices, including broker compensation arrangements, bid quoting practices and potential antitrust violations. We may receive additional subpoenas and requests for information from these attorneys general and regulators. We are cooperating with these inquiries.
We are involved in numerous other lawsuits arising, for the most part, in the ordinary course of our business operations, including employment litigation and claims of bad faith, medical malpractice, non-compliance with state regulatory regimes, marketing misconduct, failure to timely pay medical claims, investment activities, patent infringement and other intellectual property litigation and other litigation in our Health Care and Group Insurance businesses. Some of these other lawsuits are or are purported to be class actions. We intend to defend these matters vigorously.
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We have operating leases for office space and certain computer and other equipment. Rental expenses for these items were $146 million, $156 million and $174 million in 2006, 2005 and 2004, respectively. The future net minimum payments under noncancelable leases for 2007 through 2011 are estimated to be $164 million, $136 million, $108 million, $75 million and $32 million, respectively.
Health | Group | Large Case | Corporate | Total | ||||||||||||||||
(Millions) | Care | Insurance | Pensions | Interest | Company | |||||||||||||||
2006 | ||||||||||||||||||||
Revenue from external customers(1) | $ | 21,897.2 | $ | 1,846.5 | $ | 205.1 | $ | — | $ | 23,948.8 | ||||||||||
Net investment income | 334.2 | 294.1 | 536.4 | — | 1,164.7 | |||||||||||||||
Interest expense | — | — | — | 148.3 | 148.3 | |||||||||||||||
Depreciation and amortization expense | 256.9 | 13.5 | — | — | 270.4 | |||||||||||||||
Income taxes (benefits) | 847.6 | 48.6 | 56.7 | (51.9 | ) | 901.0 | ||||||||||||||
Operating earnings (loss)(2) | 1,572.7 | 132.7 | 38.9 | (96.4 | ) | 1,647.9 | ||||||||||||||
Segment assets(3) | 15,904.5 | 5,327.4 | 26,394.5 | — | 47,626.4 | |||||||||||||||
2005 | ||||||||||||||||||||
Revenue from external customers(1) | $ | 19,310.5 | $ | 1,835.3 | $ | 210.8 | $ | — | $ | 21,356.6 | ||||||||||
Net investment income | 295.0 | 293.1 | 514.9 | — | 1,103.0 | |||||||||||||||
Interest expense | — | — | — | 122.8 | 122.8 | |||||||||||||||
Depreciation and amortization expense | 204.4 | — | — | — | 204.4 | |||||||||||||||
Income taxes (benefits) | 827.9 | 51.0 | 44.1 | (43.0 | ) | 880.0 | ||||||||||||||
Operating earnings (loss)(2) | 1,427.7 | 127.7 | 33.2 | (79.8 | ) | 1,508.8 | ||||||||||||||
Segment assets(3) | 15,476.7 | 5,720.8 | 23,235.8 | — | 44,433.3 | |||||||||||||||
2004 | ||||||||||||||||||||
Revenue from external customers(1) | $ | 16,914.4 | $ | 1,655.5 | $ | 200.9 | $ | — | $ | 18,770.8 | ||||||||||
Net investment income | 262.1 | 274.1 | 526.3 | — | 1,062.5 | |||||||||||||||
Interest expense | — | — | — | 104.7 | 104.7 | |||||||||||||||
Depreciation and amortization expense | 182.2 | — | — | — | 182.2 | |||||||||||||||
Income taxes (benefits) | 592.6 | 58.0 | 21.3 | (36.7 | ) | 635.2 | ||||||||||||||
Operating earnings (loss)(2) | 992.3 | 123.3 | 31.3 | (68.0 | ) | 1,078.9 | ||||||||||||||
Segment assets(3) | 14,762.3 | 5,325.4 | 22,126.4 | — | 42,214.1 | |||||||||||||||
(1) | Revenue from the federal government was ten percent or more of our total revenue from external customers in 2006, 2005 and 2004. We earned $3.0 billion, $2.1 billion and $1.9 billion of revenue from this customer in 2006, 2005 and 2004, respectively, in the Health Care and Group Insurance segments. | |
(2) | Operating earnings (loss) excludes net realized capital gains or losses and the other items described in the reconciliation below. | |
(3) | Large Case Pensions assets include $4.8 billion, $5.1 billion and $5.4 billion attributable to discontinued products at December 31, 2006, 2005 and 2004, respectively (excluding the receivable from Large Case Pensions’ continuing products which is eliminated in consolidation). |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Operating earnings | $ | 1,647.9 | $ | 1,508.8 | $ | 1,078.9 | ||||||
Net realized capital gains, net of tax | 24.1 | 21.1 | 45.9 | |||||||||
Reduction of reserve for anticipated future losses on discontinued products(1) | 75.0 | 43.4 | — | |||||||||
Physician class action settlement insurance-related charge(2) | (47.1 | ) | — | — | ||||||||
Debt refinancing charge(3) | (8.1 | ) | — | — | ||||||||
Acquisition-related software charge(4) | (6.2 | ) | — | — | ||||||||
Income from continuing operations | $ | 1,685.6 | $ | 1,573.3 | $ | 1,124.8 | ||||||
(1) | We reduced the reserve for anticipated future losses on discontinued products by $75.0 million ($115.4 million pretax) and $43.4 million ($66.7 million pretax) in 2006 and 2005, respectively. We believe excluding any changes to the reserve for anticipated future losses on discontinued products provides more useful information as to our continuing products and is consistent with the treatment of the results of operations of these discontinued products, which are credited/charged to the reserve and do not affect our results of operations. Refer to Note 20 beginning on page 84 for additional information on the reduction of the reserve for anticipated future losses on discontinued products. | |
(2) | As a result of a trial court’s ruling in 2006, we concluded that a $72.4 million pretax receivable from third party insurers related to certain litigation we settled in 2003 was no longer probable of collection for accounting purposes. As a result, we wrote-off this receivable in 2006. We believe this charge neither relates to the ordinary course of our business nor reflects our underlying business performance and therefore, we have excluded it from operating earnings in 2006 (refer to Note 18 beginning on page 79). | |
(3) | In connection with the issuance of $2.0 billion of our senior notes in 2006, we redeemed all $700 million of our 8.5% senior notes due 2041. In connection with this redemption, we wrote-off debt issuance costs associated with the 8.5% senior notes due 2041 and recognized the deferred gain from the interest rate swaps that had hedged the 8.5% senior notes due 2041 (in May 2005, we sold these interest rate swaps; the resulting gain from which was to be amortized over the remaining life of the 8.5% senior notes due 2041). As a result of the foregoing, we recorded an $8.1 million ($12.4 million pretax) net charge in 2006. We believe this charge neither relates to the ordinary course of our business nor reflects our underlying business performance, and therefore, we have excluded it from operating earnings in 2006 (refer to Notes 13 and 15 beginning on pages 75 and 76, respectively). | |
(4) | As a result of the acquisition of Broadspire Disability in 2006, we acquired certain software which eliminated the need for similar software that we had been developing internally. As a result, we ceased our own software development and impaired amounts previously capitalized, resulting in a $6.2 million ($8.3 million pretax) charge to net income, reflected in general and administrative expenses in 2006. This charge does not reflect the underlying business performance of Group Insurance. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Health risk | $ | 19,153.5 | $ | 16,924.7 | $ | 14,862.8 | ||||||
Health fees and other revenue | 2,743.7 | 2,385.8 | 2,051.6 | |||||||||
Group life | 1,260.4 | 1,332.2 | 1,229.8 | |||||||||
Group disability | 483.3 | 408.1 | 342.2 | |||||||||
Group long-term care | 102.8 | 95.0 | 83.5 | |||||||||
Large case pensions | 205.1 | 210.8 | 200.9 | |||||||||
Total revenue from external customers(1) | $ | 23,948.8 | $ | 21,356.6 | $ | 18,770.8 | ||||||
(1) | All within the United States, except approximately $4 million, $6 million and $5 million in 2006, 2005 and 2004, respectively, which were derived from customers in Canada. |
(Millions) | 2006 | 2005 | 2004 | |||||||||
Revenue from external customers | $ | 23,948.8 | $ | 21,356.6 | $ | 18,770.8 | ||||||
Net investment income | 1,164.7 | 1,103.0 | 1,062.5 | |||||||||
Net realized capital gains | 32.2 | 32.3 | 70.8 | |||||||||
Total revenue | $ | 25,145.7 | $ | 22,491.9 | $ | 19,904.1 | ||||||
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Charged (Credited) | ||||||||||||
to Reserve for | ||||||||||||
(Millions) | Results | Future Losses | Net(1) | |||||||||
2006 | ||||||||||||
Net investment income | $ | 340.4 | $ | — | $ | 340.4 | ||||||
Net realized capital gains | 38.6 | (38.6 | ) | — | ||||||||
Interest earned on receivable from continuing products | 28.9 | — | 28.9 | |||||||||
Other revenue | 15.0 | — | 15.0 | |||||||||
Total revenue | 422.9 | (38.6 | ) | 384.3 | ||||||||
Current and future benefits | 330.7 | 42.0 | 372.7 | |||||||||
Operating expenses | 11.6 | — | 11.6 | |||||||||
Total benefits and expenses | 342.3 | 42.0 | 384.3 | |||||||||
Results of discontinued products | $ | 80.6 | $ | (80.6 | ) | $ | — | |||||
2005 | ||||||||||||
Net investment income | $ | 324.2 | $ | — | $ | 324.2 | ||||||
Net realized capital gains | 22.0 | (22.0 | ) | — | ||||||||
Interest earned on receivable from continuing products | 30.6 | — | 30.6 | |||||||||
Other revenue | 16.3 | — | 16.3 | |||||||||
Total revenue | 393.1 | (22.0 | ) | 371.1 | ||||||||
Current and future benefits | 342.8 | 17.1 | 359.9 | |||||||||
Operating expenses | 11.2 | — | 11.2 | |||||||||
Total benefits and expenses | 354.0 | 17.1 | 371.1 | |||||||||
Results of discontinued products | $ | 39.1 | $ | (39.1 | ) | $ | — | |||||
2004 | ||||||||||||
Net investment income | $ | 320.6 | $ | — | $ | 320.6 | ||||||
Net realized capital gains | 37.5 | (37.5 | ) | — | ||||||||
Interest earned on receivable from continuing products | 30.2 | — | 30.2 | |||||||||
Other revenue | 24.8 | — | 24.8 | |||||||||
Total revenue | 413.1 | (37.5 | ) | 375.6 | ||||||||
Current and future benefits | 356.1 | 6.5 | 362.6 | |||||||||
Operating expenses | 13.0 | — | 13.0 | |||||||||
Total benefits and expenses | 369.1 | 6.5 | 375.6 | |||||||||
Results of discontinued products | $ | 44.0 | $ | (44.0 | ) | $ | — | |||||
(1) | Amounts are reflected in the 2006, 2005 and 2004 Consolidated Statements of Income, except for interest earned on the receivable from continuing products, which was eliminated in consolidation. |
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(Millions) | 2006 | 2005 | ||||||
Assets: | ||||||||
Debt securities available for sale | $ | 2,857.4 | $ | 3,032.3 | ||||
Equity securities available for sale | 54.9 | 43.1 | ||||||
Mortgage loans | 650.6 | 644.9 | ||||||
Investment real estate | 77.8 | 103.6 | ||||||
Loaned securities | 228.2 | 289.3 | ||||||
Other investments(2) | 625.4 | 603.3 | ||||||
Total investments | 4,494.3 | 4,716.5 | ||||||
Collateral received under securities loan agreements | 236.4 | 295.4 | ||||||
Current and deferred income taxes | 110.3 | 88.9 | ||||||
Receivable from continuing products(3) | 452.7 | 498.8 | ||||||
Total assets | $ | 5,293.7 | $ | 5,599.6 | ||||
Liabilities: | ||||||||
Future policy benefits | $ | 3,771.1 | $ | 3,908.4 | ||||
Policyholders’ funds | 23.4 | 23.5 | ||||||
Reserve for anticipated future losses on discontinued products | 1,061.1 | 1,052.2 | ||||||
Collateral payable under securities loan agreements | 236.4 | 295.4 | ||||||
Other liabilities | 201.7 | 320.1 | ||||||
Total liabilities | $ | 5,293.7 | $ | 5,599.6 | ||||
(1) | Assets supporting the discontinued products are distinguished from assets supporting continuing products. | |
(2) | Includes debt securities on deposit as required by regulatory authorities of $22.0 million and $21.3 million at December 31, 2006 and 2005, respectively. These securities are considered restricted assets and were included in long-term investments on the Consolidated Balance Sheets. | |
(3) | The receivable from continuing products is eliminated in consolidation. |
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(Millions) | 2006 | 2005 | 2004 | |||||||||
Reserve for anticipated future losses on discontinued products, beginning of period | $ | 1,052.2 | $ | 1,079.8 | $ | 1,035.8 | ||||||
Operating income (loss) | 38.6 | 12.4 | (6.6 | ) | ||||||||
Net realized capital gains | 38.6 | 22.0 | 37.5 | |||||||||
Mortality and other | 3.4 | 4.7 | 13.1 | |||||||||
Tax benefits(1) | 43.7 | — | — | |||||||||
Reserve reduction | (115.4 | ) | (66.7 | ) | — | |||||||
Reserve for anticipated future losses on discontinued products, end of period | $ | 1,061.1 | $ | 1,052.2 | $ | 1,079.8 | ||||||
(1) | Amount represents tax credits primarily from tax advantaged investments which were reclassified from deferred tax liabilities within the liabilities supporting discontinued products. |
(Millions) | ||||
2007 | $ | 44.1 | ||
2008 | 44.4 | |||
2009 | 44.5 | |||
2010 | 44.4 | |||
2011 | 44.2 | |||
2012-2016 | 213.3 | |||
2017-2021 | 186.2 | |||
2022-2026 | 148.4 | |||
2027-2031 | 111.9 | |||
Thereafter | 179.7 | |||
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(Millions) | ||||
2007 | $ | 484.5 | ||
2008 | 475.1 | |||
2009 | 461.2 | |||
2010 | 444.4 | |||
2011 | 430.0 | |||
2012-2016 | 1,918.4 | |||
2017-2021 | 1,498.7 | |||
2022-2026 | 1,100.8 | |||
2027-2031 | 765.6 | |||
Thereafter | 1,043.6 | |||
Expected | Actual | |||||||||||||||
(Millions) | GIC | SPA | GIC | SPA | ||||||||||||
2004 | $ | 31.8 | $ | 3,849.1 | $ | 24.0 | $ | 4,065.6 | ||||||||
2005 | 30.0 | 3,708.6 | 23.5 | 3,908.4 | ||||||||||||
2006 | 28.2 | 3,563.8 | 23.4 | 3,771.1 | ||||||||||||
(Millions) | 2006 | 2005 | 2004 | |||||||||
Scheduled contract maturities, settlements and benefit payments | $ | 481.0 | $ | 492.2 | $ | 515.6 | ||||||
Participant-directed withdrawals | .4 | .2 | .3 | |||||||||
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Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
Management is responsible for our consolidated financial statements, which have been prepared in accordance with GAAP. Management believes the consolidated financial statements, and other financial information included in this report, fairly present in all material respects our financial position, results of operations and cash flows as of and for the periods presented in this report.
Our Audit Committee is comprised solely of independent directors. The Audit Committee meets regularly with management, the internal auditors and KPMG LLP to oversee and monitor the work of each and to inquire of each as to their assessment of the performance of the others in their work relating to our consolidated financial statements and internal control over financial reporting. Both KPMG LLP and our internal auditors have, at all times, the right of full access to the Audit Committee, without management present, to discuss any matter they believe should be brought to the attention of the Audit Committee.
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Aetna Inc.:
February 26, 2007
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Aetna Inc.:
February 26, 2007
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(Millions, except per common share data) | First | Second | Third | Fourth | ||||||||||||
2006 | ||||||||||||||||
Total revenue | $ | 6,234.7 | $ | 6,252.0 | $ | 6,299.5 | $ | 6,359.5 | ||||||||
Income from continuing operations before income taxes | $ | 597.3 | $ | 597.5 | $ | 728.8 | $ | 663.0 | ||||||||
Income taxes | (211.7 | ) | (208.0 | ) | (252.4 | ) | (228.9 | ) | ||||||||
Income from discontinued operations, net of tax | 16.1 | — | — | — | ||||||||||||
Net income | $ | 401.7 | $ | 389.5 | $ | 476.4 | $ | 434.1 | ||||||||
Per common share results:(1) | ||||||||||||||||
Net income | ||||||||||||||||
Basic | $ | .71 | $ | .69 | $ | .89 | $ | .83 | ||||||||
Diluted | .68 | .67 | .85 | .80 | ||||||||||||
Common stock data: | ||||||||||||||||
Dividends declared | $ | — | $ | — | $ | .04 | $ | — | ||||||||
Common stock prices, high | 52.32 | 49.33 | 41.26 | 43.71 | ||||||||||||
Common stock prices, low | 44.54 | 36.93 | 30.99 | 38.53 | ||||||||||||
2005 | ||||||||||||||||
Total revenue | $ | 5,426.9 | $ | 5,496.9 | $ | 5,700.7 | $ | 5,867.4 | ||||||||
Income from continuing operations before income taxes | $ | 609.0 | $ | 614.5 | $ | 580.9 | $ | 648.9 | ||||||||
Income taxes | (219.7 | ) | (219.6 | ) | (208.1 | ) | (232.6 | ) | ||||||||
Net income | $ | 389.3 | $ | 394.9 | $ | 372.8 | $ | 416.3 | ||||||||
Per common share results:(1) | ||||||||||||||||
Net income | ||||||||||||||||
Basic | $ | .66 | $ | .68 | $ | .65 | $ | .73 | ||||||||
Diluted | .64 | .65 | .62 | .70 | ||||||||||||
Common stock data: | ||||||||||||||||
Dividends declared | $ | — | $ | — | $ | .02 | $ | — | ||||||||
Common stock prices, high | 38.67 | 43.24 | 43.31 | 49.68 | ||||||||||||
Common stock prices, low | 29.93 | 33.70 | 37.14 | 40.00 | ||||||||||||
(1) | Calculation of the earnings per share is based on weighted average shares outstanding during each quarter and, accordingly, the sum may not equal the total for the year. |
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