EX-13.1 10 ex13_1.htm 2008 ANNUAL REPORT ex13_1.htm

Exhibit 13.1

2008 Aetna Annual Report, Financial Report to Shareholders
 
Unless the context otherwise requires, references to the terms we, our, or, us, used throughout this 2008 Annual Report, Financial Report to Shareholders (the “Annual Report”) refer to Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries.

For your reference, we provide the following index to the Annual Report:

Page
Description
2 - 42
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) The MD&A provides a review of our operating results for the years 2006 through 2008, as well as our financial condition at December 31, 2008 and 2007.  The MD&A should be read in conjunction with our consolidated financial statements and notes thereto.  The 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 2006 through 2008, as well as our outlook for 2009.  In this section, we also discuss 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.
 
     
8
Group Insurance – We provide a quantitative and qualitative discussion about the factors affecting Group Insurance revenues and operating earnings in this section.
 
     
10
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.
 
     
12
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 and realized capital gains and losses and describe our evaluation of the risk of our market-sensitive instruments.
 
     
14
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 flows.
 
     
18
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.
 
     
24
Regulatory Environment – In this section, we provide a discussion of the regulatory environment in which we operate.
 
     
32
Forward-Looking Information/Risk Factors – We conclude our 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.
 
     
43
Selected Financial Data – We provide selected annual financial data for the most recent five years.  
 
     
44
Consolidated Financial Statements – Includes our consolidated balance sheets at December 31, 2008 and 2007 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008.  These financial statements should be read in conjunction with the accompanying Notes to Consolidated Financial Statements.
 
     
48
Notes to Consolidated Financial Statements
 
     
84
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 opinion on our consolidated financial statements and internal control over financial reporting.
 
     
86
Quarterly Data (unaudited) – We provide selected quarterly financial data for each of the quarters in 2008 and 2007.
 
 
 
 
86
Corporate Performance Graph – We provide a graph comparing the cumulative total shareholder return on our common stock to the cumulative total return on certain published indices from December 31, 2003 through December 31, 2008.
 
 
Annual Report - Page 1

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

OVERVIEW

We are one of the nation’s leading diversified health care benefits companies, serving approximately 36.5 million people with information and resources to help them make better informed decisions about their health care.  We offer a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities and health care management services for Medicaid plans.  Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labor groups and expatriates.  Our operations are conducted in three business segments:  Health Care, Group Insurance and Large Case Pensions.

Summarized Results
 
(Millions)
 
2008
   
2007
   
2006
 
Revenue:
                 
  Health Care
  $ 28,775.0     $ 24,768.6     $ 22,240.5  
  Group Insurance
    1,710.7       2,139.5       2,152.1  
  Large Case Pensions
    465.0       691.5       753.1  
Total revenue
    30,950.7       27,599.6       25,145.7  
Net income
    1,384.1       1,831.0       1,701.7  
Operating earnings: (1)
                       
  Health Care
    1,895.4       1,770.9       1,572.7  
  Group Insurance
    140.0       145.5       132.7  
  Large Case Pensions
    39.2       38.1       38.9  
Cash flows from operations
    2,206.9       2,065.5       1,688.3  
(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 Segment Results and Use of Non-GAAP Measures in this MD&A on page 4 for a discussion of non-GAAP measures.  Refer to pages 5, 9 and 10 for a reconciliation of operating earnings to net income for Health Care, Group Insurance and Large Case Pensions, respectively.

Net income for 2008 includes after tax net realized capital losses of $482 million, primarily reflecting approximately $327 million of yield-related other-than-temporary impairments (“OTTI”) and approximately $92 million of credit-related OTTI of debt securities.  The losses resulted from declines in the market value in our investment portfolio as a result of deteriorating global economic conditions.  Refer to Net Realized Capital Gains and Losses beginning on page 13 for additional information.  We analyze our results of operations based on operating earnings, which exclude net realized capital gains and losses as well as other items from net income.  The combination of total revenue growth and higher underwriting margins contributed to an improvement in our operating earnings in each of the last three years.  Operating earnings in 2008 reflect lower net investment income compared to 2007, reflecting the difficult investment climate experienced primarily in the latter half of 2008.  We also achieved strong cash flows from operations in 2008 and 2007 (refer to Liquidity and Capital Resources beginning on page 14).

During 2008 and 2007, our Health Care medical membership grew, increasing by 848,000 in 2008 (refer to Health Care – Membership on page 8) and 1.4 million in 2007.  This growth occurred in both our Insured (where we assume all or a majority of risk for medical and dental care costs) and our administrative services contract (“ASC”) (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) medical products in 2008 and 2007.  In addition, during 2008 and 2007 we had growth in our dental and pharmacy products.  At December 31, 2008, we served approximately 17.7 million medical members, 14.1 million dental members and 11.1 million pharmacy members.

During 2008 and 2007, premium rates increased as well.  Together with the growth in membership, these rate increases contributed to the expansion of our total revenue, which increased approximately $3.4 billion in 2008 and $2.5 billion in 2007. 
Annual Report - Page 2

Underwriting margins in our Health Care segment, which represent the amount of premiums in excess of health care costs, improved in 2008 and 2007 on a total dollar basis, when compared to the prior periods, reflecting membership growth and premium rate increases as well as our focus on medical cost management.

During 2008 and 2007, we managed our capital in support of both new and ongoing initiatives.
During 2008 and 2007, we generated substantial cash flow from our businesses.  We used this capital to support our organic growth strategies and repurchase our common stock.  During 2007, we also used our capital to fund targeted acquisitions in support of our strategy.

In 2008 and 2007, we repurchased approximately 43 million and 33 million shares of common stock at a cost of approximately $1.8 billion and $1.7 billion, respectively, under share repurchase programs authorized by Aetna’s Board of Directors (the “Board”) in order to return available capital to shareholders.

In addition, we continue to invest in the development of our business by acquiring companies that support our strategy as well as continuing the introduction or enhancement of new products and services.  In 2007, we completed two acquisitions for an aggregate purchase price of approximately $613 million, expanding our Health Care product offerings by acquiring a leading provider of health care management services for Medicaid plans and a leading managing general underwriter (or underwriting agent) for international private medical insurance that offers expatriate benefits to individuals, small and medium enterprises, and large multinational clients around the world.

In 2008 and 2007, we issued $500 million and $700 million of senior notes, respectively, to secure long-term capital at favorable rates.  Refer to Liquidity and Capital Resources beginning on page 14 and Note 13 of Notes to Consolidated Financial Statements beginning on page 70 for additional information.

Outlook for 2009
We expect the current economic downturn and economic challenges to continue throughout 2009, resulting in continued capital markets volatility and downward pressure on our investment income and lower interest rates.  We expect unemployment to rise, leading to in-group membership attrition for our existing customers.  We also expect to see upward pressure on medical provider unit costs as providers seek to adjust to their own economic challenges.

Our goals for 2009 are to: profitably grow membership and earnings; deliver superior medical quality and total cost management; improve our expense structure through enhanced productivity; create customer value through innovation and technology; deliver a best-in-class customer experience; and enhance our diverse, high performance culture and work force.  Our 2009 outlook is as follows:

Our operating expense ratio is expected to be higher from a significant increase in pension expense.  As a result of investment losses experienced by our pension plan assets in 2008, we expect our 2009 pension expense to increase approximately $383 million pretax compared to 2008.  However, we continue to take actions to improve the efficiency of our operations, including efforts to leverage existing infrastructure to support additional growth as well as improvements in systems and processes.  We will continue to focus 2009 spending on operational improvements, including self-service and administrative technologies that will yield future benefits.

Health Care membership is targeted for growth in 2009.  We continue to take actions to increase membership in 2009, including efforts to reach customers via an integrated product approach in order to generate sales to new customers, as well as increased cross-sell penetration within our existing membership base and via targeted geographic marketing.  We expect the majority of our membership growth to be in ASC medical members.  We also expect to expand the use of our medical management processes to lower health care costs, which could result in expanded underwriting margins.  If we achieve these projected membership increases combined with medical management initiatives and price increases, it would contribute to higher revenue in our Health Care segment.
 
Corporate interest expense is expected to increase in 2009. We expect corporate interest expense to increase due to the increase in average debt outstanding resulting from our 2008 financing activities.
Annual Report - Page 3

Capital deployment.  In 2009, we intend to continue to pursue strategic acquisitions and other business development activities that support our strategy for growth and profitability.  We also intend to continue to deploy our capital through share repurchases.

Refer to Forward-Looking Information/Risk Factors beginning on page 32 for information regarding other important factors that may materially affect us.

Executive Management and Board Updates
During 2008, we announced the following changes to the Board and our management team:

 
·
Richard J. Harrington was appointed to the Board in September 2008.  Mr. Harrington is Chairman of the Thomson Reuters Foundation.  He also serves on the Board’s Audit Committee and Investment and Finance Committee.  With the addition of Mr. Harrington, the Board consists of thirteen directors.

 
·
Lonny Reisman, M.D., was appointed Senior Vice President and Chief Medical Officer in November 2008 and succeeded Troyen A. Brennan, M.D., who resigned.

 
·
Rajan Parmeswar, Vice President, Controller and Chief Accounting Officer, joined Aetna in August 2008 and succeeded Ronald M. Olejniczak, who retired in July 2008.

 
·
Gery J. Barry, Chief Strategy Officer, joined Aetna in August 2008.

 
·
Additionally, Timothy A. Holt, Senior Vice President and Chief Investment Officer, retired in February 2008.  Mr. Holt’s successor, Jean LaTorre, reports to Joseph M. Zubretsky, Executive Vice President and Chief Financial Officer.

Segment Results and Use of Non-GAAP Measures in this Document
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 79.  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.

Our discussion of the results of operations of each business segment is based on operating earnings, which exclude net realized capital gains and losses as well as other items, if any, from net income reported in accordance with GAAP.  We believe excluding net realized capital gains and losses from net income to arrive at operating earnings provides more meaningful information about our underlying business performance.  Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of liabilities; however these transactions do not directly relate to the underwriting or servicing of products for our customers and are not directly related to the core performance of our business operations.  We also may exclude other items that do not relate to the ordinary course of our business from net income to arrive at operating earnings.  In each segment discussion that follows, we present a table that reconciles operating earnings to net income reported in accordance with GAAP.  Each table details the net realized capital gains and losses and any other items excluded from net income, and the footnotes to each table describe the nature of each other item and why we believe it is appropriate to exclude that item from net income in calculating operating earnings.
 
Annual Report - Page 4

 
HEALTH CARE

Health Care consists of medical, pharmacy benefits management, dental, behavioral health and vision plans offered on both an Insured basis and an ASC basis.  Medical products include point-of-service (“POS”), preferred provider organization (“PPO”), health maintenance organization (“HMO”) and indemnity benefit plans.  Medical products also include health savings accounts and Aetna HealthFund®, consumer-directed health plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account.  We also offer Medicare and Medicaid products and services and specialty products, such as medical management and data analytics services, and stop loss insurance, as well as products that provide access to our provider network in select markets.  We separately track premiums and health care costs for Medicare and Medicaid products.  The grouping referred to as Commercial includes all medical, dental and other insured products, except Medicare and Medicaid.

Operating Summary
 
(Millions)
 
2008
   
2007
   
2006
 
Premiums:
                 
  Commercial
  $ 20,096.2     $ 18,656.8     $ 17,356.5  
  Medicare
    4,816.1       2,598.3       1,787.7  
  Medicaid
    595.0       245.0       9.3  
Total premiums
    25,507.3       21,500.1       19,153.5  
Fees and other revenue
    3,202.6       2,931.3       2,743.7  
Net investment income
    341.3       370.9       334.2  
Net realized capital (losses) gains
    (276.2 )     (33.7 )     9.1  
  Total revenue
    28,775.0       24,768.6       22,240.5  
Health care costs
    20,785.5       17,294.8       15,301.0  
Operating expenses:
                       
  Selling expenses
    1,055.2       966.6       867.4  
  General and administrative expenses
    4,281.8       3,708.3       3,618.6  
Total operating expenses
    5,337.0       4,674.9       4,486.0  
Amortization of other acquired intangible assets
    101.3       90.7       80.4  
  Total benefits and expenses
    26,223.8       22,060.4       19,867.4  
Income before income taxes
    2,551.2       2,708.2       2,373.1  
Income taxes
    924.5       959.2       847.6  
Net income
  $ 1,626.7     $ 1,749.0     $ 1,525.5  

The table presented below reconciles operating earnings to net income reported in accordance with GAAP:
 
(Millions)
 
2008
   
2007
   
2006
 
Net income
  $ 1,626.7     $ 1,749.0     $ 1,525.5  
Net realized capital losses (gains)
    213.1       21.9       (8.0 )
Severance and facility charge (1)
    35.6       -       -  
Contribution for the establishment of an out-of-network pricing database (1)
    20.0       -       -  
Physician class action settlement insurance-related charge (1)
    -       -       47.1  
Debt refinancing charge (1)
    -       -       8.1  
Operating earnings
  $ 1,895.4     $ 1,770.9     $ 1,572.7  
(1)
The following other items are excluded from operating earnings because we believe they neither relate to the ordinary course of our business nor reflect our underlying business performance:
 
· In 2008, we recorded a severance and facility charge of $35.6 million ($54.7 million pretax) related to actions taken.
 
· As a result of our agreement with the New York Attorney General to discontinue the use of Ingenix databases at a future date, we have committed to contribute $20.0 million to a non-profit organization to help create a new independent database for determining out-of-network reimbursement rates.
 
· As a result of a trial court’s ruling in 2006, we concluded that a $47.1 million ($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.
 
· 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 redeemed notes and recognized the deferred gain from the interest rate swaps that had hedged the redeemed notes.  As a result of the foregoing, we recorded an $8.1 million ($12.4 million pretax) net charge in 2006.

 
Annual Report - Page 5

 
Higher revenue and underwriting margins as well as operating expense efficiencies contributed to earnings growth in 2008 and 2007
Operating earnings for 2008 increased $125 million from 2007, which had increased $198 million from 2006.  These increases in operating earnings reflect growth in premiums and fees and other revenue, as well as higher underwriting margins 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 on page 8) and premium rate increases for renewing membership.  Furthermore, growth in premiums and fees and other revenue in 2008 and 2007 reflect our recent acquisitions.  Refer to Note 3 of Notes to Consolidated Financial Statements on page 55 for a discussion of our acquisitions.  Premium growth in 2008 and 2007 was also attributed to our new Private-Fee-for-Service Medicare plan (“PFFS”) product, which we began offering effective January 1, 2007.

Underwriting margins (premiums less health care costs) increased in 2007 and 2008 over the prior year, reflecting growth in premiums (as discussed above) partially offset by higher health care costs.

Although we became more efficient based on our operating expenses as a percentage of revenue, our total operating expenses increased in 2008 and 2007 over the prior years (primarily due to the growth in our membership).  Total operating expenses increased due to higher general and administrative expenses as a result of higher employee related costs, outside services and other expenses associated with higher membership and higher selling expenses (reflecting an increase in commissionable premiums and premium taxes both from membership growth).  Total operating expenses in 2008 also reflect the $55 million pretax severance and facility charge and the $20 million contribution for the establishment of a new independent database for determining out-of-network reimbursement rates.

We calculate our medical benefit ratio (“MBR”) by dividing health care costs by premiums. Our MBRs by product for the years ended December 31, 2008, 2007 and 2006 were as follows:

 
   
2008
   
2007
   
2006
     
Commercial
    80.3 %     79.5 %     79.3 %    
Medicare
    85.6 %     86.8 %     85.2 %    
Medicaid
    87.4 %     88.4 %     n/m   (1)   
Total
    81.5 %     80.4 %     79.9 %    
(1)
Our Medicaid results were not meaningful prior to the 2007 acquisition of Schaller Anderson, Incorporated.

Refer to the following discussion of Commercial, Medicare and Medicaid results for an explanation of the changes in our MBR.

The operating results of our Commercial products continued to grow in 2008 and 2007
Commercial premiums increased approximately $1.4 billion in 2008 compared to 2007, and increased approximately $1.3 billion in 2007 compared to 2006.  The increases in 2008 and 2007 reflect premium rate increases on renewing business and increases in membership levels (refer to Membership on page 8).

Our Commercial MBRs were 80.3% for 2008, 79.5% for 2007 and 79.3% for 2006.  The Commercial MBRs in 2008 and 2007 increased when compared to the prior year MBRs reflecting a percentage increase in our per member health care costs that outpaced the percentage increase in per member premiums.  The increase in per member health care costs in 2008 was driven primarily by increases in costs related to physician services, laboratory services, emergency room and ancillary services as well as moderate increases in hospital inpatient and outpatient costs.  Increases in per member health care costs in 2007 were due to increases across all medical categories, with larger increases in inpatient and outpatient costs than other categories.

We had no significant development of prior period health care cost estimates that affected results of operations in 2008, 2007 or 2006.  The calculation of Health Care Costs Payable is a critical accounting estimate (refer to Critical Accounting Estimates – Health Care Costs Payable beginning on page 18 for additional information).

Medicare results reflects growth in 2008 and 2007
Our Medicare Advantage contracts with the federal government are renewable for a one-year period on a calendar-year basis.  We expanded our Medicare Advantage HMO and PPO offerings into select additional markets in 2008 and 2007 and now offer Medicare Advantage HMO and PPO products in 224 counties in 19 states and Washington,
Annual Report - Page 6

D.C.  We have been a national provider of PDP since 2006.  In 2007, we began offering Medicare Advantage PFFS products in select markets for individuals and nationally for employer groups.  Medicare Advantage PFFS complements our PDP product, forming an integrated fully insured Medicare product nationwide.  We intend to continue providing each of our Medicare Advantage as well as our PDP products in 2009.
 
Medicare premiums increased approximately $2.2 billion in 2008, compared to 2007, and increased approximately $811 million in 2007 compared to 2006.  The increase in 2008 and 2007 primarily reflects the introduction of our new PFFS product, which was effective January 1, 2007, including the conversion of a large customer’s membership from a Commercial ASC plan to a Medicare Insured plan in 2008.  The increase in 2008 and 2007 was also due to increases in premiums as a result of higher membership levels, rate increases from the Centers for Medicare & Medicaid Services (“CMS”) and premium rate increases.

Our Medicare MBRs were 85.6% for 2008, 86.8% for 2007 and 85.2% for 2006.  We had no significant development of prior period health care cost estimates that affected results of operations in 2008, 2007 or 2006.  The decrease in our Medicare MBR in 2008 reflects a percentage increase in our per member premiums that outpaced the percentage increase in per member health care costs.  The increase in our Medicare MBR in 2007 compared to 2006 reflects a change in our product mix as a result of the introduction of PFFS as well as a percentage increase in our per member health care costs that outpaced the percentage increase in per member premiums.  The increases in our per member health care costs during 2007 were primarily due to increases in pharmaceutical costs.

Medicaid results for 2008 and 2007 reflect growth from the Schaller Anderson, Incorporated (“Schaller Anderson”) acquisition.
Medicaid premiums increased approximately $350 million in 2008 compared to 2007 and increased approximately $236 million in 2007 compared to 2006.  These increases primarily reflect an increase in premiums as a result of our acquisition of Schaller Anderson in July 2007.  The Medicaid MBRs were 87.4% for 2008 and 88.4% for 2007 (the 2006 Medicaid MBR was not meaningful prior to the acquisition of Schaller Anderson).  We had no significant development of prior period health care cost estimates that affected results of operations in 2008 or 2007.

Other Sources of Revenue
Fees and other revenue for 2008 increased $271 million compared to 2007 and increased $188 million in 2007 compared to 2006, reflecting revenue from our recent acquisitions of Schaller Anderson and Goodhealth Worldwide (Bermuda) Limited (“Goodhealth”) as well as growth in ASC membership.

Net investment income for 2008 decreased $30 million compared to 2007 primarily reflecting lower income from alternative investments.  Net investment income for 2007 increased $37 million compared to 2006, primarily reflecting higher average asset levels and higher average yields on debt securities.

Net realized capital losses in 2008 and 2007 were due primarily to OTTI of debt securities (refer to our discussion of Investments – Net Realized Capital Gains and Losses on page 13 for additional information).
 
Annual Report - Page 7

 
Membership
Health Care’s membership at December 31, 2008 and 2007 was as follows:
 

   
2008
   
2007
 
(Thousands)
 
Insured
   
ASC
   
Total
   
Insured
   
ASC
   
Total
 
Medical:
                                   
  Commercial (1)
    5,595       10,893       16,488       5,390       10,453       15,843  
  Medicare
    366       -       366       193       14       207  
  Medicaid (1)
    207       640       847       166       637       803  
  Total Medical Membership
    6,168       11,533       17,701       5,749       11,104       16,853  
                                                 
Consumer-Directed Health Plans (2)
                    1,431                       994  
                                                 
Dental:
                                               
  Commercial
    5,012       7,494       12,506       5,037       7,269       12,306  
  Medicare and Medicaid (1)
    229       374       603       190       398       588  
  Network Access (3)
    -       1,015       1,015       -       938       938  
Total Dental Membership
    5,241       8,883       14,124       5,227       8,605       13,832  
Pharmacy:
                                               
   Commercial (1)
                    9,846                       9,613  
   Medicare PDP (stand-alone)
                    375                       311  
   Medicare Advantage PDP
                    195                       151  
   Medicaid (1)
                    25                       21  
     Total Pharmacy Benefit Management Services
                    10,441                       10,096  
   Mail Order (4)
                    657                       636  
Total Pharmacy Membership
                    11,098                       10,732  
(1)
Approximately 28,000 State Children’s Health Insurance Program (“SCHIP”) medical members and 21,000 of both SCHIP pharmacy and dental members at December 31, 2007 were reclassified from Commercial to Medicaid in 2008.  Additionally, dental membership at December 31, 2007 was revised to include Schaller Anderson (Medicaid) membership to conform with the 2008 presentation.
(2)
Represents members in consumer-directed health plans included in Commercial medical membership above.
(3)
Represents members in products that allow these members access to our dental provider network for a nominal fee.
(4)
Represents members who purchased medications through our mail order pharmacy operations during the fourth quarter of 2008 and 2007, respectively, and are included in pharmacy membership above.

Total medical membership at December 31, 2008 increased compared to 2007.  The increase in medical membership was primarily due to growth in our Commercial and Medicare products.  Growth in Commercial membership was driven by membership growth within existing plan sponsors and new customers, net of lapses.  Growth in Medicare membership was primarily due to growth in our group PFFS plans, including the conversion of a large customer from a Commercial ASC plan to a Medicare Insured plan.

Total dental membership at December 31, 2008 increased compared to 2007 primarily due to membership growth from both new and current customers.

Total pharmacy membership increased at December 31, 2008 compared to 2007 primarily due to growth in our pharmacy benefit management services and mail order operations.  Our pharmacy benefit management services growth was due in part to an increase in Commercial pharmacy membership as well as Medicare Part D prescription drug program membership.  Mail order operations reflected an increase in member utilization during this time period.

GROUP INSURANCE

Group Insurance primarily includes group life insurance products offered on an Insured basis, including basic and supplemental group term life insurance, group universal life, supplemental or voluntary programs and accidental death and dismemberment coverage.  Group Insurance also includes (i) group disability products offered to employers on both an Insured and an ASC basis, which consist primarily of short-term and long-term disability insurance (and products which combine both), (ii) absence management services offered to employers, which include short-term and long-term disability administration and leave management, and (iii) long-term care products that were offered primarily on an Insured basis, which provide benefits covering the cost of care in private home settings, adult

 
Annual Report - Page 8

 
day care, assisted living or nursing facilities.  We no longer solicit or accept new long-term care customers, and we are working with our customers on an orderly transition of this product to other carriers.

Operating Summary
 
(Millions)
 
2008
   
2007
   
2006
 
Premiums:
                 
  Life
  $ 1,062.7     $ 1,201.4     $ 1,257.6  
  Disability
    534.6       478.8       401.5  
  Long-term care
    86.3       93.8       102.8  
Total premiums
    1,683.6       1,774.0       1,761.9  
Fees and other revenue
    97.9       101.1       84.6  
Net investment income
    240.4       303.0       294.1  
Net realized capital (losses) gains
    (311.2 )     (38.6 )     11.5  
   Total revenue
    1,710.7       2,139.5       2,152.1  
Current and future benefits
    1,468.8       1,619.2       1,646.8  
Operating expenses:
                       
  Selling expenses
    94.4       94.3       85.3  
  General and administrative expenses
    305.7       261.9       232.3  
Total operating expenses
    400.1       356.2       317.6  
Amortization of other acquired intangible assets
    6.9       6.9       5.2  
   Total benefits and expenses
    1,875.8       1,982.3       1,969.6  
(Loss) income before income taxes
    (165.1 )     157.2       182.5  
Income taxes
    (53.0 )     36.8       48.6  
Net (loss) income
  $ (112.1 )   $ 120.4     $ 133.9  

The table presented below reconciles operating earnings to net income reported in accordance with GAAP:
 
(Millions)
 
2008
   
2007
   
2006
 
Net (loss) income
  $ (112.1 )   $ 120.4     $ 133.9  
Net realized capital losses (gains)
    224.7       25.1       (7.4 )
Allowance on reinsurance recoverable (1)
    27.4       -       -  
Acquisition-related software charge (1)
    -       -       6.2  
Operating earnings
  $ 140.0     $ 145.5     $ 132.7  
(1)
The following other items are excluded from operating earnings because we believe they neither relate to the ordinary course of our business nor reflect our underlying business performance:
 
· As a result of the liquidation proceedings of Lehman Re Ltd. (“Lehman Re”), a subsidiary of Lehman Brothers Holdings Inc., we recorded an allowance against our reinsurance recoverable from Lehman Re of $27.4 million ($42.2 million pretax) in 2008.  This reinsurance is on a closed block of paid-up group whole life insurance business.
 
· As a result of the acquisition of Broadspire Disability in 2006, 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.
 
Operating earnings for 2008 decreased $6 million when compared to 2007, reflecting lower net investment income partially offset by a higher underwriting margin due to favorable disability and long-term care results.  Lower net investment income in 2008 compared to 2007 was primarily due to lower income from alternative investments.  Operating earnings for 2007 increased $13 million compared to 2006, reflecting a higher underwriting margin and higher net investment income partially offset by higher general and administrative expenses.  The 2007 growth in fees and other revenue and general and administrative expenses primarily related to the March 2006 acquisition of Broadspire Disability.

Life premiums decreased in 2008 compared to 2007 reflecting the lapse of several large customers, however these lapses did not materially affect operating earnings.

Our group benefit ratios were 87.2% for 2008, 91.3% for 2007 and 93.5% for 2006.  The decrease in our group benefit ratio for 2008 compared to 2007 was primarily due to favorable disability and long-term care experience.  The decrease in our group benefit ratio in 2007 compared to 2006 was primarily due to favorable life and disability experience.
Annual Report - Page 9

Net realized capital losses for 2008 and 2007 were due primarily to losses on OTTI of debt securities (refer to our discussion of Investments - Net Realized Capital Gains and Losses beginning on page 13 for additional information).

LARGE CASE PENSIONS

Large Case Pensions manages 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.

Operating Summary
 
(Millions)
 
2008
   
2007
   
2006
 
Premiums
  $ 193.2     $ 205.3     $ 194.1  
Net investment income
    328.3       476.0       536.4  
Other revenue
    12.0       11.6       11.0  
Net realized capital (losses) gains
    (68.5 )     (1.4 )     11.6  
    Total revenue
    465.0       691.5       753.1  
Current and future benefits
    469.9       628.9       672.2  
General and administrative expenses
    14.4       15.3       17.0  
Reduction of reserve for anticipated future losses on discontinued products
    (43.8 )     (64.3 )     (115.4 )
    Total benefits and expenses
    440.5       579.9       573.8  
Income before income taxes
    24.5       111.6       179.3  
Income taxes
    1.3       32.6       56.7  
Net income
  $ 23.2     $ 79.0     $ 122.6  

The table presented below reconciles operating earnings to net income reported in accordance with GAAP:
 
(Millions)
 
2008
   
2007
   
2006
 
Net income
  $ 23.2     $ 79.0     $ 122.6  
Net realized capital losses (gains)
    44.5       .9       (8.7 )
Reduction of reserve for anticipated future losses on discontinued products (1)
    (28.5 )     (41.8 )     (75.0 )
Operating earnings
  $ 39.2     $ 38.1     $ 38.9  
(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 $28.5 million ($43.8 million pretax) in 2008, $41.8 million ($64.3 million pretax) in 2007 and $75.0 million ($115.4 million pretax) in 2006.  We believe excluding any changes to the reserve for anticipated future losses on discontinued products provides more meaningful information as to our continuing products and is consistent with the treatment of the results of operations of these discontinued products, which are credited or charged to the reserve and do not affect our results of operations.
 
Net realized capital losses in 2008 were primarily due to OTTI of debt securities (refer to our discussion of Investments - Net Realized Capital Gains and Losses beginning on page 13 for additional information).

Discontinued Products in Large Case Pensions
Prior to 1993, we sold single-premium annuities (“SPAs”) and guaranteed investment contracts (“GICs”), primarily to employer sponsored pension plans.  In 1993, we discontinued selling these products, and now we refer to these products as discontinued products.

We discontinued selling these products because they were generating losses for us and we projected that they would continue to generate future losses over their life (which is greater than 30 years), so we established a reserve for anticipated future losses at the time of discontinuance.  We provide additional information on this reserve, including key assumptions and other important information, in Note 20 of Notes to Consolidated Financial Statements beginning on page 81.  Please refer to this note for additional information.
 
Annual Report - Page 10

 
The operating summary for Large Case Pensions on page 10 includes revenues and expenses related to our discontinued products with the exception of net realized capital gains and losses which are recorded as part of current and future benefits.  Since we established a reserve for future losses on discontinued products, as long as our expected future losses remain consistent with prior projections, the operating results of our discontinued products are applied against the reserve and do not impact operating earnings or net income for Large Case Pensions.  However, if actual or expected future losses are greater than we currently estimate, we may have to increase the reserve, which could adversely impact net income.  If actual or expected future losses are less than we currently estimate, we may have to decrease the reserve, which could favorably impact net income.  In those cases, we disclose such adjustment separately in the operating summary.

The activity in the reserve for anticipated future losses on discontinued products in 2008, 2007 and 2006 was as follows:
 
(Millions)
 
2008
   
2007
   
2006
 
Reserve, beginning of period
  $ 1,052.3     $ 1,061.1     $ 1,052.2  
Operating (loss) income
    (93.4 )     28.5       85.7  
Net realized capital (losses) gains
    (124.7 )     27.0       38.6  
Reserve reduction
    (43.8 )     (64.3 )     (115.4 )
Reserve, end of period
  $ 790.4     $ 1,052.3     $ 1,061.1  

During 2008, our discontinued products reflected an operating loss and net realized capital losses, both attributable to the unfavorable investment conditions that existed in the latter half of 2008.  The operating loss in 2008 reflects lower net investment income than we experienced in 2007, primarily related to alternative investments.  Net realized capital losses in 2008 are comprised substantially of OTTI of debt securities, a majority of which are yield-related and were caused by the widening of credit spreads relative to the interest rates on U.S. Treasury securities in 2008.  Accounting guidance requires us to recognize OTTI on these securities in order to maintain our flexibility in managing this portfolio; however, these securities continue to perform and are generating investment income to support the cash flows of our discontinued products.  We have evaluated the operating losses and the yield-related OTTI in 2008 against our expectations of future cash flows assumed in estimating the reserve and do not believe an adjustment to the reserve is required at December 31, 2008.

Management reviews the adequacy of the discontinued products reserve quarterly and, as a result, $44 million ($29 million after tax), $64 million ($42 million after tax) and $115 million ($75 million after tax) was released in 2008, 2007 and 2006, respectively.  The 2008 reserve reduction was primarily due to favorable mortality and retirement experience compared to assumptions we previously made in estimating the reserve.  The 2007 and 2006 reserve reductions were primarily due to favorable investment performance and favorable mortality and retirement experience compared to assumptions we previously made in estimating the reserve.  The current reserve reflects management’s best estimate of anticipated future losses.
 
Assets Managed by Large Case Pensions
At December 31, 2008 and 2007, Large Case Pensions assets under management consisted of the following:
 
(Millions)
 
2008
   
2007
 
Assets under management: (1)
           
   Fully guaranteed discontinued products
  $ 3,840.2     $ 4,225.1  
   Experience-rated
    4,226.8       4,554.3  
   Non-guaranteed (2)
    2,630.5       15,376.2  
   Total assets under management
  $ 10,697.5     $ 24,155.6  
(1)
Excludes net unrealized capital (losses) gains of ($111.2) million and $143.4 million at December 31, 2008 and 2007, respectively.
(2)
In 2008, approximately $12.4 billion of our mortgage loan and real estate Separate Account assets transitioned out of our business.  Refer to Note 2 of Notes to Consolidated Financial Statements beginning on page 48 for additional information.
 
Annual Report - Page 11

Assets supporting experience-rated products (where the contract holder, not us, assumes investment and other risks subject to, among other things, certain minimum guarantees) may be subject to contract holder or participant withdrawals.  For the years ended December 31, 2008, 2007 and 2006, experience-rated contract holder and participant-directed withdrawals were as follows:


(Millions)
 
2008
   
2007
   
2006
 
Scheduled contract maturities and benefit payments (1)
  $ 338.8     $ 353.6     $ 361.3  
Contract holder withdrawals other than scheduled contract maturities and benefit payments (2)
    31.1       39.4       202.2  
Participant-directed withdrawals (2)
    3.9       6.0       16.9  
(1)
Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
(2)
Approximately $524.3 million, $534.9 million and $515.5 million at December 31, 2008, 2007 and 2006, respectively, of experience-rated pension contracts allowed for unscheduled contract holder withdrawals, subject to timing restrictions and formula-based market value adjustments.  Further, approximately $93.2 million, $118.7 million and $127.8 million at December 31, 2008, 2007 and 2006, 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.

INVESTMENTS

At December 31, 2008 and 2007, our investment portfolio consisted of the following:
 
(Millions)
 
2008
   
2007
 
Debt and equity securities
  $ 13,993.3     $ 15,131.9  
Mortgage loans
    1,679.9       1,512.6  
Other investments
    1,196.2       1,247.1  
Total investments
  $ 16,869.4     $ 17,891.6  

The risks associated with investments supporting experience-rated pension and annuity products in our Large Case Pensions business are assumed by the contract holders and not by us (subject to, among other things, certain minimum guarantees).  Anticipated future losses associated with investments supporting discontinued fully guaranteed Large Case Pensions products are provided for in the reserve for anticipated future losses on discontinued products.

As a result of the foregoing, investment risks associated with our experience-rated and discontinued products generally do not impact our results of operations (refer to Note 2 of Notes to Consolidated Financial Statements beginning on page 48 for additional information).  Our total investments supported the following products at December 31, 2008 and 2007:
 
(Millions)
 
2008
   
2007
 
Supporting experience-rated products
  $ 1,582.8     $ 1,854.9  
Supporting discontinued products
    3,635.1       4,184.3  
Supporting remaining products
    11,651.5       11,852.4  
Total investments
  $ 16,869.4     $ 17,891.6  

The decrease in investments in 2008 compared to 2007 was primarily due to the decline in the value of our debt securities as a result of the adverse market conditions in 2008.  Refer to Debt and Equity Securities and Net Realized Capital Gains and Losses beginning on pages 12 and 13, respectively, for additional information.

Debt and Equity Securities
The debt securities in our portfolio had an average quality rating of A+ at December 31, 2008 and 2007, with approximately $4.3 billion at December 31, 2008 and $5.3 billion at December 31, 2007 rated AAA.  Total debt securities that were rated below investment grade (that is, having a quality rating below BBB-/Baa3) at December 31, 2008 and 2007 were $640 million and $791 million, respectively (of which 18% at December 31, 2008 and 24% at December 31, 2007 supported our discontinued and experience-rated products).

At December 31, 2008 and 2007, we held approximately $824 million and $627 million, respectively, of municipal debt securities and $64 million and $142 million, respectively, of structured product debt securities that were guaranteed by third parties, collectively representing approximately 5% and 4%, respectively, of our total
Annual Report - Page 12

investments.  These securities had an average credit rating of AA- at December 31, 2008 and AAA at December 31, 2007 with the guarantee.  Without the guarantee, the average credit rating of the municipal debt securities was A+ on each date.  The structured product debt securities are not rated by the rating agencies on a standalone basis.  We do not have any significant concentration of investments with third party guarantors (either direct or indirect).

We classify our debt and equity securities as available for sale, carrying them at fair value on our balance sheet.  Approximately 3% of our debt and equity securities at December 31, 2008 are valued using inputs that reflect our own assumptions (categorized as Level 3 inputs in accordance with FAS 157, “Fair Value Measurements”).  Refer to Note 15 of Notes to Consolidated Financial Statements beginning on page 72 for additional information on the methodologies and key assumptions we use to determine the fair value of investments.

At December 31, 2008 and 2007, our debt and equity securities had net unrealized (losses) gains of $(500) million and $209 million, respectively, of which $(123) million and $145 million, respectively, related to our experience-rated and discontinued products.  Certain of our individual debt securities, primarily those of issuers in the financial services sector, have higher levels of unrealized capital losses at December 31, 2008 due to increases in credit spreads relative to interest rates on U.S. Treasury securities in 2008, rather than unfavorable changes in the credit quality of such securities.  We have reviewed these individual debt securities for OTTI (see below) and have the intent and ability to hold these securities until market recovery.  We had no material unrealized capital losses on individual debt or equity securities at December 31, 2007.

Refer to Note 8 of Notes to Consolidated Financial Statements beginning on page 58 for details of net unrealized capital gains and losses by major security type, as well as details on our debt and equity securities with unrealized losses at December 31, 2008 and 2007.  We regularly review our debt and equity securities to determine if a decline in fair value below the carrying value is other-than-temporary.  If we determine a decline in fair value is other-than-temporary, the carrying amount of the security is written down, and the amount of the write down is included in our results of operations.  Accounting for OTTI of our investment securities is considered a critical accounting estimate.  Refer to Critical Accounting Estimates - Other-Than-Temporary Impairment of Investment Securities beginning on page 22 for additional information.

Net Realized Capital Gains and Losses
Net realized capital (losses) gains were $(656) million in 2008, $(74) million in 2007 and $32 million in 2006.  Included in net realized capital losses were $502 million for 2008 and $125 million for 2007, of yield-related OTTI losses.

Yield-related OTTI losses were primarily due to the widening of credit spreads relative to the interest rates on U.S. Treasury securities in 2008 and increases in the interest rates on U.S. Treasury securities in 2007.  During 2008, significant declines in the U.S. housing market resulted in the credit and other capital markets experiencing volatility and limitations on the ability of companies to issue debt or equity securities.  The lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity resulted in credit spreads widening during 2008.
 
Included in net realized capital losses for 2008 were $141 million credit-related OTTI losses of which $105 million related to investments in debt securities of Lehman Brothers Holdings Inc. and Washington Mutual, Inc.  We had no other individually material realized capital losses on debt or equity securities that impacted our results of operations during 2008 or 2007.  Refer to Critical Accounting Estimates - Other-Than-Temporary Impairments of Investment Securities beginning on page 22 for additional information.

Mortgage Loans
Our mortgage loan portfolio (which is collateralized by commercial real estate) represented 10% and 8% of our total invested assets at December 31, 2008 and 2007, respectively.  At December 31, 2008, our mortgage loans continued to be performing assets.  In accordance with our accounting policies, there were no specific impairment reserves on these loans at December 31, 2008 or 2007.  Refer to Notes 2 and 8 of Notes to Consolidated Financial Statements beginning on pages 48 and 58, respectively, for additional information.
Annual Report - Page 13

Risk Management and Market-Sensitive Instruments
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, futures contracts and credit default swaps.  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.

We regularly evaluate our risk from market-sensitive instruments by examining, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads.  We also regularly evaluate the appropriateness of investments relative to our management-approved investment guidelines (and operate within those guidelines) and the business objectives of our portfolios.

On a quarterly basis, we review the impact of hypothetical net losses in our investment portfolio on our consolidated near-term financial position, results of operations and cash flows assuming the occurrence of certain reasonably possible changes in near-term market rates and prices.  We determine the potential effect of interest rate risk on near-term net income, cash flow and fair value based on commonly used models.  The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options.  We also estimate the impact on fair value based on the net present value of cash flows using a representative set of likely future interest rate scenarios.  The assumptions used were as follows:  an immediate increase of 100 basis points in interest rates (which we believe represents a moderately adverse scenario and is approximately equal to the historical annual volatility of interest rate movements for our intermediate-term available-for-sale debt securities) and an immediate decrease of 25% in prices for domestic equity securities.

Based on our overall exposure to interest rate risk and equity price risk, we believe that these changes in market rates and prices would not materially affect our consolidated near-term financial position, results of operations or cash flows as of December 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
Generally, we meet our operating cash 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, operating expenses and share repurchases.

Presented in the following table is a condensed statement of cash flows for the years ended December 31, 2008, 2007 and 2006.  We present net cash flows used for operating activities of continuing operations and net cash flows provided by investing activities separately for our Large Case Pensions segment because changes in the insurance reserves for the Large Case Pensions segment (which are reported as cash used for operating activities) are funded from the sale of investments (which are reported as cash provided by investing activities).  Refer to the Consolidated Statements of Cash Flows on page 47 for additional information.
 
Annual Report - Page 14

 
(Millions)
 
2008
   
2007
   
2006
 
Cash flows from operating activities
                 
Health Care and Group Insurance  (including corporate interest)
  $ 2,397.6     $ 2,367.7     $ 1,917.6  
Large Case Pensions
    (190.7 )     (302.2 )     (279.0 )
Net cash provided by operating activities of continuing operations
    2,206.9       2,065.5       1,638.6  
Discontinued operations
    -       -       49.7  
Net cash provided by operating activities
    2,206.9       2,065.5       1,688.3  
                         
Cash flows from investing activities
                       
Health Care and Group Insurance
    (1,485.2 )     (1,391.5 )     (931.3 )
Large Case Pensions
    411.9       353.7       378.0  
Net cash used for investing activities
    (1,073.3 )     (1,037.8 )     (553.3 )
                         
Net cash used for financing activities
    (1,208.1 )     (653.7 )     (1,447.6 )
Net (decrease) increase in cash and cash equivalents
  $ (74.5 )   $ 374.0     $ (312.6 )

Cash Flow Analysis
Cash flows provided by operating activities for Health Care and Group Insurance were approximately $2.4 billion in both 2008 and 2007 and $1.9 billion in 2006.  Included in these amounts were payments of approximately $45 million pretax in both 2008 and 2007 and $245 million pretax in 2006 in voluntary contributions to our tax-qualified pension plan.  The cash flow provided by operating activities in 2008 reflects the receipt of $127 million in premium stabilization funds from a large customer.

During 2007 and 2006, we spent $613 million and $156 million on acquisitions we expect will enhance our existing product capabilities and future growth opportunities.  This use of cash was reported as cash flows used in investing activities.

Cash flows used for financing activities primarily reflect share repurchases partially offset by our issuance of debt in 2008 and 2007.  Refer to Short and Long-Term Debt below for additional information.  During the period 2006 through 2008, we repurchased common stock under various repurchase programs authorized by our Board.  In 2008, we repurchased approximately 43 million shares of common stock at a cost of $1.8 billion.  In 2007, we repurchased approximately 33 million shares of common stock at a cost of $1.7 billion.  In 2006, we repurchased approximately 60 million shares of common stock at a cost of $2.3 billion.  At December 31, 2008, the capacity remaining under our Board-approved share repurchase program was approximately $614 million.

On September 26, 2008, our Board declared an annual cash dividend of $.04 per common share to shareholders of record at the close of business on November 13, 2008.  The dividend was paid on November 28, 2008.  While our Board reviews our common stock dividend annually, we currently intend to maintain an annual dividend of $.04 per common share.  Among the factors considered by our Board in determining the amount of dividends are our results of operations and the capital requirements, growth and other characteristics of our businesses.

Short and Long-Term Debt
In September 2008, we issued $500 million of senior notes and used the proceeds to repay commercial paper borrowings.  In December 2007, we issued $700 million of senior notes and used the proceeds to repay commercial paper borrowings.  In June 2006, we issued $2 billion of senior notes and used the proceeds to redeem $700 million senior notes with a higher interest rate, repay approximately $400 million of commercial paper borrowings and for general corporate purposes, including share repurchases.

We use short-term borrowings from time to time to address timing differences between cash receipts and disbursements.  The maximum amount of commercial paper borrowings outstanding during 2008 was $978 million.

Our committed short-term borrowing capacity consists of a $1.5 billion revolving credit facility (the “Facility”) which terminates in March 2013.  The Facility also provides for the issuance of letters of credit at our request, up to $200 million, which count as usage of the available commitments under the Facility.  The Facility permits the aggregate commitments under the Facility to be expanded to a maximum of $2.0 billion upon our agreement with one or more financial institutions.  There were no amounts outstanding under the Facility at any time during 2008. 
 
Our total debt to total capital ratio (total debt divided by the sum of shareholders’ equity plus total debt) was approximately 32% and 25% at December 31, 2008 and 2007, respectively.  We continually monitor existing and alternative financing sources to support our capital and liquidity needs, including, but not limited to, debt issuance, preferred or common stock issuance and pledging or selling of assets.
Annual Report - Page 15

Refer to Note 13 of Notes to Consolidated Financial Statements on page 70 for additional information on our short-term and long-term debt.

After-tax interest expense was $154 million for 2008, $117 million for 2007 and $96 million for 2006.  The increase in interest expense in 2008 was due to higher overall average long-term debt levels as a result of our issuance of senior notes in September 2008 and December 2007.  The increase in interest expense for 2007 compared to 2006 was related to higher overall average debt levels as a result of our issuance of senior notes in December 2007 and June 2006.  Refer to Note 13 of Notes to Consolidated Financial Statements beginning on page 70 for additional information.

Restrictions on Certain Payments
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 equity holders.  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, 2008, the amount of dividends that our insurance and HMO subsidiaries could pay to Aetna without prior approval by regulatory authorities was approximately $1.6 billion in the aggregate.

We maintain capital levels in our operating subsidiaries at or above targeted and/or required capital levels and dividend amounts in excess of these levels to meet our liquidity requirements, including the payment of interest on debt and shareholder dividends.  In addition, at our discretion, we use these funds for other purposes such as funding share repurchase programs, investments in new businesses and other purposes we consider necessary.

Off-Balance Sheet Arrangements
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 58 and 76, respectively, for additional detail of our variable interest entities and guarantee arrangements, respectively, at December 31, 2008.

Contractual Obligations
The following table summarizes certain estimated future obligations by period at December 31, 2008, under our various contractual obligations.  The table below does not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable at December 31, 2008 (for example, the timing and volume of future services provided under fee-for-service arrangements and 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.
Annual Report - Page 16

 
(Millions)
 
2009
      2010 - 2011       2012 - 2013    
Thereafter
   
Total
 
Long-term debt obligations, including interest
  $ 239.1     $ 1,334.6     $ 355.5     $ 5,336.0     $ 7,265.2  
Operating lease obligations (1)
    163.9       224.7       91.4       93.2       573.2  
Purchase obligations
    208.8       191.3       59.4       16.4       475.9  
Other liabilities reflected on our balance sheet: (2)
                                       
    Future policy benefits (3) (4)
    759.7       1,437.1       1,141.5       4,186.8       7,525.1  
    Unpaid claims (3)
    559.8       428.6       283.9       558.7       1,831.0  
    Policyholders' funds (3) (4)
    754.4       103.8       83.4       674.7       1,616.3  
    Other liabilities (5)
    1,806.6       156.3       108.6       250.5       2,322.0  
Total
  $ 4,492.3     $ 3,876.4     $ 2,123.7     $ 11,116.3     $ 21,608.7  
(1)
We did not have any material capital lease obligations at December 31, 2008.
(2)
Payments of other long-term liabilities exclude Separate Account liabilities of approximately $5.9 billion because 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.
(3)
Payments of future policy benefits, unpaid claims and policyholders’ funds include approximately $797.7 million, $49.7 million and $186.6 million, respectively, of reserves for contracts subject to reinsurance.  We expect the assuming reinsurance carrier to fund these obligations and have reflected these amounts as reinsurance recoverable assets on our consolidated balance sheet.
(4)
Customer funds associated with group life and health contracts of approximately $347.7 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 losses on debt and equity securities supporting experience-rated products of $37.9 million have been excluded from the table above.
(5)
Other liabilities in the table above include general expense accruals and other related payables and exclude the following:
 
 · Employee-related benefit obligations of $1.3 billion 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, other long-term liabilities include anticipated voluntary pension contributions to our tax-qualified defined pension plan of $45.0 million in 2009 and expected benefit payments of approximately $495.8 million over the next ten years for our nonqualified pension plan and our postretirement benefit plans, which we primarily fund when paid by the plans.
 
 · Deferred gains of $79.6 million related to prior cash payments which will be recognized in our earnings in the future in accordance with GAAP.
 
 · Net unrealized capital losses of $16.0 million supporting discontinued products.
 
 · Minority interests of $86.3 million consisting of subsidiaries less than 100% owned by us.  This amount does not represent future cash payments we will be required to make.
 
 · Income taxes payable of $20.1 million related to uncertain tax positions.
 
 
Ratings
As of February 26, 2009, the credit ratings of Aetna 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 (senior debt) (1)
 bbb+
 A-
 A3
 A-
         
Aetna (commercial paper)
 AMB-2
 F1
 P-2
 A-2
         
ALIC (financial strength) (1)
 A
 AA-
 Aa3
 A+
(1)
All rating agencies have stated the outlook of Aetna’s senior debt and ALIC’s financial strength is stable.

Solvency Regulation
The National Association of Insurance Commissioners (the “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, 2008, 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, 2008, 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 when they determine a company’s rating.
 
Annual Report - Page 17

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in accordance with GAAP.  The application of GAAP requires management to make estimates and assumptions that affect our consolidated financial statements and related notes.  The accounting estimates described below are those we consider critical in preparing our consolidated financial statements.  We use information available to us at the time the estimates are made; however, as described below, these estimates could change materially if different information or assumptions were used.  Also, these estimates may not ultimately reflect the actual amounts of the final transactions that occur.

Health Care Costs Payable
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, 2008 and 2007, our IBNR reserves represented approximately 86% and 80%, 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.

We analyze historical claim payment patterns by comparing claim incurred dates (i.e., the date services were provided) to claim payment dates to estimate “completion factors.”  We estimate completion factors by aggregating claim data based on the month of service and month of claim payment and estimating the percentage of claims incurred for a given month that are complete by each month thereafter.  For any given month, substantially all claims are paid within six months of the date of service, but it can take up to 48 months or longer before all of the claims are completely resolved and paid.  These historically derived completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claim cost for a given month’s incurred claim activity.  The difference between the estimated ultimate claim cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our health care costs payable.

We use completion factors predominantly to estimate reserves for claims with claim incurred dates greater than three months prior to the financial statement date.  The completion factors we use reflect judgments and possible adjustments based on data such as claim inventory levels, claim submission and processing patterns and, to a lesser extent, other factors such as changes in health care cost trend rates, changes in membership and product mix.  If claims are submitted or processed on a faster (slower) pace than prior periods, the actual claims may be more (less) complete than originally estimated using our completion factors, which may result in reserves that are higher (lower) than the ultimate cost of claims.

Because claims incurred within three months prior to the financial statement date have less activity (i.e., a large portion of health care claims are not submitted to us and/or processed until after the end of the quarter in which services are rendered by providers to our members), estimates of the ultimate cost of claims incurred for these months are not based primarily on the historically derived completion factors.  Rather, the estimates for these months also reflect increased emphasis on the assumed health care cost trend rate, which may be influenced by seasonal patterns, and changes in membership and product mix.

Our health care cost trend rate is affected by changes in per member utilization of medical services as well as changes in the unit cost of such services.  Many factors influence the health care cost trend rate, including our ability to manage 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 per member utilization and unit 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 also contribute to the cost of health care and our health care cost trend rate.
Annual Report - Page 18

For each reporting period, we use an extensive degree of judgment in the process of estimating our health care costs payable, and as a result, considerable variability and uncertainty is inherent in such estimates, and the adequacy of such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend rates.  For each reporting period we recognize our best estimate of health care costs payable considering the potential volatility in assumed completion factors and health care cost trend rates, as well as other factors.  We believe our estimate of health care costs payable is reasonable and adequate to cover our obligations at December 31, 2008; however, actual claim payments may differ from our estimates.  A worsening (or improvement) of our health care cost trend rates or changes in completion factors from those that we assumed in estimating health care costs payable at December 31, 2008 would cause these estimates to change in the near term, and such a change could be material.

Each quarter, we re-examine previously established health care costs payable estimates based on actual claim payments for prior periods and other changes in facts and circumstances.  Given the extensive degree of judgment in this estimate, it is possible that our estimates of health care costs payable could develop either favorably (i.e., our actual health care costs for the period were less than we estimated) or unfavorably.  The changes in our estimate of health care costs payable may relate to a prior fiscal quarter, prior fiscal year or earlier periods.  We also consider the results of these re-examinations when we determine our current year liabilities.  Because of the uncertainty involved in establishing estimates of health care costs payable each period, changes in prior period health care cost estimates may be offset by current period health care costs when we establish our estimate of current period health care costs.  Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for health care costs payable.  When significant decreases (increases) in prior periods’ health care cost estimates occur that we believe significantly impact our current period results of operations, we disclose that amount as favorable (unfavorable) development of prior period health care cost estimates.  We had no significant amount of favorable (unfavorable) development of prior period health care cost estimates that affected our results of operations in 2008 or 2007 (refer to Health Care beginning on page 5 and Note 6 of Notes to Consolidated Financial Statements on page 57 for additional information).

During 2008 and 2007, we have observed an increase in our completion factors as a result of an increase in the speed of our provider claim submission and our processing times.  After considering the claims paid in 2008 and 2007 with dates of service prior to the fourth quarter of the previous year, we observed the assumed weighted average completion factors were approximately .2% and .5%, respectively, higher than previously estimated, resulting in a reduction of approximately $39 million in 2008 and $66 million in 2007 in health care costs payable that related to the prior year.  We have considered this continued increase in completion factors when determining the completion factors used in our estimates of IBNR at December 31, 2008.  However, based on our historical claim experience, it is reasonably possible that our assumed completion factors may vary by plus or minus .5% from our assumed rates, which could impact health care costs payable by approximately plus or minus $26 million pretax.

Also during 2008 and 2007, we observed that our health care cost trend rates for claims with dates of service three months or less before the financial statement date were slightly lower than previously estimated.  Specifically, after considering the claims paid in 2008 and 2007 with dates of service for the fourth quarter of the previous year, we observed health care cost trend rates that were approximately 3.7% and 4.5%, respectively, lower than previously estimated for claims associated with combined Commercial and Medicare IBNR, resulting in a reduction of approximately $108 million in 2008 and $111 million in 2007 in health care costs payable that related to the prior year.  The lower than anticipated health care cost trend rates we observed in 2008 for claims incurred in 2007 were due primarily to moderating outpatient and lower pharmacy trends.  The lower than anticipated health care cost trend rates we observed in 2007 for claims incurred in 2006 were due to moderating outpatient and physician trends, and lower pharmacy trends.  Historical health care cost trend rates are not necessarily representative of current trends.  Therefore, we consider historical trend rates together with our knowledge of recent events that may impact current trends when developing our estimates of current trend rates.  When establishing our reserves at December 31, 2008, we decreased our assumed health care cost trend rates to account for the lower than anticipated health care cost trend rates recently observed.  However, based on our historical claim experience, it is reasonably possible that our estimated health care cost trend rates may vary by plus or minus 3.0 percentage points from our assumed rates, which could impact health care costs payable by approximately plus or minus $137 million pretax.
 
Annual Report - Page 19

 

Health care costs payable as of December 31, 2008 and 2007 consisted of the following products:

(Millions)
 
2008
   
2007
 
Commercial
  $ 1,936.6     $ 1,881.8  
Medicare
    390.9       227.9  
Medicaid
    65.7       67.7  
Total health care costs payable
  $ 2,393.2     $ 2,177.4  

Premium Deficiency Reserves
We recognize a premium deficiency loss when it is probable that expected future health care costs will exceed our existing reserves plus anticipated future premiums and reinsurance recoveries.  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 Care business at December 31, 2008 or 2007.

Other Insurance Liabilities
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.

Life and Disability
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 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.

The discount rate is the interest rate at which future benefit cash flows are discounted to determine the present value of those cash flows.  The discount rate we select is a critical estimate, because higher discount rates result in lower reserves.  We determine the discount rate based on the current and estimated future yield of the asset portfolio supporting our life and disability reserves.  If the discount rate we select in estimating our reserves is lower (higher) than our actual future portfolio returns, our reserves may be higher (lower) than necessary.  Our discount rates for life and disability reserves at December 31, 2008 increased by .17% and .04%, respectively, when compared to the rates used at December 31, 2007.  Our discount rates for life and disability reserves at December 31, 2007 increased by .06% and .12%, respectively, when compared to the rates used at December 31, 2006.  The discount rates we selected for disability and life reserves at December 31, 2008 and 2007 were higher than the rates we selected in the previous year as a result of increasing investment yields on the portfolio of assets supporting these reserves.  Based on our historical experience, it is reasonably possible that the assumed discount rates for our life and disability reserves may vary by plus or minus .25% from year to year.  A .25% decrease in the discount rates selected for both our life and disability reserves would have increased current and future life and disability benefit costs by approximately $14 million pretax for 2008.

For disability claims and a portion of our life claims, we must estimate the timing of benefit payments, which takes into consideration the maximum benefit period and the probabilities of recovery (i.e., recovery rate) or death (i.e., mortality rate) of the member.  Benefit payments may also be affected by a change in employment status of a disabled member, for example if the member returns to work on a part-time basis.  Estimating the recovery and mortality rates of our members is complex.  Our actuaries evaluate our current and historical claim patterns, the timing and amount of any Social Security offset (for disability only), as well as other factors including the relative ages of covered members and the duration of each member’s disability when developing these assumptions.  For disability reserves, if our actual recovery and mortality rates are lower (higher) than our estimates, our reserves will be lower (higher) than required to cover future disability benefit payments.  For certain life reserves, if the actual
Annual Report - Page 20

 
recovery rates are lower (higher) than our estimates or the actual mortality rates are higher (lower) than our estimates, our reserves will be lower (higher) than required to cover future life benefit payments.  We use standard industry tables and our historical claim experience to develop our estimated recovery and mortality rates.  Claim reserves for our disability and life claims are sensitive to these assumptions.  Our historical experience has been that our recovery or mortality rates for our life and disability reserves vary by less than one percent during the course of a year.  A one percent less (more) favorable assumption for our recovery or mortality rates would have increased (decreased) current and future life and disability benefit costs by approximately $6 million pretax for 2008.  When establishing our reserves at December 31, 2008, we have adjusted our estimates of these rates based on recent experience.

We estimate our reserve for claims incurred but not yet reported to us for life products largely based on completion factors.  The completion factors we use are based on our historical experience and reflect judgments and possible adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and other factors.  If claims are submitted or processed on a faster (slower) pace than historical periods, the actual claims may be more (less) complete than originally estimated using our completion factors, which may result in reserves that are higher (lower) than required to cover future life benefit payments.  At December 31, 2008, we held approximately $192 million in reserves for life claims incurred but not yet reported to us.

Long-term Care
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 estimated future benefit payments less the present value of estimated 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.

Premium Deficiency Reserves
We recognize a premium deficiency loss when it is probable that expected future policy benefit costs will exceed our existing reserves plus anticipated future premiums and reinsurance recoveries.  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, 2008 or 2007.

Large Case Pensions Discontinued Products Reserve
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 2008, 2007 and 2006, $44 million, $64 million and $115 million, respectively, of reserves were released for these reasons.  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.

Recoverability of Goodwill and Other Acquired Intangible Assets
We have made 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 a periodic 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.
 
Annual Report - Page 21

 
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension (“pension”) and other postretirement benefit (“OPEB”) plans for our employees and retirees.  Refer to Note 12 of Notes to Consolidated Financial Statements beginning on page 64 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 (December 31).  A change in any of our assumptions would have an effect on our pension and OPEB plan costs.

Our expected return on plan assets assumption is based on many factors, including forecasted capital market real returns over a long-term horizon, forecasted inflation rates, historical compounded asset returns and patterns and correlations on those returns.  Expectations for modest increases in interest rates, normal inflation trends and average capital market real returns led us to an expected return on pension plan assets assumption of 8.5% for both 2008 and 2007 and an expected return on OPEB plan assets assumption of 5.5% for both 2008 and 2007.  Our expected return on pension plan assets is based on asset range allocations assumptions of 55% – 75% U.S. and international public and private equity securities, 10% – 30% fixed income securities and 5% – 25% real estate and other assets.  We regularly review actual asset allocations and periodically rebalance our investments to the mid-point of our targeted allocation ranges when we consider it appropriate.  At December 31, 2008, our actual asset allocations were consistent with our asset allocation assumptions.  Investment returns can be volatile.  Although our return on plan assets is a long-term assumption, shorter-term volatility in our annual pension costs can occur if investment returns differ from the assumed rate.  For example, a one-percent deviation from our long-term 8.5% return assumption would impact our annual pension costs by approximately $5 million after tax and would have a negligible effect on our annual OPEB costs.