Aetna 2008 Annual Report Download - page 18

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Annual Report - Page 13
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.