Aetna 2008 Annual Report Download - page 77

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Annual Report - Page 72
15. Financial Instruments
The preparation of our consolidated financial statements in accordance with GAAP requires certain of our assets and
liabilities to be reflected at their fair value, and others on another basis, such as an adjusted historical cost basis. In
this note, we provide details on the fair value of financial assets and liabilities and how we determine those fair
values. We present this information for those instruments that are reported at fair value for which the change in fair
value impacts net income or other comprehensive income separately from other financial assets and liabilities.
Financial Instruments Measured at Fair Value in our Balance Sheets
Effective January 1, 2008, we adopted FAS 157 for our financial assets and liabilities measured at fair value. FAS
157 defines fair value, expands disclosure requirements and specifies a hierarchy of valuation techniques. The
following are the levels of the hierarchy and a brief description of the type of valuation information (“inputs”) that
qualifies a financial asset or liability for each level:
o Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.
o Level 2 – Inputs other than Level 1 that are based on observable market data. These include: quoted prices
for similar assets in active markets, quoted prices for identical assets in inactive markets, inputs that are
observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or
corroborated by observable markets.
o Level 3 – Developed from unobservable data, reflecting our own assumptions.
When quoted prices in active markets for identical assets and liabilities are available, we use these quoted market
prices to determine the fair value of financial assets and liabilities and classify these assets and liabilities as Level 1.
In other cases where a quoted market price for identical assets and liabilities in an active market is either not
available or not observable, we estimate fair values using valuation methodologies based on available and observable
market information or by using a matrix pricing model. These financial assets and liabilities would then be
classified as Level 2. If quoted market prices are not available, we determine fair value using broker quotes or an
internal analysis of each investment’ s financial performance and cash flow projections. In these instances, financial
assets and liabilities will be classified based upon the lowest level of input that is significant to the valuation. Thus,
financial assets and liabilities may be classified in Level 3 even though there may be some significant inputs that
may be readily available.
The following is a description of the valuation methodologies used for our financial assets and liabilities measured at
fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Debt Securities - Where quoted prices are available in an active market, our debt securities are classified in
Level 1 of the fair value hierarchy. Our Level 1 debt securities are comprised primarily of U.S. government
securities. If Level 1 valuations are not available, the fair value is determined using models such as matrix
pricing, which uses quoted market prices of debt securities with similar characteristics or discounted cash
flows to estimate fair value. We obtained one price for each of our Level 2 debt securities and did not adjust
any of these prices at December 31, 2008.
We also value a certain amount of debt securities using Level 3 inputs. For Level 3 debt securities, fair
values are determined by outside brokers or, in the case of certain private placement securities, are priced by
internal staff. Outside brokers determine the value of these debt securities through a combination of their
knowledge of the current pricing environment and market flows. We obtained one non-binding broker quote
for each of these Level 3 debt securities and did not adjust any of these quotes at December 31, 2008. The
total fair value of our broker quoted securities was approximately $353 million at December 31, 2008.
Examples of these Level 3 debt securities include certain U.S. and foreign corporate securities and structured
products. For certain private placement securities, internal staff determine the value of these debt securities
by analyzing spreads of corporate and sector indices as well as interest spreads of comparable public bonds.
Examples of these Level 3 debt securities include certain U.S. and foreign securities and certain tax exempt
municipal securities.
Equity Securities - We currently have two classifications of equity securities: those that are publicly traded
and those that are privately held. Our publicly traded securities are classified as Level 1 because quoted
prices are available for these securities in an active market. For privately held equity securities, there is no