Aetna 2008 Annual Report Download - page 78

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active market; therefore, we classify these securities as Level 3 because we must price these securities
through an internal analysis of each investment’ s financial statements and cash flow projections.
Derivatives - Our derivative instruments are valued using models that primarily use market observable
inputs and therefore are classified as Level 2 because they are traded in markets where quoted market prices
are not readily available.
Our financial assets and liabilities with changes in fair value that are measured on a recurring basis at December 31,
2008 were as follows:
(Millions) Level 1 Level 2 Level 3 Total
Assets:
Debt Securities 669.9$ 12,836.2$ 455.7$ 13,961.8$
Equity Securities 2.2 - 29.3 31.5
Derivatives - 1.8 - 1.8
Total 672.1$ 12,838.0$ 485.0$ 13,995.1$
Liabilities:
Derivatives -$ 4.0$ -$ 4.0$
The changes in the balances of Level 3 financial assets for 2008 were as follows:
(Millions)
Debt
Securities
Equity
Securities Total
Beginning balance 642.5$ 38.8$ 681.3$
Net realized and unrealized capital (losses) gains:
Included in earnings (51.9) - (51.9)
Included in other comprehensive income (30.2) (1.0) (31.2)
Other
(1)
(29.4) 10.4 (19.0)
Purchases, sales and maturities (48.5) (34.6) (83.1)
Transfers in or (out) of Level 3
(2)
(26.8) 15.7 (11.1)
Ending Balance 455.7$ 29.3$ 485.0$
(53.8)$ -$ (53.8)$ Amount of Level 3 net unrealized capital losses included in net income
(1) Reflects realized and unrealized capital gains and losses on investments supporting our experience-rated and discontinued products, which
do not affect our results of operations.
(2) For financial assets that are transferred into Level 3, we use the fair value of the assets at the end of the reporting period. For financial
assets that are transferred out of Level 3, we use the fair value of the assets at the beginning of the reporting period.
Financial Instruments Not Measured at Fair Value in our Balance Sheets
The following is a description of the valuation methodologies used for estimating the fair value of our financial
assets and liabilities that are measured at carrying value.
Mortgage loans - Fair values are estimated by discounting expected mortgage loan cash flows at market
rates that reflect the rates at which similar loans would be made to similar borrowers. These rates reflect
management’ s assessment of the credit quality and the remaining duration of the loans. Our fair value
estimates of mortgage loans of lower credit quality, including problem and restructured loans, are based on
the estimated fair value of the underlying collateral.
Investment contract liabilities:
• With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being
offered by, or available to, us for similar contracts.
• Without a fixed maturity: Fair value is estimated as the amount payable to the contract holder upon
demand. However, we have the right under such contracts to delay payment of withdrawals that may
ultimately result in paying an amount different than that determined to be payable on demand.
Annual Report - Page 73