Aetna 2008 Annual Report Download - page 87

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During 2008, our discontinued products reflected an operating loss and net realized capital losses, both attributed 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 losses 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 the discontinued products. We have evaluated the operating losses and 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.
The anticipated run-off of the discontinued products reserve balance at December 31, 2008 (assuming that assets are
held until maturity and that the reserve run-off is proportional to the liability run-off) is as follows:
(Millions)
2009 36.7$
2010 36.6
2011 36.3
2012 35.9
2013 35.3
Thereafter 609.6
Assets and liabilities supporting discontinued products at December 31, 2008 and 2007 were as follows: (1)
(Millions) 2008 2007
Assets:
Debt and equity securities available-for-sale 2,382.4$ 3,025.2$
Mortgage loans 585.8 554.0
Other investments 666.9 605.1
Total investments 3,635.1 4,184.3
Other assets 133.4 142.6
Collateral received under securities loan agreements 150.7 309.6
Current and deferred income taxes 82.2 121.4
Receivable from continuing products
(2)
436.0 437.9
Total assets 4,437.4$ 5,195.8$
Liabilities:
Future policy benefits 3,446.4$ 3,614.5$
Policyholders' funds 16.7 21.0
Reserve for anticipated future losses on discontinued products 790.4 1,052.3
Collateral payable under securities loan agreements 150.7 309.6
Other liabilities
(3)
33.2 198.4
Total liabilities 4,437.4$ 5,195.8$
(1) Assets supporting the discontinued products are distinguished from assets supporting continuing products.
(2) The receivable from continuing products is eliminated in consolidation.
(3) Net unrealized capital losses on debt securities available-for-sale are included above in other liabilities and are not reflected in
consolidated shareholders’ equity.
The discontinued products investment portfolio has changed since inception. Mortgage loans have decreased from
$5.4 billion (37% of the investment portfolio) at December 31, 1993 to $586 million (16% of the investment
portfolio) at December 31, 2008. This was a result of maturities, prepayments and the securitization and sale of
commercial mortgages. Also, real estate decreased from $.5 billion (4% of the investment portfolio) at December
31, 1993 to $67 million (2% of the investment portfolio) at December 31, 2008, primarily as a result of sales. The
resulting proceeds were primarily reinvested in debt and equity securities. Over time, the then existing mortgage
loan and real estate portfolios and the reinvested proceeds have resulted in greater investment returns than we
originally assumed in 1993.
Annual Report - Page 82