Aetna 2011 Annual Report Download - page 65

Annual Report- Page 59
information technology system providers, independent practice associations, accountable care organizations and
call center and claim and billing service providers. These arrangements may make our operations vulnerable if
those third parties fail to comply with applicable laws or regulations or to meet their obligations to us, whether
because of our failure to adequately monitor and regulate their performance, or changes in their own financial
condition or other matters outside our control. A termination of our agreements with one or more of these service
providers could result in reduced service quality and effectiveness, inability to meet our obligations to our
customers or less favorable contract terms that may adversely affect our operating results.
Under the PBM Agreement, CVS Caremark provides certain PBM services to us and our customers and members.
The PBM Agreement is for a term of up to 12 years, although we have certain termination rights beginning in
January, 2018. CVS Caremark began providing services under the PBM Agreement on January 1, 2011. If the
PBM Agreement were to terminate for any reason or CVS Caremark's ability to perform its obligations under the
PBM Agreement were impaired, we may not be able to find an alternative supplier in a timely manner or on
acceptable financial terms. As a result, we may not be able to meet the full demands of our customers, which could
have a material adverse effect on our business, reputation and operating results.
In addition, certain of our vendors have been responsible for releases of sensitive information of our members and
employees, which has caused us to incur additional expenses and given rise to litigation against us. Certain
legislative authorities have in recent years also discussed or proposed legislation that would restrict outsourcing
and, if enacted, could materially increase our costs. We also could become overly dependent on key vendors, which
could cause us to lose core competencies if not properly monitored. In recent years, certain third parties to whom
we delegated selected functions, such as independent practice associations and specialty services providers, have
experienced financial difficulties, including bankruptcy, which may subject us to increased costs and potential
health care benefits provider network disruptions, and in some cases cause us to incur duplicative claims expense.
Adverse conditions in the U.S. and global capital markets can significantly and adversely affect the value of
our investments in debt and equity securities, mortgage loans, alternative investments and other investments,
our profitability and/or our financial position.
The global capital markets, including credit markets, continue to experience volatility, uncertainty and disruption.
As an insurer, we have a substantial investment portfolio that supports our policy liabilities and surplus and is
comprised largely of debt securities of issuers located in the U.S. As a result, the income we earn from our
investment portfolio is largely driven by the level of interest rates in the U.S., and to a lesser extent the international
financial markets; and volatility, uncertainty and/or disruptions in the global capital markets, particularly the U.S.
credit markets, and governments' monetary policy, particularly the easing of U.S. monetary policy, can significantly
and adversely affect the value of our investment portfolio, our profitability and/or our financial position by:
• Significantly reducing the value of the debt securities we hold in our investment portfolio and creating realized
capital losses that reduce our operating results and/or unrealized capital losses that reduce our shareholders'
equity.
• Keeping interest rates low on high-quality short-term debt securities (such as we have experienced during
recent years) and thereby materially reducing our net investment income and operating results as the proceeds
from maturing securities in our investment portfolio continue to be reinvested in lower yielding securities.
• Making it more difficult to value certain of our investment securities, for example if trading becomes less
frequent, which could lead to significant period-to-period changes in our estimates of the fair values of those
securities and cause period-to-period volatility in our net income and shareholders' equity.
• Reducing our ability to issue short-term debt securities at attractive interest rates, thereby increasing our interest
expense and decreasing our operating results.
• Reducing our ability to issue other securities.
Although we seek, within guidelines we deem appropriate, to match the duration of our assets and liabilities and to
manage our credit exposures, a failure to adequately do so could adversely affect our net income and our financial
condition.