Aetna 2011 Annual Report Download - page 75

Annual Report- Page 69
industrial), geographic location, vacancy rates and property condition. We determined that a credit loss was not
probable and did not record any additional allowance for loan losses with respect to performing mortgage loans in
2011, 2010 or 2009.
We record full or partial charge-offs of loans at the time an event occurs affecting the legal status of the loan,
typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of debt. Interest income on
an impaired loan is accrued to the extent we deem it collectable and the loan continues to perform under its original
or restructured terms. Interest income on problem loans is recognized on a cash basis. Cash payments on loans in
the process of foreclosure are treated as a return of principal. Mortgage loans with a maturity date or a committed
prepayment date within twelve months are classified as current on our balance sheets.
Other Investments
Other investments consist primarily of alternative investments (which are comprised of private equity and hedge
fund limited partnerships), investment real estate and derivatives. We typically do not have a controlling
ownership in our alternative investments, and therefore we apply the equity method of accounting for these
investments. We invest in real estate for the production of income. We carry the value of our investment real
estate on our balance sheets at depreciated cost, including capital additions, net of write-downs for other-than-
temporary declines in fair value. Depreciation is calculated using the straight-line method based on the estimated
useful life of each asset. If any of our real estate investments is considered held-for-sale, we carry it at the lower of
its carrying value or fair value less estimated selling costs. We generally estimate fair value using a discounted
future cash flow analysis in conjunction with comparable sales information. At the time of the sale, we record the
difference between the sales price and the carrying value as a realized capital gain or loss.
We make limited use of derivatives in order to manage interest rate, foreign exchange, price risk and credit
exposure. The derivatives we use consist primarily of futures contracts, forward contracts, interest rate swaps,
credit default swaps, warrants and put options. Derivatives are reflected at fair value on our balance sheets.
When we enter into a derivative contract, if certain criteria are met, we may designate it as one of the following: a
hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment; a hedge of a
forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or
liability; or a foreign currency fair value or cash flow hedge.
Net Investment Income and Realized Capital Gains and Losses
Net investment income on investments supporting Health Care and Group Insurance liabilities and Large Case
Pensions products (other than experience-rated and discontinued products) are reflected in our operating results.
Experience-rated products are products in the Large Case Pensions business where the contract holder, not us,
assumes investment and other risks, subject to, among other things, minimum guarantees provided by us. The
effect of investment performance on experience-rated products is allocated to contract holders' accounts daily, based
on the underlying investment's experience and, therefore, does not impact our operating results (as long as
minimum guarantees are not triggered).
When we discontinued the sale of our fully-guaranteed Large Case Pensions products, we established a reserve for
anticipated future losses from these discontinued products and segregated the related investments. Investment
performance on this separate portfolio is ultimately credited/charged to the reserve and, generally, does not impact
our operating results.
Net investment income supporting Large Case Pensions' experience-rated and discontinued products is included in
net investment income in our statements of income and is credited to contract holders accounts or the reserve for
anticipated future losses through a charge to current and future benefits.
Realized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large
Case Pensions products (other than experience-rated and discontinued products) are reflected in our operating