Aetna 2012 Annual Report Download - page 22

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Annual Report- Page 16
Net Realized Capital Gains and Losses
Net realized capital gains were $109 million in 2012, $168 million in 2011 and $228 million in 2010. The net
realized capital gains in 2012, 2011 and 2010 primarily reflect sales of debt securities which were partially offset by
losses on derivative transactions.
Yield-related OTTI losses were not significant in 2012, 2011 or 2010. In addition, we had no individually material
realized capital losses on debt or equity securities that impacted our operating results in 2012, 2011 or 2010.
Mortgage Loans
Our mortgage loan portfolio (which is collateralized by commercial real estate) represented approximately 7% and
8% of our total invested assets at December 31, 2012 and 2011, respectively. There were no material impairment
reserves on these loans at December 31, 2012 or 2011. Refer to Note 8 of Notes to Consolidated Financial
Statements on page 95 for additional information on our mortgage loan portfolio.
Risk Management and Market-Sensitive Instruments
We manage interest rate risk by seeking to maintain a tight match between the durations of our assets and liabilities
where appropriate. We manage credit risk by seeking to maintain high average quality ratings and diversified sector
exposure within our debt securities portfolio. In connection with our investment and risk management objectives,
we also use derivative financial instruments whose market value is at least partially determined by, among other
things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or
credit ratings/spreads. Our use of these derivatives is generally limited to hedging risk and has principally consisted
of using interest rate swaps, forward contracts, futures contracts, warrants, put options and credit default swaps.
These instruments, viewed separately, subject us to varying degrees of interest rate, equity price and credit
risk. However, when used for hedging, we expect these instruments to reduce overall risk.
We regularly evaluate our risk from market-sensitive instruments by examining, among other things, levels of or
changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/
spreads. We also regularly evaluate the appropriateness of investments relative to our management-approved
investment guidelines (and operate within those guidelines) and the business objectives of our portfolios.
On a quarterly basis, we review the impact of hypothetical net losses in our investment portfolio on our
consolidated near-term financial position, operating results and cash flows assuming the occurrence of certain
reasonably possible changes in near-term market rates and prices. Interest rate changes represent the most material
risk exposure category for us. We determine the potential effect of interest rate risk on near-term net income, cash
flow and fair value based on commonly-used models. The models project the impact of interest rate changes on a
wide range of factors, including duration, put options and call options. We also estimate the impact on fair value
based on the net present value of cash flows using a representative set of likely future interest rate scenarios. The
assumptions used were as follows: an immediate increase of 100 basis points in interest rates (which we believe
represents a moderately adverse scenario and is approximately equal to the historical annual volatility of interest
rate movements for our intermediate-term available-for-sale debt securities) and an immediate decrease of 15% in
prices for domestic equity securities.
Assuming an immediate 100 basis point increase in interest rates and immediate decrease of 15% in the prices for
domestic equity securities, the theoretical decline in the fair values of our market sensitive instruments was $642
million ($987 million pretax) at December 31, 2012.
• Approximately $433 million ($666 million pretax) was the result of the theoretical reduction of the fair
value of our long-term debt. Changes in the fair value of our long-term debt do not impact our financial
position or operating results.