Aetna 2012 Annual Report Download - page 90

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Annual Report- Page 84
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires the use
of estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes.
We consider the following accounting estimates critical in the preparation of the accompanying consolidated
financial statements: health care costs payable, other insurance liabilities, recoverability of goodwill and other
acquired intangible assets, measurement of defined benefit pension and other postretirement benefit plans, other-
than-temporary impairment of debt securities and revenue recognition, and allowance for estimated terminations
and uncollectible accounts. We use information available to us at the time estimates are made; however, these
estimates could change materially if different information or assumptions were used. Additionally, these estimates
may not ultimately reflect the actual amounts of the final transactions that occur.
Cash and Cash Equivalents
Cash and cash equivalents include cash on-hand and debt securities with an original maturity of three months or less
when purchased. The carrying value of cash equivalents approximates fair value due to the short-term maturity of
these investments.
Investments
Debt and Equity Securities
Debt and equity securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities,
corporate and foreign bonds and other debt and equity securities. Debt securities are classified as either current or
long-term investments based on their contractual maturities unless we intend to sell an investment within the next
twelve months, in which case it is classified as current on our balance sheets. We have classified our debt and
equity securities as available for sale and carry them at fair value. Refer to Note 10 beginning on page 102 for
additional information on how we estimate the fair value of these investments. The cost for mortgage-backed and
other asset-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the
interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. We
regularly review our debt and equity securities to determine whether a decline in fair value below the carrying
value is other-than-temporary. When a debt or equity security is in an unrealized capital loss position, we monitor
the duration and severity of the loss to determine if sufficient market recovery can occur within a reasonable
period of time. If a decline in the fair value of a debt security is considered other-than-temporary, the cost basis
or carrying value of the debt security is written down. The write-down is then bifurcated into its credit and non-
credit related components. The credit-related component is included in our operating results. The non-credit
related component is included in other comprehensive income if we do not intend to sell the debt security and is
included in our operating results if we intend to sell the debt security. We do not accrue interest on debt securities
when management believes the collection of interest is unlikely.
We lend certain debt and equity securities from our investment portfolio to other institutions for short periods of
time. Borrowers must post cash collateral in the amount of 102% to 105% of the fair value of the loaned security.
The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded
as the fair value of the loaned securities fluctuates. The collateral is retained and invested by a lending agent
according to our guidelines to generate additional income for us.
Mortgage Loans
We carry the value of our mortgage loan investments on our balance sheets at the unpaid principal balance, net of
impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days
delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default
within 3 years) or a restructured loan. For impaired loans, a specific impairment reserve is established for the
difference between the recorded investment in the loan and the estimated fair value of the collateral. We apply our
loan impairment policy individually to all loans in our portfolio.
The quarterly impairment evaluation described above also considers characteristics and risk factors attributable to
the aggregate portfolio. We would establish an additional allowance for loan losses if it were probable that there
would be a credit loss on a group of similar mortgage loans. We consider the following characteristics and risk