Aetna 2013 Annual Report Download - page 114

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Annual Report- Page 108
The following is a description of the valuation methodologies used for our financial assets and liabilities that are
measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation
hierarchy.
Debt Securities – Where quoted prices are available in an active market, our debt securities are classified
in Level 1 of the fair value hierarchy. Our Level 1 debt securities are comprised primarily of U.S. Treasury
securities. If Level 1 valuations are not available, the fair value is determined using models such as matrix
pricing, which use quoted market prices of debt securities with similar characteristics, or discounted cash
flows to estimate fair value. We obtained one price for each of our Level 2 debt securities and did not
adjust any of these prices at December 31, 2013 or 2012.
We also value certain debt securities using Level 3 inputs. For Level 3 debt securities, fair values are
determined by outside brokers or, in the case of certain private placement securities, are priced
internally. Outside brokers determine the value of these debt securities through a combination of their
knowledge of the current pricing environment and market flows. We obtained one non-binding broker
quote for each of these Level 3 debt securities and did not adjust any of these quotes at December 31, 2013
or 2012. The total fair value of our broker quoted debt securities was approximately $103 million and $117
million at December 31, 2013 and 2012 respectively. Examples of these Level 3 broker quoted debt
securities include certain U.S. and foreign corporate securities and certain of our commercial mortgage-
backed securities as well as other asset-backed securities. For some of our private placement securities, our
internal staff determines the value of these debt securities by analyzing spreads of corporate and sector
indices as well as interest spreads of comparable public bonds. Examples of these private placement Level
3 debt securities include certain U.S. and foreign securities and certain tax-exempt municipal securities.
Equity Securities – We currently have two classifications of equity securities: those that are publicly
traded and those that are privately held. Our publicly-traded securities are classified as Level 1 because
quoted prices are available for these securities in an active market. For privately-held equity securities,
there is no active market; therefore, we classify these securities as Level 3 because we price these securities
through an internal analysis of each investment’s financial statements and cash flow projections. Significant
unobservable inputs consist of earnings and revenue multiples, discount for lack of marketability and
comparability adjustments. An increase or decrease in any of these unobservable inputs would result in a
change in the fair value measurement, which may be significant.
Derivatives – Where quoted prices are available in an active market, our derivatives are classified in Level
1. Certain of our derivative instruments are valued using models that primarily use market observable
inputs and therefore are classified as Level 2 because they are traded in markets where quoted market prices
are not readily available.