Aetna 2013 Annual Report Download - page 23

Annual Report- Page 17
Mortgage Loans
Our mortgage loan portfolio (which is collateralized by commercial real estate) represented approximately 7% of
our total invested assets at both December 31, 2013 and 2012. There were no material impairment reserves on
these loans at December 31, 2013 or 2012. Refer to Note 8 of Notes to Consolidated Financial Statements on
page 100 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
when appropriate. We manage credit risk by seeking to maintain high average credit 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 (whether resulting from
changes in Treasury yields or credit spreads or other factors) represent the most material risk exposure category for
us. During 2013, we acquired Coventry which held approximately $2.2 billion of interest-sensitive investments and
had $1.8 billion of outstanding long-term debt. Although the acquisition has increased our total exposure to changes
in interest rates, we do not believe there has been a material change to the composition of these market risks as a
result of the acquisition. We have estimated the impact on the fair value of our market sensitive instruments 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 at December
31, 2013 is as follows:
• The fair value of our long-term debt would decline by approximately $404 million ($621 million pretax).
Changes in the fair value of our long-term debt do not impact our financial position or operating results.
• The theoretical reduction in the fair value of our investment securities partially offset by the theoretical
reduction in the fair value of interest rate sensitive liabilities would result in a net decline in fair value of
approximately $226 million ($347 million pretax) related to our non-experience-rated products. Reductions
in the fair value of our investment securities would be reflected as an unrealized loss in equity, as we
classify these securities as available for sale. We do not record our liabilities at fair value.
Based on our overall exposure to interest rate risk and equity price risk, we believe that these changes in market
rates and prices would not materially affect our consolidated near-term financial position, operating results or cash
flows as of December 31, 2013.