Aetna 2013 Annual Report Download - page 80

Annual Report- Page 74
• We may enter into merger or purchase agreements but, due to reasons within or outside our control, fail to
complete the related transactions, which could result in termination fees or other penalties that could be
material, material disruptions to our business and operations and negatively affect our reputation;
• In order to complete a proposed acquisition, we may be required to divest certain portions of our business;
and
• We may be involved in litigation related to mergers or acquisitions, which may be costly to defend and may
result in adverse rulings against us that could be material.
Financial Risks
We would be adversely affected if we do not effectively deploy our capital. Downgrades in our credit ratings,
should they occur, could adversely affect our reputation, business, cash flows, financial condition and operating
results.
Our operations generate significant capital, and we have the ability to raise additional capital. The manner in which
we deploy our capital, including investments in operations (such as information technology and other strategic and
capital projects), dividends, acquisitions, share and/or debt repurchases, reinsurance or other capital uses, impacts
our financial strength, claims paying ability and credit ratings issued by recognized rating organizations. Credit
ratings issued by nationally-recognized organizations are broadly distributed and generally used throughout our
industry. Our ratings reflect each rating organization's opinion of our financial strength, operating performance and
ability to meet our debt obligations or obligations to our insureds. We believe our credit ratings and the financial
strength and claims paying ability of our principal insurance and HMO subsidiaries are important factors in
marketing our products to certain of our customers. In addition, our credit ratings impact the cost and availability of
future borrowings, and accordingly our cost of capital.
Each of the ratings organizations reviews our ratings periodically, and there can be no assurance that our current
ratings will be maintained in the future. Among other things, our ratings may be affected by the assumption of debt
in connection with an acquisition. For example, one of the nationally-recognized rating agencies reduced their
rating of our long-term senior debt upon the closing of the Coventry acquisition. Downgrades in our ratings, should
they occur, could adversely affect our reputation, business, cash flows, financial condition and operating results.
Adverse conditions in the U.S. and global capital markets can significantly and adversely affect the value of our
investments in debt and equity securities, mortgage loans, alternative investments and other investments, our
operating results and/or our financial position.
The global capital markets, including credit markets, continue to experience volatility and uncertainty. As an
insurer, we have a substantial investment portfolio that supports our policy liabilities and surplus and is comprised
largely of debt securities of issuers located in the U.S. As a result, the income we earn from our investment portfolio
is largely driven by the level of interest rates in the U.S., and to a lesser extent the international financial markets;
and volatility, uncertainty and/or disruptions in the global capital markets, particularly the U.S. credit markets, and
governments' monetary policy, particularly U.S. monetary policy, can significantly and adversely affect the value of
our investment portfolio, our operating results and/or our financial position by:
• Significantly reducing the value of the debt securities we hold in our investment portfolio and creating
realized capital losses that reduce our operating results and/or unrealized capital losses that reduce our
shareholders' equity.
• Keeping interest rates low on high-quality short-term or medium-term debt securities (such as we have
experienced during recent years) and thereby materially reducing our net investment income and operating
results as the proceeds from securities in our investment portfolio that mature or are otherwise disposed of
continue to be reinvested in lower yielding securities.
• Making it more difficult to value certain of our investment securities, for example if trading becomes less
frequent, which could lead to significant period-to-period changes in our estimates of the fair values of
those securities and cause period-to-period volatility in our net income and shareholders' equity.