Aetna 2014 Annual Report Download - page 109

Download and view the complete annual report

Please find page 109 of the 2014 Aetna annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 156

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156

Annual Report- Page 103
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.
The fair values of our Level 2 debt securities are obtained 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 review these prices to ensure they are based on observable market inputs that include, but are not
limited to, quoted prices for similar assets in active markets, quoted prices for identical assets in inactive
markets and inputs that are observable but not prices (for example, interest rates and credit risks). We also
review the methodologies and the assumptions used to calculate prices from these observable inputs. On a
quarterly basis, we select a sample of our Level 2 debt securities’ prices and compare them to prices
provided by a secondary source. Variances over a specified threshold are identified and reviewed to confirm
the price provided by the primary source represents an appropriate estimate of fair value. In addition, our
internal investment team consistently compares the prices obtained for select Level 2 debt securities to the
team’s own independent estimates of fair value for those securities. We obtained one price for each of our
Level 2 debt securities and did not adjust any of these prices at December 31, 2014 or 2013.
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, 2014
or 2013. The total fair value of our broker quoted debt securities was approximately $126 million and $103
million at December 31, 2014 and 2013, respectively. Examples of these broker quoted Level 3 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 in 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 in 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 in Level 2 because they are traded in markets where quoted market prices
are not readily available.