Aetna 2014 Annual Report Download - page 89

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Annual Report- Page 83
an impaired loan is accrued to the extent we deem it collectible and the loan continues to perform under its original
or restructured terms. Interest income on problem loans is recognized on a cash basis. Cash payments on loans in
the process of foreclosure are treated as a return of principal. Mortgage loans with a maturity date or a committed
prepayment date within twelve months are classified as current on our balance sheets.
Other Investments
Other investments consist primarily of the following:
• Alternative investments, which are comprised of private equity and hedge fund limited partnerships. We
typically do not have a controlling ownership in our alternative investments, and therefore we apply the
equity method of accounting for these investments.
• Investment real estate, which is carried on our balance sheets at depreciated cost, including capital
additions, net of write-downs for other-than-temporary declines in fair value. Depreciation is calculated
using the straight-line method based on the estimated useful life of each asset. If any of our real estate
investments is considered held-for-sale, we carry it at the lower of its carrying value or fair value less
estimated selling costs. We generally estimate fair value using a discounted future cash flow analysis in
conjunction with comparable sales information. At the time of the sale, we record the difference between
the sales price and the carrying value as a realized capital gain or loss.
• Privately-held equity securities, which are carried at cost on our balance sheets. We do not estimate the fair
value of these securities if there are no identified events or changes in circumstances that may have a
significant adverse effect on the fair value of the investment. Additionally, as a member of the Federal
Home Loan Bank of Boston (“FHLBB”), we are required to purchase and hold shares of the FHLBB. These
shares are restricted and also carried at cost.
• Bank loans, which are carried on our balance sheets at amortized cost, net of any allowance for
impairments. If any of our bank loans are considered held-for-sale, we carry those loans at the lower of cost
or fair value.
• Derivatives, which we make limited use of in order to manage interest rate, foreign exchange, price risk and
credit exposure. The derivatives we use consist primarily of interest rate swaps, forward contracts, futures
contracts, warrants, put options, and credit default swaps. Derivatives are reflected at fair value on our
balance sheets. When we enter into a derivative contract, if certain criteria are met, we may designate it as
one of the following: a hedge of the fair value of a recognized asset or liability or of an unrecognized firm
commitment; a hedge of a forecasted transaction or of the variability of cash flows to be received or paid
related to a recognized asset or liability; or a foreign currency fair value or cash flow hedge.
Net Investment Income and Realized Capital Gains and Losses
Net investment income on investments supporting Health Care and Group Insurance liabilities and Large Case
Pensions products (other than experience-rated and discontinued products) are reflected in our operating results.
Experience-rated products are products in the Large Case Pensions business where the contract holder, not us,
assumes investment and other risks, subject to, among other things, minimum guarantees provided by us. The
effect of investment performance on experience-rated products is allocated to contract holders’ accounts daily,
based on the underlying investment experience and, therefore, does not impact our operating results (as long as
minimum guarantees are not triggered).
When we discontinued the sale of our fully-guaranteed Large Case Pensions products, we established a reserve for
anticipated future losses from these discontinued products and segregated the related investments. Investment
performance on this separate portfolio is ultimately credited/charged to the reserve and, generally, does not impact
our operating results.
Net investment income supporting Large Case Pensions’ experience-rated and discontinued products is included in
net investment income in our statements of income and is credited to contract holders’ accounts or the reserve for
anticipated future losses through a charge to current and future benefits.