Aetna 2006 Annual Report Download - page 54

Download and view the complete annual report

Please find page 54 of the 2006 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 102

  • 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

Page 52
Mortgage Loans
We carry the value of our mortgage loan investments on the balance sheet at the unpaid principal balance, net of
impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days
delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default
within 3 years) or a restructured loan. For impaired loans, a specific impairment reserve is established for the
difference between the recorded investment in the loan and the estimated fair value of the collateral. We apply our
loan impairment policy individually to all loans in our portfolio and do not aggregate loans for the purpose of
applying this policy. We record full or partial charge-offs of loans at the time an event occurs affecting the legal
status of the loan, typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of
debt. Interest income on an impaired loan is accrued to the extent we deem it collectable 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 of less than one year from the balance sheet date are reported in
other investments on the Consolidated Balance Sheets.
Derivative Instruments
We make limited use of derivatives in order to manage interest rate, foreign exchange and price risk. The
derivatives we use consist primarily of futures contracts, forward contracts, interest rate swaps and warrants.
Derivatives are reflected at fair value in our Consolidated Balance Sheets in other investments. The fair value of
derivatives is based on quoted market prices, dealer quotes or internal price estimates believed to be comparable to
dealer quotes.
When we enter into a derivative contract, if certain criteria are met, we may designate the derivative 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 and realized capital gains and losses on investments supporting Health Care’ s and Group
Insurance’ s liabilities and Large Case Pensions’ products (other than experience-rated and discontinued products)
are reflected in our results of operations. Realized capital gains and losses are determined on a specific
identification basis. Unrealized capital gains and losses are reflected in shareholders’ equity, net of related income
taxes, as a component of accumulated other comprehensive income. We reflect purchases and sales of debt and
equity securities on the trade date. We reflect purchases and sales of mortgage loans and investment real estate on
the closing date.
Realized and unrealized capital gains and losses on investments supporting experience-rated products in the Large
Case Pensions business are reflected in policyholders’ funds in the Consolidated Balance Sheets and are determined
on a specific identification basis. Experience-rated products are products in the Large Case Pensions business
where the contract holder, not us, assumes investment (including realized capital gains and losses) and other risks,
subject to, among other things, minimum guarantees provided by us. The effect of investment performance is
allocated to contract holders’ accounts daily, based on the underlying investment’ s experience and, therefore, does
not impact our results of operations (as long as minimum guarantees are not triggered). Net investment income
supporting Large Case Pensions’ experience-rated products is included in net investment income in the
Consolidated Statements of Income, which is credited to contract holders in current and future benefits.
When we discontinued the sale of our fully guaranteed Large Case Pensions products, we established a reserve for
anticipated future losses from these products and segregated the related investments. These investments are
managed as a separate portfolio. Investment income and net realized capital gains and losses on this separate
portfolio are ultimately credited/charged to the reserve and, therefore, do not impact our results of operations.
Unrealized capital gains or losses on this separate portfolio are reflected in other current liabilities in the
Consolidated Balance Sheets. Refer to Note 20 beginning on page 84 for additional information on our
discontinued products.