Aetna 2006 Annual Report Download - page 79

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Page 77
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Our fair value estimates are made at a specific point in time, based on available market information and
judgments about a given financial instrument, such as estimates of timing and amount of future cash flows. Such
estimates do not reflect any premium or discount that could result from offering for sale at one time our entire
holdings of a particular financial instrument, and do not consider the tax impact of the realization of unrealized
capital gains or losses. In many cases, our fair value estimates cannot be substantiated by comparison to
independent markets, and the disclosed value cannot be realized upon immediate settlement of the instrument.
We take the fair values of all financial instruments into consideration when we evaluate our management of
interest rate, price and liquidity risks.
We used the following valuation methods and assumptions in estimating the fair value of the financial
instruments included in the table above:
Debt and equity securities: Fair values are based on quoted market prices or dealer quotes. Non-traded debt
securities are priced independently by a third party vendor and non-traded equity securities are priced based on our
internal analysis of the investment’ s financial statements and cash flow projections.
Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates that
reflect the rates at which similar loans would be made to similar borrowers. These rates reflect management’ s
assessment of the credit quality and the remaining duration of the loans. Our fair value estimates of mortgage loans
of lower credit quality, including problem and restructured loans, are based on the estimated fair value of the
underlying collateral.
Derivatives: Fair values are estimated based on quoted market prices, dealer quotes or our internal price estimates
that we believe are comparable to dealer quotes.
Investment contract liabilities:
With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being
offered by, or available to, us for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the contract holder upon demand.
However, we have the right under such contracts to delay payment of withdrawals that may ultimately result
in paying an amount different than that determined to be payable on demand.
Long-term debt: Fair values are based on quoted market prices for the same or similar issued debt or, if no
quoted market prices were available, on the current rates estimated to be available to us for debt of similar terms
and remaining maturities.
Derivative Financial Instruments
We are using interest rate swap agreements to manage certain exposures related to changes in interest rates on
investments supporting experience-rated and discontinued products in the Large Case Pensions business. The use
of these derivatives does not impact our results of operations.
During 2005 and 2006, we entered into five forward starting swaps (with an aggregate notional value of $1.0
billion) in order to hedge the change in cash flows associated with interest payments generated by the forecasted
issuance of senior notes. These transactions qualified as cash flow hedges. In connection with our 2006 debt
issuance (refer to Note 13 on page 75), we terminated the five forward starting swaps. As a result, we received
approximately $15 million, which was recorded as other comprehensive income and is being amortized as a
reduction of interest expense over the life of the applicable senior notes issued in 2006.