Aetna 2009 Annual Report Download - page 56

Annual Report – Page 50
twelve months, in which case it is classified as current. We have classified our debt and equity securities as
available for sale and carry them at fair value. Refer to Note 10 beginning on page 63 for additional information on
how we estimate the fair value of our debt and equity securities. The cost for mortgage-backed and other asset-
backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest
method over the estimated remaining term of the securities, adjusted for anticipated prepayments. We regularly
review our debt and equity securities to determine whether a decline in fair value below the carrying value is other-
than-temporary. When a debt or equity security is in an unrealized capital loss position, we monitor the duration and
severity of the loss to determine if sufficient market recovery can occur within a reasonable period of time.
Beginning April 1, 2009, we recognize an impairment on debt securities when we intend to sell a security that is in
an unrealized loss position or if we determine a credit-related loss has occurred. Prior to April 1, 2009, we would
recognize an impairment if we did not have the intention and ability to hold the security until it recovered its value
(refer to New Accounting Standards beginning on page 48 for additional information). We do not accrue interest on
debt securities when management believes the collection of interest is unlikely.
We lend certain debt and equity securities from our investment portfolio to other institutions for short periods of time.
Borrowers must post cash collateral in the amount of 102% to 105% of the fair value of the loaned security. The fair
value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair
value of the loaned securities fluctuates. The collateral is retained and invested by a lending agent according to our
guidelines to generate additional income for us.
Mortgage Loans
We carry the value of our mortgage loan investments on our 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. 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 current assets on our balance sheets.
Other Investments
Other investments consist primarily of alternative investments (which are comprised of private equity and hedge fund
limited partnerships), investment real estate and derivatives. We typically do not have a controlling ownership in our
alternative investments and therefore we apply the equity method of accounting for these investments. We invest in
real estate for the production of income. We carry the value of our investment real estate on our balance sheet 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.
We make limited use of derivatives in order to manage interest rate, foreign exchange, price risk and credit exposure.
The derivatives we use consist primarily of futures contracts, forward contracts, interest rate swaps, credit default
swaps and warrants. 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 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.