<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JUNE 7, 1996
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-14328 06-1445591
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 277-0111
<PAGE> 2
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
CURRENT REPORT ON FORM 8-K
ITEM 5. OTHER EVENTS
Travelers/Aetna Property Casualty Corp. (the "Registrant") is filing this
Current Report on Form 8-K to provide certain additional financial information
related to the businesses of The Aetna Casualty and Surety Company ("ACSC")
and The Standard Fire Insurance Company ("SFIC") and their subsidiaries, which
businesses were acquired by the Registrant on April 2, 1996.
Annexed hereto as Exhibit 99.01 and incorporated by reference herein are the
historical combined financial statements of ACSC and SFIC and their subsidiaries
as of and for the three months ended March 31, 1996. Annexed hereto as Exhibit
99.02 and incorporated by reference herein are the unaudited pro forma condensed
combined statement of income for the three months ended March 31, 1996 and the
unaudited pro forma condensed combined balance sheet as of March 31, 1996 of the
Registrant.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
Exhibit No. Description
----------- -----------
99.01 Historical combined financial statements of
The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company and their
subsidiaries as of and for the three months
ended March 31, 1996.
99.02 Unaudited pro forma condensed combined
statement of income for the three months ended
March 31, 1996 and the unaudited pro forma
condensed combined balance sheet as of March
31, 1996 of the Registrant, together with the
notes thereto.
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 7, 1996
Travelers/Aetna Property Casualty Corp.
By: /s/ William P. Hannon
----------------------------------
William P. Hannon
Chief Financial Officer
3
<PAGE> 1
EXHIBIT 99.01
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
<PAGE> 2
PAGE 1
Page
Financial Report
Combined Financial Statements (Unaudited) 2
Notes to Combined Financial Statements (Unaudited) 6
<PAGE> 3
PAGE 2
COMBINED STATEMENT OF INCOME (Unaudited)
For the three months ended March 31, 1996
(Millions)
- ----------------------------------------------------------
Revenue:
Premiums $1,038.2
Net investment income 242.9
Fees and other income 18.3
Net realized capital gains 306.5
--------
Total revenue 1,605.9
- ----------------------------------------------------------
Claims and Expenses:
Claims and claim adjustment expenses 963.6
Operating expenses 164.4
Amortization of deferred policy
acquisition costs 160.7
--------
Total claims and expenses 1,288.7
- ----------------------------------------------------------
Income before income taxes 317.2
Income taxes 99.6
--------
Net income $ 217.6
==========================================================
See Notes to Combined Financial Statements.
<PAGE> 4
PAGE 3
COMBINED BALANCE SHEET
As of March 31, 1996
<TABLE>
<CAPTION>
(Millions, except share data)
- -------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Assets:
Investments:
Debt securities:
Available for sale, at fair value
(amortized cost $12,752.3) $12,732.4
Equity securities, at fair value
(cost $29.1) 34.3
Short-term investments .2
Mortgage loans 1,012.8
Real estate 255.9
Other 121.5
---------
Total investments 14,157.1
- -------------------------------------------------------------------------------------
Cash and cash equivalents 514.3
Reinsurance recoverables and receivables 5,226.1
Accrued investment income 206.6
Premiums due and other receivables 975.6
Federal and foreign income taxes:
Current 2.5
Deferred 755.5
Deferred policy acquisition costs 296.1
Other assets 1,026.3
---------
Total assets $23,160.1
- -------------------------------------------------------------------------------------
Liabilities:
Unpaid claims and claim adjustment expenses $16,690.8
Unearned premiums 1,385.9
Policyholders' funds left with the companies 40.6
---------
Total insurance liabilities 18,117.3
Long-term debt 35.2
Other liabilities 1,334.1
---------
Total liabilities 19,486.6
- -------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Notes 12, 13 and 14)
Shareholder's Equity:
Common capital stock (1,000 shares authorized, issued
and outstanding with a par value of $25,000 and
20,000 shares authorized, issued and outstanding with
a par value of $250) 30.0
Paid in capital 1,477.5
Net unrealized capital losses (112.3)
Retained earnings 2,278.3
---------
Total shareholder's equity 3,673.5
- -------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $23,160.1
=====================================================================================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE> 5
PAGE 4
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1996
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------------------
<S> <C>
Shareholder's equity, beginning of period $ 3,881.4
Dividends to shareholder (.4)
Net change in unrealized capital
gains and losses (425.1)
Net income 217.6
----------
Shareholder's equity, end of period $ 3,673.5
- ----------------------------------------------------------------
</TABLE>
See Notes to Combined Financial Statements.
<PAGE> 6
PAGE 5
COMBINED STATEMENT OF CASH FLOWS (Unaudited)
For the three months ended March 31, 1996
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
Cash Flows from Operating Activities:
Net income $ 217.6
Adjustments to reconcile net income to
net cash used for operating activities:
Increase in accrued investment income (22.1)
Increase in premiums due and other receivables (5.1)
Decrease in reinsurance recoverables and receivables 50.5
Decrease in deferred policy acquisition costs 9.7
Depreciation and amortization 100.4
Decrease in federal and foreign income taxes (111.7)
Net increase in other assets and other liabilities (3.1)
Increase in insurance liabilities 119.7
Net realized capital gains (306.5)
Amortization of net investment discounts 2.2
Other, net (0.9)
---------
Net cash used for operating activities 50.7
---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 686.4
Equity securities 527.0
Equity subsidiary 139.5
Short-term investments 4,228.9
Investment maturities and repayments of:
Debt securities available for sale 270.6
Mortgage loans 37.0
Cost of investment purchases in:
Debt securities available for sale (2,583.6)
Equity securities (13.3)
Mortgage loans (.2)
Real estate (13.0)
Short-term investments (4,089.5)
Increase in property and equipment (126.9)
Other, net 264.6
---------
Net cash used for investing activities (672.5)
---------
Cash Flows from Financing Activities:
Dividends paid to shareholder (.4)
---------
Net cash used for financing activities (.4)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (622.2)
Cash and cash equivalents, beginning of period 1,136.5
---------
Cash and cash equivalents, end of period $ 514.3
================================================================================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE> 7
PAGE 6
NOTES TO COMBINED FINANCIAL STATEMENTS, (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF ENTITY AND PRINCIPLES OF COMBINATION
The combined financial statements include The Aetna Casualty and Surety Company
and The Standard Fire Insurance Company and their subsidiaries (collectively,
the "Companies") which were wholly-owned subsidiaries of Aetna Life and Casualty
Company ("Aetna") and were sold to an affiliate of the Travelers Insurance Group
Inc. ("Travelers") on April 2, 1996. The Companies' commercial insurance
operations provide most types of commercial property-casualty insurance
(primarily workers' compensation, auto, liability and other specialty products),
bonds, and insurance-related services for businesses, government units and
associations. The personal insurance operations underwrite private-passenger
auto and homeowner insurance, which is sold to individuals through independent
agents, with a significant market in the Northeastern states.
Due to the related business activities, common management control, common
ownership and the interdependence of the affiliated entities, combined financial
statements have been prepared in accordance with generally accepted accounting
principles. Intercompany transactions between the Companies have been
eliminated.
ACCOUNTING CHANGES
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of
As of January 1, 1996, the Companies adopted Financial Accounting Standard
("FAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement requires long-lived assets
to be held and used to be written down to fair value when they are considered
impaired. Long-lived assets to be disposed of (e.g., real estate held for sale)
are carried at the lower of cost or fair value less estimated selling costs. In
addition, this statement does not allow long-lived assets to be disposed of to
be depreciated. The adoption of FAS No. 121 did not have a material effect on
results of operations.
Accounting for Stock-Based Compensation
FAS No. 123, Accounting for Stock-Based Compensation, is effective for 1996
reporting. This statement addresses the accounting for the cost of stock-based
compensation, such as stock options. FAS No. 123 permits either expensing the
cost of stock-based compensation over the vesting period or disclosing in the
financial statement footnotes what this expense would have been. This cost would
be measured at the grant date based upon estimated fair values, using option
pricing models. The Companies have selected the disclosure alternative. Data on
a separate company basis regarding such disclosures is not available.
<PAGE> 8
PAGE 7
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
Debt securities which may be sold prior to maturity are classified as available
for sale and carried at fair value. Available for sale debt securities are
written down (as realized losses) for other than temporary declines in value.
Unrealized gains and losses related to available for sale investments, net of
related taxes, are reflected in shareholder's equity.
Equity securities are classified as available for sale and carried at fair
value. Equity securities are written down (as realized losses) for other than
temporary declines in value. Unrealized gains and losses related to such
securities, net of related taxes, are reflected in shareholder's equity.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-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.
Purchases and sales of debt and equity securities are recorded on the trade
date.
Mortgage loans are carried at unpaid principal balances, net of impairment
reserves, and are generally secured. A mortgage loan is considered impaired when
it is probable that the Companies will be unable to collect amounts due
according to the contractual terms of the loan agreement. For impaired loans, a
specific impairment reserve is established for the difference between the
recorded investment in the mortgage loan and the fair value of the collateral. A
general reserve is established for losses management believes are likely to
arise from the overall portfolio but cannot be attributed to specific loans.
<PAGE> 9
PAGE 8
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Investment real estate, which the Companies have the intent to hold for the
production of income, is carried at depreciated cost, including capital
additions, net of write-downs for other than temporary declines in fair value.
Properties held for sale (primarily acquired through foreclosure) are carried at
the lower of cost or fair value less estimated selling costs. Adjustments to the
carrying value of properties held for sale are recorded in a valuation reserve.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Other invested assets consist primarily of partnerships, equity subsidiaries and
agency loans. Partnerships and equity subsidiaries are carried on an equity
basis and agency loans are carried at the unpaid principal balance.
The Companies utilize foreign exchange forward contracts and swap agreements for
other than trading purposes in order to manage investment returns and align
maturities, interest rates, currency rates and funds availability with its
obligations. (Please refer to Note 12.)
Foreign exchange forward contracts which are designated at inception and
effective as hedges of foreign translation exposures and foreign transaction
exposures related to investments classified as available for sale are accounted
for using the deferral method. Under the deferral method, realized and
unrealized gains and losses from these forward contracts are deferred on the
balance sheet, net of tax, in net unrealized capital gains or losses. Upon
disposal of the hedged item, deferred gains and losses are recognized in net
realized capital gains or losses in the Combined Statement of Income. Excess
realized or unrealized gain or loss, if any, from the foreign exchange forward
contract compared to the foreign investment being hedged, is reported as a net
realized gain or loss in the Combined Statement of Income.
Swap agreements which are designated as interest rate or foreign exchange rate
risk management instruments at inception are accounted for using the accrual
method. Under the accrual method, the difference between amounts paid and
received on such agreements is reported in net investment income in the Combined
Statement of Income; there is no recognition in the Combined Balance Sheet for
changes in the fair value of the agreement.
<PAGE> 10
PAGE 9
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts and certain agency expenses. Acquisition costs are
amortized over the life of the insurance contract.
Deferred policy acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income would not be
adequate to cover related losses and expenses.
OTHER ASSETS
Property and equipment are reported at depreciated cost using the straight-line
method based upon the estimated useful lives of the assets. The carrying value
of property and equipment at March 31, 1996 was $38.7 million, and was net of
accumulated depreciation of $190.7 million.
INSURANCE LIABILITIES
Liabilities for unpaid claims and claim adjustment expenses include, to the
extent reasonably estimable, provisions for payments to be made on reported
claims, and claims incurred but not reported and for associated claim adjustment
expenses. (Please refer to Note 11.) Workers' compensation life table indemnity
reserves are discounted at 5% for voluntary business and 3.5% for involuntary
business. Workers' compensation life table indemnity reserves, net of the
related discount, totaled $438 million at March 31, 1996 which was 13.2% of the
Companies' total workers' compensation reserves for unpaid claims and claim
adjustment expenses at March 31, 1996. Certain other reserves with fixed or
determinable payment patterns over periods of up to seven years, including
reserves related to certain environmental and asbestos-related claim
settlements, have also been discounted. The rates used in discounting such
reserves range from 4.4% to 7.2%, and the amount of such discounted reserves,
net of reinsurance was approximately $179.4 million at March 31, 1996.
The Companies' insurance reserve liabilities are reported net of estimated
amounts of salvage and subrogation.
Unearned premiums are calculated on a pro rata basis. Additional premiums under
retrospectively-rated policies are excluded from unearned premiums and
classified as premiums due.
<PAGE> 11
PAGE 10
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMIUMS, CLAIMS AND EXPENSES
Premiums are generally recognized as revenue on a pro rata basis over the policy
term. Certain policies allow the Companies to charge additional premiums as a
result of recognizing additional claim and expense costs under the policies.
Such premiums are recognized when the related losses are provided.
Claims and expenses, including acquisition costs such as commissions, certain
premium taxes and certain other items, are charged to current operations as
incurred. Claims are reported net of salvage and subrogation received and
anticipated. Premiums, claims and expenses are also reported net of deductions
for reinsurance ceded.
STRUCTURED SETTLEMENTS
In cases where the Companies have obtained a structured settlement with a
qualified assignment, i.e., the structured settlement annuity is owned by a
party other than the Companies, the cost of the annuity is recognized as a paid
loss and gains, if any, are recognized in income. For cases where no qualified
assignment is obtained, the related loss amount and the annuity cost plus
accrued interest are included in loss reserves and reinsurance recoverables,
respectively.
FEDERAL AND FOREIGN INCOME TAXES
The Companies are included in the consolidated federal income tax return of
Aetna. The Companies are taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. Foreign
subsidiaries and U.S. subsidiaries operating outside of the United States are
taxed under applicable foreign statutes. Deferred income tax expenses or
benefits result from changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities.
2. INVESTMENTS
Debt securities at March 31, 1996 was as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- ---------------------------------------------------------------------------
Available for Sale:
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 2,947.8 $ 32.7 $ 51.8 $ 2,928.7
Obligations of states and
political subdivisions 599.7 6.0 8.8 596.9
Utilities 926.5 18.8 9.6 935.7
Financial 1,572.8 16.8 8.8 1,580.8
Transportation/Capital Goods 753.7 14.5 16.5 751.7
Other corporate securities 330.2 4.1 2.6 331.7
Mortgage-backed securities 2,460.9 16.3 43.8 2,433.4
Other loan-backed securities 728.9 6.7 2.3 733.3
Foreign governments 1,396.6 25.9 14.9 1,407.6
Other 1,035.2 13.8 16.4 1,032.6
------------------------------------------
Total Available for Sale $12,752.3 $155.6 $175.5 $12,732.4
- -----------------------------------------------------------------------------
</TABLE>
<PAGE> 12
PAGE 11
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The carrying and fair value of debt securities are shown below by contractual
maturity. Actual maturities may differ from contractual maturities because
securities may be restructured, called or prepaid.
<TABLE>
<CAPTION>
March 31, 1996
-------------------------
Amortized Fair
(Millions) Cost Value
- ------------------------------------------------------------------------
Available for Sale:
- ------------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 876.0 $ 876.3
After one year through five years 4,004.6 3,995.0
After five years through ten years 2,612.4 2,620.5
After ten years 2,069.5 2,073.9
Mortgage-backed securities 2,460.9 2,433.4
Other loan-backed securities 728.9 733.3
- ------------------------------------------------------------------------
Total Available for Sale $12,752.3 $12,732.4
- ------------------------------------------------------------------------
</TABLE>
Investments in equity securities at March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 29.1 $ 5.3 $ .1 $ 34.3
- -----------------------------------------------------------------------------------
</TABLE>
Real estate holdings at March 31, 1996 were as follows:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------
<S> <C>
Properties held for sale $187.4
Investment real estate 89.4
------
276.8
Valuation reserve(1) 20.9
------
Net carrying value $255.9
- ----------------------------------------------------
</TABLE>
(1) As a result of the adoption of FAS No. 121 on January 1, 1996, valuation
reserves were increased by $10.7 million in conjunction with the reversal of
previously recorded accumulated depreciation related to properties held for
sale.
Total real estate write-downs included in the net carrying value of the
Companies' real estate holdings on the Combined Balance Sheet at March 31, 1996
were $97.5 million.
At March 31, 1996, the total recorded investment in mortgage loans that are
considered to be impaired (which include problem loans, restructured loans and
potential problem loans) and related specific reserves are $124.7 million and
$15.5 million, respectively. Included in the total recorded investment are
impaired loans of $55.8 million for which no specific reserves are considered
necessary.
<PAGE> 13
PAGE 12
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The activity in the mortgage loan impairment reserves for the three months ended
March 31, 1996 is summarized below:
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------
<S> <C>
Balance at December 31, 1995 $65.7
Principal write-offs (5.6)
-----
Balance at March 31, 1996 (1) $60.1
- ---------------------------------------------------
</TABLE>
(1) Total reserves at March 31, 1996 included $15.5 million of specific reserves
and $44.6 million of general reserves.
The Companies accrue interest income on impaired loans to the extent it is
deemed collectible and the loan continues to perform under its original or
restructured contractual terms. Interest income on problem loans is generally
recognized on a cash basis. Cash payments on loans in the process of foreclosure
are generally treated as a return of principal.
Income earned (pretax) and received were $2.9 million and $2.2 million,
respectively, on the average recorded investment in impaired loans of $149.1
million for the three months ended March 31, 1996.
The carrying values of investments that were nonincome producing for the three
months preceding the balance sheet date were as follows:
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------
<S> <C>
Debt securities $ .6
Mortgage loans 14.6
Real estate 18.1
-----
Total nonincome producing investments $33.3
- ---------------------------------------------------
</TABLE>
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold. Provisions for impairments and
changes in the fair value of real estate subsequent to foreclosure are also
included in net realized capital gains or losses. Unrealized capital gains and
losses on available for sale investments, net of related taxes, are reflected in
shareholder's equity.
Net realized capital gains (losses) on investments for the three months ended
March 31, 1996 were as follows:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------
<S> <C>
Debt securities $ 50.0
Equity securities 268.2
Mortgage loans .8
Real estate .2
Other (12.7)
------
Pretax net realized capital gains $306.5
- ----------------------------------------------------
After-tax net realized capital gains $199.8
- ----------------------------------------------------
</TABLE>
Proceeds from the sale of investments in debt securities available for sale for
the three months ended March 31, 1996 were $.7 billion. Gross gains of $57.5
million and gross losses of $7.5 million were realized on those sales.
<PAGE> 14
PAGE 13
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
During the three months ended March 31, 1996, the Companies sold their
investment in Federated Investors, Executive Risk, Inc. and MBIA, Inc. These
sales resulted in a combined realized capital gain of $276.8 million (pretax)
which was reflected in the Combined Statement of Income.
Changes in shareholder's equity included changes in unrealized capital gains
(losses), for the three months ended March 31, 1996 as follows:
<TABLE>
<CAPTION>
(Millions)
- ------------------------------------------------------
<S> <C>
Equity securities $(205.2)
Debt securities available for sale (435.9)
Foreign exchange and other, net (4.5)
--------
(645.6)
Decrease in deferred federal
income taxes 220.5
-------
Net changes in unrealized capital gains
(losses) $(425.1)
- -----------------------------------------------------
</TABLE>
Shareholder's equity included the following unrealized capital gains (losses),
for the three months ended March 31, 1996 as follows:
<TABLE>
<CAPTION>
(Millions)
- -----------------------------------------------------
<S> <C>
Equity securities:
Gross unrealized capital gains $ 5.3
Gross unrealized capital losses (.1)
--------
5.2
Debt securities available for sale:
Gross unrealized capital gains 155.6
Gross unrealized capital losses (175.5)
--------
(19.9)
Foreign exchange and other, net (101.2)
Deferred federal income tax benefits (3.6)
-------
Net unrealized capital losses $(112.3)
- -----------------------------------------------------
</TABLE>
4. NET INVESTMENT INCOME
Sources of net investment income for the three months ended March 31, 1996 were
as follows:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------
<S> <C>
Debt securities $195.4
Equity securities 2.2
Short-term investments 2.9
Mortgage loans 31.4
Real estate 25.8
Other 1.2
Cash equivalents 12.1
------
Gross investment income 271.0
Less investment expenses 28.1
------
Net investment income $242.9
- ----------------------------------------------------
</TABLE>
<PAGE> 15
PAGE 14
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The amount of dividends that may be paid to Aetna by AC&S and The Standard Fire
Insurance Company in 1996, without prior approval by the Insurance Commissioner
of the State of Connecticut (the "Department") is $216.6 million (the sale
agreement with Travelers prohibits the payment of dividends from the Companies
unless specifically approved by Travelers). Dividends of $.4 million were paid
by AC&S to Aetna in the three months ended March 31, 1996. No dividends have
been paid by The Standard Fire Insurance Company during the three months ended
March 31, 1996. Dividend payments by the domestic insurance subsidiaries of AC&S
and The Standard Fire Insurance Company are subject to similar restrictions in
Connecticut and other states, and are limited in 1996 to approximately $164.4
million in the aggregate. No dividends were paid to AC&S or The Standard Fire
Insurance Company by the domestic insurance subsidiaries during the three months
ended March 31, 1996.
The Department recognizes as net income and surplus those amounts determined in
conformity with statutory accounting practices prescribed or permitted by the
Department, which differ in certain respects from generally accepted accounting
principles.
Combined statutory net income was $284.5 million for the three months ended
March 31, 1996. Combined statutory surplus was $2,775.8 million as of March 31,
1996.
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. Under the risk-based capital ("RBC") standards for property-casualty
insurers adopted by the National Association of Insurance Commissioners, each of
the Companies applies the RBC formula which compares adjusted surplus to
required surplus and reflects the risk profile of the company (RBC ratio). The
RBC ratio at December 31, 1995 for each of the Companies is above the levels
which would require regulatory action.
As of March 31, 1996, the Companies do not utilize any statutory accounting
practices which are not prescribed by insurance regulators that, individually or
in the aggregate, materially affect statutory shareholder's equity.
<PAGE> 16
PAGE 15
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
(Millions) 1996
- ------------------------------------------------------------
<S> <C>
Long-term debt:
Mortgage Notes and Other Notes, 6.9%-11%
due in varying amounts to 2018 $35.2
-----
</TABLE>
Aggregate maturities of long-term debt and sinking fund requirements for the
remainder of 1996 through 2000 are $.3 million, $.2 million, $29.5 million, $.1
million, $.1 million, respectively, and $5.0 million thereafter.
7. FEDERAL AND FOREIGN INCOME TAXES
The Companies are included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it would
have incurred were it not a member of the consolidated group, and credits the
member for the use of its tax saving attributes in the consolidated return.
Components of income taxes as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
(Millions)
- -------------------------------------------------------
<S> <C>
Current taxes (benefits):
Loss - from operations $(107.7)
Income - foreign taxes .2
Realized capital gains 108.4
-------
.9
Deferred taxes (benefits):
Income - from operations 100.8
Loss - foreign taxes (.4)
Realized capital losses (1.7)
-------
98.7
-------
Total $ 99.6
- -----------------------------------------------------
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the three months ended March
31, 1996 for the following reasons:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------
<S> <C>
Income before income taxes $317.2
Tax rate 35%
------
Application of the tax rate 111.0
Tax effect of:
Tax-exempt interest (3.2)
Foreign operations (.4)
Excludable dividends (1.4)
Other, net (6.4)
------
Income taxes $ 99.6
- ----------------------------------------------------
</TABLE>
<PAGE> 17
PAGE 16
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at March 31, 1996 are presented below:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------
<S> <C>
Deferred tax assets:
Insurance reserves $825.1
Reserve for severance and facilities
expense 4.6
Impairment reserves .8
Net unrealized capital losses 3.6
Net operating loss carryforward 17.8
Other 26.4
------
Total gross assets 878.3
Deferred tax liabilities:
Deferred policy acquisition costs 103.6
Market discount 11.0
Other 8.2
------
Total gross liabilities 122.8
------
Net deferred tax asset $755.5
- ----------------------------------------------------
</TABLE>
Management believes that it is more likely than not that the Companies will
realize the benefit of the net deferred tax asset of $755.5 million. Aetna's
election of special estimated tax payments in years 1989 through 1994 assures
realizability of a substantial portion of deferred tax assets arising from the
discounting of property-casualty reserves. The Companies have more than 15 years
to generate sufficient taxable income to cover the reversal of its temporary
differences due to the long-term reversal patterns of these differences. Because
of Aetna's long-term history of taxable income, which is projected to continue,
and the availability of significant tax planning strategies, such as converting
tax-exempt bonds to taxable bonds, the Companies expect sufficient taxable
income in the future to realize the net deferred tax asset.
The net deferred tax asset includes $17.8 million related to the Companies'
expected utilization of its current U.S. net operating loss carryforward of
$50.8 million, $39.1 million of which expires in the year 2009 and $11.7 million
of which expires in the year 2010.
The Internal Revenue Service (the "Service") has completed examination of the
consolidated federal income tax returns of Aetna through 1990. Discussions are
being held with the Service with respect to proposed adjustments. The Service
has commenced its examination for the years 1991 through 1994. However,
management believes there are adequate defenses against, or sufficient reserves
recorded by Aetna to provide for, such challenges.
The Companies received net federal income tax refunds of $8.9 million during the
three months ended March 31, 1996.
<PAGE> 18
PAGE 17
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. BENEFIT PLANS
Pension Plans - The Companies, in conjunction with Aetna, have noncontributory
defined benefit plans covering substantially all employees and certain agents.
The plans provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a
120-month period). Contributions are determined by using the Projected Unit
Credit Method and, for qualified plans subject to ERISA requirements, are
limited to the amounts that are currently deductible for tax reporting purposes.
The accumulated benefit obligations and plan assets are recorded by Aetna. Data
on a separate company basis regarding the proportionate share of the accumulated
benefit obligation and plan assets is not available. The accumulated plan assets
exceed accumulated benefits. Pretax charges to operations for the pension plan
(based on the Companies' total salary cost as a percentage of Aetna's total
salary cost) were $5.8 million for the three months ended March 31, 1996. The
companies funded $18.8 million to the plan in the three months ended March 31,
1996.
Postretirement Benefits - In addition to providing pension benefits, Aetna also
provides certain health care and life insurance benefits for retired employees.
A comprehensive medical and dental plan is offered to all full-time employees
retiring at age 50 with 15 years of service or at age 65 with 10 years of
service. Retirees are generally required to contribute to the plans based on
their years of service with Aetna. The accumulated benefit obligations and plan
assets are recorded by Aetna. Data on a separate company basis regarding the
proportionate share of employee costs is not available. An allocation, based on
headcount, of Aetna's total cash costs for retirees is reflected in the Combined
Statement of Income and is not material.
Incentive Saving Plan - Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested in
common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $4.8 million for the three months ended March 31, 1996.
1994 Stock Incentive Plan - Certain employees participate in Aetna's 1994 stock
incentive plan (which replaced the 1984 stock option plan). The 1994 plan
provides for stock options (see (1) Stock Option Plans), and deferred contingent
common stock or cash awards (see (2) Incentive Units) to certain key employees.
The Companies' pretax charges to operations for the Stock Incentive Plan were
$2.5 million for the three months ended March 31, 1996.
<PAGE> 19
PAGE 18
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. BENEFIT PLANS (CONTINUED)
(1) Stock Option Plans - Executive and middle management employees may be
granted options to purchase common stock of Aetna at the market price on the
date of grant. Certain options granted prior to 1992 contain stock appreciation
rights permitting the employee to exercise those rights and receive the excess
of fair market value at the date of exercise over the grant date fair market
value in cash and/or stock.
(2) Incentive Units - Executive and middle management employees may be granted
incentive units under the Aetna 1994 Stock Incentive Plan, which are rights to
receive Aetna common stock or cash at the end of a vesting period (currently
1996 and 1998) conditioned upon the employee's continued employment during that
period and achievement of Aetna performance goals. The incentive unit holders
are not entitled to dividends during the vesting period.
9. RELATED PARTY TRANSACTIONS
A substantial portion of the administrative and support functions of the
Companies are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures which
management considers reasonable and appropriate for the type and nature of
service provided. The Companies have agreements and contracts with certain Aetna
affiliates to provide administrative and technical services. The types of
services provided by Aetna and its affiliates to the Companies related to such
functions include, but are not limited to, general ledger processing, including
subsidiary expense ledgers, use of the corporate conference center, office
services, purchasing, security, facilities management, payroll and other human
resources services, bank administration and other treasury services. The
Companies are also allocated charges for certain corporate staff area costs
which include, but are not limited to, salaries, certain employee benefit and
incentive plans, legal fees, travel and taxes (including payroll and personal
property).
Hartford-area home office properties occupied by the Companies are owned by
Aetna affiliates. The Companies are charged rent based on their proportionate
share (based on square footage occupied) of the total occupancy cost of Aetna's
Hartford-area properties. Certain other facilities owned by the Companies,
either directly or through partnerships, are leased by Aetna and its affiliates.
The Companies, by virtue of their participation in the consolidated operations
of Aetna, benefit from certain costs which are incurred in other Aetna legal
entities and not subsequently allocated back to the Companies. Such costs
include, but are not limited to, advertising, interest expense, charitable
contributions, certain postretirement benefits other than pensions, certain
postemployment benefits and certain other employee benefit plans.
<PAGE> 20
PAGE 19
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Companies utilize intercompany receivable/payable accounts to settle
allocated charges primarily related to general and administrative expenses of
Aetna and its affiliates. Such expenses are paid by the parent company, Aetna
Life and Casualty Company which acts as a clearinghouse in allocating such
expenses to each of the parent company's subsidiaries. Settlements generally
take place within 45 days after the end of each month.
In conjunction with the anticipated sale of the Companies to Travelers, certain
investments (equity securities, mortgage loans, real estate and other invested
assets) were transferred at fair value (book value of $80.3 million) from the
Companies to Aetna affiliates resulting in net realized capital gains of $66.8
million (pretax) which are reflected in the Combined Statement of Income.
10. REINSURANCE
The Companies utilize reinsurance agreements to reduce their exposure to large
losses in all aspects of their insurance business. Reinsurance permits recovery
of a portion of losses from reinsurers, although it does not discharge the
primary liability of the Companies as direct insurers of the risks reinsured.
The Companies evaluate the financial strength of potential reinsurers and
continually monitor the financial condition of present reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Combined Balance Sheet.
Prepaid reinsurance premiums were $.3 billion at March 31, 1996. A summary of
earned premiums for the three months ended March 31 was as follows:
<TABLE>
<CAPTION>
(Millions)
- -------------------------------------------------------
<S> <C>
Direct Amount $ 1,118.7
Ceded to Other Companies(1) 281.1
Assumed from Other Companies(2) 200.6
---------
Net Amount $ 1,038.2
- -------------------------------------------------------
Percentage of Amount Assumed to Net 19.3%
- -------------------------------------------------------
</TABLE>
(1) Includes $42.7 million of premiums ceded to Aetna affiliates.
(2) Includes $35.2 million of premiums assumed from Aetna affiliates.
There is not a material difference in premiums on a written versus an earned
basis.
Ceded claims and claim adjustment expenses were $.3 billion for the three months
ended March 31, 1996.
Certain subsidiaries of the Companies act as servicing carriers for several
involuntary pools. This business is ceded completely to the pools, and the
Companies have no direct underwriting risk associated with it. Reinsurance
recoverables for this business were approximately $1.6 billion as of March 31,
1996. The Companies also participate as members in a number of the involuntary
pools, and as a result assume their share of premiums and losses associated with
these pools.
<PAGE> 21
PAGE 20
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE (CONTINUED)
The Companies also utilize a variety of reinsurance agreements, primarily with
nonaffiliated insurers, to control their exposure to large property-casualty
losses. These agreements, most of which are renegotiated annually as to
coverage, limits and price, are structured either on a treaty basis (where all
risks meeting prescribed criteria are automatically covered) or on a facultative
basis (where the circumstances of specific individual insurance risks are
reflected). The amount of risk retained by the Companies depends on the
underwriter's evaluation of the specific risk, subject to maximum limits based
on risk characteristics and the type of coverage. The principal catastrophe
reinsurance agreement currently in force covers approximately 90% of specified
property losses between $150 million and $325 million.
11. RESERVES
The following represents changes in aggregate reserves for unpaid claims and
claim adjustment expenses for the three months ended March 31, 1996:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------------------------
<S> <C>
Net unpaid claims and claim adjustment expenses
at beginning of period $11,573
Incurred claims and claim adjustment expenses:
Provision for insured events of the current year 819
Increases in provision for insured events
of prior years(1) 145
- ----------------------------------------------------------------------
Total incurred claims and claim adjustment expenses 964
- ----------------------------------------------------------------------
Payments: Claim and claim adjustment expenses
attributable to insured events of the current year 181
Claim and claim adjustment expenses
attributable to insured events of prior years 688
- ----------------------------------------------------------------------
Total payments 869
- ----------------------------------------------------------------------
Net unpaid claims and claim adjustment expenses at
end of the period 11,668
Plus: Reinsurance recoverables 4,602
Deductible amounts recoverable from policyholders 421
- ----------------------------------------------------------------------
Gross unpaid claims and claim adjustment expenses
at end of the period $16,691
- ----------------------------------------------------------------------
</TABLE>
(1) Includes $122.8 million related to a reinsurance agreement with Am Re.
(Please refer to Note 13.)
<PAGE> 22
PAGE 21
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. RESERVES (CONTINUED)
Environmental and Asbestos-Related Claims
In the opinion of management, the Companies' reserves for environmental-related
claims at March 31, 1996 represent the Companies' best estimate of their
ultimate environmental-related liability, based on currently known facts,
current law (including Superfund), current technology, and assumptions
considered reasonable where facts are not known. Due to the significant
uncertainties and related management judgment involved in estimating the
Companies' environmental liability, no assurances can be given that the
environmental reserve represents the amount that will ultimately be paid by the
Companies for all environmental-related losses. The amount ultimately paid could
differ materially from the Companies' currently recorded reserve as legal and
factual issues are clarified, but any difference cannot be reasonably estimated
at this time.
In conjunction with the reserve addition for environmental-related claims in
1995, the Companies purchased reinsurance which provided aggregate protection of
$335 million for the adverse loss development beyond reserves held (net of
existing reinsurance). Under this arrangement, approximately $165 million of the
existing reserves for such losses were ceded at the time the contract was
entered into. As a result of the asbestos-related reserve addition in 1995 and
other reserve developments, substantially all of the available statutory surplus
protection afforded by this reinsurance was utilized during 1995. In accordance
with FAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, the benefits associated with recoveries under this
arrangement have been deferred and are being amortized over the period until the
losses are expected to be paid by the reinsurer. Reinsurance benefits recorded
under this arrangement were $1.7 million during the three months ended March 31,
1996 and benefits remaining to be amortized were $246.7 million at March 31,
1996.
<PAGE> 23
PAGE 22
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. RESERVES (CONTINUED)
Environmental and Asbestos-Related Claims (continued)
Reserving for asbestos-related claims is subject to significant uncertainties
and management is currently unable to make a reasonable estimate as to the
ultimate amount of losses or a reasonable range of losses for all
asbestos-related claims and related litigation expenses. Management has
continued to evaluate reserves for asbestos liabilities as the Companies
continue to gather and analyze new information and reassess its reserving
techniques for these claims in order to determine whether it can better estimate
its liability. Adjustments may be made to such reserves as loss patterns develop
and other information is obtained, and the amount ultimately paid for such
claims could differ materially from reserves, although any difference cannot be
reasonably estimated at this time.
Environmental and asbestos-related loss and loss adjustment expense reserves as
reflected on the Combined Balance Sheet at March 31, were as follows (before
reinsurance and net of discounts on certain environmental and asbestos
settlements):
<TABLE>
<CAPTION>
(Millions)
- -------------------------------------------------------------------
<S> <C>
Environmental Liability $ 981.9
Asbestos Bodily Injury 765.6
Asbestos Property Damage 30.8
--------
Total Environmental and Asbestos-Related Reserves $1,778.3
- -----------------------------------------------------------========
</TABLE>
Workers' Compensation Claims
Estimating workers' compensation reserves is particularly difficult (and,
therefore, more subject to change than many other types of property-casualty
claims), largely because of the length of the "tail" associated with workers'
compensation claims. Workers' compensation claim costs are dependent on a number
of complex factors including social and economic trends and changes in doctrines
of legal liability and damage awards. Adjustments will be made to such reserves
as loss patterns develop and new information becomes available and such
adjustments may be material.
Other
Policyholders of the Companies also seek insurance coverage from the Companies
for other long-term exposure claims against them, including claims relating to
silicone-based personal products, lead paint and other allegedly toxic or
harmful substances. Evaluating and reserving for these types of exposures is
complex and subject to many uncertainties including those stemming from coverage
issues, long latency periods and changing or expanding laws and legal theories
of liability. Adjustments will be made to such reserves as loss patterns develop
and new information becomes available and such adjustments may be material.
<PAGE> 24
PAGE 23
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Companies' financial
instruments at March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------- -----
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 514.3 $ 514.3
Short-term investments .2 .2
Debt securities 12,732.4 12,732.4
Equity securities 34.3 34.3
Mortgage loans 1,012.8 1,004.7
LIABILITIES:
Long-term debt $ 35.2 $ 35.2
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Companies' entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Companies' management
of interest rate and liquidity risk, and currency exposures, the fair values of
all assets and liabilities should be taken into consideration, not only those
presented above.
The following valuation methods and assumptions were used by the Companies in
estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not available,
the carrying amounts reported in the Combined Balance Sheet approximate fair
value. Short-term instruments have a maturity date of one year or less and
include cash and cash equivalents and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The 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.
Long-term debt: Fair value is based on quoted market prices for the same or
similar issued debt or, if no quoted market prices are available, on the current
rates estimated to be available to the Companies for debt of similar terms and
remaining maturities.
<PAGE> 25
PAGE 24
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS)
The notional amounts, carrying values and estimated fair values of the
Companies' off-balance-sheet financial instruments at March 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Carrying
Value
Notional Asset Fair
(Millions) Amount (Liability) Value
- ---------------------------------------------------------------------
1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange forward contracts
- sell:
Related to investments in
nondollar denominated assets $ 10.3 $ - $ -
Foreign exchange forward contracts
- buy:
Related to investments in
nondollar denominated assets 2.7 - -
Interest rate swaps:
Unrecognized gains 380.0 - 11.9
Unrecognized losses 380.0 - (11.8)
</TABLE>
The notional amounts of these instruments do not represent the Companies' risk
of loss. The fair value amounts of these instruments were estimated based on
quoted market prices, dealer quotations or internal price estimates believed to
be comparable to dealer quotations. These amounts reflect the estimated amounts
that the Companies would have to pay or would receive if the contracts were
terminated.
The Companies engage in hedging activities to manage foreign exchange and
interest rate risk. Such hedging activities have principally consisted of using
off-balance-sheet instruments including foreign exchange forward contracts and
interest rate swap agreements. All of these instruments involve, to varying
degrees, elements of market risk and credit risk in excess of the amounts
recognized in the Combined Balance Sheets. The Companies evaluate the risks
associated with off-balance-sheet financial instruments in a manner similar to
that used to evaluate the risks associated with on-balance-sheet financial
instruments. Market risk is the possibility that future changes in market prices
may make a financial instrument less valuable. For off-balance-sheet financial
instruments used for hedging, such market price changes are generally offset by
the market price changes in the hedged instruments held by the Companies. Credit
risk arises from the possibility that counterparties may fail to perform under
the terms of the contract, which could result in an unhedged position. However,
unlike on-balance-sheet financial instruments, where credit risk generally is
represented by the notional or principal amount, the off-balance-sheet financial
instruments' risk of credit loss generally is significantly less than the
notional value of the instrument and is represented by the positive fair value
of the instrument. The Companies generally do not require collateral or other
security to support the financial instruments discussed below. However, the
Companies control their exposure to credit risk through credit approvals, credit
limits and regular monitoring procedures. There were no material concentrations
of off-balance-sheet financial instruments at March 31, 1996.
<PAGE> 26
PAGE 25
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS) (CONTINUED)
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts of
two different currencies at a specified future date and at a specified price.
The Companies utilize foreign exchange forward contracts to hedge their foreign
currency exposure arising from certain investments in foreign affiliates and
nondollar denominated investment securities. The Companies generally utilize
foreign currency contracts with terms of up to three months.
At March 31, 1996 the Companies has unhedged foreign currency exposures of $29.8
million and $.2 million related to net investments in foreign affiliates and
investments in nondollar denominated assets, respectively.
Interest Rate Swaps
The Companies utilize interest rate swaps to manage certain exposures related to
changes in interest rates. This swap activity included transactions which were
entered into in prior years where the Companies act as an intermediary for
entities whose debt the Companies have guaranteed to allow them to convert
variable rate debt to a fixed rate, with the Companies retaining no interest
rate risk. (Please refer to Note 13.)
13. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Commitments to extend credit are legally binding agreements to lend monies at a
specified interest rate and within a specified time period. Risk arises from the
potential inability of counterparties to perform under the terms of the
contracts and from interest rate fluctuations. The Companies' exposure to credit
risk is reduced by the existence of conditions within the commitment agreements
which release the Companies from their obligations in the event of a material
adverse change in the counterparty's financial condition. At March 31, 1996, the
Companies had $19.3 million in commitments to fund partnerships.
Through the normal course of investment operations, the Companies commit to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either a higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At March 31, 1996, the Companies had commitments to
purchase investments of $15.0 million which was equal to the fair value.
<PAGE> 27
PAGE 26
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
FINANCIAL GUARANTEES
The Companies no longer write municipal bond insurance and such business
previously written by the Companies was reinsured with another company. It is
not practicable to estimate the fair value of the business that has been ceded.
AC&S was a writer of financial guarantees on obligations secured by real estate,
corporate debt obligations, and of municipal and non-municipal tax-exempt
entities through December 31, 1987, and ceased writing such guarantees as of
January 1, 1988. The aggregate net par value of financial guarantees outstanding
at March 31, 1996 was $636.7 million. Future runoff of financial guarantees as
of March 31, 1996 after adjusting for extensions granted on certain guarantees,
is estimated to be $24.8 million for the remainder of 1996, $134.8 million for
1997, $276.1 million for 1998, $3.1 million for 1999, $6.6 million for 2000 and
$191.3 million thereafter. It is not practicable to estimate a fair value for
AC&S' financial guarantees because AC&S no longer writes such guarantees, there
is no quoted market price for such contracts, and it is not practicable to
reliably estimate the timing and amount of all future cash flows due to the
unique nature of each of these contracts.
Total reserves for the financial guarantee business, which include reserves for
defaults, probable losses not yet identified and unearned premiums, were $36.7
million at March 31, 1996. Premium income received from such guarantees is
recognized pro rata over the contract coverage period.
REINSURANCE AGREEMENT
In connection with the 1992 sale of American Re-Insurance Company ("Am Re"), Am
Re and AC&S entered into a reinsurance agreement which provides that to the
extent Am Re incurred losses in 1991 and prior that were still outstanding at
January 1, 1992 in excess of $2.7 billion, AC&S has an 80% participation in
payments on those losses up to a maximum payment by AC&S of $500 million. In
early 1996, Am Re announced that it was increasing reserves as of year end 1995
for asbestos, environmental and other latent liabilities. As a result of this
increase, losses of approximately $178 million ($123 million after discount),
which were largely workers' compensation life table indemnity claims, were ceded
to AC&S. In conjunction with reflecting these losses in the three months ended
March 31, 1996, $109 million of premiums and other income which had previously
been deferred are reflected in the Combined Statement of Income. It is
reasonably possible that additional undiscounted losses of up to approximately
$320 million pretax could be ceded to the company in the future.
STRUCTURED SETTLEMENTS
The Companies have settled claims through the purchase of structured settlement
annuities under which they remain liable to the claimants. Such structured
settlements of $1,181.5 million are reflected in reinsurance recoverables on the
Combined Balance Sheet at March 31, 1996. Included in such liabilities is $345.4
million of structured settlements purchased from affiliates, consisting of
$169.0 million from Aetna Life Insurance Company, and $176.4 million from Aetna
Life Insurance and Annuity Company at March 31, 1996.
<PAGE> 28
PAGE 27
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION
The Companies are continuously involved in numerous lawsuits arising, for the
most part, in the ordinary course of their business operations either as
liability insurers defending third-party claims brought against their insureds
or as insurers defending coverage claims brought against them, including
lawsuits related to issues of policy coverage and judicial interpretation. One
such area of coverage litigation involves legal liability for environmental and
asbestos-related claims. These lawsuits and other factors make reserving for
these claims subject to significant uncertainties.
While the ultimate outcome of such litigation cannot be determined at this time,
such litigation, net of reserves established therefore and giving effect to
reinsurance probable of recovery, is not expected to result in judgments for
amounts material to the financial condition of the Companies, although it may
adversely affect results of operations in future periods.
14. CONCENTRATIONS OF INVESTMENT CREDIT RISK
The Companies' holdings in debt securities were $12.7 billion as of March 31,
1996. The debt securities in the Companies' portfolio are generally rated by
external rating agencies, and, if not externally rated, are rated by the
Companies on a basis believed to be similar to that used by the rating agencies.
At March 31, 1996, the average quality rating of the Companies' portfolio of
debt securities was AA and the composition by quality ratings and market sector
were as follows:
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
<S> <C> <C> <C>
AAA 52.6% Corporate 27.7%
AA 11.2% Treasuries/Agencies 23.0%
A 22.6% Mortgage-Backed Securities 19.1%
BBB 11.5% Financial 12.4%
BB & Below 2.1% Public Utilities 7.4%
Other Loan-Backed 5.7%
Municipals 4.7%
</TABLE>
At March 31, 1996, mortgage loan balances, net of specific impairment reserves,
by property type and geographic region were as follows:
<TABLE>
<CAPTION>
Mixed
Hotel/ Use/
(Millions) Office Retail Apartment Motel Industrial Other Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $170.9 $ 84.6 $ 62.8 $ 2.7 $ 3.1 $51.5 $ 375.6
New England 110.2 72.3 59.9 79.4 - - 321.8
Middle Atlantic 82.2 17.5 - - 19.1 .1 118.9
Pacific and
Mountain 46.8 35.2 18.4 - 8.4 - 108.8
South Central 62.6 15.6 .9 1.6 - - 80.7
North Central 6.6 20.6 .9 11.5 1.5 .9 42.0
Other - - - - - 9.6 9.6
- ------------------------------------------------------------------------------------
Total $479.3 $245.8 $142.9 $95.2 $32.1 $62.1 1,057.4
- ------------------------------------------------------------------------------------
Less general portfolio loss reserve 44.6
- ------------------------------------------------------------------------------------
Adjusted total, net of reserves $1,012.8
- ----------------------------------------------------------------------------========
</TABLE>
<PAGE> 29
PAGE 28
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONCENTRATIONS OF INVESTMENT CREDIT RISK (CONTINUED)
As of March 31, 1996, the Companies' investments in problem, potential problem
and restructured mortgage loans by property type and geographic distribution
were as follows:
<TABLE>
<CAPTION>
Problem,Potential Problem and Restructured Geographic Distribution of Problem,
Mortgage Loans by Property Type Potential Problem and Restructured
Mortgage Loans
- ------------------------------------------ -----------------------------------
<S> <C> <C> <C>
Office 65.4% Pacific and Mountain 59.1%
Retail 32.9% South Central 19.0%
Apartment 1.7% South Atlantic 14.7%
North Central 7.0%
New England .2%
</TABLE>
"Problem loans" are defined to be loans with payments over 60 days past due,
loans on properties in the process of foreclosure, loans on properties involved
in bankruptcy proceedings and loans on properties subject to redemption.
"Restructured loans" are loans whose original contract terms have been modified
to grant concessions to the borrower and are currently performing pursuant to
such modified terms.
Potential problem loans are identified through the portfolio review process on
the basis of known information about the ability of borrowers to comply with
present loan terms. Identifying such potential problem loans requires
significant judgment as to likely future market conditions and developments
specific to individual properties and borrowers. Provision for losses that
management believes are likely to arise from such potential problem loans is
included in the specific impairment reserves. (Please see Note 2 for a
discussion of mortgage loan impairment reserves.)
The Companies' equity real estate balances were $255.9 million at March 31,
1996. The Companies' equity real estate balances at March 31, 1996 by property
type and geographic distribution were as follows:
<TABLE>
<CAPTION>
Equity Real Estate by Property Type Geographic Distribution of Equity Real
Estate
- ----------------------------------- --------------------------------------
<S> <C> <C> <C>
Office 51.7% Pacific and Mountain 42.4%
Hotel/Motel 15.0% North Central 17.2%
Retail 14.4% South Atlantic 17.2%
Industrial 9.9% New England 12.7%
Other 9.0% South Central 7.3%
Middle Atlantic 3.2%
</TABLE>
<PAGE> 30
PAGE 29
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
Segment information at March 31, 1996 and for the three months then ended was as
follows:
<TABLE>
<CAPTION>
Commercial Personal
(Millions) Lines Lines Combined
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums $ 707.9 $ 330.3 $ 1,038.2
Net investments income 204.0 38.9 242.9
Fee & other income 16.6 1.7 18.3
Realized investment gains 246.8 59.7 306.5
--------- -------- ---------
Total 1,175.3 430.6 1,605.9
--------- -------- ---------
Income before federal income taxes(1) 215.5 101.7 317.2
--------- -------- ---------
Net income(1) 150.7 66.9 217.6
--------- -------- ---------
Total assets $19,509.4 $3,650.7 $23,160.1
--------- -------- ---------
- -----------------------------------------------------------------------------
</TABLE>
(1) Includes the transfer of $50 million ($33 million, after-tax) in reserves
from Personal lines to Commercial lines.
<PAGE> 1
Exhibit 99.02
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of income of
Travelers/Aetna Property Casualty Corp. (the "Company") for the three months
ended March 31, 1996, presents results for the Company as if the Company's
acquisition of the domestic property and casualty insurance operations of Aetna
Life and Casualty Company (the "Aetna P&C" operations) and transactions related
to the funding of the acquisition, had occurred as of January 1, 1996. The
accompanying unaudited pro forma condensed combined balance sheet of the Company
as of March 31, 1996 gives effect to the acquisition and related transactions as
if they had occurred as of March 31, 1996. The unaudited pro forma financial
information does not purport to represent what the Company's financial position
or results of operations actually would have been had the acquisition and
related transactions in fact occurred on the dates indicated, or to project the
Company's financial position or results of operations for any future date or
period. The pro forma adjustments are based on available information and certain
assumptions that the Company currently believes are reasonable in the
circumstances. The unaudited pro forma financial information should be read in
conjunction with the accompanying notes thereto; the separate historical
condensed consolidated financial statements of the Company as of and for the
three months ended March 31, 1996, which are contained in the Company's
quarterly report on Form 10-Q as of and for the three months ended March 31,
1996; and the separate historical combined financial statements of Aetna P&C
and its subsidiaries as of and for the three months ended March 31, 1996, which
are contained herein.
The pro forma adjustments and pro forma combined amounts are provided for
informational purposes only. The Company's financial statements will reflect the
effects of the acquisition and related transactions only from the date such
events occur. The pro forma adjustments are applied to the historical financial
statements to, among other things, account for the acquisition as a purchase.
Under purchase accounting, the total purchase cost will be allocated to the
Aetna P&C assets and liabilities based on their fair values. Allocations are
subject to valuations as of the date of the acquisition based on appraisals and
other studies, which are not yet completed. Accordingly, the final allocations
will be different from the amounts reflected herein. Although the final
allocations will differ, the unaudited pro forma financial information reflects
management's best estimate based on currently available information.
As the Aetna P&C operations are integrated with the existing property and
casualty insurance operations of the Company, management expects to realize,
over a two-year period, $300 million ($195 million after tax) in annual cost
savings from reduction of overhead expenses, changes in the corporate
infrastructure of Aetna P&C and elimination of redundant expenses. There can be
no assurance that the Company will achieve its expected cost savings. These
expected future cost savings are not reflected in the unaudited pro forma
financial information.
1
<PAGE> 2
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Aetna
TAP P&C Pro Forma Pro Forma
Assets Historical Historical Adjustments Combined
------ ---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale at market $10,484 $12,732 $ 710 (A) $23,908
(18) (B)
Equity securities, at market 694 34 728
Mortgage loans 189 1,013 (167) (B) 1,035
Real estate held for sale 24 256 (72) (B) 208
Short-term securities 812 812
Other investments 391 122 513
- -------------------------------------------------------------------------------------------------------------------
Total investments 12,594 14,157 453 27,204
- -------------------------------------------------------------------------------------------------------------------
Cash 57 514 571
Investment income accrued 160 207 367
Premium balances receivable 2,245 976 3,221
Reinsurance recoverables 5,428 5,226 10,654
Deferred acquisition costs 207 296 (96) (B) 407
Cost of acquired businesses in excess of net assets 416 1,035 (B) 1,451
Deferred federal income taxes 719 756 294 (B) 1,769
Contractholder receivables 1,745 1,745
Other assets 1,099 1,028 5 (A) 2,084
(18) (A)
(30) (B)
- -------------------------------------------------------------------------------------------------------------------
Total assets $24,670 $23,160 $ 1,643 $49,473
- -------------------------------------------------------------------------------------------------------------------
Liabilities
- ------------
Claims and claim adjustment expense reserves $15,516 $16,732 $32,248
Unearned premium reserves 1,709 1,386 3,095
Short-term borrowings $ 700 (A) 700
Long-term debt 35 700 (A) 735
Contractholder payables 1,745 1,745
Other liabilities 2,176 1,334 458 (B) 3,968
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 21,146 19,487 1,858 42,491
- -------------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
junior subordinated debt securities 900 (A) 900
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity
- ---------------------
Common stock 10 30 (6) (A) 4
(30) (C)
Additional paid-in capital 2,890 1,477 1,145 (A) 5,454
1,499 (A)
(49) (A)
(31) (A)
(1,477) (C)
Retained earnings 520 2,278 (2,278) (C) 520
Unrealized investment gains (losses), net of taxes 104 (112) 112 (C) 104
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,524 3,673 (1,115) 6,082
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $24,670 $23,160 $ 1,643 $49,473
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Balance Sheet.
2
<PAGE> 3
Travelers/Aetna Property Casualty Corp.
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(in millions of dollars)
A. The following pro forma adjustments reflect the funding of the
acquisition, the formation of Travelers/Aetna Property Casualty Corp.
(TAP), and a contribution to TAP's capital:
<TABLE>
<CAPTION>
<S> <C>
Sources
-------
Capital contribution from TIGI $1,138
Issuance of long-term debt 700
Related issuance costs (5)
Short-term borrowings 700
Proceeds from issuance and sale of TAP's common stock representing
an 18% interest in TAP's common equity:
Private offering 525
Initial public offering 975
Related issuance costs charged to additional paid-in capital (49)
Issuance of TAP-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely Junior Subordinated
Debt Securities: 900
Related issuance costs charged to additional paid-in capital (31)
Settlement of receivables from Aetna 18
------
Total sources $4,871
======
Uses
----
Purchase price for Aetna P&C $4,161
Additional capital contribution to TAP (invested in fixed maturities) 710
------
Total uses $4,871
======
</TABLE>
B. The following pro forma adjustments result from the allocation of purchase
price of the acquisition based on fair value of the underlying net assets
acquired. The amounts and assumptions related to the primary adjustments
are as follows:
<TABLE>
<CAPTION>
Assets Debit(Credit)
------ ------------
<S> <C>
Discount allocated to investments in fixed maturities based on the
fair value of the investments $ (18)
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
Adjustment of carrying amount of investments in
mortgage loans based on fair value of underlying
collateral reflecting the Company's sales strategy $ (167)
Adjustment of carrying amount of real estate to fair
value reflecting the Company's sales strategy $ (72)
Adjustment to deferred acquisition costs to reflect the Company's
policy of deferring only commissions and premiums taxes on sale
of property and casualty insurance policies $ (96)
Excess of purchase price for the acquisition over fair
value of net assets acquired $1,035
Adjustment to reflect the net deferred tax benefit of
purchase accounting adjustments $ 294
Adjustments to other assets $ (30)
Liabilities
-----------
Adjustments to other liabilities:
Amounts allocated to restructuring costs
Severance and benefit payments for employees to
be terminated $ (120)
Rent expense for excess or unused office space (65)
Lease payments for unused office and data
processing equipment and software (40)
Cost of relocating employees and other related costs (25)
Adjustment to the liability for loss based assessments for
second injury funds (137)
Other (71)
------
Total adjustment to other liabilities $ (458)
======
</TABLE>
C. Adjustment to eliminate the Aetna P&C stockholder's equity
4
<PAGE> 5
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
TAP Aetna P&C Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES:
Premiums $ 826 $1,038 $1,864
Net investment income 196 243 $ 2 (a) 441
Fee income 99 18 117
Realized investment gains (losses) 26 307 333
Other revenues 5 5
- -------------------------------------------------------------------------------------------------------------
Total revenues 1,152 1,606 2 2,760
- -------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Claims and claim adjustment expenses 730 964 1,694
Amortization of deferred acquisition costs 120 161 281
General and administrative expenses 177 164 (10) (a) 372
41 (b)
- -------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,027 1,289 31 2,347
- -------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes 125 317 (29) 413
Federal income taxes (tax benefits) 27 99 (8) (c) 118
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ 98 $ 218 $(21) $ 295
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Net income per share of common stock $ .74
------
Weighted average number of common shares outstanding (millions) 400
------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Income.
5
<PAGE> 6
Travelers/Aetna Property Casualty Corp.
Notes to Unaudited Pro Forma Condensed Combined Statement of Income
(in millions of dollars)
(a) Principal adjustments resulting from the allocation of purchase price based
on fair value of underlying net assets, as follows:
<TABLE>
<CAPTION>
Increase (decrease)
in income before
federal income taxes
--------------------
<S> <C>
Net investment income:
Amortization of discount allocated to
investments on a level yield basis
over the life of the investments $ 2
---
General and administrative expenses:
Amortization of liability for loss based
assessments for second injury funds $ 8
Amortization of excess of purchase
price over the fair value of net assets
acquired, over 40 years (7)
Amortization of liabilities related to
employee benefit plans 7
Other 2
---
$10
---
</TABLE>
See Note B of Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
for additional information.
No pro forma adjustment has been made to net investment income to reflect
the net investment income resulting from the capital contribution of $710.
If these proceeds were assumed to be invested in fixed maturities at a rate
of 6.5%, net investment income would increase by $12 ($7 after tax).
(b) Pro forma adjustments to reflect interest expense relating to the
acquisition as follows:
<TABLE>
<CAPTION>
<S> <C>
Interest expense at 6-3/4% on $500 of long-term debt and 7-3/4%
on $200 of long-term debt including amortization of issuance costs $13
Interest expense at 5-3/4% on short-term borrowings 10
Dividends at 8% on TAP-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts holding solely
Junior Subordinated Debt Securities 18
---
$41
---
</TABLE>
6
<PAGE> 7
(c) Adjustment to reflect the income tax effects of (a) and (b) above.
The pro forma information is not necessarily indicative of future consolidated
results of operations.
As the Aetna P&C operations are integrated with the existing property and
casualty insurance operations of the Company, management of the Company expects
to realize, over a two-year period, $300 ($195 after tax) in annual cost savings
from reduction of overhead expenses, changes in the corporate infrastructure of
Aetna P&C and elimination of redundant expenses. There can be no assurance that
the Company will achieve its projected cost savings. These future cost savings
are not reflected in the Unaudited Pro Forma Financial Information.
The allocation of the purchase price to the assets and liabilities of Aetna P&C
is subject to valuations as of the date of the Acquisition based on appraisals
and other studies, which are not yet completed. Accordingly, the final
allocations will differ from the amounts reflected herein. Adjustments of
insurance policy and claims reserves and certain other insurance accounts
resulting from the valuation of these accounts will be recorded in operations in
the period or periods determined. The Company is continuing to review the
insurance reserves of Aetna P&C, including the effect of applying the Company's
strategies, policies and practices in determining such reserves, primarily
relating to reserves for cumulative injury claims, insurance products involving
financial guarantees based on the fair value of underlying collateral and
certain other insurance accounts. Based on the reviews at this stage, it is
possible that additional reserves of up to approximately $750 in the aggregate
may be recorded upon completion of these reviews, which would result in
after-tax charges to income of up to approximately $488 in the aggregate.
Stockholders' equity would be correspondingly reduced by an equivalent after-tax
amount as a result of these charges. The Company believes that its reviews are
likely to be completed in the second quarter of 1996, although there can be no
assurance as to the ultimate timing thereof.
7
