<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
_______________
Commission file number 1-11913
_________
Aetna Inc.
___________________________________________________________________________
(Exact name of registrant as specified in its charter)
Connecticut 02-0488491
___________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
___________________________________________________________________________
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
______________________
Not Applicable
___________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _____
_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at June 30, 1997
________________ _________________
Common Capital Stock
$.01 par value 149,951,690
<PAGE> 2
TABLE OF CONTENTS
_________________
Page
____
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Condensed Notes to Financial Statements 8
Independent Auditors' Review Report 24
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 50
Item 4. Submission of Matters to a Vote
of Security Holders. 50
Item 5. Other Information. 51
Item 6. Exhibits and Reports on Form 8-K. 51
Signatures 52
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
___________________________ _________________________
(Millions, except share and per common share data) 1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenue:
Premiums...................................... $ 3,178.1 $ 1,727.6 $ 6,265.5 $ 3,606.0
Net investment income......................... 847.1 893.8 1,687.2 1,780.1
Fees and other income......................... 568.4 548.1 1,126.1 1,066.3
Net realized capital gains.................... 34.7 4.4 36.2 66.4
____________ ____________ ____________ ____________
Total revenue............................. 4,628.3 3,173.9 9,115.0 6,518.8
____________ ____________ ____________ ____________
Benefits and expenses:
Current and future benefits................... 3,208.6 2,076.2 6,365.7 4,347.6
Operating expenses............................ 869.1 769.4 1,703.2 1,525.2
Interest expense.............................. 60.8 28.7 116.8 60.3
Amortization of goodwill and other
acquired intangible assets................... 95.3 2.9 188.0 5.7
Amortization of deferred policy
acquisition costs............................ 55.4 38.1 100.8 75.1
Reductions of loss on discontinued products... - (170.0) (172.5) (170.0)
Severance and facilities charges
(reserve reductions)......................... (31.0) 392.7 (45.0) 392.7
____________ ____________ ____________ ____________
Total benefits and expenses................ 4,258.2 3,138.0 8,257.0 6,236.6
____________ ____________ ____________ ____________
Income from continuing operations
before income taxes............................ 370.1 35.9 858.0 282.2
Income taxes (benefits)
Current....................................... 115.7 62.0 239.6 124.8
Deferred...................................... 24.3 (50.4) 109.0 (32.4)
____________ ____________ ____________ ____________
Total income taxes........................ 140.0 11.6 348.6 92.4
____________ ____________ ____________ ____________
Income from continuing operations............... 230.1 24.3 509.4 189.8
Discontinued Operations, net of tax:
Income from operations......................... - - - 182.2
Gain on sale................................... - 263.7 - 263.7
____________ ____________ ____________ ____________
Net income ............................... $ 230.1 $ 288.0 $ 509.4 $ 635.7
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Net income applicable to
common ownership........................ $ 216.2 $ 288.0 $ 481.6 $ 635.7
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Results per common share:
Income from continuing operations............... $ 1.43 $ .21 $ 3.19 $ 1.63
Discontinued Operations, net of tax:
Income from operations......................... - - - 1.57
Gain on sale................................... - 2.26 - 2.27
____________ ____________ ____________ ____________
Net income ................................... $ 1.43 $ 2.47 $ 3.19 $ 5.47
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Dividends declared............................ $ .20 $ - $ .40 $ .69
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Weighted average common shares and
common share equivalents..................... 151,204,884 116,490,454 151,074,342 116,297,376
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1997 1996
___________ ____________
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale,
at fair value (amortized cost
$30,862.8 and $31,441.4).................. $ 31,634.1 $ 32,336.3
Equity securities, at fair value
(cost $1,003.4 and $963.4).................. 1,393.3 1,332.8
Short-term investments......................... 956.7 723.2
Mortgage loans................................. 6,322.1 6,700.9
Real estate.................................... 636.7 850.2
Policy loans................................... 734.1 707.3
Other.......................................... 876.1 835.5
___________ ___________
Total investments........................ 42,553.1 43,486.2
Cash and cash equivalents...................... 1,616.6 1,462.6
Accrued investment income...................... 552.3 598.6
Premiums due and other receivables............. 1,369.5 1,190.4
Deferred policy acquisition costs.............. 2,372.9 2,226.9
Goodwill and other acquired intangible assets.. 8,625.3 8,432.6
Other assets................................... 958.6 1,070.1
Separate Accounts assets....................... 37,651.6 34,445.5
___________ ___________
Total assets............................. $ 95,699.9 $ 92,912.9
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 5
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
June 30, December 31,
(Millions, except share and per common share data) 1997 1996
__________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits........................ $ 18,040.7 $ 17,783.4
Unpaid claims................................. 3,100.2 3,029.2
Unearned premiums............................. 188.0 333.6
Policyholders' funds left with the Company.... 19,032.6 19,901.7
___________ ___________
Total insurance liabilities............... 40,361.5 41,047.9
Dividends payable to shareholders............. 36.9 36.9
Short-term debt............................... 434.7 282.8
Long-term debt................................ 2,375.6 2,380.0
Current income taxes.......................... 114.8 164.3
Deferred income taxes......................... 148.2 31.7
Other liabilities............................. 2,826.3 3,202.3
Minority and participating policyholders'
interests.................................... 228.7 221.7
Separate Accounts liabilities................. 37,609.7 34,380.6
___________ ___________
Total liabilities......................... 84,136.4 81,748.2
___________ ___________
Aetna-obligated mandatorily redeemable
preferred securities of subsidiary
limited liability company holding
primarily debentures guaranteed by Aetna.... 275.0 275.0
___________ ___________
Commitments and Contingent Liabilities
(Notes 5 and 12)
Shareholders' Equity:
Class C Voting Mandatorily Convertible
Preferred Stock ($.01 par value; 15,000,000
shares authorized; 11,655,457 in 1997 and
11,655,546 in 1996 issued and outstanding)... 865.4 865.4
Common Stock ($.01 par value; 500,000,000
shares authorized; 149,951,690 in 1997 and
150,084,799 in 1996 issued and outstanding).. 3,997.2 4,032.8
Net unrealized capital gains.................. 352.6 340.0
Retained earnings............................. 6,073.3 5,651.5
___________ ___________
Total shareholders' equity................ 11,288.5 10,889.7
___________ ___________
Total liabilities, redeemable preferred
securities and shareholders' equity...... $ 95,699.9 $ 92,912.9
___________ ___________
___________ ___________
Shareholders' equity per common share......... $ 69.51 $ 66.79
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 6
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Millions, except share data)
Class C Voting
Mandatorily Net
Convertible Unrealized
Preferred Common Capital Retained Treasury
Six Months Ended June 30, 1997 Total Stock Stock Gains Earnings Stock
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $10,889.7 $ 865.4 $ 4,032.8 $ 340.0 $ 5,651.5 $ -
_______________________________________________________________________________________________________
Net income.......................... 509.4 509.4
Change in net unrealized capital
gains............................. 12.6 12.6
Common stock issued for benefit
plans and other (1,670,891 shares) 118.3 118.3
Repurchase of common shares
(1,804,000 shares)................ (153.9) (153.9)
Common stock dividends.............. (59.8) (59.8)
Preferred stock dividends........... (27.8) (27.8)
__________________________________________________________________
Balances at June 30, 1997 $11,288.5 $ 865.4 $ 3,997.2 $ 352.6 $ 6,073.3 $ -
_____________________________________________________________________________________
_______________________________________________________
Six Months Ended June 30, 1996
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 7,272.8 $ - $ 1,448.2 $ 641.1 $ 5,195.6 $ (12.1)
_______________________________________________________________________________________________________
Net income.......................... 635.7 635.7
Change in net unrealized capital
gains............................. (537.9) (537.9)
Common stock issued for benefit
plans and other (977,021 shares).. 51.4 51.4
Common stock dividends.............. (79.7) (79.7)
__________________________________________________________________
Balances at June 30, 1996 $ 7,342.3 $ - $ 1,499.6 $ 103.2 $ 5,751.6 $ (12.1)
_______________________________________________________________________________________________________
__________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
________________________
(Millions) 1997 1996
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................ $ 509.4 $ 635.7
Adjustments to reconcile net income to net
cash used for operating activities:
Income from Discontinued Operations............................ - (182.2)
Decrease in accrued investment income.......................... 46.1 61.3
(Increase) decrease in premiums due and other receivables...... (135.4) 13.9
Increase in deferred policy acquisition costs.................. (149.7) (123.4)
Depreciation and amortization.................................. 266.0 90.3
Increase (decrease) in income taxes............................ 80.9 (270.6)
Net (increase) decrease in other assets and other liabilities.. (786.4) 655.9
Decrease in insurance liabilities.............................. (315.2) (1,345.1)
Net realized capital gains..................................... (36.2) (66.4)
Gain on sale of Discontinued Operations........................ - (263.7)
Amortization of net investment discounts....................... (78.5) (60.4)
Other, net..................................................... 10.7 .2
_________ _________
Net cash used for operating activities....................... (588.3) (854.5)
_________ _________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 8,088.7 7,681.8
Equity securities.............................................. 344.1 282.9
Mortgage loans................................................. 116.8 80.4
Real estate.................................................... 261.4 74.8
Other investments.............................................. 356.5 529.2
Short-term investments......................................... 8,379.9 17,489.7
Discontinued Operations........................................ - 4,134.1
Investment maturities and repayments of:
Debt securities available for sale............................. 2,036.5 1,730.0
Mortgage loans................................................. 392.9 691.7
Cost of investments in:
Debt securities available for sale............................. (9,453.4) (8,026.7)
Equity securities.............................................. (301.0) (643.1)
Mortgage loans................................................. (177.4) (98.3)
Real estate.................................................... (34.5) (23.9)
Other investments.............................................. (427.6) (490.9)
Short-term investments......................................... (8,580.2) (18,601.1)
Increase in property and equipment................................ (31.3) (18.0)
Decrease (increase) in Separate Accounts.......................... 23.1 (1.0)
Other, net........................................................ 51.3 (85.6)
_________ _________
Net cash provided by investing activities.................... 1,045.8 4,706.0
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 952.4 1,001.2
Withdrawals of investment contracts............................... (1,286.6) (1,846.2)
Issuance of long-term debt........................................ .1 4.6
Repayment of long-term debt....................................... (3.8) (6.9)
Common stock issued under benefit plans and other................. 118.3 51.4
Common stock acquired............................................. (153.9) -
Net increase (decrease) in short-term debt........................ 158.4 (356.1)
Dividends paid to shareholders.................................... (87.6) (158.8)
_________ _________
Net cash used for financing activities....................... (302.7) (1,310.8)
_________ _________
Effect of exchange rate changes on cash and cash equivalents......... (.8) .1
_________ _________
Net increase in cash and cash equivalents............................ 154.0 2,540.8
Cash and cash equivalents, beginning of period....................... 1,462.6 1,712.7
_________ _________
Cash and cash equivalents, end of period............................. $ 1,616.6 $ 4,253.5
_________ _________
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 114.2 $ 56.1
_________ _________
_________ _________
Income taxes paid ................................................ $ 272.8 $ 202.5
_________ _________
_________ _________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 8
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include Aetna Inc. and its
majority-owned subsidiaries (collectively, the "Company"),
including Aetna Services, Inc. ("Aetna Services") (formerly Aetna
Life and Casualty Company) and Aetna U.S. Healthcare Inc. ("Aetna
U.S. Healthcare") (formerly U.S. Healthcare, Inc. ("U.S.
Healthcare")). Less than majority-owned entities in which the
Company has at least a 20% interest are reported on the equity
basis. These consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and
are unaudited. Certain reclassifications have been made to 1996
financial information to conform to the 1997 presentation. These
interim statements necessarily rely heavily on estimates,
including assumptions as to annualized tax rates. In the opinion
of management, all adjustments necessary for a fair statement of
results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related
notes as presented in the Company's 1996 Annual Report on Form 10-
K. Certain financial information that is normally included in
annual financial statements prepared in accordance with generally
accepted accounting principles, but that is not required for
interim reporting purposes, has been condensed or omitted.
(2) Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was issued in June 1996 and provides accounting and
reporting standards for transfers of financial assets and
extinguishments of liabilities.
FAS No. 125 is effective for 1997 financial statements; however,
certain provisions relating to accounting for repurchase
agreements and securities lending are not effective until January
1, 1998. Provisions effective in 1997 did not have a material
effect on the Company's financial position or results of
operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material
effect on its financial position or results of operations.
<PAGE> 9
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Future Application of Accounting Standards (Continued)
FAS No. 128, Earnings per Share, was issued in February 1997.
This statement provides new accounting and reporting standards for
earnings per share. It will replace the currently used primary
and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share represents
the potential dilution that could occur if all stock options and
other stock-based awards, as well as convertible securities, were
exercised and converted into common stock if their effect is
dilutive. This statement, effective for year-end 1997 financial
statements, requires that prior period earnings per share data be
restated. The Company does not expect adoption of this statement
to have a material impact on earnings per common share amounts.
FAS No. 130, Reporting Comprehensive Income, was issued in June
1997 and establishes standards for the reporting and presentation
of comprehensive income and its components in a full set of
financial statements. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from
transactions with owners) and includes net income, net unrealized
capital gains or losses on available for sale securities and
foreign currency translation adjustments. As this new standard
only requires additional information in a financial statement, it
will not affect the Company's financial position or results of
operations. FAS No. 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives
permitted by the statement.
FAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued in June 1997 and establishes
standards for the reporting of information relating to operating
segments in annual financial statements, as well as disclosure of
selected information in interim financial reports. This statement
supersedes FAS No. 14, Financial Reporting for Segments of a
Business Enterprise, which requires reporting segment information
by industry and geographic area (industry approach). Under FAS
No. 131, operating segments are defined as components of a company
for which separate financial information is available and is used
by management to allocate resources and assess performance
(management approach). This statement is effective for year-end
1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information).
The Company does not anticipate that this standard will
significantly impact the composition of its current operating
segments, which are consistent with the management approach.
<PAGE> 10
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Earnings Per Common Share
Primary earnings per common share are computed using net income
less preferred stock dividends divided by the weighted average
number of common shares outstanding (including common share
equivalents). Fully diluted earnings per common share are computed
using net income divided by the weighted average number of common
shares outstanding (including common share equivalents and other
potentially dilutive securities). In determining primary earnings
per common share, the 6.25% Class C Voting Mandatorily Convertible
Preferred Stock ("Class C Stock") is not considered to be a common
stock equivalent. The Class C Stock is included in the
calculation of the Company's fully diluted earnings per common
share. The weighted average number of shares of Class C Stock
outstanding was 11.7 million for the three and six months ended
June 30, 1997. There is not a material difference between primary
and fully diluted earnings per common share.
<PAGE> 11
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Merger with U.S. Healthcare
The merger with U.S. Healthcare was consummated on July 19, 1996,
and the Company's consolidated results of operations include U.S.
Healthcare from that date.
The unaudited pro forma information below presents combined
results of the Company's operations as if the merger with U.S.
Healthcare (as well as the sale of Aetna's property-casualty
operations - see Note 5) had occurred on January 1, 1996 and
reflects adjustments which include interest expense related to the
assumed financing of a portion of the cash consideration paid,
interest income foregone related to the balance of the cash
consideration paid, amortization of goodwill and other acquired
intangible assets, and adjustments to conform U.S. Healthcare's
accounting policies with Aetna Services' and to remove the effect
of merger-related costs incurred by U.S. Healthcare prior to the
merger. No adjustment has been made to give effect to any
synergies which may be realized in future periods as a result of
the merger.
The unaudited pro forma information is not necessarily indicative
of the consolidated results of operations of the combined company
had the merger occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in millions, except per common share data) June 30, 1996(1) June 30, 1996(1)
___________________________________________ __________________ ________________
<S> <C> <C>
Revenue $ 4,222.5 $ 8,606.6
_________ _________
_________ _________
Net realized capital gains
included in revenue $ 4.4 $ 69.2
_________ _________
_________ _________
Income before income taxes $ 33.9 $ 321.9
Income taxes 30.0 144.7
_________ _________
Net income $ 3.9 $ 177.2
_________ _________
_________ _________
Net income (loss) per common share $ (.07) $ .98
_________ _________
_________ _________
<FN>
(1) Includes the Company's reductions of loss on discontinued products of $170.0 million
pretax ($110.5 after tax) for the three and six months ended June 30, 1996 and $392.7
million pretax ($255.0 million after tax) of severance and facilities charges for the
three and six months ended June 30, 1996.
</TABLE>
<PAGE> 12
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Other Acquisitions and Dispositions
On April 2, 1996, the Company sold its property-casualty
operations to an affiliate of The Travelers Insurance Group Inc.
("Travelers") for approximately $4.1 billion in cash. The sale
resulted in an after-tax gain of $264 million ($218 million
pretax).
The operating results of the property-casualty operations were
presented as Discontinued Operations through the sale date.
Operating results for the period from January 1 to April 2, 1996
were:
<TABLE>
<CAPTION>
(Millions) 1996
_____________________________________________________________
<S> <C>
Total revenue $ 1,539.3
_____________________________________________________________
_________
Income before taxes $ 262.7
Income taxes 80.5
_________
Net income $ 182.2
_____________________________________________________________
_________
</TABLE>
As a result of the sale, the Company retained no property-casualty
liabilities other than those associated with indemnifying
Travelers for a portion of certain potential liability exposures.
While there can be no assurances, management currently does not
believe that the aggregate ultimate loss arising from these
indemnifications, if any, will be material to the annual net
income, liquidity or financial condition of the Company, although
it is reasonably possible.
In April 1997, the Company acquired a 49.0% stake in a joint
venture formed with Sul America Seguros, Brazil's largest
insurance company. The joint venture provides health and life
insurance, as well as private pension plan, products. The joint
venture is being accounted for on the equity basis. The initial
purchase price of approximately $300 million was funded through
the issuance of commercial paper. The commercial paper was repaid
prior to June 30, 1997.
On May 1, 1997, the Company sold Aetna Professional Management
Corporation, a physician management business. In connection with
the sale, the Company recorded after-tax capital losses of $11
million
($20 million pretax) and $44 million ($43 million pretax) for the
three and six months ended June 30, 1997 related to the
disposition.
<PAGE> 13
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments
Net investment income includes amounts allocable to experience
rated contractholders of $334 million and $344 million for the
three months ended June 30, 1997 and 1996, respectively, and $673
million and $697 million for the six months ended June 30, 1997
and 1996, respectively. Interest credited to contractholders is
included in current and future benefits.
Net realized capital gains allocable to experience rated
contractholders of $18 million and $46 million for the three
months ended June 30, 1997 and 1996, respectively, and $49 million
and $84 million for the six months ended June 30, 1997 and 1996,
respectively, were deducted from net realized capital gains as
reflected on the Consolidated Statements of Income, and an
offsetting amount is reflected on the Consolidated Balance Sheets
in policyholders' funds left with the Company.
The total recorded investment in mortgage loans that are
considered to be impaired (including problem loans, restructured
loans and potential problem loans) and related specific reserves
are presented in the table below.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
____________________ ______________________
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Supporting discontinued products $ 371.6 $ 71.3 $ 387.3 $ 86.9
Supporting experience rated products 213.2 39.8 258.3 40.0
Supporting remaining products 136.5 15.7 160.1 17.2
_________________________________________________
Total Impaired Loans $ 721.3(1) $ 126.8 $ 805.7(1) $ 144.1
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Includes impaired loans of $263.7 million and $227.0 million at June 30, 1997 and
December 31, 1996, respectively, for which no specific reserves are considered
necessary.
</TABLE>
<PAGE> 14
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments (Continued)
The activity in the specific and general reserves for the six
months ended June 30, 1997 and the twelve months ended December
31, 1996 is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 287.5 $ 228.3 $ 89.1 $ 604.9
Credited to net realized capital gains - - (33.0) (33.0)
Credited to other accounts(1) (10.0) (57.6) - (67.6)
Principal write-offs (140.8) (96.0) (20.5) (257.3)
______________________________________________________________________________________________
Balance at December 31, 1996(2) 136.7 74.7 35.6 247.0
Charged to net realized capital gains - - .7 .7
Credited to other accounts(1) - - (.7) (.7)
Principal write-offs (4.0) 1.3 (4.5) (7.2)
______________________________________________________________________________________________
Balance at June 30, 1997(2) $ 132.7 $ 76.0 $ 31.1 $ 239.8
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Reflects adjustments to reserves related to assets supporting experience rated products and
discontinued products which do not affect the Company's results of operations.
(2) Total reserves at June 30, 1997 and December 31, 1996 include $126.8 million and $144.1
million of specific reserves, respectively, and $113.0 million and $102.9 million of
general reserves, respectively.
</TABLE>
Income earned (pretax) and cash received on the average recorded
investment in impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
__________________________ __________________________
Average Averaged
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________ __________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 373.9 $ 8.9 $ 8.0 $ 377.4 $ 17.6 $ 15.9
Supporting experience rated products 215.8 4.2 3.9 227.1 8.4 7.7
Supporting remaining products 128.5 2.4 2.3 133.9 5.0 4.7
_______________________________________________________
Total $ 718.2 $ 15.5 $ 14.2 $ 738.4 $ 31.0 $ 28.3
_____________________________________________________________________________________________
_______________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
__________________________ __________________________
Average Averaged
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________ __________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 692.9 $ 15.0 $ 16.0 $ 694.1 $ 30.0 $ 31.6
Supporting experience rated products 506.4 10.3 9.8 503.9 19.8 19.6
Supporting remaining products 228.2 4.2 5.0 223.4 9.7 9.7
_______________________________________________________
Total $1,427.5 $ 29.5 $ 30.8 $1,421.4 $ 59.5 $ 60.9
_____________________________________________________________________________________________
_______________________________________________________
</TABLE>
<PAGE> 15
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Supplemental Cash Flow Information
Significant noncash investing and financing activities include
acquisition of real estate through foreclosures of mortgage loans
amounting to $25 million and $66 million for the six months ended
June 30, 1997 and 1996, respectively.
(8) Financial Instruments
The Company engages in hedging activities to manage interest rate,
price and currency risks. Such hedging activities have
principally consisted of using off-balance sheet instruments such
as those presented in the table below. (See General Account
Investments - Use of Derivatives and Other Investments on page 47
of the Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note 5 of the Company's 1996 Annual
Report for a description of the Company's hedging activities).
The notional amounts, carrying values and estimated fair values of
the Company's off-balance sheet and other financial instruments
are as follows (in millions):
<TABLE>
<CAPTION>
Carrying
Value
Notional Asset Fair
June 30, 1997 Amount (Liability) Value
______________________________________________________________________________
<S> <C> <C> <C>
Foreign exchange forward contracts - sell:
Related to net investments in foreign
affiliates $ 138.6 $ (.1) $ -
Related to investments in nondollar
denominated assets 42.5 - -
Foreign exchange forward contracts - buy:
Related to net investments in foreign
affiliates 2.1 - -
Related to investments in nondollar
denominated assets 23.5 .9 .9
Futures contracts to purchase
debt securities 38.5 .3 .3
Interest rate swaps 43.0 - 5.7
Warrants to purchase securities 19.0 4.1 4.1
</TABLE>
<PAGE> 16
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Severance and Facilities Charges
During 1996, the Company established severance and facilities
reserves in the Aetna U.S. Healthcare, Aetna Retirement Services
and Corporate segments to reflect the integration of the health
businesses and certain other actions taken or to be taken in order
to make its businesses more competitive.
Activity for the six months ended June 30, 1997 within the
severance and facilities reserves (pretax, in millions) and
positions eliminated related to such actions were as follows:
<TABLE>
<CAPTION>
Reserve Positions
_______________________________________________________________________________
<S> <C> <C>
Balance at December 31, 1996 $ 725.2 6,952
Actions taken(1) (160.4) (1,667)
Adjustments(2) (45.0) (1,200)
_______ ______
Balance at June 30, 1997 $ 519.8 4,085
_______________________________________________________________________________
_____________________________
<FN>
(1) Includes $75.4 million of severance-related actions.
(2) Reflects reductions in anticipated severance actions resulting from higher
attrition than was contemplated in the establishment of the reserve in the
Aetna U.S. Healthcare segment.
</TABLE>
The 1,667 positions eliminated during the six months ended June
30, 1997 related to the following segments: 86% - Aetna U.S.
Healthcare, 7% - Aetna Retirement Services and 7% - Corporate.
The Aetna U.S. Healthcare severance actions are expected to be
substantially completed by the end of 1998. The Aetna Retirement
Services severance actions are expected to be substantially
completed by March 31, 1998. The Corporate severance actions and
vacating of certain leased office space are expected to be
substantially completed by the end of 1997. In connection with
the sale of the Company's property-casualty operations, the
Company vacated, and the purchaser subleased, at market rates for
a period of eight years, the space that the Company occupied in
the CityPlace office facility in Hartford. The remaining lease
payments (net of expected subrentals) on the facilities (other
than the CityPlace office facility) are payable over approximately
the next three years.
<PAGE> 17
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products
The Company discontinued the sale of its fully guaranteed large
case pension products (single-premium annuities ("SPAs")and
guaranteed investment contracts ("GICs")) in 1993. Under the
Company's accounting for these discontinued products, a reserve
for anticipated future losses from these products was established,
and the reserve is reviewed by management quarterly. As long as
the reserve continues to represent management's then best estimate
of expected future losses, results of operations of the
discontinued products, including net realized capital gains and
losses, are credited/charged to the reserve and do not affect the
Company's results of operations. As a result of management's
detailed review in the first quarter of 1997, the Company released
$173 million (pretax) of the reserve, constituting the remaining
portion of the reserve related to GICs, primarily as a result of
continued favorable developments in real estate markets. The
resulting reserve reflects management's best estimate of
anticipated future net losses. To the extent that aggregate
future losses on GICs and SPAs are greater or less than
anticipated, the Company's results of operations would be
adversely or positively affected, respectively. The discussion
below presents information for the discontinued SPA and GIC
products on a combined basis. (Refer to the Company's 1996 Annual
Report for a more complete discussion of the reserve for
anticipated future losses on discontinued products.)
At the time of discontinuance, a receivable from Large Case
Pensions' continuing products equivalent to the net present value
of the anticipated cash flow shortfalls was established for the
discontinued products. Interest on the receivable is accrued at
the discount rate which was used to calculate the loss on
discontinuance. The offsetting payable, on which interest is
similarly accrued, is reflected in continuing products. Interest
on the payable generally offsets the investment income on the
assets available to fund the shortfall. At June 30, 1997, the
receivable from continuing products, net of related deferred taxes
payable of $37 million on the accrued interest income, was $504
million. During 1996, $315 million of the receivable, net of the
related deferred taxes payable on the accrued interest income of
$19 million, was funded from continuing products to meet liquidity
needs from maturing GICs. As of June 30, 1997, no additional
funding of the receivable had taken place. This amount is
eliminated in consolidation.
<PAGE> 18
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged
(Credited) to
Reserve for
Future
Three months ended June 30, 1997 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 174.6 $ - $ 174.6
Net realized capital gains 63.8 (63.8) -
Interest earned on receivable
from continuing products 8.3 - 8.3
Other income 2.6 - 2.6
__________________________________
Total revenue 249.3 (63.8) 185.5
__________________________________
Current and future benefits 165.6 17.0 182.6
Operating expenses 2.9 - 2.9
__________________________________
Total benefits and expenses 168.5 17.0 185.5
__________________________________
Results of discontinued products $ 80.8 $ (80.8) $ -
__________________________________________________________________________
__________________________________
Charged
(Credited) to
Reserve for
Future
Three months ended June 30, 1996 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 200.8 $ - $ 200.8
Net realized capital gains 2.1 (2.1) -
Interest earned on receivable
from continuing products 13.1 - 13.1
Other income 6.9 - 6.9
__________________________________
Total revenue 222.9 (2.1) 220.8
__________________________________
Current and future benefits 198.9 12.9 211.8
Operating expenses 9.0 - 9.0
__________________________________
Total benefits and expenses 207.9 12.9 220.8
__________________________________
Results of discontinued products $ 15.0 $ (15.0) $ -
__________________________________________________________________________
__________________________________
<FN>
(1) Amounts are reflected in the 1997 and 1996 Consolidated Statements of Income, except
for interest earned on the receivable from continuing products which is eliminated
in consolidation.
</TABLE>
<PAGE> 19
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
<TABLE>
<CAPTION>
Charged
(Credited) to
Reserve for
Future
Six months ended June 30, 1997 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 353.2 $ - $ 353.2
Net realized capital gains 94.3 (94.3) -
Interest earned on receivable
from continuing products 16.6 - 16.6
Other income 10.0 - 10.0
__________________________________
Total revenue 474.1 (94.3) 379.8
__________________________________
Current and future benefits 335.1 38.9 374.0
Operating expenses 5.8 - 5.8
__________________________________
Total benefits and expenses 340.9 38.9 379.8
__________________________________
Results of discontinued products $ 133.2 $ (133.2) $ -
__________________________________________________________________________
__________________________________
Charged
(Credited) to
Reserve for
Future
Six months ended June 30, 1996 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 423.8 $ - $ 423.8
Net realized capital gains 24.0 (24.0) -
Interest earned on receivable
from continuing products 26.2 - 26.2
Change in Accounting Policy -
FAS No. 121(2) 8.3 - 8.3
Other income 11.8 - 11.8
__________________________________
Total revenue 494.1 (24.0) 470.1
__________________________________
Current and future benefits 408.6 50.1 458.7
Operating expenses 11.4 - 11.4
__________________________________
Total benefits and expenses 420.0 50.1 470.1
__________________________________
Results of discontinued products $ 74.1 $ (74.1) $ -
__________________________________________________________________________
__________________________________
<FN>
(1) Amounts are reflected in the 1997 and 1996 Consolidated Statements of
Income, except for interest earned on the receivable from continuing
products which is eliminated in consolidation.
(2) Refer to Note 1 in the Company's 1996 Annual Report for a discussion of
FAS No. 121.
</TABLE>
<PAGE> 20
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
Assets and liabilities of discontinued products at June 30, 1997 were
as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Debt securities available for sale $5,002.4
Mortgage loans 2,526.5
Real estate 212.8
Short-term and other investments 182.3
________
Total investments 7,924.0
Current and deferred income taxes 155.5
Receivable from continuing products 541.3
________
Total assets $8,620.8
_______________________________________________________________
________
Future policy benefits $4,806.4
Policyholders' funds left with the Company 2,784.7
Reserve for anticipated future losses
on discontinued products 947.5
Other 82.2
________
Total liabilities $8,620.8
_______________________________________________________________
________
</TABLE>
Net unrealized capital gains on available for sale debt securities
are included above in other liabilities and are not reflected in
consolidated shareholders' equity. The reserve for anticipated
future losses is included in future policy benefits on the
Consolidated Balance Sheets.
The activity in the reserve for anticipated future losses on
discontinued products during the first six months of 1997 was as
follows (pretax, in millions):
<TABLE>
<CAPTION>
<S> <C>
Reserve at December 31, 1996 $ 986.8
Results of discontinued products 133.2
Reserve reduction (172.5)
________
Reserve at June 30, 1997 $ 947.5
_______________________________________________________________
________
</TABLE>
<PAGE> 21
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities
Aetna Inc. has fully and unconditionally guaranteed the payment of
all principal, premium, if any, and interest on all outstanding
debt securities of Aetna Services, including the $348,000,000 9.5%
Subordinated Debentures due 2024 (the "Subordinated Debentures")
issued to Aetna Capital L.L.C., a wholly owned subsidiary of Aetna
Services (collectively, the "Aetna Services Debt"). Aetna Capital
L.L.C. has issued $275,000,000 of redeemable preferred stock and
the Subordinated Debentures represent substantially all of the
assets of Aetna Capital L.L.C.
Aetna Services has a revolving credit facility in an aggregate
amount of $1.5 billion with a worldwide group of banks that
terminates in June 2001. Various interest rate options are
available under the facility and any borrowings mature on the
expiration date of the credit commitment. Aetna Services pays
facility fees ranging from .065% to .20% per annum, depending upon
its long-term senior unsecured debt rating. The facility fee at
June 30, 1997 is at an annual rate of .08%. The facility also
supports Aetna Services' commercial paper borrowing program. As a
guarantor of any amounts outstanding under the credit facility,
Aetna Inc. is required to maintain shareholders' equity, excluding
net unrealized capital gains or losses, of at least $7.5 billion.
<PAGE> 22
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (Continued)
Separate financial statements of Aetna Services have not been
presented herein or in any separate reports filed with the
Securities and Exchange Commission because management has
determined that such financial statements would not be material to
holders of the Aetna Services Debt. Summarized consolidated
financial information for Aetna Services is as follows (in
millions):
Balance Sheets Information:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
____________ ____________
<S> <C> <C>
Total investments (excluding
Separate Accounts) $ 41,653.2 $ 42,555.0
___________ ___________
___________ ___________
Total assets $ 86,196.6 $ 83,171.6
___________ ___________
___________ ___________
Total insurance liabilities $ 39,701.7 $ 40,357.4
___________ ___________
___________ ___________
Total liabilities $ 82,954.0 $ 80,352.8
___________ ___________
___________ ___________
Total redeemable preferred stock $ 275.0 $ 275.0
___________ ___________
___________ ___________
Total shareholder's equity $ 2,967.6 $ 2,543.8
___________ ___________
___________ ___________
</TABLE>
Statements of Income Information:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
__________________ ________________
<S> <C> <C>
Total revenue $ 3,286.6 $ 6,441.8
Total benefits and expenses 2,952.1 5,658.1
___________ ___________
Income before income taxes $ 334.5 $ 783.7
___________ ___________
___________ ___________
Net income $ 225.6 $ 499.4
___________ ___________
___________ ___________
</TABLE>
<PAGE> 23
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (Continued)
The amount of dividends which may be paid to Aetna Services or
Aetna U.S. Healthcare by their domestic insurance and HMO
subsidiaries from June 30, 1997 through December 31, 1997 without
prior approval by state regulatory authorities is limited to
approximately $143 million in the aggregate. There are no such
restrictions on distributions from Aetna Services or Aetna U.S.
Healthcare to Aetna Inc. or on distributions from Aetna Inc. to
its shareholders.
(12) Litigation
The Company is involved in numerous lawsuits arising, for the most
part, in the ordinary course of its business operations, including
litigation in its health business concerning benefit plan coverage
and other decisions made by the Company, and alleged medical
malpractice by participating providers. While the ultimate
outcome of litigation against the Company cannot be determined at
this time, after consideration of the defenses available to the
Company and any related reserves established, it is not expected
to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results
of operations in future periods.
<PAGE> 24
Independent Auditors' Review Report
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Aetna Inc. and Subsidiaries as of June 30, 1997, and the
related condensed consolidated statements of income for the three-
month and six-month periods ended June 30, 1997 and 1996, and the
related condensed consolidated statements of shareholders' equity
and cash flows for the six-month periods ended June 30, 1997 and
1996. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Aetna Inc.
and Subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our
report dated February 4, 1997, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1996, is fairly presented, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
August 4, 1997
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations addresses the financial condition of Aetna
Inc. and its subsidiaries (collectively, the "Company") as of June
30, 1997 and 1996, and its results of operations for the three and
six-month periods ended June 30, 1997 and 1996.
Consolidated Results of Operations
__________________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions, except per common share data) Three Months Ended June 30, Six Months Ended June 30,
________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 3,178.1 $ 1,727.6 84.0 % $ 6,265.5 $ 3,606.0 73.8%
Net investment income................ 847.1 893.8 (5.2) 1,687.2 1,780.1 (5.2)
Fees and other income................ 568.4 548.1 3.7 1,126.1 1,066.3 5.6
Net realized capital gains........... 34.7 4.4 - 36.2 66.4 (45.5)
_________ _________ _________ _________
Total revenue.................... 4,628.3 3,173.9 45.8 9,115.0 6,518.8 39.8
Current and future benefits.......... 3,208.6 2,076.2 54.5 6,365.7 4,347.6 46.4
Operating expenses................... 869.1 769.4 13.0 1,703.2 1,525.2 11.7
Interest expense..................... 60.8 28.7 111.8 116.8 60.3 93.7
Amortization of goodwill and
other acquired intangible assets.... 95.3 2.9 - 188.0 5.7 -
Amortization of deferred policy
acquisition costs................... 55.4 38.1 45.4 100.8 75.1 34.2
Reductions of loss on discontinued
products............................ - (170.0) (100.0) (172.5) (170.0) 1.5
Severance and facilities charges
(reserve reductions)................ (31.0) 392.7 - (45.0) 392.7 -
_________ _________ _________ _________
Total benefits and expenses...... 4,258.2 3,138.0 35.7 8,257.0 6,236.6 32.4
_________ _________ _________ _________
Income from continuing operations
before income taxes................. 370.1 35.9 - 858.0 282.2 -
Income taxes......................... 140.0 11.6 - 348.6 92.4 -
_________ _________ _________ _________
Income from continuing operations.... 230.1 24.3 - 509.4 189.8 168.4
Discontinued Operations, net of tax:
Income from operations.............. - - - - 182.2 (100.0)
Gain on sale........................ - 263.7 (100.0) - 263.7 (100.0)
_________ _________ _________ _________
Net income....................... $ 230.1 $ 288.0 (20.1) $ 509.4 $ 635.7 (19.9)
_________ _________ _________ _________
_________ _________ _________ _________
Net income applicable
to common ownership............ $ 216.2 $ 288.0 (24.9) $ 481.6 $ 635.7 (24.2)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains from
continuing operations, net of
tax (included above)................ $ 24.3 $ 2.6 - $ 8.4 $ 44.0 (80.9)
_________ _________ _________ _________
_________ _________ _________ _________
Results per common share:
Income from continuing operations.... $ 1.43 $ .21 - $ 3.19 $ 1.63 95.7
Discontinued Operations, net of tax:
Income from operations.............. - - - - 1.57 (100.0)
Gain on sale........................ - 2.26 (100.0) - 2.27 (100.0)
_________ _________ _________ _________
Net income....................... $ 1.43 $ 2.47 (42.1) $ 3.19 $ 5.47 (41.7)
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview
________
Consolidated Results
The Company reported income from continuing operations of
$230 million and $509 million for the three and six months ended
June 30, 1997, respectively, compared with $24 million and $190
million for the same periods a year ago. These results are
affected by factors (discussed in more detail on page 27)
including:
benefits in the first quarter of 1997 and the second
quarter of 1996 related to reserve reductions for Large
Case Pensions;
benefits for the three and six months ended June 30,
1997 related to reductions of Aetna U.S. Healthcare's
severance and facilities reserve;
severance and facilities charges in the second quarter
of 1996 primarily related to actions associated with the
sale of the Company's property-casualty operations in
that quarter; and
net realized capital gains in all periods.
Excluding these factors, income from continuing operations would
have been $186 million and $363 million for the three and six
months ended June 30, 1997, respectively, and $166 million and
$290 million for the same periods a year ago.
These results reflect increased earnings in each business segment
and business growth in each core business partially offset by
higher interest expense primarily due to additional debt incurred
in connection with the financing of the U.S. Healthcare, Inc.
("U.S. Healthcare") merger. (See "Aetna U.S. Healthcare" for a
discussion of pro forma results as though the merger had occurred
on January 1, 1996.)
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Underlying Business Results
Aetna U.S. Healthcare's earnings improved during the three and six
months ended June 30, 1997 due to increased earnings from group
insurance and other health products, partially offset by decreased
earnings from health risk products when compared to pro forma
earnings for the same periods a year ago. Improved earnings in
Aetna Retirement Services ("ARS") during the three and six months
ended June 30, 1997 primarily reflect improved financial services'
results due to increased fee income earned on a growing base of
assets under management, partially offset by decreased individual
life insurance results. International's earnings also improved
during the three and six months ended June 30, 1997 reflecting
business and earnings growth in certain Asia Pacific and Latin
American operations partially offset for the six months ended June
30, 1997 by increased losses from start-up operations, primarily
those in the Philippines. Large Case Pensions' results during the
three and six months ended June 30, 1997 improved, although assets
under management declined, reflecting favorable prior year reserve
development and lower operating expenses. Large Case Pensions'
earnings also reflect a decrease and an increase for the three and
six months ended June 30, 1997, respectively, in income on the
investments supporting the capital in this business. The
Corporate segment reflects higher interest expense in 1997
primarily resulting from additional debt incurred in connection
with the financing of the U.S. Healthcare merger and also the
absence, in 1997, of interest income earned in the second quarter
of 1996 on the reinvestment of proceeds received from the sale of
the Company's property-casualty operations.
Factors Affecting Comparison of Results
The U.S. Healthcare merger, the property-casualty sale, reserve
reductions for Large Case Pensions and certain other factors
complicate the comparison of the Company's results for the periods
presented. Detailed information regarding certain of these
factors (after tax) is set forth below.
Factors Primarily Related to the Merger
Income from continuing operations for the three and six
months ended June 30, 1997 includes U.S. Healthcare
results.
Income from continuing operations for the three and six
months ended June 30, 1997 reflects an increase in
amortization of goodwill and other acquired intangible
assets of $77 million and $150 million, respectively,
primarily related to the amortization of intangible assets
created as a result of the U.S. Healthcare merger.
Income from continuing operations for the three and six
months ended June 30, 1997 includes an increase in interest
expense of $21 million and $37 million, respectively,
primarily due to additional debt incurred in connection
with the financing of the U.S. Healthcare merger.
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Results of continuing operations for the three and six
months ended June 30, 1996 include $30 million of interest
income earned on the net proceeds received from the sale of
the Company's property-casualty operations.
Results of continuing operations for the three and six
months ended June 30, 1997 include benefits of $20 million
and $29 million related to reductions of Aetna U.S.
Healthcare's severance and facilities reserve. (See
"Severance and Facilities Charges".)
In connection with the merger, the Company issued
approximately 35.0 million shares of common stock and 11.7
million shares of mandatorily convertible preferred stock.
The increase in the number of common shares outstanding and
the dividends on the mandatorily convertible preferred
stock affect the comparability of per common share amounts.
(See Note 3 of Condensed Notes to Financial Statements for
further discussion.)
Other Significant Factors
Results of continuing operations for the three and six
months ended June 30, 1996, include severance and
facilities charges of $255 million primarily related to
actions associated with the sale of the Company's property-
casualty operations in that quarter. (See "Severance and
Facilities Charges".)
Results of continuing operations for the six months ended
June 30, 1997 and for the three and six months ended June
30, 1996 include $108 million and $111 million,
respectively, of benefits from reductions of the reserve
for anticipated future losses on discontinued products,
primarily as a result of continued favorable developments
in real estate markets. (See "Large Case Pensions -
Discontinued Products".)
Results of continuing operations for the three and six
months ended June 30, 1997 include $24 million and $8
million, respectively, of net realized capital gains,
compared with $3 million and $44 million, respectively, for
the same periods a year ago. Net realized capital gains
for the three and six months ended June 30, 1997 include a
$34 million gain related to the sale of a portion of the
Company's investment in Travelers Property Casualty Corp.
Net realized capital gains for the three and six months
ended June 30, 1997 also include losses of $11 million and
$44 million, respectively, related to the disposition of
Aetna Professional Management Corporation ("APMC"), a
physician practice management business, which was completed
in the second quarter of 1997. Net realized capital gains
for the three and six months ended June 30, 1996 include a
$25 million gain related to the sale of Aetna Realty
Investors ("ARI") which was substantially offset by net
realized capital losses related to bond sales. Net
realized capital gains for the six months ended June 30,
1996 also include a $15 million gain from the sale of an
HMO subsidiary.
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Net Income
The Company reported net income of $230 million and $509 million
for the three and six months ended June 30, 1997, respectively,
and $288 million and $636 million, respectively, for the same
periods a year ago. Net income for the three and six months ended
June 30, 1996 includes a gain from the sale of the Company's
property-casualty operations (reflected as Discontinued
Operations) of $264 million, and for the six months ended June 30,
1996, income from such operations of $182 million.
Merger and Property-Casualty Sale
Aetna Inc. became the parent corporation of Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. (formerly U.S.
Healthcare) as a result of the merger transaction effected on July
19, 1996. The merger was accounted for as a purchase of U.S.
Healthcare. (See Note 4 of Condensed Notes to Financial
Statements.) Aetna sold its property-casualty operations on April
2, 1996. (See Note 5 of Condensed Notes to Financial Statements
for a discussion of certain indemnifications and other information
related to the property-casualty sale.)
This Overview is a summary of certain information that appears
later in this Management's Discussion and Analysis. Important
additional information about the businesses' results for the three
and six months ended June 30, 1997 and 1996 and about the
Company's financial condition and liquidity and capital resources
follows. Because it has been summarized, the information
presented in the Overview is qualified by more detailed
information appearing later. Because of the importance of this
detailed information, you should read this Management's Discussion
and Analysis in its entirety.
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare
_____________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 2,737.3 $ 1,355.7 101.9% $ 5,423.4 $ 2,907.8 86.5%
Net investment income................ 109.2 97.2 12.3 212.8 191.0 11.4
Fees and other income................ 388.3 381.6 1.8 766.4 737.2 4.0
Net realized capital gains (losses).. (22.0) (5.9) - (34.9) 25.3 -
_________ _________ _________ _________
Total revenue..................... 3,212.8 1,828.6 75.7 6,367.7 3,861.3 64.9
Current and future benefits.......... 2,295.9 1,177.9 94.9 4,545.8 2,522.8 80.2
Operating expenses................... 609.0 527.5 15.5 1,200.4 1,055.3 13.7
Amortization of goodwill and other
acquired intangible assets.......... 90.5 2.1 - 180.9 4.2 -
Amortization of deferred policy
acquisition costs................... 8.6 2.3 - 13.1 5.1 156.9
Severance and facilities charges
(reserve reductions)................ (31.0) 30.0 - (45.0) 30.0 -
_________ _________ _________ _________
Total benefits and expenses....... 2,973.0 1,739.8 70.9 5,895.2 3,617.4 63.0
_________ _________ _________ _________
Income before income taxes........... 239.8 88.8 170.0 472.5 243.9 93.7
Income taxes......................... 100.6 31.2 - 219.1 84.9 158.1
_________ _________ _________ _________
Net income........................... $ 139.2 $ 57.6 141.7 $ 253.4 $ 159.0 59.4
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (12.8) $ (3.9) - $ (39.2) $ 17.6 -
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
Aetna U.S. Healthcare's net income for the three and six months
ended June 30, 1997 increased by $82 million and $94 million,
respectively, compared with the same periods a year ago. These
results reflect amortization of goodwill and other acquired
intangible assets ($75 million and $149 million after tax, for the
three and six months ended June 30, 1997, respectively, and $2
million and $4 million, respectively, for the same periods a year
ago) and net realized capital gains or losses. Net income for the
three and six months ended June 30, 1997 reflects after-tax
benefits of $20 million and $29 million, respectively, related to
reductions in the severance and facilities reserve due to higher
attrition than was contemplated in the establishment of the
reserve. Net income for the three and six months ended June 30,
1996 reflects an after-tax severance and facilities charge of $20
million. Excluding the above items, results for the three and six
months ended June 30, 1997 increased $123 million and $247
million, respectively, from the prior year, primarily reflecting
the inclusion of U.S. Healthcare. (See Note 4 of Condensed Notes
to Financial Statements.)
Net realized capital losses for the three and six months ended
June 30, 1997 include after-tax losses of $11 million and $44
million, respectively, related to the disposition of APMC. Net
realized capital gains for the six months ended June 30, 1996
include a $15 million after-tax gain from the sale of an HMO
subsidiary. The earnings of APMC and the HMO subsidiary were not
material to the results of Aetna U.S. Healthcare.
Aetna U.S. Healthcare's effective tax rates of 42% and 46% for the
three and six months ended June 30, 1997, respectively, when
compared to 35% for the same periods a year ago, primarily reflect
an increase in amortization of goodwill (which is nondeductible
for income tax purposes) as well as for the six months ended June
30, 1997, the tax treatment of the disposition of APMC.
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
The remainder of the discussion related to Aetna U.S. Healthcare
presents 1996 results on a pro forma basis as if the merger had
occurred at the beginning of 1996.
<TABLE>
<CAPTION>
Operating Summary
(Millions) Pro Forma (1) Pro Forma (1)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 % Change June 30, 1997 June 30, 1996 % Change
_____________________________________ _____________________________________
<S> <C> <C> <C> <C> <C> <C>
Premiums........................ $ 2,737.3 $ 2,434.6 12.4% $ 5,423.4 $ 5,025.1 7.9%
Net investment income........... 109.2 109.2 - 212.8 214.1 (.6)
Fees and other income........... 388.3 407.1 (4.6) 766.4 785.7 (2.5)
Net realized capital gains
(losses)....................... (22.0) (5.9) - (34.9) 28.1 -
_________ _________ _________ _________
Total revenue................ 3,212.8 2,945.0 9.1 6,367.7 6,053.0 5.2
Current and future benefits..... 2,295.9 2,007.4 14.4 4,545.8 4,128.5 10.1
Operating expenses.............. 609.0 670.2 (9.1) 1,200.4 1,343.3 (10.6)
Amortization of goodwill and
other acquired intangible
assets......................... 90.5 91.1 (.7) 180.9 182.2 (.7)
Amortization of deferred
policy acquisition costs....... 8.6 2.3 - 13.1 5.1 156.9
Severance and facilities charges
(reserve reductions)........... (31.0) 30.0 - (45.0) 30.0 -
________ _________ _________ _________
Total benefits and
expenses.................... 2,973.0 2,801.0 6.1 5,895.2 5,689.1 3.6
________ _________ _________ _________
Income before income taxes...... 239.8 144.0 66.5 472.5 363.9 29.8
Income taxes.................... 100.6 66.4 51.5 219.1 163.6 33.9
_________ _________ _________ _________
Net income...................... $ 139.2 $ 77.6 79.4 $ 253.4 $ 200.3 26.5
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains
(losses), net of tax
(included above)............... $ (12.8) $ (3.9) - $ (39.2) $ 19.3 -
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
(1) Represents financial information as though the merger with U.S. Healthcare occurred on
January 1, 1996, reflecting adjustments which include: (a) amortization of goodwill
and other acquired intangible assets; (b) interest income foregone related to a $500
million dividend paid by U.S. Healthcare to the Company; and (c) adjustments to
conform U.S. Healthcare's accounting policies with Aetna Services' and to remove the
effect of merger-related costs incurred by U.S. Healthcare prior to the merger. The
1996 pro forma operating summary and information derived from the summary is not
necessarily indicative of the results of operations of the Aetna U.S. Healthcare
segment had the merger occurred at the beginning of 1996, nor is it necessarily
indicative of future results. The 1996 pro forma operating summary does not give
effect to (a) any synergies which may be realized in future periods as a result of
the merger or (b) the costs of financing the merger (see "Corporate").
</TABLE>
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
In order to provide a comparison that management believes better
reflects the underlying performance of Aetna U.S. Healthcare's two
businesses, Health Risk, and Group Insurance and Other Health, the
earnings discussion that follows excludes amortization of goodwill
and other acquired intangible assets, severance and facilities
actions and net realized capital gains or losses. The table below
sets forth earnings on this basis for the Health Risk, Group
Insurance and Other Health businesses, and other related
information.
<TABLE>
<CAPTION>
(Millions) Pro Forma Pro Forma
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
_____________ _____________ _____________ _____________
<S> <C> <C> <C> <C>
Health Risk $ 110.7 $ 127.1 $ 236.0 $ 255.9
Group Insurance and Other Health 95.7 49.1 176.3 95.0
_______ _______ _______ _______
Total Aetna U.S. Healthcare $ 206.4 $ 176.2 $ 412.3 $ 350.9
_______ _______ _______ _______
_______ _______ _______ _______
Health Risk Medical Loss Ratio 83.6% 80.8% 83.1% 80.4%
_______ _______ _______ _______
_______ _______ _______ _______
Health Risk SG&A Ratio 12.0% 14.8% 11.8% 14.5%
_______ _______ _______ _______
_______ _______ _______ _______
</TABLE>
Aetna U.S. Healthcare's earnings for the three and six months
ended June 30, 1997 increased by $30 million, or 17%, and $61
million, or 18%, respectively, compared with the pro forma
earnings for the same periods a year ago. The segment's results
reflect decreased Health Risk earnings and improved Group
Insurance and Other Health earnings.
Earnings for the three and six months ended June 30, 1997 in the
Health Risk business were impacted by several components.
Commercial and Medicare HMO medical costs per member per month
increased by 7% and 10%, respectively, for the three months ended
June 30, 1997 and 8% and 11%, respectively, for the six months
ended June 30, 1997 primarily resulting from higher inpatient
facility, physician and pharmacy costs which were principally
driven by higher unfavorable prior year reserve development in
1997. Partially offsetting the increase in HMO medical costs were
benefits resulting from increased HMO enrollment and increased
Commercial and Medicare HMO premiums per member per month of 1%
and 7%, respectively, for the three and six months ended June 30,
1997. The increases in Commercial HMO premiums per member per
month for the three and six months ended June 30, 1997 resulted
from premium rate increases instituted in 1997, which were
partially offset by customers selecting lower premium plans and a
shift in geographic mix. Excluding the impact of prior year
reserve development, Commercial and Medicare HMO medical costs per
member per month increased 1% and 5%, respectively, for the three
months ended June 30, 1997 and 3% and 6%, respectively, for the
six months ended June 30, 1997. Premium rates per member per
month increased in excess of medical costs per member per month
when compared to the same periods a year ago for the Medicare
business, excluding the impact of prior year reserve development.
Health Risk results also benefited from lower preferred provider
organization (PPO) and Indemnity medical costs resulting from
favorable prior year reserve runoff, and improvement in operating
expenses as a result of continuing cost savings initiatives.
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
The increase in earnings for the three and six months ended June
30, 1997 for the Group Insurance and Other Health business is
primarily attributable to higher earnings related to Other Health
products. Favorable results related to Other Health products for
the three and six months ended June 30, 1997 reflect lower
operating expenses due to continuing cost savings initiatives and
higher administrative service contract fees resulting from rate
increases and changes in product mix. Results also reflect higher
earnings from Group Insurance products due to favorable
adjustments to claim benefit reserve estimates for life,
disability and long-term care products, as well as increased
product sales.
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
Pro Forma
_June 30, 1997 (1)(2) June 30, 1996 (1)(2)
_____________________ ______________________
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
_________________________________________________________ ______________________
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial 3,536 578 4,114 3,209 520 3,729
Medicare 349 20 369 264 20 284
Medicaid 107 - 107 135 - 135
_____ _____ ______ _____ _____ ______
Total HMO 3,992 598 4,590 3,608 540 4,148
POS 328 2,443 2,771 291 2,245 2,536
PPO 742 2,975 3,717 747 3,038 3,785
Indemnity 415 2,521 2,936 537 2,909 3,446
_____ _____ ______ _____ _____ ______
Total Health Membership 5,477 8,537 14,014 5,183 8,732 13,915
_____ _____ ______ _____ _____ ______
_____ _____ ______ _____ _____ ______
Group Insurance: (3)
Group Life 9,971 9,460
______ ______
______ ______
Disability 2,675 2,343
______ ______
______ ______
Long-Term Care 96 96
______ ______
______ ______
<FN>
(1) Health membership as of June 30, 1997 reflects system and plan conversions; these
conversions will continue for the remainder of 1997. The conversions predominately
affect Indemnity and PPO membership and have an immaterial impact on all other Health
products. June 30, 1996 reflects adjustments computed for December 31, 1996 membership
(a decrease of approximately 173 thousand members), based on known corrected data
from these conversions, as applied to June 30, 1996 membership previously reported.
(2) Group Insurance membership as of June 30, 1997 reflects the conversion to a new
membership reporting system. June 30, 1996 reflects adjustments computed for
December 31, 1996 membership (an increase of approximately 1 million members), as
applied to June 30, 1996 membership previously reported.
(3) Many Group Insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.
</TABLE>
Total Health membership as of June 30, 1997 increased by 99
thousand members, or .7%, when compared to June 30, 1996.
Membership increases in Commercial HMO, Medicare HMO and POS were
partially offset by a decline in Indemnity enrollment. The
decline in Indemnity enrollment reflects the continued migration
of Indemnity members to other managed care products. Total HMO
membership as of June 30, 1997 increased by 442 thousand members
or 11% when compared to June 30, 1996.
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
Revenue for Aetna U.S. Healthcare increased by $284 million, or
10%, and $533 million, or 9%, for the three and six months ended
June 30, 1997, respectively, compared to the same periods a year
ago, excluding revenues of $156 million for the six months ended
June 30, 1996 from the Civilian Health and Medical Program of the
Uniformed Services contract which was not renewed, and net
realized capital gains or losses. This growth was primarily due
to membership growth in Commercial and Medicare HMO products,
partially offset by lower Indemnity membership, as well as to
premium rate increases instituted at the beginning of 1997.
Operating expenses for Aetna U.S. Healthcare decreased by $61
million, or 9%, and $143 million, or 11%, for the three and six
months ended June 30, 1997, respectively, compared with the same
periods a year ago primarily due to the impact of continuing cost
reduction efforts and operating expenses in 1996, not present in
1997, associated with investments in primary care physician
practices.
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services
_________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
__________________________________ ________________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums (1)...................... $ 38.0 $ 41.8 (9.1)% $ 78.4 $ 87.7 (10.6)%
Net investment income............. 279.4 264.6 5.6 552.0 531.9 3.8
Fees and other income (2)......... 136.5 110.8 23.2 270.9 214.1 26.5
Net realized capital gains........ 3.8 1.6 137.5 9.2 17.3 (46.8)
_________ _________ _________ _________
Total revenue.................. 457.7 418.8 9.3 910.5 851.0 7.0
Current and future benefits....... 256.0 254.1 .7 522.2 506.1 3.2
Operating expenses (2)............ 91.7 84.8 8.1 173.1 167.6 3.3
Amortization of deferred policy
acquisition costs................ 25.9 14.2 82.4 47.3 31.5 50.2
_________ _________ _________ _________
Total benefits and expenses.... 373.6 353.1 5.8 742.6 705.2 5.3
_________ _________ _________ _________
Income before income taxes........ 84.1 65.7 28.0 167.9 145.8 15.2
Income taxes...................... 25.1 17.9 40.2 52.5 41.5 26.5
_________ _________ _________ _________
Net income........................ $ 59.0 $ 47.8 23.4 $ 115.4 $ 104.3 10.6
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains, net
of tax (included above).......... $ 2.5 $ 1.1 127.3 $ 6.0 $ 11.3 (46.9)
_________ _________ _________ _________
_________ _________ _________ _________
Deposits not included in premiums
above:
Annuities - fixed options....... $ 298.4 $ 416.3 (28.3) $ 578.6 $ 723.6 (20.0)
Annuities - variable options.... 796.2 681.0 16.9 1,614.3 1,340.3 20.4
Individual Life Insurance....... 117.3 105.9 10.8 237.8 208.7 13.9
_________ _________ _________ _________
Total......................... $ 1,211.9 $ 1,203.2 .7 $ 2,430.7 $ 2,272.6 7.0
_________ _________ _________ _________
_________ _________ _________ _________
Assets under management: (3)(4)
Annuities - fixed options....... $11,898.1 $11,418.6 4.2
Annuities - variable options.... 17,527.1 12,415.2 41.2
_________ _________
Subtotal Annuities............ 29,425.2 23,833.8 23.5
Investment advisory (2)......... 4,525.0 1,096.8 -
_________ _________
Financial services............ 33,950.2 24,930.6 36.2
Individual Life Insurance....... 2,993.3 2,700.9 10.8
_________ _________
Total......................... $36,943.5 $27,631.5 33.7
_________ _________
_________ _________
Individual life insurance
coverage issued.................. $ 2,538.0 $ 2,584.8 (1.8)
_________ _________
_________ _________
Individual life insurance
coverage in force................ $49,471.4 $47,772.5 3.6
_________ _________
_________ _________
<FN>
(1) Includes $13.7 million and $30.1 million for the three and six months ended
June 30, 1997, respectively, and $12.3 million and $32.2 million, respectively,
for the same periods a year ago, for annuity premiums on contracts converting
from the accumulation phase to payout options with life contingencies.
(2) The three and six months ended June 30, 1997 include $9.6 million and $17.8 million,
respectively, of fees and other income and $6.8 million and $12.7 million, respectively,
of operating expenses and, at June 30, 1997, $2,907.6 million of assets under management
that were previously reported in the Large Case Pensions segment, reflecting the
consolidation of the Company's investment advisory services and certain other pension
products which complement Aetna Retirement Services' business strategy.
(3) Excludes net unrealized capital gains of approximately $318 million and $155
million at June 30, 1997 and 1996, respectively.
(4) Includes $6,142.9 million and $3,772.3 million at June 30, 1997 and 1996,
respectively, of assets invested through ARS products in unaffiliated mutual funds.
</TABLE>
ARS' net income for the three and six months ended June 30, 1997
increased $11 million when compared with the same periods a year
ago. Excluding net realized capital gains, results for the three
and six months ended June 30, 1997 increased $10 million, or 21%,
and $16 million, or 18%, respectively, from the prior year periods
reflecting improved earnings from financial services products
partially offset by lower earnings related to individual life
insurance products.
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
____________________________________
The table below sets forth earnings by product type, excluding net
realized capital gains (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Millions) June 30, June 30,
___________________ __________________
1997 1996 1997 1996
____ _______ ____ _______
<S> <C> <C> <C> <C>
Financial services $ 39.8 $ 25.6 $ 76.5 $ 52.6
Individual life insurance 16.7 21.1 32.9 40.4
_______ _______ _______ _______
Total $ 56.5 $ 46.7 $ 109.4 $ 93.0
_______ _______ _______ _______
_______ _______ _______ _______
</TABLE>
The $14 million and $24 million increases in earnings for the
three and six months ended June 30, 1997, respectively, for
financial services products reflects increased fee income
primarily from increased assets under management. Assets under
management (excluding approximately $2.9 billion of assets under
management that were previously reported in the Large Case
Pensions segment) increased by 23% when compared to the same
period a year ago primarily due to continued business growth
through deposits and appreciation in the stock market.
Earnings for the three and six months ended June 30, 1997 from
individual life insurance products decreased $4 million and $8
million, respectively, primarily due to unfavorable mortality
experience.
Earnings for financial services products reflect lower operating
expenses relative to assets under management, and individual life
insurance earnings also reflect lower operating expenses, in both
cases resulting from cost savings associated with previous
restructurings.
Of the $11.9 billion and $11.4 billion of fixed annuity assets
under management at June 30, 1997 and 1996, respectively, 24% were
fully guaranteed and 76% were experience rated. The average
annualized earned rate on investments supporting fully guaranteed
investment contracts was 7.8% and 7.9% and the average annualized
earned rate on investments supporting experience rated investment
contracts was 8.0% and 8.1% for the six months ended June 30, 1997
and 1996, respectively. The average annualized credited rate on
fully guaranteed investment contracts was 6.7% and 6.7% and the
average annualized credited rate on experience rated investment
contracts was 5.9% and 6.1% for the six months ended June 30, 1997
and 1996, respectively. The resulting annualized interest margins
on fully guaranteed investment contracts were 1.1 % and 1.2% and
on experience rated investment contracts were 2.1% and 2.0% for
the six months ended June 30, 1997 and 1996, respectively.
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
____________________________________
The duration of the investment portfolios supporting ARS'
liabilities is regularly monitored and adjusted in order to
maintain an aggregate duration that is within 0.5 years of the
estimated duration of the underlying liabilities. For a fuller
discussion of the Company's asset/liability management practices,
see the Company's 1996 Annual Report.
In July 1997, in connection with the Company's efforts to expand
its financial planning business, the Company acquired Financial
Network Investment Corporation ("FNIC"). FNIC is a broker/dealer
which is licensed in all 50 states and includes more than 2,400
registered representatives and 177 branch offices in 35 states.
The purchase price was not material to the Company.
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
International
_____________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
_________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 359.0 $ 278.0 29.1% $ 676.4 $ 517.6 30.7%
Net investment income................ 93.8 82.8 13.3 186.1 165.8 12.2
Fees and other income................ 32.6 32.5 .3 66.7 61.9 7.8
Net realized capital gains........... 6.9 .2 - 10.8 1.3 -
________ ________ ________ ________
Total revenue..................... 492.3 393.5 25.1 940.0 746.6 25.9
Current and future benefits.......... 300.2 237.0 26.7 576.5 450.2 28.1
Operating expenses................... 114.6 88.1 30.1 215.0 171.9 25.1
Interest expense..................... 1.5 1.7 (11.8) 3.2 3.5 (8.6)
Amortization of goodwill and
other acquired intangible assets.... 4.8 .7 - 7.1 1.4 -
Amortization of deferred policy
acquisition costs................... 20.9 21.6 (3.2) 40.4 38.5 4.9
________ ________ ________ ________
Total benefits and expenses....... 442.0 349.1 26.6 842.2 665.5 26.6
________ ________ ________ ________
Income before income taxes........... 50.3 44.4 13.3 97.8 81.1 20.6
Income taxes ........................ 13.9 17.1 (18.7) 30.4 29.1 4.5
________ ________ ________ ________
Net income........................... $ 36.4 $ 27.3 33.3 $ 67.4 $ 52.0 29.6
________ ________ ________ ________
________ ________ ________ ________
Net realized capital gains,
net of tax (included above)......... $ 4.2 $ .2 - $ 7.7 $ .8 -
________ ________ ________ ________
________ ________ ________ ________
</TABLE>
International's net income for the three and six months ended June
30, 1997 increased by $9 million and $15 million, respectively,
compared with the same periods a year ago. Excluding net realized
capital gains, results for the three and six months ended June 30,
1997 increased $5 million, or 19%, and $9 million, or 17%,
respectively, from the prior year, primarily reflecting continued
business growth in Taiwan and results from the Company's newly
acquired operations in Brazil. The improvement for the six months
ended June 30, 1997 was partially offset by increased losses
related to start-up operations, primarily those in the
Philippines.
In April 1997, the Company acquired a 49.0% stake in a joint
venture formed with Sul America Seguros, Brazil's largest
insurance company. The joint venture provides health and life
insurance, as well as private pension plan, products. The joint
venture is being accounted for on the equity basis. The initial
purchase price of approximately $300 million was funded through
the issuance of commercial paper in the Corporate segment.
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions
___________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
_________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 43.8 $ 52.1 (15.9)% $ 87.3 $ 92.9 (6.0)%
Net investment income................ 361.2 395.5 (8.7) 726.8 838.4 (13.3)
Fees and other income (3)............ 8.4 23.2 (63.8) 17.3 52.5 (67.0)
Net realized capital gains (losses).. (6.1) 2.5 - (1.2) 12.7 -
__________ __________ _________ __________
Total revenue..................... 407.3 473.3 (13.9) 830.2 996.5 (16.7)
Current and future benefits.......... 356.5 407.2 (12.5) 721.2 868.5 (17.0)
Operating expenses (3)............... 8.2 22.9 (64.2) 15.8 43.2 (63.4)
Reductions of loss on discontinued
products............................ - (170.0) (100.0) (172.5) (170.0) 1.5
__________ __________ _________ __________
Total benefits and expenses....... 364.7 260.1 40.2 564.5 741.7 (23.9)
__________ __________ _________ __________
Income before income taxes........... 42.6 213.2 (80.0) 265.7 254.8 4.3
Income taxes......................... 17.6 75.3 (76.6) 99.3 90.1 10.2
__________ __________ _________ __________
Net income........................... $ 25.0 $ 137.9 (81.9) $ 166.4 $ 164.7 1.0
__________ __________ _________ __________
__________ __________ _________ __________
Net realized capital gains (losses),.
net of tax (included above)......... $ (3.1) $ 1.7 - $ .1 $ 8.3 (98.8)
__________ __________ _________ __________
__________ __________ _________ __________
Deposits not included in premiums
above............................... $ 417.2 $ 528.0 (21.0) $ 922.2 $ 922.4 -
__________ __________ _________ __________
__________ __________ _________ __________
Assets under management (1)(2)(3).... $33,849.5 $ 36,884.9 (8.2)
_________ __________
_________ __________
<FN>
(1) Excludes net unrealized capital gains of approximately $255 million and $150
million at June 30, 1997 and 1996, respectively.
(2) Includes assets under management of $7,751.3 million and $9,097.3 million at
June 30, 1997 and 1996, respectively, related to discontinued products.
(3) The three and six months ended June 30, 1996 include $7.5 million and $15.7 million,
respectively, of fees and other income and $5.4 million and $12.7 million, respectively,
of operating expenses and, at June 30, 1996, assets under management valued at $2,672.2
million which are currently reported in the ARS segment, reflecting the consolidation of
the Company's investment advisory services and certain other pension products which
complement ARS' business strategy.
</TABLE>
Large Case Pensions' net income for the three and six months ended
June 30, 1997 decreased by $113 million and increased by $2
million, respectively, compared with the same periods a year ago.
Excluding the reduction of the loss on discontinued products
(discussed below) and net realized capital gains or losses,
results for the three and six months ended June 30, 1997 increased
$2 million, or 9%, and $12 million, or 26%, respectively, from the
prior year, reflecting favorable prior year reserve development
and lower operating expenses resulting from the runoff of the
business. These results also reflect a decrease and an increase
for the three and six months ended June 30, 1997, respectively, in
income earned on investments supporting Large Case Pensions'
capital, including earnings from leveraged buyout and venture
capital limited partnerships.
Assets under management at June 30, 1997 were 8% lower than a year
earlier, primarily as a result of the continuing runoff of the
underlying liabilities and the consolidation into the ARS segment
of the Company's investment advisory services and certain other
pension products which complement ARS' business strategy.
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
Net realized capital gains for the three months ended June 30,
1996 include a gain of $25 million related to the sale of ARI
which was substantially offset by net realized capital losses
related to bond sales. The earnings of ARI for the three and six
months ended June 30, 1996 were not material to Large Case
Pensions' earnings.
General account assets supporting experience rated products may be
subject to participant or contractholder withdrawal. Participant
withdrawals are generally subject to significant tax and plan
constraints. Experience rated contractholder and participant
withdrawals and transfers were as follows (excluding
contractholder transfers to other Company products) (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
___________________________ _________________________
1997 1996 1997 1996
_____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $ 230.6 $ 289.8 $ 457.4 $ 607.9
________ ________ ________ ________
________ ________ ________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments $ 50.3 $ 47.1 $ 136.1 $ 362.3 (2)
________ ________ ________ ________
________ ________ ________ ________
Participant withdrawals $ 30.9 $ 44.7 $ 64.8 $ 101.1
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
(2) Primarily relates to an unscheduled withdrawal by one contractholder.
</TABLE>
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case
pension products (single-premium annuities ("SPAs") and guaranteed
investment contracts ("GICs")) in 1993. Under the Company's
accounting for these discontinued products, a reserve for anticipated
future losses from these products was established, and the reserve is
reviewed by management quarterly. As long as the reserve continues to
represent management's then best estimate of expected future losses,
results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the
reserve and do not affect the Company's results of operations. As a
result of management's detailed review in the first quarter of 1997,
the Company released $173 million (pretax) of the reserve,
constituting the remaining portion of the reserve related to GICs,
primarily as a result of continued favorable developments in real
estate markets. The resulting reserve reflects management's best
estimate of anticipated future net losses. To the extent that
aggregate future losses on GICs and SPAs are greater or less than
anticipated, the Company's results of operations would be adversely
or positively affected, respectively. The discussion below presents
information for the discontinued SPA and GIC products on a combined
basis. (Refer to the Company's 1996 Annual Report.)
<PAGE> 41
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
At the time of discontinuance, a receivable from Large Case
Pensions' continuing products equivalent to the net present value
of the anticipated cash flow shortfalls was established for the
discontinued products. Interest on the receivable is accrued at
the discount rate which was used to calculate the loss on
discontinuance. The offsetting payable, on which interest is
similarly accrued, is reflected in continuing products. Interest
on the payable generally offsets the investment income on the
assets available to fund the shortfall. At June 30, 1997, the
receivable from continuing products, net of related deferred taxes
payable of $37 million on the accrued interest income, was $504
million. During 1996, $315 million of the receivable, net of the
related deferred taxes payable on the accrued interest income of
$19 million, was funded from continuing products to meet liquidity
needs from maturing GICs. As of June 30, 1997, no additional
funding of the receivable had taken place.
Results of discontinued products were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
___________________________ _________________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Interest margin (a) $ 5.9 $ 1.2 $ 11.8 $ 9.9
Net realized capital gains 41.5* 1.4 61.3* 15.6
Interest earned on receivable from
continuing products 5.4 8.6 10.8 17.0
Other, net (1.6) (1.8) .3 5.0
_______ _______ _______ _______
Results of discontinued products,
after tax $ 51.2 $ 9.4 $ 84.2 $ 47.5
_______ _______ _______ _______
_______ _______ _______ _______
Results of discontinued products,
pretax $ 80.8 $ 15.0 $ 133.2 $ 74.1
_______ _______ _______ _______
_______ _______ _______ _______
<FN>
(a) Represents the amount by which interest credited to holders of fully guaranteed
large case pension contracts is less than interest earned on invested assets
supporting such contracts.
* Includes net realized capital gains of $37.3 million for the three and six months
ended June 30, 1997 resulting from the sale of investments in order to meet liquidity
needs.
</TABLE>
The activity in the reserve for anticipated future losses on
discontinued products during the first six months of 1997 was as
follows (pretax, in millions):
<TABLE>
<CAPTION>
<S> <C>
Reserve at December 31, 1996 $ 986.8
Results of discontinued products 133.2
Reserve reduction (172.5)
________
Reserve at June 30, 1997 $ 947.5
________
________
</TABLE>
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
Distributions on discontinued products were as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
___________________________ __________________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities,
settlements and benefit
payments (1) $ 423.8 $ 733.7 $ 866.9 $1,366.9
________ ________ ________ ________
________ ________ ________ ________
Participant directed withdrawals $ 9.7 $ 14.9 $ 19.7 $ 30.4
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes early retirement of guaranteed investment contracts liabilities of $175.0
million and $181.8 million for the three and six months ended June 30, 1996, respectively.
There were no such retirements for the three and six months ended June 30, 1997.
</TABLE>
Cash required to fund these distributions was provided by earnings
and scheduled payments on and sales of invested assets.
See "General Account Investments" on page 45.
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Corporate
_________
<TABLE>
<CAPTION>
Operating Summary
(Millions, after tax) Three Months Ended June 30, Six Months Ended June 30,
___________________________ __________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Interest expense.................... $ 38.5 $ 17.5 120.0% $ 73.7 $ 36.9 99.7%
Other (income) expense, net (1)..... (9.0) 228.8 - 19.5 253.3 (92.3)
<FN>
(1) Includes after-tax net realized capital gains of $33.5 million and $33.8 million for
the three and six months ended June 30, 1997, respectively, and $3.5 million and $6.0
million for the same periods a year ago. After-tax net realized capital gains for the
three and six months ended June 30, 1997, include a $33.6 million gain related to the
sale of a portion of the Company's investment in Travelers Property Casualty Corp.
</TABLE>
The increase in interest expense of $21 million and $37 million
for the three and six months ended June 30, 1997, respectively,
compared to the same periods a year ago primarily results from
additional debt incurred in connection with the financing of the
U.S. Healthcare merger.
Excluding net realized capital gains, other (income) expense
decreased $208 million and $206 million for the three and six
months ended June 30, 1997, respectively, compared with the same
period a year ago. Other (income) expense for the three and six
months ended June 30, 1996 includes a $235 million (after tax)
severance and facilities charge related to actions associated with
the sale of the Company's property-casualty operations in the
second quarter of 1996 (see "Severance and Facilities Charges")
and interest income of $30 million (after tax) for the three and
six months ended June 30, 1996 earned from the investment of the
net proceeds received from the sale of the Company's property-
casualty operations. Excluding these items, other expense for the
three and six months ended June 30, 1997 was approximately level
compared with the same periods a year ago.
<PAGE> 44
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Severance and Facilities Charges
________________________________
During 1996, the Company established severance and facilities
reserves in the Aetna U.S. Healthcare, ARS and Corporate segments
to reflect the integration of the health businesses and certain
other actions taken or to be taken in order to make its businesses
more competitive. During the six months ended June 30, 1997, the
Company charged costs of $160 million to such reserves. In
addition, the Company also reduced the Aetna U.S. Healthcare
severance and facilities reserve by $45 million (pretax) during
the six months ended June 30, 1997 due to higher attrition than
was contemplated in the establishment of the reserve. Of the
approximately 9,400 positions expected to be eliminated by the
Company in the aggregate, 5,288 had been eliminated through
severance actions and the effects of higher attrition by June 30,
1997 and the related severance benefits charged against the
reserve.
The Aetna U.S. Healthcare severance actions are expected to be
substantially completed by the end of 1998. The ARS severance
actions are expected to be substantially completed by March 31,
1998. The Corporate severance actions and the vacating of certain
leased office space are expected to be substantially completed by
the end of 1997. In connection with the sale of the Company's
property-casualty operations, the Company vacated, and the
purchaser subleased, at market rates for a period of eight years,
the space that the Company occupied in the CityPlace office
facility in Hartford. The remaining lease payments (net of
expected subrentals) on the facilities (other than the CityPlace
office facility) are payable over approximately the next three
years.
See Note 9 of Condensed Notes to Financial Statements for
additional information.
<PAGE> 45
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
Debt Securities
As of June 30, 1997 and December 31, 1996, debt securities
represented 74% of the Company's total general account invested
assets as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1997 1996
________________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 5,002.4 $ 5,189.3
Supporting experience rated products 14,471.8 14,888.9
Supporting remaining products 12,159.9 12,258.1
__________________________________
Total debt securities (1) $ 31,634.1 $ 32,336.3
__________________________________
__________________________________
<FN>
(1) Total debt securities at June 30, 1997 and December 31, 1996 include "Below
Investment Grade" securities of $1.7 billion of which 69% and 73%, respectively,
support discontinued and experience rated products. See the Company's 1996 Annual
Report for a discussion of "Below Investment Grade" securities.
</TABLE>
Debt securities reflect net unrealized capital gains of
$771 million at June 30, 1997, compared with $895 million at
December 31, 1996. Of the net unrealized capital gains at June
30, 1997, $169 million and $332 million relate to assets
supporting discontinued products and experience rated pension
contractholders, respectively.
Mortgage Loans
At June 30, 1997 and December 31, 1996, the Company's mortgage
loan investments, net of impairment reserves, supported the
following types of business:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1997 1996
_________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 2,526.5 $ 2,730.7
Supporting experience rated products 2,149.5 2,370.5
Supporting remaining products 1,646.1 1,599.7
_______________________
Total mortgage loan investments (1) $ 6,322.1 $ 6,700.9
_______________________
_______________________
<FN>
(1) Mortgage loans at June 30, 1997 and December 31, 1996 include $722.2 million and
$801.1 million of restructured, potential problem and problem loans, respectively,
of which 81% and 80% support discontinued and experience rated products, respectively.
(See the Company's 1996 Annual Report for a discussion of problem, restructured and
potential problem loans). Specific impairment reserves on these loans were $126.8
million and $144.1 million at June 30, 1997 and December 31, 1996, respectively.
(See Note 6 of Condensed Notes to Financial Statements).
</TABLE>
<PAGE> 46
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
During the first six months of 1997, the Company continued to
manage its mortgage loan portfolio to reduce the balance in
absolute terms and relative to invested assets, and to reduce its
overall risk. The $379 million decrease in the mortgage loan
portfolio primarily reflects the effect of loan prepayments and
repayments of maturing loans.
The Company foreclosed on loans with a principal balance of
$27 million and collateral with a fair market value of $25 million
in the first six months of 1997. Additional loans with a
principal balance of $58 million were in the process of
foreclosure at June 30, 1997.
The Company does not accrue interest on problem loans or
restructured loans when management believes the collection of
interest is unlikely. The amount of pretax investment income
required by the original terms of problem and restructured loans
outstanding at June 30 and the portion actually recorded as income
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
__________________ __________________
(Millions) 1997 1996 1997 1996
________________________________________________________________ __________________
<S> <C> <C> <C> <C>
Income which would have been recorded under
original terms of loans $ 13.2 $ 30.8 $ 28.6 $ 48.8
Income recorded 9.2 23.9 21.1 35.3
_______ _______ _______ _______
Lost investment income (1) $ 4.0 $ 6.9 $ 7.5 $ 13.5
_______ _______ _______ _______
_______ _______ _______ _______
<FN>
(1) Lost investment income included 75% related to income allocated to investments
supporting discontinued and experience rated products for the three and six months
ended June 30, 1997, and 72% and 79%, respectively, for the same periods a year ago.
</TABLE>
Real Estate
The Company's equity real estate balances, net of write-downs and
reserves, were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1997 1996
_____________________________________________________________________
<S> <C> <C>
Investment real estate $ 205.2 $ 192.0
Properties held for sale (1)(2)(3) 431.5 658.2
________________________
Total $ 636.7 $ 850.2
________________________
________________________
<FN>
(1) Includes $133.2 million of in-substance foreclosures at December 31, 1996.
There were no in-substance foreclosures at June 30, 1997.
(2) Properties held for sale at June 30, 1997 and December 31, 1996 include 85%
and 84%, respectively, supporting discontinued and experience rated products.
(3) Foreclosed real estate classified as properties held for sale was carried at 54%
and 57% of the Company's cash investment (unpaid mortgage balance plus capital
additions) at June 30, 1997 and December 31, 1996, respectively.
</TABLE>
<PAGE> 47
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Total after-tax net realized capital losses (gains) from real
estate write-downs and changes in the valuation reserves were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
__________________ _________________
(Millions) 1997 1996 1997 1996
______________________________________________________________________ _________________
<S> <C> <C> <C> <C>
Allocable to discontinued products $ 1.6 $ .1 $ 5.7 $ (3.0)
Allocable to experience rated products 2.0 - 3.1 .1
Allocable to remaining products 0.4 16.2 1.5 16.2
</TABLE>
Use of Derivatives and Other Investments
The Company's use of derivatives is generally limited to hedging
activity and principally consists of using foreign exchange forward
contracts, futures contracts, interest rate swap agreements and
warrants to hedge interest rate, price and currency risks. These
instruments, viewed separately, subject the Company to varying
degrees of market and credit risk. However, when used for hedging,
the expectation is that these instruments would reduce overall market
risk. Market risk is the possibility that future changes in market
prices may decrease the market value of one or all of these financial
instruments. Credit risk arises from the possibility that
counterparties may fail to perform under the terms of the contracts.
Management does not believe that its current hedging activity will
have a material effect on the Company's liquidity or results of
operations. (See Note 8 of Condensed Notes to Financial Statements.)
The Company also has investments in certain debt instruments with
derivative characteristics, including those where market value is
at least partially determined by, among other things, levels of or
changes in domestic and/or foreign interest rates (short-term or
long-term), exchange rates, prepayment rates, equity markets or
credit ratings/spreads. The amortized cost and fair value of
these securities included in the debt securities portfolio as of
June 30, 1997 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
_____________________________________________________________________________
<S> <C> <C>
Residential collateralized mortgage obligations: $ 2,683.2 $ 2,773.2
Principal-only strips (included above) 65.2 74.5
Interest-only strips (included above) 8.1 22.4
Other structured securities with derivative
characteristics (1) 82.0 84.3
<FN>
(1) Represents nonleveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed-income securities and
interest rate swap agreements.
</TABLE>
<PAGE> 48
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
_______________________________
Financings and Financing Capacity
Cash and cash equivalents at June 30, 1997 and December 31, 1996 were
$1.6 billion and $1.5 billion, respectively.
Substantially all of the Company's short-term and long-term
borrowings and financings are conducted through Aetna Services and
are fully and unconditionally guaranteed by Aetna Inc. (See Note 11
of Condensed Notes to Financial Statements).
The Company uses short-term borrowings from time to time to address
timing differences between receipts and disbursements. The maximum
amount of domestic short-term borrowings outstanding during the first
six months of 1997 was $858 million.
In the second quarter of 1997, the Company issued an additional $314
million of commercial paper in connection with the Company's
investment in a joint venture in Brazil. The commercial paper was
repaid prior to June 30, 1997.
Common Stock Transactions
In October 1996, the Board of Directors of the Company (the "Board")
authorized the repurchase of up to 5 million shares of its common
stock from time to time. As of June 30, 1997, 2,998,400 shares of
common stock had been repurchased pursuant to this authority at a
cost of $237 million, of which 1,804,000 shares at a cost of $154
million were repurchased during the six months ended June 30, 1997.
Ratings
The ratings of certain of Aetna Inc.'s subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
____________________________________________________________
Moody's Investors Standard
A.M. Best Duff & Phelps Service & Poor's
____________________________________________________________
<S> <C> <C> <C> <C>
Aetna Services, Inc.
(senior debt) **
February 4, 1997 * A A2 A-
August 5, 1997 * A A2 A
Aetna Services, Inc.
(commercial paper) **
February 4, 1997 * D-1 P-1 A-2
August 5, 1997 * D-1 P-1 A-1
Aetna Life Insurance Company
(claims paying)
February 4, 1997 A AA- Aa3 A
August 5, 1997 A AA- A1 A+
Aetna Life Insurance and Annuity Company
(claims paying)
February 4, 1997 A+ AA+ Aa2 AA-
August 5, 1997 A+ AA+ Aa3 AA-
<FN>
* Not rated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
</TABLE>
In addition, certain of the Company's HMO subsidiaries are rated
on their claims paying ability by A.M. Best. All such ratings are
in the "Excellent" or "Superior" categories.
<PAGE> 49
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Dividends
On June 27, 1997, the Board declared a quarterly dividend of $.20 per
share of common stock and $1.18945 per share of 6.25% Class C Voting
Mandatorily Convertible Preferred Stock to shareholders of record at
the close of business on July 25, 1997, payable August 15, 1997.
New Accounting Pronouncements
_____________________________
See Note 2 of Condensed Notes to Financial Statements for a
discussion of recently issued accounting pronouncements.
Regulatory Environment
______________________
Legislation to reform the federal Medicare program was passed by
Congress on July 31, 1997 and is expected to be signed into law.
Certain provisions of this legislation will phase-in, beginning in
1998, changes to the Medicare risk HMO premium determination
methodology that will likely reduce increases in the premiums
payable to the Company as compared with the methodology previously
used. The level and extent of any such reductions will vary by
geographic market and other factors. While the phase-in
provisions will provide the Company with an opportunity to offset
any such reductions in premium increases by adjusting the premiums
payable by members, the benefits included in the Company's
products, and payment rates to hospitals, competition and other
factors may result in such adjustments not fully offsetting any
such reductions. See "Regulatory Environment" in the Company's
1996 Annual Report for further discussions of certain regulations
relating to the Company.
Forward-Looking Information
___________________________
See "Forward Looking Information", "Regulatory Environment" and
the "Outlook" section of each business segment in the Company's
1996 Annual Report for information regarding important factors
that may materially affect the Company.
<PAGE> 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most
part, in the ordinary course of its business operations, including
litigation in its health business concerning benefit plan coverage
and other decisions made by the Company, and alleged medical
malpractice by participating providers. While the ultimate
outcome of litigation against the Company cannot be determined at
this time, after consideration of the defenses available to the
Company and any related reserves established, it is not expected
to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results
of operations in future periods.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders of the Company was held
on Friday, April 25, 1997.
(b) Directors elected at the meeting:
[CAPTION]
<TABLE>
Votes Votes Broker
For Withheld Non-Votes
_____ ________ _________
<S> <C> <C> <C>
Leonard Abramson 143,036,602 2,083,850 0
Betsy Z. Cohen 143,089,040 2,031,412 0
Ronald E. Compton 142,898,963 2,221,489 0
William H. Donaldson 143,095,415 2,025,037 0
Barbara Hackman Franklin 143,090,045 2,030,407 0
Jerome S. Goodman 143,103,054 2,017,398 0
Earl G. Graves 143,098,840 2,021,612 0
Gerald Greenwald 143,148,302 1,972,150 0
Ellen M. Hancock 143,091,793 2,028,659 0
Richard L. Huber 143,123,334 1,997,118 0
Michael H. Jordan 143,133,690 1,986,762 0
Jack D. Kuehler 143,120,902 1,999,550 0
Frank R. O'Keefe, Jr. 143,075,965 2,044,487 0
Judith Rodin 143,114,021 2,006,431 0
Joseph T. Sebastianelli* 143,080,345 2,040,107 0
<FN>
* Mr. Sebastianelli resigned from the Board of Directors in May 1997.
</TABLE>
(c) Other matters voted upon:
[CAPTION]
<TABLE>
Votes Votes Broker
For Against Abstain Non-Votes
_____ _______ _______ _________
<S> <C> <C> <C> <C>
(1) Appointment of
Independent Auditors 144,379,322 425,826 315,304 0
(2) Proposal to Rotate
Location of Annual
Meeting 5,252,312 124,468,494 1,804,349 13,595,297
</TABLE>
<PAGE> 51
PART II. OTHER INFORMATION (Continued)
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth the Company's ratio of earnings to
fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Years ended December 31,
____________________________________
June 30, 1997 1996 1995 1994 1993 1992
________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 7.12 2.45 4.97 4.74 (a) 1.90
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 5.34 2.10 4.97 4.74 (a) 1.90
<FN>
(a) The Company reported a pretax loss from continuing operations in 1993 which
was inadequate to cover fixed charges by $1.0 billion.
</TABLE>
For purposes of computing both the ratio of earnings to fixed
charges and the ratio of earnings to combined fixed charges and
preferred stock dividends, "earnings" represent consolidated
earnings from continuing operations before income taxes,
cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of
interest (and the portion of rental expense deemed representative
of the interest factor) and includes the dividends paid to
preferred shareholders of a subsidiary. (See Note 14 of Notes to
Financial Statements in the Company's 1996 Annual Report.) During
1995, 1994, 1993 and 1992 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined
fixed charges and preferred stock dividends were the same as the
ratios of earnings to fixed charges.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(12) Statement Re Computation of Ratios.
(12.1) Computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended
June 30, 1997 and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992 for the Company and
for the six months ended June 30, 1997 and for the
year ended December 31, 1996 for Aetna Services, Inc.
(15) Letter Re Unaudited Interim Financial Information.
(15.1) Letter from KPMG Peat Marwick LLP acknowledging
awareness of the use of a report on unaudited interim
financial information, dated August 4, 1997.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE> 52
SIGNATURES
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 thereunto duly
authorized.
Aetna Inc.
_______________________
(Registrant)
Date August 5, 1997 By /s/ Robert J. Price
_____________________________
(Signature)
Robert J. Price
Vice President
and Corporate Controller
(Chief Accounting Officer)
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
____________________________________________________
(Millions) June 30, 1997 1996 1995 1994 1993 1992
________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 858.0 $ 338.7 $ 726.2 $ 627.5 $(1,014.7) $ 145.5
Add back fixed charges........... 141.6 245.1 187.0 170.8 154.7 171.5
Minority interest................ 8.3 16.4 16.1 11.4 7.0 8.6
________ _______ _______ _______ _________ _________
Income (loss) as adjusted..... $1,007.9 $ 600.2 $ 929.3 $ 809.7 $ (853.0) $ 325.6
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Fixed charges:
Interest on indebtedness....... $ 116.8(1) $ 168.3(1)$ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4
Portion of rents representative
of interest factor............ 24.8 76.8 71.1 72.2 77.3 90.1
________ _______ _______ _______ _________ _________
Total fixed charges........... $ 141.6 $ 245.1 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Preferred stock dividend
requirements.................... 47.1 41.1 - - - -
________ _______ _______ _______ _________ _________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 188.7 $ 286.2 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to fixed
charges......................... 7.12 2.45 4.97 4.74 (5.51) 1.90
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 5.34 2.10 4.97 4.74 (5.51) 1.90
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
<FN>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the Company's 1996
Annual Report.)
</TABLE>
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
(Millions) June 30, 1997 December 31, 1996
________________ _________________
<S> <C> <C>
Pretax income from continuing
operations...................... $ 783.7 $ 335.0
Add back fixed charges........... 139.7 243.8
Minority interest................ 8.5 16.4
________ ________
Income as adjusted............ $ 931.9 $ 595.2
________ ________
________ ________
Fixed charges:
Interest on indebtedness (2)... $ 115.4 $ 168.3
Portion of rents representative
of interest factor............ 24.3 75.5
________ ________
Total fixed charges........... $ 139.7 $ 243.8
________ ________
________ ________
Preferred stock dividend
requirements.................... - -
________ ________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 139.7 $ 243.8
________ ________
________ ________
Ratio of earnings to fixed
charges......................... 6.67 2.44
________ ________
________ ________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 6.67 2.44
________ ________
________ ________
<FN>
(1) Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities
of Aetna Services, Inc. (See Note 13 of Notes to Financial Statements in
the Company's 1996 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the Company's 1996
Annual Report.)
</TABLE>
Exhibit 15
<PAGE> 1
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Inc.
Hartford, Connecticut
Gentlemen:
Re: Registration Statements No. 333-07167, 333-07169, 33-52819,
33-52819-01, 333-08427, 333-08429, 333-08431 and 333-05791
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
August 4, 1997 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11
of the Act.
By /s/ KPMG PEAT MARWICK LLP
_____________________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
August 4, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period
ended June 30, 1997 for Aetna Inc. and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 31,634
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,393
<MORTGAGE> 6,322
<REAL-ESTATE> 637
<TOTAL-INVEST> 42,553
<CASH> 1,617
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,373
<TOTAL-ASSETS> 95,700
<POLICY-LOSSES> 18,041
<UNEARNED-PREMIUMS> 188
<POLICY-OTHER> 3,100
<POLICY-HOLDER-FUNDS> 19,033
<NOTES-PAYABLE> 2,376
865
0
<COMMON> 3,997
<OTHER-SE> 6,426
<TOTAL-LIABILITY-AND-EQUITY> 95,700
6,266
<INVESTMENT-INCOME> 1,687
<INVESTMENT-GAINS> 36
<OTHER-INCOME> 1,126
<BENEFITS> 6,366
<UNDERWRITING-AMORTIZATION> 101
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 858
<INCOME-TAX> 349
<INCOME-CONTINUING> 509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509
<EPS-PRIMARY> 3.19
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>There is not a material difference between primary and fully diluted
earnings per common share.
</FN>
</TABLE>
