<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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) Identification No.)
151 Farmington Avenue,
Hartford, Connecticut 06156
_______________________________ _____________________
(Address of principal (ZIP Code)
executive offices)
Registrant's telephone number, including area code: (860) 273-0123
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
___________________ _________________________
Common Stock $.01 par value New York Stock Exchange
6.25% Class C Voting Mandatorily New York Stock Exchange
Convertible Preferred Stock
$.01 par value
9 1/2% Cumulative Monthly Income New York Stock Exchange
Preferred Securities, Series A
(issued by a subsidiary)
6 3/8% Notes due August 15, 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of January 31, 1997 was
$12,519,793,850.
As of January 31, 1997, 149,772,274 shares of the registrant's
Common Stock $.01 par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 annual report to shareholders
(the "Annual Report"). (Parts I, II and IV)
Portions of the registrant's proxy statement to be filed on or about
March 21, 1997 (the "Proxy Statement"). (Parts III and IV)
<PAGE> 2
TABLE OF CONTENTS
Page
____
PART I
Item 1. Business.
A. Organization of Business 3
B. Financial Information about Industry Segments 4
C. Description of Industry Segments
1. Aetna U.S. Healthcare 4
2. Aetna Retirement Services 14
3. International 18
4. Large Case Pensions 20
5. General Account Investments 22
6. Other Matters
a. Regulation 23
b. NAIC IRIS Ratios 26
c. Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock
Dividends 26
d. Trademarks 27
e. Miscellaneous 27
Item 2. Properties. 28
Item 3. Legal Proceedings. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Executive Officers of Aetna Inc. 29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 31
Item 6. Selected Financial Data. 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 31
Item 8. Financial Statements and Supplementary Data. 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 31
PART III
Item 10. Directors and Executive Officers of the Registrant. 32
Item 11. Executive Compensation. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management. 32
Item 13. Certain Relationships and Related Transactions. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 32
Index to Financial Statement Schedules 38
Signatures 58
<PAGE> 3
PART I
Item 1. Business.
A. Organization of Business
Aetna Inc. and its subsidiaries (collectively, the "Company")
constitute the nation's largest health benefits company, based on
membership, and one of the nation's largest insurance and
financial services organizations centered around three core
businesses: health care, retirement services and international.
Aetna Inc., a Connecticut corporation, became the parent corporation
of Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life and
Casualty Company) and U.S. Healthcare, Inc. ("U.S. Healthcare") as a
result of the merger transaction on July 19, 1996. The merger has
been accounted for as a purchase of U.S. Healthcare. The Company's
consolidated results of operations include the results of Aetna
Services and, from the date of the merger, the results of U.S.
Healthcare. (See Note 2 of Notes to Financial Statements in the
Annual Report.)
On April 2, 1996, the Company sold its property-casualty operations
("Discontinued Operations") to an affiliate of The Travelers
Insurance Group Inc. ("Travelers"). (See Note 3 of Notes to
Financial Statements in the Annual Report.)
The Company's business operations are conducted in the following
segments: Aetna U.S. Healthcare, Aetna Retirement Services,
International and Large Case Pensions. The principal products
included in such segments are:
Aetna U.S. Healthcare:
Health products (including health maintenance organization,
point-of-service, preferred provider organization and
indemnity products)
Group life and disability insurance
Long-term care insurance
Aetna Retirement Services:
Financial services
Individual life insurance
International:
Life and health insurance and financial services
Large Case Pensions:
Retirement products (including pension and annuity products)
for primarily defined benefit and defined contribution
plans
In addition to the above, the Corporate segment includes interest
expense and corporate expenses not directly related to the
Company's business segments, such as staff area expenses,
advertising and contributions.
<PAGE> 4
B. Financial Information about Industry Segments
Revenue, income from continuing operations before income taxes, income
from continuing operations, income (loss) from Discontinued
Operations, net of tax, net income, and assets, by industry segment
are set forth in Note 17 to the Financial Statements, which is
incorporated herein by reference to the Annual Report. Revenue and
income from continuing operations before extraordinary item and
cumulative effect adjustments, attributable to each industry segment
are incorporated herein by reference to the Selected Financial Data in
the Annual Report.
Certain reclassifications have been made to 1995 and 1994 financial
information to conform to 1996 presentation.
C. Description of Industry Segments
1. Aetna U.S. Healthcare
Products and Services
_____________________
Aetna U.S. Healthcare provides a full spectrum of health products
(managed care and indemnity) and group insurance products (life,
disability and long-term care) on both an insured and an employer-
funded basis. Under insured plans, the Company assumes all or a
majority of health care cost, utilization, mortality, morbidity or
other risk depending on the product. Under employer-funded plans,
the customer, and not the Company, assumes all or a majority of
these risks.
Aetna U.S. Healthcare consists of the Health Risk business and the
Group Insurance and Other Health business.
Health products include health maintenance organization, point-of-
service, preferred provider organization and indemnity products.
The Health Risk business includes such health products offered on
an insured basis.
The Group Insurance and Other Health business includes group life
and disability insurance, long-term care insurance and all health
products offered on an employer-funded basis.
The following table summarizes premiums and fees and other income
for the Health Risk and Group Insurance and Other Health
businesses:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Health Risk $ 6,749.5 $ 4,960.9 $ 4,577.8
Group Insurance and Other Health 2,511.6 2,301.1 2,230.9
_________ _________ _________
Total Aetna U.S. Healthcare $ 9,261.1* $ 7,262.0 $ 6,808.7
_________ _________ _________
_________ _________ _________
U.S. Healthcare Pre Merger (historical amounts) $ 2,384.7** $ 3,542.1 $ 2,920.4
_________ _________ _________
_________ _________ _________
<FN>
* Includes U.S. Healthcare premiums and fees and other income from July 19, 1996 through
December 31, 1996.
** Reflects premiums and fees and other income from January 1, 1996 through July 18, 1996.
</TABLE>
Under insured plans, Aetna U.S. Healthcare charges a premium and
under employer-funded plans, Aetna U.S. Healthcare charges a fee
for administrative and claim services.
<PAGE> 5
The principal Commercial health products offered by Aetna U.S.
Healthcare include the following:
Health Maintenance Organization ("HMO") plans offer comprehensive
managed care benefits generally through participating network
physicians, hospitals and other providers. When an individual
enrolls in one of the Company's HMOs, he or she selects a primary
care physician ("PCP") from among the physicians participating in
the Aetna U.S. Healthcare network. PCPs generally are family
practitioners, internists, general practitioners or pediatricians
who provide necessary preventive and primary medical care, and are
generally responsible for coordinating other necessary health care
including making referrals to participating network specialists.
Preventive care and quality improvement are emphasized in these
plans. The Company offers HMO plans with varying levels of
copayments which result in different levels of premium rates. HMO
plans are principally offered on an insured basis. HMO membership
totaled 3.1 million and 2.8 million (on a basis consistent with
1996 reflecting the inclusion of U.S. Healthcare) as of
December 31, 1996 and 1995, respectively.
Point-of-Service ("POS") plans blend the advantages of HMO and
indemnity plans. Members can have comprehensive HMO-style
benefits through network providers with minimum out-of-pocket
expense (copayments) and also can go directly, without a referral,
to any provider they choose, subject to, among other things,
certain deductibles and coinsurance, with out-of-pocket maximums.
POS plans are offered on both insured and employer-funded bases.
POS membership totaled 3.5 million and 2.6 million (on a basis
consistent with 1996 reflecting the inclusion of U.S. Healthcare)
as of December 31, 1996 and 1995, respectively.
Preferred Provider Organization ("PPO") plans offer the member
flexibility in selecting any health care provider, with benefits
paid at a higher level when care is received from a network
provider. Health care services are typically subject to, among
other things, deductibles and coinsurance, with member cost
sharing limited by out-of-pocket maximums. PPO plans are offered
on both insured and employer-funded bases. PPO membership totaled
3.8 million and 3.9 million (on a basis consistent with 1996
reflecting the inclusion of U.S. Healthcare) as of December 31,
1996 and 1995, respectively.
Indemnity plans offer the member flexibility in selecting any
health care provider for covered services. Some medical
management features may be included in these plans, such as
inpatient precertification, limiting payments to reasonable and
customary charges and additional benefits for preventive services
(e.g. cancer screening). Coverage is subject to deductibles and
coinsurance, with member cost sharing limited by out-of-pocket
maximums. Indemnity plans are offered on both insured and
employer-funded bases. Indemnity membership totaled 3.4 million
and 4.1 million (on a basis consistent with 1996 reflecting the
inclusion of U.S. Healthcare) as of December 31, 1996 and 1995,
respectively.
<PAGE> 6
In addition to Commercial health products, the Company also offers
coverage for Medicare beneficiaries and individuals eligible for
Medicaid benefits. Such coverages include the following:
Through contracts with the Health Care Financing Administration
("HCFA"), Aetna U.S. Healthcare HMOs offer coverage for Medicare-
eligible individuals in certain geographic areas. All services
must be obtained through network providers, with the exception of
emergency and urgent care. Members generally receive enhanced
benefits over standard Medicare fee-for-service coverage,
including vision, hearing and pharmacy coverage. Such Medicare
plans are offered primarily on an insured basis. Medicare
membership totaled .3 million and .2 million (on a basis
consistent with 1996 reflecting the inclusion of U.S. Healthcare)
as of December 31, 1996 and 1995, respectively.
In addition, the Company also serves as an administrator of
Medicare benefits in certain states, providing claim services for
physicians, hospitals, skilled nursing facilities and home health
agencies in exchange for a fee. During the third quarter of 1996,
the Company announced its intent to exit this business, in part to
more actively participate in offering Medicare risk insurance.
The contract with HCFA to provide these administrative services is
expected to expire before the end of 1997.
The Company has contracts with certain state and local agencies to
offer coverage for Medicaid-eligible individuals. Benefits are
determined by the contracted agencies. Medicaid is offered on an
insured basis. Medicaid membership totaled .1 million as of
December 31, 1996 and 1995 (on a basis consistent with 1996
reflecting the inclusion of U.S. Healthcare).
Aetna U.S. Healthcare offers a variety of specialty health care
coverages offered as either supplements to health products or as
stand-alone products. Such coverages include indemnity and managed
dental plans, prescription drug, vision, wellness programs, employee
assistance and behavioral health services, as well as network-based
workers' compensation case management services.
These specialty health coverages and services are included in either
Health Risk or Group Insurance and Other Health business, with the
exception of employee assistance, behavioral health and network-based
workers' compensation case management services, which are only
included in Group Insurance and Other Health.
Aetna U.S. Healthcare group insurance products consist primarily of
the following:
Group Life Insurance consists principally of renewable term coverage,
the amounts of which may be fixed or linked to individual employee
wage levels. Basic and supplemental term coverage and spouse and
dependent coverages are available. Group universal life and
accidental death benefit coverages are also available. Group Life
Insurance is offered on an insured basis. Group Life membership
totaled 8.5 million and 8.0 million as of December 31, 1996 and 1995,
respectively.
<PAGE> 7
Group Disability Insurance provides coverage for disabled employees'
income replacement benefits for both short-term disability and long-
term disability. The Company also offers a managed disability product
with additional case management features. Group disability insurance
coverages are offered on both an insured and employer-funded basis.
Group disability membership totaled 2.5 million and 2.2 million (on a
basis consistent with 1996 reflecting the inclusion of U.S.
Healthcare) as of December 31, 1996 and 1995, respectively.
Long-Term Care Insurance provides coverage for long-term care expenses
in a nursing home, adult day care or home setting. Long-term care
insurance is offered on an insured basis. Long-term care membership
totaled .1 million as of December 31, 1996 and 1995 (on a basis
consistent with 1996 reflecting the inclusion of U.S. Healthcare).
Provider Networks
_________________
General
Aetna U.S. Healthcare provides members with access to health care
services through networks of independent health care providers. The
Company contracts with providers to participate in its provider
networks as it expands into new geographic areas or as considered
necessary in order to serve members. The providers in the Company's
networks are independent contractors and are neither employees or
agents of the Company (a small number of provides are employed by
professional corporations managed by the Company).
The HMOs operated by Aetna U.S. Healthcare most closely adhere to the
individual practice model. Under the individual practice model, the
HMO contracts with independent physicians who are broadly dispersed
throughout a community and who care for patients in their own offices.
Participating physicians generally also have patients who are not
members of the Company's HMOs. In the Company's HMOs, the primary
care physician plays an important role in practicing preventive
medicine and acts on behalf of the HMO member to coordinate the care
provided by specialist physicians, hospitals, and other health care
providers.
Aetna U.S. Healthcare employs a variety of practices to help contain
the cost of medical services. In addition to contracts with health
care providers (discussed below), such procedures include the
development and implementation of standards for the appropriate
utilization of health care resources and working with health care
providers to review data in order to help them improve consistency and
quality.
The Company has developed contractual arrangements with providers to
help control the cost of medical services. These contractual
arrangements cover the majority of medical services.
At December 31, 1996, Aetna U.S. Healthcare provider networks included
approximately 70,000 primary care physicians, 115,000 specialist
physicians and 2,500 hospitals.
<PAGE> 8
Contracting
Primary Care Physicians
Compensation by the Company's HMOs to PCPs is principally on a
capitated basis, although fee-for-service contracts also exist. Under
a capitation arrangement, physicians receive a monthly fixed fee for
each HMO member, regardless of the medical services provided to the
member. In some instances, the capitation rate is subject to
adjustment based on the attainment of certain criteria including
comprehensiveness of care, quality of care and utilization. This
quality-based incentive program is administered via the Company's
Quality Care Compensation System. In the fee-for-service arrangement,
network physicians are paid for health care services provided to the
member based upon an agreed-upon fee schedule.
Hospitals
Aetna U.S. Healthcare negotiates contracts that provide for all-
inclusive per diem, per case and capitated hospitalization rates,
with fixed rates for ambulatory surgery and emergency room
services. Certain contracted hospitals' final compensation is
based upon attainment of agreed-upon quality and other measures.
Aetna U.S. Healthcare HMOs generally require precertification of
elective admissions and monitoring of the length of hospital
stays. Participating physicians generally admit their HMO
patients to hospitals using referral procedures that direct the
hospital to the Company's patient management unit, which confirms
the patient's membership status while obtaining pertinent data.
This unit also coordinates related activities, including the
subsequent transition to the home environment and home care, if
necessary. Case management assistance for complex or
"catastrophic" cases is provided by a special case unit.
Specialists
Specialist physicians participating in the Company's networks are
generally reimbursed at contracted rates per visit or procedure.
Aetna U.S. Healthcare's HMOs have fixed-fee capitated payment
arrangements for most mental health, substance abuse, laboratory,
radiology, diagnostic imaging, podiatric and physical therapy
services.
Integrated Delivery Systems
Aetna U.S. Healthcare continues to develop strategic relationships
with national and regional Integrated Delivery Systems ("IDS") to
provide comprehensive medical services. Under these arrangements,
the Company's HMOs contract with an IDS for a fixed, per member
fee. This fee covers most of the care required by the member
which is generally delivered by the IDS and its affiliated PCPs,
hospitals and specialists.
Quality Assessment
Quality assessment programs begin with the initial selection of
providers. Providers wanting to participate in the Company's HMO
networks must satisfy an extensive set of criteria, including
licensing, hospital admission privileges, demonstrated
proficiency, written references, patient access, office standards,
after-hours coverage and many other factors.
<PAGE> 9
Participating physicians are recertified regularly. Recertification
covers many aspects of patient care including an analysis of member
grievances filed with the member relations department, the transfer
and termination rate of members from the practice, on-site
interviews, analysis of utilization patterns, extensive member
surveys and analysis of drug prescription patterns. Committees, each
composed of a peer group of participating private physicians, review
PCP applicants and participating PCPs being considered for
recertification.
The Company also offers quality and outcome measurement and
improvement programs, and health care data analysis systems for
providers and purchasers of health care.
With an emphasis on quality improvement, the Company seeks
accreditation for certain of its HMO plans from the National
Committee for Quality Assurance ("NCQA"), a national organization
established to review the quality and medical management systems
of HMOs and other managed care plans. Accreditation by NCQA is a
nationally recognized standard. As of December 31, 1996, a
majority of the Company's HMO membership is serviced by health
plans which have been granted full, three-year accreditation.
Principal Markets and Sales
___________________________
The Health Risk business is marketed in all 50 states. Total
health membership is widely dispersed throughout the United
States. Health Risk membership is concentrated in the Mid-
Atlantic and Northeast regions where the majority of HMO members
are located.
The Group Insurance and Other Health business is also offered in
50 states. This business consists primarily of large customers
(i.e., those with at least 3,000 lives).
The following table presents total health membership by region and
funding arrangement, as of December 31, 1996:
<TABLE>
<CAPTION>
(Thousands) 1996 1995 (1) 1994 (1)
______________________ ______________________ ______________________
Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total
_____ _______ ______ _____ _______ ______ _____ _______ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mid-Atlantic 1,921 1,146 3,067 369 767 1,136 384 721 1,105
Northeast 1,170 809 1,979 478 731 1,209 460 706 1,166
Southeast 609 1,817 2,426 455 1,761 2,216 480 1,738 2,218
Mid-West 467 2,090 2,557 480 2,072 2,552 468 2,111 2,579
West Central 494 1,919 2,413 508 1,836 2,344 526 1,829 2,355
West(2) 733 1,035 1,768 1,452 1,044 2,496 1,450 953 2,403
_____ _______ ______ _____ _______ ______ _____ _______ ______
Total Health
Membership(3) 5,394 8,816 14,210 3,742 8,211 11,953 3,768 8,058 11,826
_____ _______ ______ _____ _______ ______ _____ _______ ______
_____ _______ ______ _____ _______ ______ _____ _______ ______
<FN>
(1) Excludes U.S. Healthcare membership of 2,443 and 1,967 for 1995 and 1994, respectively.
U.S. Healthcare membership is primarily risk and concentrated in the Mid-Atlantic and
Northeast regions.
(2) Decreased membership as of December 31, 1996 resulted primarily from the award of a risk
contract with the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS")
to another contractor. The Company remained the primary provider through March 31, 1996.
(3) Includes the following products: Commercial, Medicare and Medicaid HMO, POS, PPO and
Indemnity.
</TABLE>
For membership composition of Aetna U.S. Healthcare's products by
funding arrangement, see Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") - Aetna U.S.
Healthcare in the Annual Report.
<PAGE> 10
For both Health Risk and Group Insurance and Other Health businesses,
products and services are marketed primarily to employers for the
benefit of employees and their dependents. Frequently, employers offer
employees a choice of coverages, from which the employee makes his or
her selection during a designated enrollment period (usually one month
annually). In some instances, Aetna U.S. Healthcare may be the only
health care coverage offered. Employers pay all or a portion of the
monthly premiums, and employees, through payroll deductions, pay any
premium not provided as an employee benefit.
Within the Health Risk business, Medicare coverage is sold on an
individual basis although certain marketing is directed to retirees of
employer groups. Medicaid is marketed to individuals rather than
employer groups. Because these coverages are sold on an individual
basis, Medicare and Medicaid marketing costs are typically higher than
for other products.
Aetna U.S. Healthcare products are sold primarily through Company sales
personnel who frequently work with independent consultants and brokers
who assist in the production and servicing of business. Sales
representatives also sell to employers on a direct basis.
For large customers, independent consultants and brokers are frequently
used to secure sales.
Marketing and sales efforts are supported by an advertising program
which includes television, radio, billboards and print media, supported
by market research and direct marketing efforts.
Health Pricing
______________
For insured Commercial plans, customer contracts are generally
established in advance of the policy period, for a duration of one year.
In determining the premium rates to be charged to the customer,
prospective and retrospective rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the
beginning of the policy period. Unanticipated increases in medical
costs cannot be recovered in the current policy year; however, prior
experience for a product in the aggregate is considered in determining
premium rates for future periods. Federally-qualified HMOs are required
to set premiums in this manner.
Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior
to contract inception, without regard to actual utilization of services
incurred by individual members, using one of three approved community
rating methods. These rates may vary from account to account to reflect
projected family size and contract mix, benefit levels, renewal date,
and other factors. Under one of these methods, "traditional community
rating", an HMO establishes premium rates based on its revenue
requirements for its entire enrollment in a given community. Under
"community rating by class", an HMO establishes premium rates based on
its revenue requirements for broad classes of membership distinguished
by factors such as age and sex. Under "group specific community
rating", an HMO establishes premium rates based on the HMO's revenue
requirements for providing services to the group. State laws in certain
of the states in which the Company operates HMOs require the filing with
and approval by the state of HMO premium rates and certain states may
prohibit the use of one or more of these rating methods. In addition to
reviewing anticipated medical costs, some states also review anticipated
administrative costs as part of the approval process. Future results of
the Company could be affected, if the premium rates requested by the
Company are not approved or are adjusted downward by state regulators.
<PAGE> 11
Under retrospective rating, a preliminary premium rate is
determined at the beginning of the policy period. Once the policy
period has ended, the actual experience is reviewed. If the
experience is positive (i.e., actual claim costs and other
expenses are less than those expected) then a refund is credited
to the policy. If the experience is negative, then the resulting
deficit may, in certain instances, be recovered through
contractual provisions; otherwise the deficit is considered in
setting future premium levels. If a customer elects to terminate
coverage, these deficits generally cannot be recovered.
Retrospective rating is generally used for non-HMO health
customers which exceed 300 lives.
Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage
to Medicare beneficiaries who choose health care coverage through an
HMO. Under these contracts, which are typically executed annually,
HCFA pays the HMO at a fixed, capitated rate based on membership and
adjusted for demographic factors. At present, the rate is determined
each year based on average per capita Medicare costs by county,
calculated on a five-year rolling average. Inflation, changes in
utilization patterns and benefit plans, and demographic factors such
as age and sex are also considered in the rate calculation process.
Amounts payable under the Medicare risk arrangements are subject to
periodic unilateral revision by HCFA. In addition to premiums
received from HCFA, some of the Medicare products offered by Aetna
U.S. Healthcare require a modest premium to be paid by the member.
Under the Medicare risk arrangements, Aetna U.S. Healthcare assumes
the risk if actual medical expenses exceed the amount paid by HCFA
and the member. Medicare contracts typically generate higher per
member per month revenues and medical expenses than Commercial plans.
Aetna U.S. Healthcare also has HMO contracts with a variety of other
federal government employee groups under the Federal Employees Health
Benefit Program. Premium rates are subject to federal government
review and, in some instances, audit. Premium rates for these
contracts are set prospectively but are subject to retrospective
adjustments.
Premiums and fees from the federal government accounted for 18% of
Aetna U.S. Healthcare's revenue in 1996, as determined on a pro forma
basis for the U.S. Healthcare acquisition (see Note 2 of Notes to
Financial Statements in the Annual Report). Contracts with HCFA
accounted for 70% of these premiums and fees, with the balance from
other federal employee related benefit programs.
The Company has contracts with state and local agencies to provide
fully-insured health benefits to persons eligible for Medicaid
benefits. These contracts are generally for a period of one to three
years. Aetna U.S. Healthcare receives a fixed monthly payment based
on membership in return for the coverage of health care services.
Depending on the state, the rates may be subject to unilateral
revision by the contracting agencies. Similar to Medicare risk,
Aetna U.S. Healthcare assumes the risk of higher than expected
expenses.
Contracts with the customer to provide administrative services for
employer-funded plans are generally for a period of one to three
years, with built-in inflation factors. Aetna U.S. Healthcare may
also enter into a one-year service arrangement, which guarantees
certain functions such as customer service response time, claim
processing accuracy and/or claim processing turnaround time. A one-
year claim administration arrangement which guarantees claim expenses
to be incurred by the customer may also be executed. With any of
these guarantees, Aetna U.S. Healthcare is financially at risk if the
conditions of the arrangements are not met.
<PAGE> 12
Competition
___________
Competition in the health care industry has intensified in recent
years, primarily due to more aggressive marketing and pricing, a
proliferation of competing products, including new products developed
in an effort to contain health care costs, and increased quality and
price sensitivity. New entrants into the marketplace and existing
competitors who have been strengthened by mergers and consolidation
have also contributed to the more intense competitive environment.
Aetna U.S. Healthcare believes that the most significant factors
which distinguish competing health plans are quality of service
and managed care programs, comprehensiveness of coverage, cost
(including both premium and member out-of-pocket costs), product
design, financial stability and the geographic scope of provider
networks and the providers available in such networks. Aetna U.S.
Healthcare believes that it is competitive in each of these areas.
The ability to increase the number of persons covered by Aetna
U.S. Healthcare benefits or to increase revenues is affected by
competition in any particular area and by the desire and ability
of employers to self fund their employees' insurance. Competition
may also affect the availability of services from health care
providers, including primary care physicians and hospitals.
Within the Health Risk business, Aetna U.S. Healthcare competes
with local and regional managed care plans in addition to managed
care plans sponsored by large health insurance companies and Blue
Cross/Blue Shield plans. Additional competitors include other
types of medical and dental provider organizations, various
specialty service providers, integrated health care delivery
organizations, and in certain plans, with programs sponsored by
the federal or state governments.
Within the Other Health component of the Group Insurance and Other
Health business, Aetna U.S. Healthcare competes primarily with
other commercial insurance companies, third party administrators
and with employers who are moving to totally employer-funded,
self-administered benefit plans.
For the Group Insurance industry, Aetna U.S. Healthcare believes
that the most significant factors which distinguish competing
companies are price, quality of service, comprehensiveness of
coverage, and product array and design. Specialty carriers have
increased market penetration in the disability business. The
deeply-penetrated group life market remains highly competitive,
while competition continues to intensify in the emerging long-term
care market.
Reserves
________
For the Health Risk business, reserves reflect estimates of the
ultimate cost of claims that have been incurred but not yet
reported or paid. Claim reserves are based on a number of factors
including those derived from historical claim experience.
Reserves are recorded for both retrospectively and prospectively
rated cases. Medical claims payable are estimated periodically,
and any resulting adjustments are included in current operations.
<PAGE> 13
For Group Insurance products, reserves are established as premiums
become due to reflect the present value of expected future
obligations net of the present value of expected future premiums.
Policy reserves for group paid-up life insurance generally reflect
long-term fixed obligations and are computed on the basis of
assumed or guaranteed yield and benefit payments. Assumptions are
based on the Company's historical claim experience. For long-term
disability products, reserves are established for (i) lives
currently in payment status (using standard industry morbidity and
interest rate assumptions), (ii) lives who have not yet satisfied
the waiting period, but are expected to do so and (iii) claims
that have been incurred but not reported. Long-term care reserves
are a long-term obligation calculated using industry data for
morbidity and mortality assumptions.
Group health and group insurance premiums are generally recorded
as premium revenue over the term of the coverage. Some group
contracts allow for premiums to be adjusted to reflect emerging
experience. Such premiums are recognized as the related
experience emerges.
Reinsurance
___________
Aetna U.S. Healthcare utilizes reinsurance agreements with
nonaffiliated insurers for Group Insurance businesses to control
its exposure to large losses and certain other risks. The Company
maintains catastrophic life reinsurance which provides protection
against accidents involving 5 or more covered lives. For
disability business, reinsurance arrangements for excess coverage
are established on a case-by-case basis to reflect the
circumstances of the specific disability risks. In addition, the
Company carries contingent medical malpractice professional
liability insurance.
Group Life Insurance In Force and Other Statistical Data
________________________________________________________
The following table summarizes changes in group life insurance in
force before deductions for reinsurance ceded to other companies
for the years indicated:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
In force, end of year $278,499 $274,429 $288,546
________ ________ ________
________ ________ ________
Terminations (lapses and all other) $ 18,014 $ 14,119 $ 24,946
________ ________ ________
________ ________ ________
Number of policies and contracts
in force, end of year:
Group Life Contracts (1) 15,288 19,175 23,268
Group Conversion Policies (2) 33,538 33,358 37,513
<FN>
(1) Due to the diversity of coverages and size of covered groups, statistics
are not provided for average size of policies in force.
(2) Reflects conversion privileges exercised by insureds under group life
policies to replace those policies with individual life policies.
</TABLE>
Factors Affecting Forward-Looking Information
_____________________________________________
For information regarding certain important factors that may
materially affect Aetna U.S. Healthcare's business, see MD&A -
Forward-Looking Information in the Annual Report.
<PAGE> 14
2. Aetna Retirement Services
Products and Services
_____________________
Aetna Retirement Services ("ARS") offers financial services and
individual life insurance products. Primarily all products, other
than investment advisory services, are offered through Aetna Life
Insurance and Annuity Company, an indirect, wholly-owned
subsidiary of the Company. Investment advisory services are
offered through Aeltus Investment Management Inc. ("Aeltus"), a
registered investment adviser and an indirect, wholly-owned
subsidiary of the Company. Aeltus also serves as sub-adviser to
Aetna mutual funds.
Financial Services
Financial services products principally include annuity contracts
that offer a variety of funding and payout options for individual
and employer-sponsored retirement plans qualified under Internal
Revenue Code Sections 401, 403, 408 and 457 (collectively,
"qualified plans") and nonqualified annuity contracts. These
contracts may be deferred or immediate ("payout annuities").
Financial services also include investment advisory services,
financial planning and pension plan administrative services.
Individual Life Insurance
Individual life insurance products include universal life and
variable universal life, which have both life insurance and
investment characteristics, traditional whole life and term
insurance. Universal life and variable universal life products
accounted for approximately 95% of life insurance new business
premiums in 1996.
Investment Options
ARS products provide customers with variable and/or fixed
investment options. Variable ("nonguaranteed") options provide
for full assumption by the customer of investment risks. Assets
supporting variable options are held in separate accounts that
invest in Aetna mutual funds and/or unaffiliated mutual funds.
Separate account investment income and realized capital gains and
losses are not reflected in the Company's consolidated results of
operations. Fixed options can be either "fully guaranteed" or
"experience rated". Fully guaranteed options provide guarantees
on investment return, maturity values, and if applicable, benefit
payments. Experience rated options require the customer to assume
investment (including realized capital gains and losses) and other
risks subject, among other things, to certain minimum guarantees.
The effect of such realized gains and losses (as long as minimum
guarantees are not triggered) does not impact the Company's
results.
<PAGE> 15
Fees and Investment Margins
Insurance charges, investment management or other fees earned by
ARS, vary by product and depend, among other factors, on the
funding option selected by the customer under the product. For
variable annuities or life insurance products where assets are
allocated to variable funding options, ARS charges the separate
account an asset-based insurance fee and expense charge. In
addition, where the customer selects an Aetna mutual fund as a
variable funding option, ARS receives an asset-based investment
management fee. For unaffiliated mutual funds, ARS receives
distribution fees and/or expense reimbursements. For fixed
funding options, ARS derives an investment margin, which is based
on the difference between income earned on the investments
supporting the liability and interest credited to customers. Other
fees or charges, such as administrative fees, may be assessed
depending on the nature of the product.
ARS also provides direct investment advisory services to
unaffiliated customers through Aeltus generally for fees based on
assets under management.
Assets Under Management
The substantial portion of fees or other charges and investment
margins are based on assets under management. Assets under
management are principally affected by deposits, investment growth
(i.e., interest credited to customer accounts for fixed options or
market performance for variable options) and persistency (i.e.,
customer retention). Assets under management, excluding net
unrealized capital gains and losses on debt securities other than
those held in separate accounts, were $32.1 billion, $25.1 billion
and $20.3 billion at December 31, 1996, 1995 and 1994,
respectively. Approximately 93% and 91% of assets under
management at December 31, 1996 and 1995, respectively, allowed
for contractholder withdrawal, 75% and 69% of which, respectively,
are subject to market value adjustments or deferred surrender
charges at December 31, 1996.
To encourage customer retention, contracts typically impose a
surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception. The period of time
and level of the charge vary by product. In addition, an approach
incorporated into recent variable annuity contracts with fixed
funding options allows contractholders to receive an incremental
interest rate if withdrawals from the fixed account are spread
over a period of five years. Further, more favorable credited
rates may be offered after policies have been in force for a
period of time. Existing tax penalties on annuity distributions
prior to age 59-1/2 provide further disincentive to customers for
premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.
<PAGE> 16
Life Insurance In Force and Other Statistical Data
__________________________________________________
For individual life insurance products, life insurance in force is
a key determinant of earnings as contract charges for cost of
insurance coverage are typically based on amounts of coverage in
force less accumulated policy reserves. The key drivers of life
insurance in force are new sales, surrenders and mortality. The
following table summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies:
<TABLE>
<CAPTION>
(Amounts in millions, except number of policies and average size of policies in
force)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Sales and additions:
Permanent:
Nonparticipating $ 4,357 $ 5,212 $ 3,348
Participating 12 12 13
Term:
Nonparticipating 1,382 2,160 1,037
Participating 133 390 1,787
________ ________ ________
Total $ 5,884 $ 7,774 $ 6,185
________ ________ ________
________ ________ ________
Terminations:
Surrenders and conversions $ 1,646 $ 1,620 $ 1,494
Lapses 2,098 1,874 1,973
Other 330 281 306
________ ________ ________
Total $ 4,074 $ 3,775 $ 3,773
________ ________ ________
________ ________ ________
In force, end of year:
Permanent $ 35,883 $ 34,614 $ 31,879
Term 13,100 12,559 11,295
________ ________ ________
Total $ 48,983 $ 47,173 $ 43,174
________ ________ ________
________ ________ ________
Number of policies in force,
end of year:
Nonparticipating 627,233 626,880 627,018
Participating 105,098 113,045 120,967
________ ________ ________
Total 732,331 739,925 747,985
________ ________ ________
________ ________ ________
Average size of policies in
force, end of year:
Nonparticipating $ 66,385 $ 62,009 $ 54,452
Participating 69,883 73,433 74,658
</TABLE>
See Note 12 of Notes to Financial Statements in the Annual Report
for a discussion of participating life insurance contracts.
The following table summarizes premiums and deposits for ARS:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Premiums $ 180.7 $ 260.2 $ 235.7
Deposits 4,564.8 3,785.1 2,966.3
_________ _________ _________
$ 4,745.5 $ 4,045.3 $ 3,202.0
_________ _________ _________
_________ _________ _________
</TABLE>
Principal Markets and Method of Distribution
____________________________________________
ARS products and services are offered primarily to individuals,
pension plans, small businesses and employer-sponsored groups in
the health care, government, education (collectively "not-for-
profit" organizations) and corporate markets. ARS products
generally are sold through pension professionals, independent
agents and brokers, third party administrators, banks and
dedicated career agents.
<PAGE> 17
Competition
___________
ARS competes with other insurance companies, as well as an array
of financial services companies including banks, mutual funds and
other investment managers. Principal competitive factors are
reputation for investment performance, product features, service,
cost and the perceived financial strength of the investment
manager or sponsor.
Competition may affect, among other matters, both business growth
and the pricing of ARS' products and services.
Reserves
________
Reserves for limited payment contracts (annuities with life
contingent payout) are computed on the basis of assumed investment
yield, mortality, morbidity and expenses and include a margin for
adverse deviation. The assumptions vary by plan, year of issue
and policy duration. Reserves for investment contracts (deferred
annuities and immediate annuities without life contingent payouts)
are equal to cumulative deposits plus credited interest less
withdrawals and charges thereon. Of those investment contracts
which are experience rated, the reserves also reflect net realized
capital gains/losses (which ARS reflects through credited rates on
an amortized basis) and unrealized capital gains/losses related to
Financial Accounting Standard ("FAS") No. 115.
Reserves for universal life products (which are all experience
rated) are equal to cumulative deposits less withdrawals and
charges plus credited interest thereon, plus/less net realized
capital gains/losses (which ARS reflects through credited rates on
an amortized basis). These reserves also reflect unrealized
capital gains/losses related to FAS No. 115. Reserves for all
other fixed individual life contracts are computed on a basis
consistent with that described above for limited payment
contracts.
Reserves, as described above, are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves compounded annually at assumed rates,
are expected to be sufficient to meet the Company's policy
obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
Reinsurance
___________
ARS retains no more than $10 million of risk per individual life
insured. Amounts in excess of the retention limit are reinsured
with unaffiliated companies.
Factors Affecting Forward-Looking Information
_____________________________________________
For information regarding certain important factors that may
materially affect ARS' business, see MD&A - Forward-Looking
Information in the Annual Report.
<PAGE> 18
3. International
The International segment ("International"), through subsidiaries
and joint venture operations, sells primarily life and health
insurance and financial services products in non-U.S. markets.
The Company increased its focus on investments in international
operations in the late 1980's. Since then the Company has been
increasing its investments in emerging international and financial
services markets, primarily in Asia Pacific and Latin America,
where it believes demographic and other characteristics afford the
opportunity for long-term business growth. The Company seeks to
enter new emerging markets in their early stages of development,
seeking to be among the first foreign entrants, and then to build
sufficient scale of operations to compete with local and other
foreign companies. The Company also explores opportunities for
additional investments in markets where it has established
operations.
The Company may invest in a new market or increase its position in
a market through a combination of acquisitions, joint ventures or
by starting up new independent operations. Over the past 5 years,
the Company has invested $495 million in its international
operations, of which $214 million was invested in 1996, a majority
of which related to expanding its Mexican operations.
Additionally, in February 1997, the Company entered into an
agreement in principle to acquire up to 49% of a joint venture in
Brazil (see MD&A - International in the Annual Report for
information regarding the 1996 investment in Mexico and the 1997
agreement in principle to invest in Brazil).
The Company classifies its operations in international regions as
either "established" or "start-up", depending on the stage of
their business developments. Over the past several years, the
Company has also exited certain mature markets that do not meet
its current strategy.
International conducts its business in several geographic regions:
Asia Pacific - Operations are conducted through majority-
owned subsidiaries in Taiwan and Malaysia, as well as
through other equity subsidiaries (where the Company has
between a 20% and 50% interest) in Hong Kong and New
Zealand. The products and services sold by these
subsidiaries include individual and group life and health
insurance, deposit administration and related financial
products and services.
Latin America - Operations are conducted through wholly-
owned and majority-owned subsidiaries in Chile and equity
subsidiaries in Mexico. The products and services sold
by these subsidiaries include individual and group life
and health insurance, annuities, personal and commercial
property-casualty insurance, and pension fund
administration services.
Canada - Operations are conducted through wholly-owned
subsidiaries. The products and services sold by these
subsidiaries include individual and group life, health
and disability insurance and administration services to
group plans.
<PAGE> 19
Other - Operations include primarily start-up operations
(subsidiaries in the initial years of operation) in Peru,
Argentina, Philippines and Indonesia, as well as home
office expenses. The products and services sold by these
subsidiaries include individual and group life insurance,
and health and pension fund administration services.
Each of the subsidiaries through which International conducts
business operates within guidelines established by the Company.
Methods of distributing products vary by country and product
depending on local laws, customs and the needs of the particular
market. Distribution channels include career agents, independent
agents and brokers, financial institutions and direct sales.
Competition varies by country and includes well established local
companies, as well as companies based in North America, Europe,
Australia and Japan that have a strong international presence.
The following table sets forth International's revenue (including
only its share of operating income for equity subsidiaries and
excluding net realized capital gains and losses, and operating
earnings or losses (i.e., net income or loss excluding net
realized capital gains and losses) by region, premiums and life
insurance in force, before deductions for reinsurance ceded to
other companies:
<TABLE>
<CAPTION>
Operating
Revenue Earnings
______________________________ ___________________________
(Millions) 1996 1995 1994 1996 1995 1994
____ ____ ____ ____ ____ _______
<S> <C> <C> <C> <C> <C> <C>
Asia Pacific $ 845.1 $ 698.2 $ 636.8 $ 54.3 $ 46.0 $ 31.3
Latin America 351.5 355.2 261.6 55.8 47.9 35.8
Canada 375.9 386.5 366.4 10.2 11.2 10.5
Other 52.0 22.3 27.7 (14.8) (16.4) (8.5)
________ ________ ________ _______ _______ _______
$1,624.5 $1,462.2 $1,292.5 $ 105.5 $ 88.7 $ 69.1
________ ________ ________ _______ _______ _______
________ ________ ________ _______ _______ _______
Premiums (included in
revenue above) $1,166.1 $1,038.5 $ 887.1
________ ________ ________
________ ________ ________
Life insurance in force,
end of year $ 76,672 $ 59,384 $ 45,126
________ ________ ________
________ ________ ________
</TABLE>
Premium growth in 1996 and 1995 was primarily due to increased
sales in the Asia Pacific market.
Factors Affecting Forward-Looking Information
_____________________________________________
For information regarding certain important factors that may
materially affect International's business, see MD&A - Forward-
Looking Information in the Annual Report.
<PAGE> 20
4. Large Case Pensions
Principal Products
__________________
The Large Case Pensions segment manages a variety of retirement
products (including pension and annuity products) offered to IRC
Section 401 qualified defined benefit and defined contribution plans.
Contracts provide nonguaranteed, partially guaranteed (experience
rated) and fully guaranteed investment options through General and
Separate Account products. The majority of Large Case Pensions'
products that utilize Separate Accounts provide contractholders with
a vehicle for investments under which the contractholders assume the
investment risks as well as the benefit of favorable performance.
Large Case Pensions earns a management fee on these Separate
Accounts.
In 1993, the Company discontinued its fully guaranteed large case
pension products. (For additional information, see MD&A - Large Case
Pensions in the Annual Report.)
At December 31, assets under management, including Separate Accounts
and excluding net unrealized capital gains and losses on debt
securities, were $35.3 billion in 1996, $45.6 billion in 1995 and
$46.9 billion in 1994. The decline in assets under management is
primarily attributable to the sale of Insurance Company Investment
Management, a specialized asset manager, the transfer of assets under
management to the ARS segment, reflecting the consolidation of the
Company's investment advisory services, as well as the continuing
runoff of the underlying liabilities.
The following table summarizes premiums and deposits:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Premiums $ 176.8 $ 264.9 $ 234.4
Deposits 1,781.8 1,600.2 1,982.2
_________ _________ _________
Total $ 1,958.6 $ 1,865.1 $ 2,216.6
_________ _________ _________
_________ _________ _________
</TABLE>
Reserves
________
When the Company discontinued the fully guaranteed large case
pension products, it established a reserve for expected future
losses on the runoff of the business. For additional information
on this reserve, see Note 9 of Notes to Financial Statements in
the Annual Report.
The Company also maintains reserves for guaranteed investment
contracts equal to amounts deposited plus credited interest thereon.
Reserves for single premium annuity contracts reflect the present
value of benefits based on actuarial assumptions established at the
time of contract purchase. Such assumptions are based on the
Company's experience, which is periodically reviewed against
published industry data. These products provide guarantees on
investment return, maturity values, and if applicable, benefit
payments. The interest credited on these contracts during 1996
ranged from 3.5% to 17.7% with an average rate of 8.7% (compared with
8.9% in 1995). For the contracts in force at December 31, 1996, the
average credited rate was 8.5%. None of these contracts allow for
contractholder withdrawal, except in extraordinary circumstances.
<PAGE> 21
Reserves for experience rated contracts reflect cumulative deposits,
less withdrawals and charges, plus credited interest thereon,
plus/less net realized capital gains/losses (which the Company
intends to reflect in credited rates) and net unrealized capital
gains/losses related to FAS No. 115.
Factors Affecting Forward-Looking Information
_____________________________________________
For information regarding certain important factors that may
materially affect Large Case Pension's business, see MD&A - Forward-
Looking Information in the Annual Report.
<PAGE> 22
5. General Account Investments
Consistent with the nature of the contract obligations involved in
the Company's health, life, annuity and pension operations, the
majority of general account assets have been invested in
intermediate and long-term, fixed-income obligations such as
treasury obligations, mortgage-backed securities, corporate debt
securities and mortgage loans.
For information concerning the valuation of investments, see Notes
1, 4, and 7 of Notes to Financial Statements in the Annual Report.
The following table sets forth the distribution of invested
assets, cash and cash equivalents and accrued investment income of
the Company's general account portfolio (excluding Discontinued
Operations) as of the end of the years indicated: (1) (2) (3)
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Debt securities:
Bonds:
United States Government and
government agencies and
authorities $ 3,773.1 $ 3,720.5 $ 4,414.9
States, municipalities and
political subdivisions 355.3 81.5 113.8
U.S. Corporate securities:
Utilities 2,420.3 2,333.0 1,942.5
Financial 4,546.5 4,704.3 3,732.7
Transportation/capital goods 2,492.8 2,729.9 2,234.4
Health care/consumer products 1,803.7 1,924.8 1,143.7
Natural resources 1,317.9 1,278.8 993.1
Other 1,519.8 1,859.2 1,484.6
_________ _________ _________
Total U.S. Corporate securities 14,101.0 14,830.0 11,531.0
Foreign:
Government, including political
subdivisions 2,505.4 1,968.3 1,750.8
Utilities 790.2 780.1 544.1
Other 3,513.1 2,986.3 2,418.2
_________ _________ _________
Total foreign securities 6,808.7 5,734.7 4,713.1
Residential mortgage-backed securities:
Pass-throughs 1,848.4 1,864.4 1,902.7
Collateralized mortgage obligations 2,764.7 3,073.9 3,091.2
_________ _________ _________
Total residential mortgage-backed
securities 4,613.1 4,938.3 4,993.9
Commercial/Multifamily mortgage-
backed securities 1,144.3 774.0 413.9
Other asset-backed securities 1,464.6 1,772.5 1,334.4
_________ _________ _________
Total bonds 32,260.1 31,851.5 27,515.0
Redeemable preferred stocks 76.2 8.8 10.4
_________ _________ _________
Total debt securities 32,336.3 31,860.3 27,525.4
_________ _________ _________
Equity securities:
Common stocks 1,185.3 566.9 512.7
Nonredeemable preferred stocks 147.5 92.8 101.9
_________ _________ _________
Total equity securities 1,332.8 659.7 614.6
_________ _________ _________
Short-term investments 723.2 607.8 344.4
Mortgage loans 6,700.9 8,327.2 10,389.9
Real estate (4) 850.2 1,277.3 1,283.7
Policy loans 707.3 629.4 533.8
Other 835.5 688.6 838.0
_________ _________ _________
Total investments $43,486.2 $44,050.3 $41,529.8
_________ _________ _________
_________ _________ _________
Cash and cash equivalents $ 1,462.6 $ 1,712.7 $ 2,277.2
_________ _________ _________
_________ _________ _________
Accrued investment income $ 598.6 $ 618.3 $ 596.8
_________ _________ _________
_________ _________ _________
<FN>
(1) Excludes Separate Accounts.
(2) All debt securities are carried at fair value in 1996 and 1995, and a majority are
carried at fair value in 1994.
(3) Includes $8.7 billion, $10.3 billion and $11.9 billion of investments supporting
discontinued products in 1996, 1995 and 1994, respectively.
(4) Includes real estate acquired through foreclosures (including in-substance
foreclosures) of mortgage loans.
</TABLE>
<PAGE> 23
The following table summarizes the Company's investment results: (1)
<TABLE>
<CAPTION>
(Dollar amounts in millions)
Net Earned Net Net Realized Change in Net
Investment Investment Capital Gains Unrealized Capital
Income (2) Income Rate (3) (Losses) (4) Gains and Losses (5)
__________ _______________ _____________ ____________________
<S> <C> <C> <C> <C>
For the year:
1996 $3,565.2 8.0% $ 134.4 $ 10.8
1995 3,575.1 7.9 47.2 1,002.8
1994 3,631.4 7.8 (55.2) (979.3)
<FN>
(1) Excludes Separate Accounts, investments in affiliates and Discontinued Operations.
(2) Net investment income excludes net realized capital gains and losses and is after
deduction of investment expenses, but before deduction of income taxes.
(3) The Earned Net Investment Income Rate for any given year is equal to (a) net investment
income divided by (b) the average of cash, invested assets and investment income due and
accrued at the beginning and end of the year. Investments in affiliates have been
eliminated for purposes of this calculation.
(4) Net realized capital gains (losses) are before income taxes and exclude gains and losses
allocable to experience rated pension contractholders in all years. Further, net realized
capital gains (losses) related to discontinued products were credited to/charged against
the reserve for anticipated future losses which was established at the end of 1993.
(5) Net unrealized capital gains (losses) are before federal income taxes and exclude changes
in unrealized capital gains (losses) related to experience rated contractholders and
discontinued products.
</TABLE>
6. Other Matters
a. Regulation
General
The Company's operations are subject to comprehensive regulation
throughout the United States and the foreign jurisdictions in
which it does business. The laws of these jurisdictions establish
supervisory agencies, including state health, insurance and
securities departments, with broad authority to grant licenses to
transact business and regulate many aspects of the products and
services offered by the Company, as well as solvency and reserve
adequacy. Many agencies also regulate investment activities on
the basis of quality, diversification, and other quantitative
criteria. The Company's operations and accounts are subject to
examination at regular intervals by certain of these regulators.
Health Care
The federal government and the states in which the Company
conducts its HMO and other health operations have adopted laws and
regulations that govern the business activities of the Company to
varying degrees. These laws and regulations may restrict how the
Company conducts its businesses and may result in additional
burdens and costs to the Company. Areas of governmental
regulation include licensure, premium rates, benefits, service
area expansion, quality assurance procedures, plan design,
eligibility requirements, provider contracts and rates of payment,
underwriting, financial arrangements, financial condition
(including reserves) and corporate governance. These laws and
regulations are subject to amendments and changing interpretations
in each jurisdiction.
<PAGE> 24
Most states, including those in which the Company now operates
HMOs, require HMOs to be licensed prior to commencing operations.
If the Company establishes an HMO in any state where it does not
presently operate an HMO, it generally has to seek licensure. The
time necessary to obtain an HMO license varies from state to
state. Each HMO must file periodic financial and operating
reports with the states in which it does business. In addition,
HMO operations are subject to state examination and periodic
license renewal.
The provision of services to certain employee health benefit plans
is subject to the Employee Retirement Income Security Act of 1974
("ERISA"), a complex set of laws and regulations subject to
interpretation and enforcement by the Internal Revenue Service and
the Department of Labor ("DOL"). ERISA regulates certain aspects
of the relationships between the Company and employers who
maintain employee benefit plans subject to ERISA. Some of the
administrative services and other activities of the Company may
also be subject to regulation under ERISA. In addition, some
states require licensure or registration of companies providing
third party claims administration services for benefit plans.
Certain legislative and regulatory changes related to health
products have recently been enacted or proposed, and a variety of
other potential legislative and regulatory changes are receiving a
high level of attention at both the state and federal level. For
a discussion of these matters see MD&A - Regulatory Environment in
the Annual Report. For information regarding regulation of
pricing by the Company's HMOs, see "Aetna U.S. Healthcare - Health
Pricing", on page 10.
Investment and Retirement Products and Services
Operations conducted by ARS and Large Case Pensions are subject to
regulation by various insurance agencies where the Company
conducts business, in particular the insurance departments of
Connecticut and New York. Among other matters, these agencies may
regulate premium rates, trade practices, agent licensing, policy
forms, underwriting and claims practices, the maximum interest
rates that can be charged on life insurance policy loans, and the
minimum rates that must be provided for accumulation of surrender
value.
The Securities and Exchange Commission (the "SEC") and, to a
lesser extent, the states regulate the sales and investment
management activities and operations of broker-dealer and
investment advisory subsidiaries of the Company. The SEC also
regulates certain of the Company's pension, annuity, life
insurance and other investment and retirement products. These
products involve Separate Accounts of Aetna Life Insurance and
Annuity Company and mutual funds registered under the Investment
Company Act of 1940.
<PAGE> 25
International
The nature and extent of regulations affecting the Company's
international operations varies by jurisdiction and line of
business. Most operations are subject to local insurance laws.
These laws typically regulate the types of business that can be
written, policy forms and terms, currency, permitted investments,
reserves, taxation and other matters affecting the conduct of the
business. International operations are also subject to a variety
of additional investment and other controls that may be imposed by
governments. Certain jurisdictions may require that portions of
the business be reinsured through designated state-affiliated
institutions. As a foreign investor, the Company is also subject
to a variety of restrictions regarding permitted levels of equity
ownership, remittance of foreign earnings, repatriation of
capital, exchange of currency, and entry into new lines of
business. Regulation of international operations may also be
subject to other political factors not typically associated with
doing business in the United States, such as more rapid change of
regulatory policy, possible nationalization of businesses,
hostilities and unrest.
Federal Employee Benefit Regulation
ARS and Large Case Pensions also provide a variety of products and
services to employee benefit plans that are covered by ERISA.
In December 1993, in a case involving an employee benefit plan and
an insurance company, the United States Supreme Court ruled that
assets in the insurance company's general account that were
attributable to a portion of a group pension contract issued to
the plan that was not a "guaranteed benefit contract" were "plan
assets" for purposes of ERISA and that the insurance company was
an ERISA fiduciary with respect to those assets. In reaching its
decision, the Court declined to follow a 1975 DOL interpretive
bulletin that had suggested that insurance company general account
assets were not plan assets.
Congress recently enacted the Small Business Job Protection Act
(the "Act"), which, among other matters, created a framework for
resolving potential issues raised by the Supreme Court decision.
The Act provides that, absent criminal conduct, insurers generally
will not have liability with respect to general account assets
held under contracts that are not guaranteed benefit contracts
based on claims that those assets are plan assets. The relief
afforded extends to conduct that occurred before the date that is
eighteen months after the DOL issues final regulations required by
the Act. The regulations will address ERISA's application to the
general account assets of insurers attributable to contracts
issued on or before December 31, 1998 that are not guaranteed
benefit contracts. The conference report relating to the Act
states that contracts issued after December 31, 1998 that are not
guaranteed benefit contracts will be subject to ERISA's fiduciary
obligations. The Company is not currently able to predict how
these matters may ultimately affect its businesses.
<PAGE> 26
HMO and Insurance Holding Company Laws
A number of states, including Connecticut, regulate affiliated
groups of HMOs and insurers such as the Company under holding
company statutes. These laws may require these companies to
maintain certain levels of equity. For information regarding
restrictions on certain payments of dividends or other
distributions by HMO and insurance company subsidiaries of the
Company, see MD&A - Liquidity and Capital Resources in the Annual
Report. Some of these laws also regulate changes in control (as
do Connecticut corporate laws), and other matters such as
transactions with affiliates. See also Note 16 of Notes to
Financial Statements in the Annual Report.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed (up to
prescribed limits) for certain obligations of insolvent insurance
companies to policyholders and claimants. The after-tax charges
to earnings for guaranty fund obligations for the years ended
December 31, 1996 and 1995 were $4 million and $8 million,
respectively. There were no such charges in 1994. While the
Company has historically recovered more than half of guaranty fund
assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future
efforts to recover such assessments. For information regarding
certain other potential regulatory changes relating to the
Company's businesses, see MD&A - Forward-Looking Information.
b. NAIC IRIS Ratios
The NAIC IRIS ratios cover 12 categories of financial data with
defined usual ranges for each category. The ratios are intended
to provide insurance regulators "early warnings" as to when a
given company might warrant special attention. An insurance
company may fall out of the usual range for one or more ratios and
such variances may result from specific transactions that are in
themselves immaterial or eliminated at the consolidated level. In
1995, none of Aetna Inc.'s significant insurance subsidiaries had
more than two IRIS ratios that were outside of the NAIC usual
ranges.
Management does not expect that any of the Company's significant
subsidiaries will have more than two IRIS ratios outside of the
NAIC usual ranges for 1996.
See MD&A - Liquidity and Capital Resources in the Annual Report for
additional discussion regarding solvency regulation.
c. 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 years ended December 31:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 2.45 4.97 4.74 (a) 1.90
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends 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>
<PAGE> 27
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 Annual Report.) During 1992, 1993,
1994 and 1995, there was no preferred stock outstanding. 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.
d. Trademarks
The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare
(Trademark application pending), U.S. Healthcare (Registered
Trademark), and Aetna Retirement Services (Registered Trademark),
together with the corresponding design logos are owned by the
Company. The Company considers these trademarks and its other
trademarks and trade names important in the operation of its
business. However, the business of the Company is not dependent
on any individual trademark or trade name.
e. Miscellaneous
The Company had approximately 30,850 domestic employees at
December 31, 1996. In addition, the Company had approximately
7,750 international employees at December 31, 1996 in its majority
and wholly-owned non-U.S. subsidiaries.
Management believes that the Company's computer facilities,
systems and related procedures are adequate to meet its business
needs. The Company's data processing systems and backup and
security policies, practices and procedures are regularly
evaluated by the Company's management and its internal auditors
and are modified as considered necessary.
The federal government is a significant customer of the Aetna
U.S. Healthcare segment and the Company, accounting for
approximately 11% of the Company's consolidated revenue in 1996.
No other customer accounted for 10% or more of the Company's
consolidated revenues in 1996. No other segment of the Company's
business is dependent upon a single customer or a few customers,
the loss of which would have a significant effect on the earnings
of the segment. See Note 17 of Notes to Financial Statements in
the Annual Report regarding segment information.
The loss of business from any one, or a few, independent brokers
or agents would not have a material adverse effect on the earnings
of the Company or any of its segments.
<PAGE> 28
Item 2. Properties.
The home office of the Company is a building complex located at
151 Farmington Avenue, Hartford, Connecticut, with approximately
1.6 million square feet. The Company and certain of its
subsidiaries also own or lease other space in the greater Hartford
area, Blue Bell, Pennsylvania and Fairfield, New Jersey, as well
as various field locations throughout the country. The Company
believes its properties are adequate and suitable for its business
as presently conducted, including consideration of planned
restructuring activities.
The foregoing does not include numerous investment properties held
by the Company in its general and separate accounts.
Item 3. 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.
None.
<PAGE> 29
EXECUTIVE OFFICERS OF AETNA INC.*
The Chairman of the Company is elected and all other executive
officers listed below are appointed by the Board of Directors of
the Company at its Annual Meeting each year to hold office until
the next Annual Meeting of the Board or until their successors are
elected or appointed. None of these officers have family
relationships with any other executive officer or Director.
<TABLE>
<CAPTION>
Business Experience
Name of Officer Principal Position Age * During Past Five Years **
_______________ __________________ ___ ______________________
<S> <C> <C> <C>
Ronald E. Compton Chairman and President 64 (1)
Richard L. Huber Vice Chairman for
Strategy and Finance 60 (2)
Thomas J. Calvocoressi Vice President and
General Counsel 43 (3)
Michael J. Cardillo Executive Vice President,
Combined Health Operations*** 53 (4)
Mary Ann Champlin Senior Vice President,
Aetna Human Resources 49 (5)
Frederick C. Copeland, Jr. Executive Vice President,
International*** 55 (6)
Daniel P. Kearney Executive Vice President,
Investments/Financial
Services*** 57 (7)
Joseph T. Sebastinelli Executive Vice President,
Combined Health Operations*** 50 (8)
<FN>
* As of February 28, 1997.
** The Company was incorporated in 1996 in conjunction with the merger of Aetna
Services and U.S. Healthcare. Aetna Services and U.S. Healthcare became
wholly-owned subsidiaries of the Company on July 19, 1996. Except where noted,
all of the named individuals became executive officers of the Company on
July 19, 1996. The business experience for each executive officer included in
this section reflects their prior position(s) with the former parent company or
its subsidiaries as well as such officer's current position.
*** Executive Vice Presidents, in conjunction with certain other senior
officers, are responsible for assisting the Chairman and President, and
Vice Chairman in setting policy and overall direction for the Company.
</TABLE>
<PAGE> 30
(1)
Mr. Compton has served as Chairman since March 1, 1992. He is
also President, a position he has held since July 1988.
(2)
Mr. Huber has served in his current position since February 1995.
From September 1994 to February 1995, he served as President and
Chief Operating Officer of Grupo Wasserstein Perella. From 1990
to September 1994, he served as Vice Chairman of Continental Bank.
(3)
Mr. Calvocoressi assumed his current position on January 1, 1997.
From March 1996 to January 1997, he served as Vice President and
Deputy General Counsel of Aetna. He served as Vice President and
Corporate Counsel from August 1994 to March 1996, and as Vice
President and Counsel from July 1993 to August 1994 and as
Counsel, Office of General Counsel from July 1991 to July 1993.
(4)
Mr. Cardillo has served in his current position since July 19,
1996. Additionally, he is Co-President of Aetna U.S. Healthcare
since July 19, 1996. Mr. Cardillo has been Co-President of U.S.
Healthcare since 1995 and principal marketing officer since 1989.
(5)
Mrs. Champlin has served in her current position since November
1992. From February 1991 through November 1992 she served as Vice
President, Aetna Human Resources.
(6)
Mr. Copeland assumed his current position on July 19, 1996. He
also serves as President and Chief Executive Officer of Aetna
International, Inc., a position he assumed in April 1996, after
having served as President of Aetna International since July 1995.
From January 1993 to July 1995, he served as Chairman, President
and Chief Executive Officer of Fleet Financial Group. From
September 1987 to January 1993, he served as President and Chief
Executive Officer of Citibank Canada.
(7)
Mr. Kearney has served in his current position since December
1993. From February 1991 to December 1993 he served as Group
Executive responsible for investments and large case pensions.
(8)
Mr. Sebastianelli has served in his current position since July
19, 1996. Additionally, he is Co-President of Aetna U.S.
Healthcare, a position he assumed on July 19, 1996. Mr.
Sebastianelli has been Co-President of U.S. Healthcare since 1995
and principal medical administrative officer since 1994. From
1984 to 1994, Mr. Sebastianelli was the sole proprietor of
Sebastianelli Law Associates.
<PAGE> 31
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
Aetna Inc.'s common stock is listed on the New York Stock
Exchange. Its symbol is AET. As of January 31, 1997, there were
23,132 record holders of the common stock.
The dividends declared and the high and low sales prices with
respect to the Company's common stock for each quarterly period
for the past two years are incorporated herein by reference from
"Quarterly Data" in the Annual Report.
Information regarding restrictions on the Company's present and
future ability to pay dividends is incorporated herein by
reference from Note 16 of Notes to Financial Statements in the
Annual Report.
In connection with the merger with U.S. Healthcare, the Company
entered into an Amended and Restated Agreement with
Leonard Abramson, former Chairman of U.S. Healthcare and currently
a director of the Company. Pursuant to the Agreement,
Mr. Abramson performs certain consulting services and agreed
generally not to compete with the Company. As part of a payment
due to Mr. Abramson in connection with the agreement generally not
to compete, on July 19, 1996, Aetna Inc. issued 37,538 shares of
its common stock to Mr. Abramson. Based on the nature of the
transaction and the investor, the transaction did not involve any
public offering, and the issuance of the shares was made pursuant
to Section 4(2) of the Securities Act of 1933.
Item 6. Selected Financial Data.
The information contained in "Selected Financial Data" in the
Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The 1996 Consolidated Financial Statements and the report of the
registrant's independent auditors and the unaudited information
set forth under the caption "Quarterly Data" are incorporated
herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE> 32
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I
pursuant to General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with
Section 16 (a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Proxy Statement.
Item 11. Executive Compensation.
The information under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The information under the caption "Security Ownership of Certain
Beneficial Owners, Directors, Nominees and Executive Officers" in
the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Certain Transactions and
Relationships" in the Proxy Statement is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements and the report of the
registrant's independent auditors are incorporated herein by
reference to the Annual Report.
2. Financial statement schedules:
The supporting schedules of the consolidated entity are included
in this Item 14. See Index to Financial Statement Schedules on
page 38.
<PAGE> 33
3. Exhibits: *
(3) Articles of Incorporation and By-Laws.
Aetna Inc. Amended and Restated Certificate of Incorporation,
incorporated herein by reference to the Company's Registration
Statement on Form S-4 (File No. 333-5791) filed on June 12, 1996.
Aetna Inc. Bylaws, as amended.
(4) Instruments defining the rights of security holders,
including indentures.
Senior Indenture, dated July 1, 1996, between the Company, Aetna
Services, Inc. (formerly Aetna Life and Casualty Company), and
State Street Bank and Trust Company of Connecticut, National
Association, as Trustee, incorporated herein reference to the
Company's Form 10-Q filed on October 25, 1996.
Form of Subordinated Indenture between Aetna Services, Inc., Aetna
Inc. and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee (including the forms of
Subordinated Debt Securities and Subordinated Debt Guarantees),
incorporated herein by reference to the Company's and Aetna
Services, Inc.'s Registration Statement on Form S-3 (File No. 333-
07167) filed on June 28, 1996.
Designations, Rights and Preferences of 6.25% Class C Voting
Preferred Stock, incorporated herein by reference to the Company's
8-K filed on July 26, 1996.
Aetna Inc. Rights Agreement, incorporated herein by reference to
the Company's 8-K filed on July 26, 1996.
Indenture, dated as of October 15, 1986, between Aetna Services,
Inc. and The First National Bank of Boston, Trustee, incorporated
herein by reference to Aetna Services, Inc.'s 1992 Form 10-K.
First Indenture Supplement, dated as of August 1, 1996, to
Indenture, dated as of October 15, 1986, between Aetna Services,
Inc. and State Street Bank and Trust Company, as Successor
Trustee, incorporated herein by reference to the Company's Form
10-Q filed on October 25, 1996.
Indenture, dated as of August 1, 1993, between Aetna Services,
Inc. and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee, incorporated herein by reference
to Aetna Services, Inc.'s Registration Statement on Form S-3 (File
No. 33-50427).
First Indenture Supplement, dated as of August 1, 1996, to the
Indenture dated as of August 1, 1993 between Aetna Services, Inc.
and State Street Bank and Trust Company of Connecticut, National
Association, as Trustee, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.
<PAGE> 34
3. Exhibits (Continued): *
Written Action, dated as of November 15, 1994, establishing the
terms of Series A Preferred Securities of Aetna Capital L.L.C.,
incorporated herein by reference to Aetna Services, Inc.'s Form
8-K filed on November 22, 1994.
Subordinated Indenture, dated as of November 1, 1994, between
Aetna Services, Inc. and The First National Bank of Chicago, as
Trustee, incorporated herein by reference to Aetna Services,
Inc.'s Form 8-K filed on November 22, 1994.
First Indenture Supplement, dated as of August 1, 1996, to the
Indenture, dated as of November 1, 1994, between Aetna Services,
Inc. and The First National Bank of Chicago, as Trustee,
incorporated herein by reference to the Company's Form 10-Q filed
on October 25, 1996.
Payment and Guarantee Agreement, dated November 22, 1994, of Aetna
Services, Inc. with respect to Aetna Capital L.L.C., incorporated
herein by reference to Aetna Services, Inc.'s Form 8-K filed on
November 22, 1994.
Payment and Guarantee Agreement, dated as of August 1, 1996, of
Aetna Inc. with respect to Aetna Capital L.L.C., incorporated
herein by reference to the Company's Form 10-Q filed on October
25, 1996.
Amendment No. 1, dated as of August 1, 1996, to the Fiscal Agency
Agreement, dated as of July 17, 1986, between Aetna Services, Inc.
and State Street Bank and Trust Company, as successor Fiscal
Agent, incorporated herein by reference to the Company's Form 10-Q
filed on October 25, 1996.
(10) Material contracts.
Employment Agreement, dated as of March 30, 1996, by and between
U.S. Healthcare, Inc. and Joseph Sebastianelli, incorporated
herein by reference to the Company's Form 10-Q filed on October
25, 1996.**
Employment Agreement, dated as of March 30, 1996, by and between
U.S. Healthcare, Inc. and Michael Cardillo, incorporated herein by
reference to the Company's Form 10-Q filed on October 25, 1996.**
Stock Purchase Agreement, dated as of November 28, 1995, between
The Travelers Insurance Group Inc. and Aetna Services, Inc.
relating to the purchase and sale of 100% of the Common Stock of
The Aetna Casualty and Surety Company and The Standard Fire
Insurance Company, incorporated herein by reference to Aetna
Services, Inc.'s 1995 Form 10-K.
Letter Agreement, dated as of January 19, 1995, between Aetna
Services, Inc. and Richard L. Huber, incorporated herein by
reference to Aetna Services, Inc.'s 1995 Form 10-K.**
<PAGE> 35
3. Exhibits (Continued): *
Employment Agreement, dated as of January 29, 1996, between Aetna
Services, Inc. and Ronald E. Compton, incorporated herein by
reference to Aetna Services, Inc.'s 1995 Form 10-K.**
Employment Agreement, dated as of December 19, 1995, between Aetna
Services, Inc. and Daniel P. Kearney, incorporated herein by
reference to Aetna Services, Inc.'s 1995 Form 10-K.**
The 1984 Stock Option Plan of Aetna Life and Casualty Company
and amendments thereto, incorporated herein by reference to the
1992 Form 10-K. **
Letter Agreement, dated as of January 31, 1996, between Aetna
Services, Inc. and The Travelers Insurance Group Inc.,
incorporated herein by reference to Aetna Services, Inc.'s Form
10-Q filed on April 26, 1996.
Amendment, dated as of April 2, 1996, to Stock Purchase Agreement,
dated as of November 28, 1995, between Aetna Services, Inc. and
The Travelers Insurance Group Inc., incorporated herein by
reference to Aetna Services, Inc.'s Form 10-Q filed on April 26,
1996.
Registration Rights Agreement, dated as of March 30, 1996, between
the Company and Leonard Abramson, incorporated herein by reference
to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Amendment No. 1, dated as of May 30, 1996, to the Registration
Rights Agreement, dated as of March 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.
Amended and Restated Agreement, dated as of May 30, 1996, between
the Company and Leonard Abramson, incorporated herein by reference
to the Company's Registration Statement on Form S-4 (Registration
No. 333-5791) filed on June 12, 1996.
The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by
reference to the Company's Registration Statement on Form S-4
(Registration No. 333-5791) filed on June 12, 1996.
The Aetna Inc. Annual Incentive Plan, incorporated herein by
reference to the Company's Registration Statement on Form S-4
(Registration No. 333-5791) filed on June 12, 1996.
The Aetna Inc. Non-Employee Director Deferred Stock and Deferred
Compensation Plan, as amended.
<PAGE> 36
3. Exhibits (Continued): *
The Supplemental Pension Benefit Plan for Certain Employees of
Aetna Services, Inc., incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.
Amendment No. 1, dated March 1, 1996 to Letter Agreement, dated
January 19, 1995, between Aetna Services, Inc. and
Richard L. Huber, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.**
Amended and Restated U.S. Healthcare, Inc. Savings Plan,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995
Form 10-K filed on March 25, 1996.
Amended and Restated Pension Plan for Employees of U.S.
Healthcare, Inc., incorporated herein by reference to U.S.
Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
Split Dollar Insurance Agreement, dated as of February 1, 1990,
among Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy
Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and
U.S. Healthcare, Inc., and the related Collateral Assignment
Agreement, dated as of February 1, 1990, among Madlyn K. Abramson,
Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson,
Judith Abramson and David B. Soll, and U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995
Form 10-K filed on March 25, 1996.
Split Dollar Insurance Agreement, dated as of January 21, 1991,
among Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson,
Judith Abramson, David B. Soll, Jerome Goodman and Edward M.
Glickman, and U.S. Healthcare, Inc., and the related Collateral
Assignment Agreement, dated as of January 21, 1991, among Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman,
and U.S. Healthcare, Inc., incorporated herein by reference to
U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
Description of Deferred Compensation Plan, incorporated herein
by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on
March 25, 1996.
Voting Agreement, dated as of March 30, 1996, among Leonard Abramson,
Aetna Life Insurance Company and Aetna Life Insurance and Annuity
Company, incorporated herein by reference to Aetna Services, Inc.'s
Form 10-Q filed on April 26, 1996.
Agreement and Plan of Merger, dated as of March 30, 1996, among
Aetna Services, Inc., U.S. Healthcare, Inc., the Company, Antelope
Sub, Inc. and New Merger Corporation, incorporated herein by
reference to Aetna Services, Inc.'s Form 10-Q filed on April 26,
1996.
Amendment No. 1, dated as of May 30, 1996, to the Agreement and
Plan of Merger, dated as of March 30, 1996, among Aetna Services,
Inc., U.S. Healthcare, Inc., the Company, Antelope Sub. Inc. and
New Merger Corporation, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.
<PAGE> 37
3. Exhibits (Continued): *
Aetna Services, Inc. Credit Facility, incorporated herein by
reference to Aetna Services, Inc.'s Report on Form 8-K filed on July
16, 1996.
Notification from Aetna Services, Inc. dated October 22, 1996
electing to reduce Credit Facility to $1.5 billion.
Description of certain arrangements not embodied in formal documents,
as described under the headings "Director Compensation" and
"Executive Compensation", incorporated herein by reference to the
Aetna Services, Inc. 1996 Proxy Statement.
(11) Statement re computation of per share earnings.
Incorporated herein by reference to Note 1 of Notes to Financial
Statements in the Annual Report.
(12) Statement re computation of ratios.
Statement re: computation of ratio of earnings to fixed charges for
the Company for the years ended December 31, 1996, 1995, 1994, 1993
and 1992 and Aetna Services for the year ended December 31, 1996.
Statement re: computation of ratio of earnings to combined fixed
charges and preferred stock dividends for the Company for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 and Aetna Services
for the year ended December 31, 1996.
(13) Annual Report to security holders.
Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Consolidated Financial
Statements and the report of the Company's independent auditors, and
unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel.
Consent of Independent Auditors to Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney.
(27) Financial data schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 25, 1996, relating
to the merger with U.S. Healthcare, Inc. including unaudited
condensed consolidated pro forma financial statements of the Company
for the nine and twelve months ended September 30, 1996 and December
31, 1995, respectively.
* Exhibits other than those listed are omitted because they are not
required or are not applicable. Copies of exhibits are available
without charge by writing to the Office of the Corporate
Secretary, Aetna Inc., 151 Farmington Avenue, Hartford,
Connecticut 06156.
** Management contract or compensatory plan or arrangement.
<PAGE> 38
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC.
Page
____
Independent Auditors' Report 39
I Summary of Investments - Other than
Investments in Affiliates as
of December 31, 1996 40
II Condensed Financial Information of the
Registrant:
Aetna Inc. as of and for the year ended
December 31, 1996 41
Aetna Services, Inc. (formerly Aetna Life
and Casualty Company) as of December 31, 1995
and for the years ended December 31, 1995
and 1994 47
III Supplementary Insurance Information as of
and for the years ended December 31, 1996,
1995 and 1994 53
IV Reinsurance 56
V Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1996, 1995
and 1994 57
Certain of the required information is shown in the Financial
Statements or Notes thereto in the Annual Report. Certain
information has been omitted from the schedules filed because the
information is not applicable.
Certain reclassifications have been made to 1995 and 1994
financial information to conform to 1996 presentation.
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
____________________________
The Shareholders and Board of Directors
Aetna Inc.:
Under date of February 4, 1997, we reported on the consolidated
balance sheets of Aetna Inc. and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, as contained in the
1996 annual report to shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in
the annual report on Form 10-K for the year 1996. In connection
with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement
schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
By /s/ KPMG Peat Marwick LLP
_________________________
(Signature)
KPMG PEAT MARWICK LLP
Hartford, Connecticut
February 4, 1997
<PAGE> 40
AETNA INC. AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1996
<TABLE>
<CAPTION>
Amount
at which
shown in the
Type of Investment Cost Value* balance sheet
__________ __________ _____________
(Millions)
<S> <C> <C> <C>
Debt securities:
Bonds:
United States Government
and government agencies
and authorities $ 3,723.0 $ 3,773.1 $ 3,773.1
States, municipalities and
political subdivisions 348.4 355.3 355.3
U.S. Corporate securities:
Utilities 2,355.3 2,420.3 2,420.3
Financial 4,486.0 4,546.5 4,546.5
Transportation/capital goods 2,373.7 2,492.8 2,492.8
Health care/consumer products 1,754.0 1,803.7 1,803.7
Natural resources 1,287.7 1,317.9 1,317.9
Other 1,488.1 1,519.8 1,519.8
_________ _________ _________
Total U.S. Corporate
securities 13,744.8 14,101.0 14,101.0
Foreign:
Government, including political
subdivisions 2,407.5 2,505.4 2,505.4
Utilities 740.3 790.2 790.2
Other 3,376.3 3,513.1 3,513.1
_________ _________ _________
Total foreign securities 6,524.1 6,808.7 6,808.7
Residential mortgage-backed
securities:
Pass-throughs 1,771.5 1,848.4 1,848.4
Collateralized mortgage
obligations 2,665.8 2,764.7 2,764.7
_________ _________ _________
Total residential
mortgage-backed securities 4,437.3 4,613.1 4,613.1
Commercial/Multifamily
mortgage-backed securities 1,131.5 1,144.3 1,144.3
Other asset-backed securities 1,458.0 1,464.6 1,464.6
_________ _________ _________
Total bonds 31,367.1 32,260.1 32,260.1
Redeemable preferred stocks 74.3 76.2 76.2
_________ _________ _________
Total debt securities 31,441.4 $32,336.3 32,336.3
_________
_________
Equity securities:
Common stocks:
Public utilities 16.1 $ 20.9 20.9
Banks, trust and insurance
companies 222.8 481.4 481.4
Industrial, miscellaneous
and all other 591.6 683.0 683.0
_________ _________ _________
Total common stocks 830.5 1,185.3 1,185.3
Nonredeemable preferred stocks 132.9 147.5 147.5
_________ _________ _________
Total equity securities 963.4 $ 1,332.8 1,332.8
_________ _________ _________
_________
Short-term investments 723.2 723.2
Mortgage loans 6,700.9 6,700.9
Real estate 850.2 850.2
Policy loans 707.3 707.3
Other 713.4 (1) 835.5 (2)
_________ _________
Total investments $42,099.8 $43,486.2
_________ _________
_________ _________
________________________
<FN>
* See Notes 1 and 4 of Notes to Financial Statements in the Company's
1996 Annual Report.
(1) Excludes investments in affiliates of $122.1 million.
(2) Includes investments in affiliates of $122.1 million.
</TABLE>
<PAGE> 41
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statement of Income
<TABLE>
<CAPTION>
For the year ended December 31,
(Millions) 1996
____
<S> <C>
Net investment income $ 1.2
_______
Total revenue 1.2
Operating expenses .2
_______
Total expenses .2
_______
Income before income taxes
and equity in earnings of affiliates 1.0
Current income taxes .5
Equity in earnings of affiliates 204.6
_______
Income from continuing operations 205.1
Discontinued Operations, net of tax:
Income from operations 182.2
Gain on sale 263.7
_______
Net income $ 651.0
_______
_______
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 42
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Balance Sheet
<TABLE>
<CAPTION>
As of December 31,
(Millions, except share data) 1996
____
<S> <C>
ASSETS
Investments:
Short-term investments $ 8.8
Investments in affiliates 10,842.3
_________
Total investments 10,851.1
Cash and cash equivalents 26.9
Due from affiliates 6.0
Affiliate dividends receivable 100.0
Deferred income taxes 4.0
_________
Total assets $10,988.0
_________
_________
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 36.9
Other liabilities 40.1
Current income taxes 21.3
_________
Total liabilities 98.3
_________
Shareholders' Equity:
Class C Voting Mandatorily
Convertible Preferred Stock
($.01 par value; 15,000,000 shares
authorized; 11,655,546 issued
and outstanding) 865.4
Common stock ($.01 par value; 500,000,000
shares authorized; 150,084,799 issued;
and 150,084,799 outstanding) 4,032.8
Net unrealized capital gains 340.0
Retained earnings 5,651.5
_________
Total shareholders' equity 10,889.7
_________
Total $10,988.0
_________
_________
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 43
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Class C
Voting
Mandatorily
Convertible Net Unrealized
For the year ended December 31, 1996 Preferred Common Capital Gains Retained Treasury
(Millions, except share data) Total Stock Stock (Losses) (1) Earnings Stock
_____________________________________________________________________________________________________________
<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 651.0 651.0
Change in net unrealized capital gains
or losses (301.1) (301.1)
Class C Voting Mandatorily Convertible
Preferred stock issued for U.S.
Healthcare merger (11,655,546 shares) 865.4 865.4
Common shares issued for U.S.
Healthcare merger (34,988,615 shares) 2,580.1 2,580.1
Stock options issued for U.S.
Healthcare merger 24.8 24.8
Common stock issued for benefit plans
(1,563,491 shares) 75.1 75.1
Repurchase of common shares
(1,194,400 shares) (83.3) (83.3)
Common stock dividends (170.0) (170.0)
Preferred stock dividends (25.1) (25.1)
Treasury stock retired - (12.1) 12.1
______________________________________________________________________
Balances at December 31, 1996 $10,889.7 $ 865.4 $ 4,032.8 $ 340.0 $ 5,651.5 $ -
____________________________________________________________________________________________________________
<FN>
See Notes to Condensed Financial Statements.
(1) Excludes unrealized capital gains and losses attributable to assets supporting
discontinued products and to assets supporting experience rated contracts.
</TABLE>
<PAGE> 44
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
For the year ended December 31,
(Millions) 1996
____
<S> <C>
Cash Flows from Operating Activities:
Net income $ 651.0
Adjustments to reconcile net income
to net cash provided by operating activities:
Income from Discontinued Operations (182.2)
Equity in earnings of affiliates (204.6)
Gain on sale of Discontinued Operations (263.7)
Other, net 27.7
_______
Net cash provided by operating activities 28.2
_______
Cash Flows from Investing Activities:
Proceeds from sales of short-term investments 184.4
Cost of investments in short-term investments (193.2)
Cost of investment in U.S. Healthcare (5,243.9)
Capital contributions to affiliates (500.0)
Dividends received from affiliates 5,938.0
Other, net 35.2
_______
Net cash provided by investing activities 220.5
_______
Cash Flows from Financing Activities:
Stock issued under benefit plans 75.1
Common shares repurchased (83.3)
Dividends paid to shareholders (237.3)
_______
Net cash used for financing activities (245.5)
_______
Net increase in cash and cash equivalents 3.2
Cash and cash equivalents, beginning of year 23.7
_______
Cash and cash equivalents, end of year $ 26.9
_______
_______
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 45
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements
1. Background of Organization
Aetna Inc. was incorporated under the Stock Corporation Act of the
state of Connecticut on March 25, 1996 for the purpose of
effectuating the combination of Aetna Services, Inc. (formerly
Aetna Life and Casualty Company) ("Aetna Services") and U.S.
Healthcare, Inc. ("U.S. Healthcare") in accordance with the terms
of the Agreement and Plan of Merger dated as of March 30, 1996.
Aetna's merger with U.S. Healthcare was consummated on July 19,
1996. As a result of the merger, Aetna Services and U.S.
Healthcare are each direct wholly-owned subsidiaries of Aetna Inc.
The accompanying condensed financial statements include the
results of operations of Aetna Services from January 1, 1996 and
of U.S. Healthcare from July 19, 1996 which are reflected as
Equity in Earnings of Affiliates on the Statement of Income.
These financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto in the Annual
Report.
2. 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 1/2%
Subordinated Debentures due 2024 (the "Subordinated Debentures")
issued to Aetna Capital L.L.C., a wholly-owned subsidiary of Aetna
Services. 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. See Note 13
to the Consolidated Financial Statements in the Annual Report for a
description of outstanding debt.
3. Dividends
Cash dividends paid to Aetna Inc. by Aetna Services and U.S.
Healthcare for the year ended December 31, 1996 were $5.3 billion
and $.6 million, respectively. This included the dividend by
Aetna Services of the net proceeds from the sale of the property-
casualty operations. The dividends from Aetna Services were used
to finance the cash portion of the U.S. Healthcare merger
consideration. See Note 16 to the Consolidated Financial
Statements in the Annual Report for a description of dividend
restrictions.
<PAGE> 46
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements (Continued)
4. Accounting Changes
See Note 1 to the Consolidated Financial Statements in the Annual
Report for a description of accounting changes.
5. Discontinued Products
See Note 9 to the Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
6. Sales of Subsidiaries
See Note 3 to the Consolidated Financial Statements in the Annual
Report for a description of the sales of subsidiaries.
7. Severance and Facilities Charges
See Note 8 to the Consolidated Financial Statements in the Annual
Report for a description of the severance and facilities charges.
8. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual
Report for a description of income taxes.
<PAGE> 47
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions) 1995 1994
____ ____
<S> <C> <C>
Premiums $ 1.2 $ 1.5
Net investment income (expense) 1.0 (7.9)
Net realized capital losses (.2) (7.9)
_______ _______
Total revenue 2.0 (14.3)
Current and future benefits .4 .9
Operating expenses 39.2 32.1
Interest expense 108.3 92.5
_______ _______
Total benefits and expenses 147.9 125.5
_______ _______
Losses before income taxes
(benefits) and equity in earnings
of affiliates (145.9) (139.8)
Income taxes (benefits):
Current (57.2) (23.2)
Deferred 3.1 (19.4)
Equity in earnings of affiliates 565.7 506.6
_______ _______
Income from continuing operations 473.9 409.4
Income (Loss) from Discontinued
Operations, net of tax (222.2) 58.1
_______ _______
Net income $ 251.7 $ 467.5
_______ _______
_______ _______
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 48
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Balance Sheet
<TABLE>
<CAPTION>
As of December 31,
(Millions, except share data) 1995
____
<S> <C>
ASSETS
Investments:
Debt securities, available for sale
at fair value (cost of $3.9) $ 3.9
Equity securities, at market
(cost $18.4) 14.9
Short-term investments 10.2
Other 8.7
Investments in affiliates:
Insurance and financial services
companies 4,830.4
International insurance and
financial services companies 780.2
Discontinued Operations 3,932.8
_________
Total investments 9,581.1
Cash and cash equivalents 23.7
Premiums due and other receivables 5.6
Due from affiliates 61.3
Accrued investment income 3.2
Deferred income taxes 304.8
Other assets 43.2
_________
Total assets $10,022.9
_________
_________
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance reserve liabilities $ 45.8
Dividends payable to shareholders 79.2
Long-term debt 958.0
Short-term debt 329.9
Other liabilities 238.7
Liability for postretirement
benefits other than pensions 609.5
Due to affiliates 356.0
Current income taxes 133.0
_________
Total liabilities 2,750.1
_________
Shareholders' Equity:
Common stock (no par value;
250,000,000 shares authorized;
115,013,675 issued; and
114,727,093 outstanding) 1,448.2
Net unrealized capital gains 641.1
Retained earnings 5,195.6
Treasury stock, at cost (12.1)
_________
Total shareholders' equity 7,272.8
_________
Total $10,022.9
_________
_________
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 49
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Two years ended December 31, 1995 Common Capital Gains Retained Treasury
(Millions, except share data) Total Stock (Losses) (1) Earnings Stock
_________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 7,043.1 $ 1,422.0 $ 648.2 $ 5,103.3 $(130.4)
________________________________________________________________________________________________
Net income 467.5 467.5
Change in net unrealized capital gains
or losses (1,719.7) (1,719.7)
Common stock issued for benefit plans
(457,191 shares) 26.1 26.1
Loss on issuance of treasury stock (2.8) (2.8)
Common stock dividends (311.2) (311.2)
__________________________________________________________
Balances at December 31, 1994 $ 5,503.0 $ 1,419.2 $(1,071.5) $ 5,259.6 $(104.3)
________________________________________________________________________________________________
Net income 251.7 251.7
Change in net unrealized capital gains
or losses 1,712.6 1,712.6
Common stock issued for benefit plans
(2,069,335 shares) 97.4 5.2 92.2
Gain on issuance of treasury stock 23.8 23.8
Common stock dividends (315.7) (315.7)
__________________________________________________________
Balances at December 31, 1995 $ 7,272.8 $ 1,448.2 $ 641.1 $ 5,195.6 $ (12.1)
________________________________________________________________________________________________
<FN>
See Notes to Condensed Financial Statements.
(1) Excludes unrealized capital gains and losses attributable to assets supporting
discontinued products and to assets supporting experience rated contracts.
</TABLE>
<PAGE> 50
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions) 1995 1994
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 251.7 $ 467.5
Adjustments to reconcile net income
to net cash used for operating activities:
Loss (Income) from Discontinued Operations 222.2 (58.1)
Decrease (Increase) in premiums due and
other receivables 116.4 (12.3)
Increase in accrued investment income (1.6) (0.3)
Depreciation and amortization 0.1 0.1
Increase in income taxes 0.5 93.1
Net decrease in other assets and other
liabilities (70.3) (19.7)
Increase in insurance reserve liabilities 45.2 0.1
Equity in earnings of affiliates (565.7) (506.6)
Net realized capital losses 0.2 7.9
Amortization of net investment discounts (0.2) (0.2)
Other, net (36.0) (90.6)
_______ _______
Net cash used for operating activities (37.5) (119.1)
_______ _______
Cash Flows from Investing Activities:
Proceeds from sales of:
Equity securities - 1.1
Short-term investments 1,289.3 1,200.3
Cost of investments in:
Debt securities available for sale (0.1) (3.8)
Equity securities (0.1) (21.8)
Short-term investments (1,272.2) (1,139.6)
Real estate - (1.0)
Capital contributions to affiliates (303.0) -
Dividends received from affiliates 451.7 -
Other, net (139.6) 17.2
_______ _______
Net cash provided by investing activities 26.0 52.4
_______ _______
Cash Flows from Financing Activities:
Issuance of long-term debt .6 .6
Issuance of subordinated debentures
to affiliates - 348.1
Stock issued under benefit plans 121.2 23.3
Repayment of long-term debt (100.8) -
Net increase in short-term debt 329.9 -
Dividends paid to shareholders (315.7) (311.2)
_______ _______
Net cash provided by financing activities 35.2 60.8
_______ _______
Effect of exchange rate on cash
and cash equivalents - 0.1
_______ _______
Net increase (decrease) in cash and
cash equivalents 23.7 (5.8)
Cash and cash equivalents, beginning of year - 5.8
_______ _______
Cash and cash equivalents, end of year $ 23.7 $ -
_______ _______
_______ _______
Supplemental disclosure of cash flow
information:
Interest paid $ 117.8 $ 90.6
_______ _______
_______ _______
Income taxes received, net $ 70.2 $ 150.3
_______ _______
_______ _______
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 51
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto in the Annual Report. Certain reclassifications were made
to 1994 financial information to conform to 1995 presentation.
1. Merger with U.S. Healthcare, Inc.
The merger between Aetna Services, Inc. (formerly Aetna Life and
Casualty Company) ("Aetna Services") and U.S. Healthcare, Inc.
("U.S. Healthcare") was consummated on July 19, 1996. As a result
of the merger, Aetna Services and U.S. Healthcare are each direct,
wholly-owned subsidiaries of Aetna Inc. (See pages 41 through 46
for condensed financial information of Aetna Inc. for the year
ended December 31, 1996.)
2. Long-Term Debt
<TABLE>
<CAPTION>
(Millions) 1995
____
<S> <C>
Long-term debt:
Notes, 8 5/8% due 1998 $ 99.8
Notes, 6 3/8% due 2003 198.9
Debentures, 6 3/4% due 2013 198.4
Eurodollar Notes, 7 3/4% due 2016 63.5
Debentures, 8% due 2017 199.1
Debentures, 7 1/4% due 2023 198.3
_________
$ 958.0
_________
_________
</TABLE>
3. Dividends
The amounts of cash dividends paid to Aetna Services by insurance
affiliates for the years ended December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
____ ____
<S> <C> <C>
Consolidated subsidiaries $451.7 $ -
______ ____
______ ____
</TABLE>
See Note 16 to the Consolidated Financial Statements in the Annual
Report for a description of dividend restrictions from the
consolidated insurance subsidiaries to Aetna Services.
4. Due Affiliates
See Note 14 to the Consolidated Financial Statements in the Annual
Report for a description of amount due to Aetna Capital L.L.C., a
subsidiary of Aetna Services.
<PAGE> 52
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Notes to Condensed Financial Statements (Continued)
5. Accounting Changes
See Note 1 to the Consolidated Financial Statements in the Annual
Report for a description of accounting changes.
6. Discontinued Products
See Note 9 to the Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
7. Sales of Subsidiaries
See Note 3 to the Consolidated Financial Statements in the Annual
Report for a description of the sales of subsidiaries.
8. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual
Report for a description of income taxes.
<PAGE> 53
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1996
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 39.2 $ 2,509.1 $ 1,724.3 $ 252.8 $ 579.9 $ 7,765.2
Aetna Retirement Services 1,488.1 3,935.8 30.1 - 10,868.1 180.7
International 699.6 3,370.1 73.5 80.8 434.0 1,166.1
Large Case Pensions - 9,168.3 1.4 - 8,019.7 176.8
_________ _________ _________ _________ _________ _________
Total $ 2,226.9 $18,983.3 $ 1,829.3 $ 333.6 $19,901.7 $ 9,288.8
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(3) written(4)
_______ _________ _____________ __________ ____________ _________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 414.6 $ 1,553.9 $ 6,622.4 $ 11.9 $ 2,973.9 $ 6,982.8
Aetna Retirement Services 1,086.7 494.8 1,035.9 74.3 386.5 -
International 334.2 130.7 996.8 73.9 388.4 292.0
Large Case Pensions 1,649.2 112.3 1,484.0 (2) - 58.6 -
Corporate 80.5 17.5 - - 717.9 -
_________ _________ _________ _________ _________ _________
Total $ 3,565.2 $ 2,309.2 $10,139.1 $ 160.1 $ 4,525.3 $ 7,274.8
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
<FN>
(1) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, interest expense, amortization of goodwill and other
acquired intangible assets and severance and facilities charges.
(4) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 54
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1995
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 50.5 $ 2,485.2 $ 1,285.3 $ 86.8 $ 634.4 $ 5,949.7
Aetna Retirement Services 1,320.8 3,917.4 30.2 - 10,704.4 260.2
International 581.8 2,691.9 82.8 55.3 851.7 1,038.5
Large Case Pensions - 9,278.4 1.5 - 10,708.2 264.9
Corporate - - 163.3 .3 - -
_________ _________ _________ _________ _________ _________
Total $ 1,953.1 $18,372.9 $ 1,563.1 $ 142.4 $22,898.7 $ 7,513.3
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(2) written(3)
_______ ___________ _____________ __________ ____________ __________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 364.0 $ 1,301.7 $ 5,100.4 $ 22.2 $ 2,038.4 $ 5,016.5
Aetna Retirement Services 1,044.1 401.8 1,061.4 46.1 303.8 -
International 308.7 112.6 911.2 70.8 350.5 234.8
Large Case Pensions 1,850.6 153.4 2,036.1 - 100.1 -
Corporate 7.7 2.0 - - 292.7 -
_________ _________ _________ _________ __________ _________
Total $ 3,575.1 $ 1,971.5 $ 9,109.1 $ 139.1 $ 3,085.5 $ 5,251.3
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
<FN>
(1) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(2) Includes operating expenses, interest expense and amortization of goodwill and other
acquired intangible assets.
(3) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 55
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1994
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 74.2 $ 2,487.4 $ 1,204.5 $ 137.5 $ 682.1 $ 5,611.5
Aetna Retirement Services 1,139.6 3,274.1 25.3 - 9,106.2 235.7
International 477.2 2,293.1 54.1 41.5 839.4 887.1
Large Case Pensions - 9,916.9 1.5 - 12,548.7 234.4
Corporate - - 104.0 .4 - -
_________ _________ _________ _________ __________ __________
Total $ 1,691.0 $17,971.5 $ 1,389.4 $ 179.4 $ 23,176.4 $ 6,968.7
_________ _________ _________ _________ __________ __________
_________ _________ _________ _________ __________ __________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(2) written(3)
_______ ___________ _____________ __________ ____________ __________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 351.6 $ 1,176.0 $ 4,755.1 $ 40.5 $ 1,805.4 $ 4,669.8
Aetna Retirement Services 958.7 310.4 983.5 27.4 258.9 -
International 308.4 101.5 782.7 65.7 349.8 199.0
Large Case Pensions 2,017.4 103.4 2,175.9 - 98.2 -
Corporate (4.7) (5.0) 22.2 - 293.6 -
_________ _________ _________ _________ _________ _________
Total $ 3,631.4 $ 1,686.3 $ 8,719.4 $ 133.6 $ 2,805.9 $ 4,868.8
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
<FN>
(1) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(2) Includes operating expenses, interest expense and amortization of goodwill and other
acquired intangible assets.
(3) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 56
AETNA INC. AND SUBSIDIARIES
SCHEDULE IV
Reinsurance*
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
______ _________ _________ _________ ________
<S> <C> <C> <C> <C> <C>
1996**
____
Premiums:
Life insurance $ 2,248.2 $ 85.6 $ 42.8 $ 2,205.4 1.9%
Accident and health insurance 7,073.2 62.1 23.5 7,034.6 .3
Property-casualty insurance 95.1 50.1 3.8 48.8 7.8
_________ _________ _________ _________
Total premiums $ 9,416.5 $ 197.8 $ 70.1 $ 9,288.8 .8%
_________ _________ _________ _________
_________ _________ _________ _________
1995**
____
Premiums:
Life insurance $ 2,253.4 $ 72.1 $ 43.9 $ 2,225.2 2.0%
Accident and health insurance 5,286.4 48.3 9.4 5,247.5 .2
Property-casualty insurance 98.2 57.6 - 40.6 -
_________ _________ _________ _________
Total premiums $ 7,638.0 $ 178.0 $ 53.3 $ 7,513.3 .7%
_________ _________ _________ _________
_________ _________ _________ _________
1994**
____
Premiums:
Life insurance $ 2,150.3 $ 64.6 $ 37.8 $ 2,123.5 1.8%
Accident and health insurance 4,852.3 63.0 17.1 4,806.4 .4
Property-casualty insurance 98.1 60.5 1.2 38.8 3.1
_________ _________ _________ _________
Total premiums $ 7,100.7 $ 188.1 $ 56.1 $ 6,968.7 .8%
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
* Excludes intercompany transactions.
** Net life insurance in force was $381.4 billion, $362.8 billion and $358.1 billion
at December 31, 1996, 1995 and 1994, respectively.
</TABLE>
<PAGE> 57
AETNA INC. AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Additions
_________________________
Balance
at Charged
December Charged (credited) Balance
Balance at 31, 1995 (credited) to other at end
beginning as to costs and accounts- Deductions- of
of period Adjustments adjusted expenses (1) describe (2) describe (3) period
__________ ___________ ________ ____________ ___________ ___________ _______
<S> <C> <C> <C> <C> <C> <C> <C>
1996
____
Asset valuation
reserves:
Mortgage loans $ 604.9 $ - $ 604.9 $ (33.0) $ (67.6) $ (257.3) $ 247.0
Real estate 130.6 52.9 (4) 183.5 27.1 1.9 (70.4) 142.1
Other 2.8 - 2.8 - - - 2.8
_________ __________ ________ _________ _________ ___________ _______
$ 738.3 $ 52.9 $ 791.2 $ (5.9) $ (65.7) $ (327.7) $ 391.9
__________ __________ ________ _________ _________ ___________ _______
__________ __________ ________ _________ _________ ___________ _______
1995
____
Asset valuation
reserves:
Mortgage loans $ 647.5 $ 208.5 (5) $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9
Real estate 111.4 - 111.4 3.3 55.5 (39.6) 130.6
Other 6.0 - 6.0 - - (3.2) 2.8
_________ __________ ________ _________ _________ ___________ _______
$ 764.9 $ 208.5 $ 973.4 $ 13.7 $ 50.5 $ (299.3) $ 738.3
__________ __________ ________ _________ _________ ___________ _______
__________ __________ ________ _________ _________ ___________ _______
1994
____
Asset valuation
reserves:
Debt securities $ 79.0 $ - $ 79.0 $ 3.8 $ 14.7 $ (97.5) $ -
Mortgage loans 1,122.4 - 1,122.4 47.2 197.9 (720.0) 647.5
Equity securities 3.3 - 3.3 - - (3.3) -
Real estate 214.4 - 214.4 (4.5) 24.2 (122.7) 111.4
Other 6.0 - 6.0 - - - 6.0
__________ __________ ________ _________ _________ ___________ _______
$ 1,425.1 $ - $1,425.1 $ 46.5 $ 236.8 $ (943.5) $ 764.9
__________ __________ ________ _________ _________ ___________ _______
__________ __________ ________ _________ _________ ___________ _______
<FN>
(1) Charged to net realized capital (gains) losses in the Consolidated Statements of Income.
(2) Reflects additions to (reductions of) reserves related to assets supporting experience rated
contracts and discontinued products for which a corresponding reduction was included in
Policyholders' Funds Left with the Company in the Consolidated Balance Sheets and the reserve
for future losses, respectively.
(3) Reduction in reserves is primarily a result of related asset write-downs (including foreclosures
of real estate) and sales.
(4) As a result of the adoption of FAS No. 121, valuation reserves at January 1, 1996 were
increased by $52.9 million in connection with the reversal of previously recorded accumulated
depreciation related to properties held for sale.
(5) The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million
related to experience rated products.
</TABLE>
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 28, 1997
AETNA INC.
(Registrant)
By /s/ Robert J. Price
_______________________________
(Signature)
Robert J. Price
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 28, 1997.
* *
___________________________________ _______________________________
Ronald E. Compton, Chairman, Gerald Greenwald, Director
President and Director
(Principal Executive Officer)
* *
___________________________________ _______________________________
Leonard Abramson, Director Ellen M. Hancock, Director
* *
___________________________________ _______________________________
Betsy Z. Cohen, Director Michael H. Jordan, Director
* *
___________________________________ _______________________________
William H. Donaldson, Director Jack D. Kuehler, Director
* *
___________________________________ _______________________________
Barbara Hackman Franklin, Director Frank R. O'Keefe, Jr., Director
* *
___________________________________ _______________________________
Jerome S. Goodman, Director Judith Rodin, Director
* *
___________________________________ _______________________________
Earl G. Graves, Director Richard L. Huber, Vice Chairman
for Strategy and Finance
(Principal Financial Officer)
and Director
/s/ Robert J. Price
___________________________________
Robert J. Price, Vice President
and Corporate Controller
(Controller)
* By /s/ Robert J. Price
_____________________________
Robert J. Price
(Attorney-in-Fact)
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
______ ______________________ ______
<S> <C> <C>
(3) Articles of Incorporation and By-Laws.
(3.1) Aetna Inc. Bylaws, as amended. Electronic
(10) Material contracts.
(10.1) The Aetna Inc. Non-Employee Director Deferred Stock and
Deferred Compensation Plan, as amended. Electronic
(10.2) Notification from Aetna Services, Inc. dated October 22, 1996
electing to reduce Credit Facility to $1.5 billion. Electronic
(12) Statement re computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed charges
for the Company for the years ended December 31, 1996, 1995, 1994,
1993 and 1992 and Aetna Services for the year ended December
31, 1996.
Statement re: computation of ratio of earnings to combined fixed
charges and preferred stock dividends for the Company for the years
ended December 31, 1996, 1995, 1994, 1993, and 1992 and Aetna
Services for the year ended December 31, 1996.
(13) Annual Report to security holders. Electronic
Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Consolidated
Financial Statements and the report of the Company's independent
auditors, and unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant. Electronic
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel. Electronic
Consent of Independent Auditors to Incorporation by Reference in
the Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney. Electronic
(27) Financial data schedule. Electronic
</TABLE>
<PAGE> 1
Exhibit 3.1
AETNA INC.
BY-LAWS
ARTICLE I
SHAREHOLDERS' MEETINGS
Section 1. The Annual Meeting of the Shareholders of the Company
shall be held at such time and place as the Board of Directors may
prescribe.
Section 2. At any meeting of the shareholders, only such business
may be conducted as shall have been properly brought before the
meeting and as shall have been determined to be lawful and
appropriate for consideration by shareholders at the meeting. To
be properly brought before a meeting, the business must be (a)
specified in the notice of meeting, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors
or the Chairman, or (c) otherwise properly brought before the
meeting by a shareholder. For business to be properly brought
before a meeting by a shareholder pursuant to clause (c) above, the
shareholder must have given written notice of such shareholder's
intent to present such business, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the
Company not later than 90 days prior to the date such meeting is to
be held; provided, however, notice by the shareholder shall be
timely in any event if received not later than the close of
business on the 10th day following the day on which public
disclosure of the date of the meeting was made. Such shareholder's
notice shall set forth as to each matter the shareholder proposes
to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (b) the name and address,
as they appear on the Company's books, of such shareholder, (c) the
class and number of shares of capital stock of the Company which
are beneficially owned by such shareholder, and (d) any material
interest of such shareholder in such business. Notwithstanding
anything in these By-Laws to the contrary, no business shall be
conducted at a meeting except in accordance with the procedures set
forth in this Section 2. The chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting in accordance with the
procedures prescribed herein, or that business was not lawful or
appropriate for consideration by shareholders at the meeting, and
if the chairman of the meeting should so determine, the chairman of
the meeting shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted at
that meeting.
Section 3. Nomination of persons for election to the Board of
Directors of the Company may be made by the Board of Directors or
by any shareholder of the Company entitled to vote for the election
of Directors. Any shareholder entitled to vote for the election of
Directors at a meeting may nominate persons for the election of
Directors only if written notice of such shareholder's intent to
make such nomination is given, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the
Company not later than 90 days prior to the date such meeting is to
be held; provided, however, that notice by the shareholder shall be
timely in any event if received not later than the close of
business on the 10th day following the day on which
<PAGE> 2
public disclosure of the date of the meeting was made. Such
shareholder's notice shall set forth (a) as to each person whom
the shareholder proposes to nominate for election or re-election
as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of
capital stock of the Company which are beneficially owned by such
person and (iv) any other information relating to such person that
is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such person's
written consent to being named in the proxy statement as a nominee
and to serving as a Director if elected) and (b) as to the
shareholder giving the notice, (i) the name and address, as they
appear on the Company's books, of such shareholder and, (ii) the
class and number of shares of capital stock of the Company which
are beneficially owned by such shareholder. The chairman of the
meeting shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the
procedures herein prescribed and, if the chairman of the meeting
should so determine, the chairman shall so declare to the meeting
and the defective nomination shall be disregarded.
Section 4. Special meetings of the shareholders may be called by
the Board, the Chairman or the President. Each such meeting shall
be held on the date and at the hour specified in the call for the
meeting and, unless another place within or without the State of
Connecticut has been specified in any such call by the Board or
the Chairman, at the home office of the Company in the City of
Hartford.
Section 5. The order of and the rules for conducting business at
all meetings of the shareholders shall be determined by the
chairman of the meeting.
ARTICLE II
DIRECTORS
Section 1. The Board of Directors shall consist of not less than
three and not more than twenty-one Directors, and the number of
directorships at any time within such minimum and maximum range
shall be the number fixed by vote of the shareholders or Directors
or, in the absence thereof, shall be the number of Directors
elected at the preceding Annual Meeting of Shareholders. If a
vacancy in the Board of Directors is created by an increase in the
number of directorships, it may be filled for the unexpired term
by action of the shareholders or by the concurring vote of
Directors holding a majority of the directorships, which number of
directorships shall be the number prior to the vote on the
increase. All other vacancies in the Board shall be filled in the
manner provided by law.
Section 2. Regular meetings of the Board shall be held at such
place and on such day and hour at such periodic intervals as the
Board may from time to time designate. Notice of such regular
meetings need not be given, but the Secretary shall notify each
Director by mail of the action of the Board designating or
changing the place, period, day, or hour of such regular meetings.
<PAGE> 3
Section 3. Special meetings of the Board shall be held at the
call of the Chairman, the President or not less than one-third of
the Directors then in office.
Section 4. A quorum shall consist of a majority of the Directors
at the time in office, but not less than two Directors nor less
than one-third of the number of Directors provided for by Article
II, Section 1.
Section 5. The Board shall fix the compensation of each Director
and of each member of a committee appointed by the Board pursuant
to Article III.
ARTICLE III
COMMITTEES OF THE BOARD
Section 1. There shall be an Executive Committee consisting of
not less than three Directors, including the Chairman, who shall
be designated by the affirmative vote of Directors holding a
majority of the directorships, at a meeting at which a quorum is
present. The Committee may advise with and aid the officers of
the Company on matters concerning its interests and the management
of its business, and generally perform such duties and exercise
such powers as may be directed or delegated by the Board from time
to time. During the intervals between meetings of the Board, the
Committee shall possess and may exercise all of the authority of
the Board in the management and direction of the business,
property and affairs of the Company, subject to such limitations
as the Board may from time to time impose.
Section 2. From time to time the Board, by the affirmative vote
of Directors holding a majority of the directorships, at a meeting
at which a quorum is present, (a) may provide for such other
committees as the Board deems necessary or appropriate to carry
out such of its functions and responsibilities or to advise it on
such matters as may be specified in such vote; (b) may alter or
amend the functions or responsibilities of any such committee
theretofore established; and (c) may designate two or more
Directors to constitute any such committee.
Section 3. The Board, by the affirmative vote of Directors
holding a majority of the directorships, at a meeting at which a
quorum is present, may designate any member of a committee as
chairman of that committee, may appoint any officer of the Company
(or his designate) as recorder of that committee, and may
designate or provide for the designation of one or more Directors
as alternate members of that committee who may replace any absent
or disqualified member at any meeting of that committee upon such
notice and in such manner as may be provided in the vote
designating such alternate members. Each committee shall meet at
the call of its chairman, the Chairman, the President, the
Secretary, or any two members of the committee. The presence of a
majority of the members of a committee shall be necessary to
constitute a quorum. Regular minutes of the proceedings of each
committee shall be kept in a book provided for that purpose, and
all actions of each committee shall be reported to the Board. The
members of each committee of the Board shall continue in office
for such term as may be provided in the vote designating them as
members (which term shall not exceed their term of office as
Directors) and until their successors are duly designated, unless
sooner discharged.
<PAGE> 4
ARTICLE IV
OFFICERS
Section 1. There shall be a Chairman elected by the Board of
Directors from their own number and a President and a Secretary
appointed by the Board. The Board may also appoint one or more
Vice Chairmen, Executive Vice Presidents and Senior Vice
Presidents. The Board shall fix, or authorize any officer or
officers to fix, the compensation of any such officer. In
addition, the Board may appoint, and fix the compensation of, and
may authorize any officer or officers to appoint, and to fix the
compensation of, such additional officers as the Board or such
authorized officer or officers deem necessary for the proper
conduct of the business of the Company.
Section 2. The Chairman shall be the chief executive officer of
the Company unless the Board vests such position in another
officer. The chief executive officer shall be responsible under
the direction of the Board for the general supervision,
management, and control of the affairs and property of the
Company. The Chairman shall serve as an ex officio member of all
committees appointed by the Board except as may be otherwise
provided in these By-Laws or in the vote appointing a committee.
The Chairman shall preside at all meetings of the shareholders,
the Board and all committees appointed by the Board of which he is
a member except as may be otherwise provided in the vote
appointing a committee. The Chairman, and the chief executive
officer if they are not the same person, shall have such other
authority and responsibility and perform such other duties as may
from time to time be delegated by the Board.
Section 3. Officers appointed pursuant to Section 1 of this
Article IV shall be subject to the direction of and shall have
such authority and perform such duties as may be assigned from
time to time by the Board of Directors or the chief executive
officer.
ARTICLE V
CORPORATE SEAL
Section 1. The corporate seal of the Company consists of the
corporate name "Aetna Inc." in a circle, and the words "Hartford,
Conn." within the circle.
Section 2. The corporate seal shall be in the custody of the
Secretary and shall be affixed by him or, with the approval of the
Chairman, or President, by his delegate to documents required to
be executed under the seal of the Company. Duplicate seals may be
in the possession of such other officers of the Company, and
affixed to such documents, as the Board of Directors, or officers
acting under its authorization, may from time to time determine
necessary or desirable.
<PAGE> 5
ARTICLE VI
AMENDMENT OF BY-LAWS
These By-Laws may be rescinded or amended
(a) by an affirmative vote of the holders of a majority of the
voting power of shares entitled to vote thereon at a meeting of
the shareholders in the call for which written notice of such
proposed action shall have been given, or,
(b) by vote of a majority of the number of Directors provided for
by Article II, Section 1, at any meeting of the Board upon written
notice to each Director of the action proposed to be taken.
January 1, 1997
<PAGE> 1
Exhibit 10.1
AETNA INC.
NON-EMPLOYEE DIRECTOR DEFERRED STOCK
AND DEFERRED COMPENSATION PLAN
SECTION 1. ESTABLISHMENT OF PLAN; PURPOSE.
The Plan is hereby established to permit Eligible Directors
of the Company, in recognition of their contributions to the
Company, to receive Shares in the manner described below. The
Plan is intended to enable the Company to attract, retain and
motivate qualified Directors and to enhance the long-term
mutuality of interest between Directors and stockholders of the
Company.
SECTION 2. DEFINITIONS.
When used in this Plan, the following terms shall have the
definitions set forth in this Section:
"Accounts" shall mean an Eligible Director's Stock Unit
Account and Interest Account, as described in Section 8.
"Affiliate" shall mean an entity at least a majority of the
total voting power of the then-outstanding voting securities of
which is held, directly or indirectly, by the Company and/or one
or more other Affiliates.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Committee" shall mean the Nominating and Corporate
Governance Committee of the Board of Directors or such other
committee of the Board as the Board shall designate from time to
time.
"Company" shall mean Aetna Inc.
"Compensation" shall mean the annual retainer fees earned by
an Eligible Director for service as a Director, the annual
retainer fee, if any, earned by an Eligible Director for service
as a member of a committee of the Board of Directors; and any fees
earned by an Eligible Director for attendance at meetings of the
Board of Directors and any of its committees.
"Director" shall mean any member of the Board of Directors,
whether or not such member is an Eligible Director.
"Disability" shall mean an illness or injury that lasts at
least six months, is expected to be permanent and renders a
Director unable to carry out his/her duties.
"Effective Date" shall mean the date, if any, on which the
Plan is approved by the shareholders of Aetna Life and Casualty
Company and U.S. Healthcare, Inc. and the transactions
contemplated by the Merger Agreement are consummated.
"Eligible Director" shall mean a member of the Board of
Directors who is not an employee of the Company.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
<PAGE> 2
"Fair Market Value" shall mean on any date, with respect to a
Share of Common Stock, the closing price of a Share of Common
Stock as reported by the Consolidated Tape of New York Stock
Exchange Listed Shares on the next preceding date on which there
was such a trade.
"Government Service" shall mean the appointment or election
of the Eligible Director to a position with the federal, state or
local government or any political subdivision, agency or
instrumentality thereof.
"Grant" shall mean a grant of Units under Section 5.
"Interest Account" shall mean the bookkeeping account
established to record the interests of an Eligible Director with
respect to deferred Compensation that is not deemed invested in
Units.
"Merger Agreement" shall mean the Agreement and Plan of
Merger, dated as of March 30, 1996, among Aetna Life and Casualty
Company, U.S. Healthcare, Inc., the Company, Antelope Sub, Inc.
and New Merger Corporation, as amended by Amendment No. 1 thereto
dated as of May 30, 1996.
"Prior Plan" shall mean the Aetna Life and Casualty Company
Non-Employee Director Deferred Stock and Deferred Compensation
Plan.
"Retirement" shall mean termination of service as a Director
on account of the Company's mandatory Director retirement policy
as may be in effect on the date of such termination of service.
"Shares" shall mean shares of Stock.
"Stock" shall mean the Common Stock, $.01 par value, of the
Company.
"Stock Unit Account" shall mean, with respect to an Eligible
Director who has elected to have deferred amounts deemed invested
in Units, a bookkeeping account established to record such
Eligible Director's interest under the Plan related to such Units.
"Subsidiary" shall mean any entity of which the Company
possesses directly or indirectly fifty percent (50%) or more of
the total combined voting power of all classes of stock of such
entity.
"Unit" shall mean a contractual obligation of the Company to
deliver a Share or pay cash based on the Fair Market Value of a
Share to an Eligible Director or the beneficiary or estate of such
Eligible Director as provided herein.
"Year of Service as a Director" shall mean a period of 12
months of service as a Director, measured from the effective date
of a Grant.
SECTION 3. ADMINISTRATION.
The Plan shall be administered such that awards under the
Plan shall be deemed to be exempt under
Rule 16b-3 of the Securities and Exchange Commission under the
Exchange Act ("Rule 16b-3"), as such Rule is in effect on the
Effective Date of the Plan and as it may be subsequently amended
from time to time.
<PAGE> 3
SECTION 4. SHARES AUTHORIZED FOR ISSUANCE.
4.1. Maximum Number of Shares. The aggregate number of
Shares with respect to which Grants may be made to Eligible
Directors under the Plan shall not exceed 99,600 Shares, subject
to adjustment as provided in Section 4.2 below. If any Unit is
settled in cash or is forfeited without a distribution of Shares,
the Shares otherwise subject to such Unit shall again be available
for Grants hereunder.
4.2. Adjustment for Corporate Transactions. In the event
that any stock dividend, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up,
spin-off, combination, exchange of shares, warrants or rights
offering to purchase Stock at a price substantially below Fair
Market Value, or other similar event affects the Stock such that
an adjustment is required to preserve, or to prevent enlargement
of, the benefits or potential benefits made available under the
Plan, then the Board of Directors shall adjust the number and kind
of shares which thereafter may be awarded under the Plan and the
number of Units that have been, or may be, granted under the Plan.
SECTION 5. UNIT GRANTS.
5.1. Unit Awards. Each Eligible Director (other than any
Eligible Director who has received an award under the Prior Plan)
who is first elected or appointed to the Board of Directors on or
after the Effective Date of the Plan shall be awarded 1,500 Units
on such date (or such other number of Units as the Board shall
determine). In addition, on the date of each Annual Meeting of
Shareholders of the Company occurring after 1996 and during the
term of the Plan an eligible Director serving as a Director on
such date shall be awarded 350 Units (or such other number of
Units as the Board shall determine).
5.2. Delivery of Shares. Subject to satisfaction of the
applicable vesting requirements set forth in Section 6 and except
as otherwise provided in Section 7, all Shares that are subject to
any Units shall be delivered to an Eligible Director and
transferred on the books of the Company on the date which is the
first business day of the month immediately following the
termination of such Eligible Director's service as a Director.
Notwithstanding the foregoing, an Eligible Director may elect that
all or a portion of his or her Units shall be payable in cash as
soon as practicable following the first business day of the month
immediately following the termination of such Eligible Director's
service as a Director. Any fractional Shares to be delivered in
respect of Units shall be settled in cash based upon the Fair
Market Value on the date any whole Shares are transferred on the
books of the Company to the Eligible Director or the Eligible
Director's beneficiary. The amount of any cash payment shall be
determined by multiplying the number of Units and the number of
Units subject to a cash payment election by the Fair Market Value
on the first business day of such month. Upon the delivery of a
Share (or cash with respect to a whole or fractional Share)
pursuant to the Plan, the corresponding Unit (or fraction thereof)
shall be canceled and be of no further force or effect.
5.3. Nontransferability. Units may not be assigned or
transferred, in whole or in part, either directly or by operation
of law (except in the event of an Eligible Director's death by
will or applicable laws of descent and distribution), including,
but not by way of limitation, by execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner, and no such
right or interest of any Eligible Director in the Plan shall be
subject to any obligation or liability of such Eligible Director.
<PAGE> 4
5.4. Dividend Equivalents. An Eligible Director shall have
no rights as a shareholder of the Company with respect to any
Units until Shares are delivered to the Director pursuant to this
Section 5 hereof; provided that, each Eligible Director shall have
the right to receive an amount equal to the dividend per Share for
the applicable dividend payment date (which, in the case of any
dividend distributable in property other than Shares, shall be the
per Share value of such dividend, as determined by the Company for
purposes of income tax reporting) times the number of Units held
by such Eligible Director on the record date for the payment of
such dividend (a "Dividend Equivalent"). Each Eligible Director
may elect, prior to any calendar year, whether the Dividend
Equivalent is (i) payable in cash, on or as soon as practicable
after each date on which dividends are paid to shareholders with
respect to Shares; (ii) treated as reinvested in an additional
number of Units determined by dividing (A) the cash amount of any
such dividend by (B) the Fair Market Value on the related dividend
payment date; or (iii) deferred and credited to the Eligible
Director's Interest Account pursuant to Section 8.4.
SECTION 6. VESTING.
6.1. Service Requirements. Except as otherwise provided in
this Section 6 or Section 7, an Eligible Director shall vest in
his or her Units as provided in this Section 6.1. If an Eligible
Director terminates service prior to the completion of three Years
of Service as a Director, the number of Shares to be delivered to
such Eligible Director in respect of Units granted upon his or her
election to the Board shall equal the amount obtained by
multiplying 1,500 by a fraction, the numerator of which is the
number of full months of service completed by such Director from
the applicable date of Grant and the denominator of which is 36.
If an Eligible Director terminates service prior to the completion
of three Years of Service as a Director, the number of Shares to
be delivered to such Eligible Director in respect of any annual
Grant of Units made prior to 1996 shall equal the amount obtained
by multiplying 200 by a fraction, the numerator of which is the
number of full months of service completed by such Director from
the applicable date of Grant and the denominator of which is 36.
If an Eligible Director terminates service prior to the completion
of one Year of Service as a Director from the date of Grant with
respect to any annual grant of Units made after 1995, the number
of Shares to be delivered to such Eligible Director in respect of
such Grant shall equal the amount obtained by multiplying 350 by a
fraction, the numerator of which is the number of full months of
service completed by such Director from the applicable date of
Grant and the denominator of which is 12. Notwithstanding the
foregoing, and except as provided in Section 6.2, if the Eligible
Director terminates service by reason of his/her death,
Disability, Retirement, or acceptance of a position in Government
Service prior to the completion of the period of service required
to be performed to fully vest in any Grant, all Shares that are
the subject of such Grant (or, if elected by the Eligible
Director, the value thereof in cash) shall be delivered to such
Eligible Director (or the Eligible Director's beneficiary or
estate).
6.2. Six Months' Minimum Service. If an Eligible Director
has completed less than six consecutive months of service as a
Director, all Units held by such Eligible Director shall be
immediately forfeited. If an Eligible Director has completed less
than six consecutive months of service from any date on which any
annual Grant of Units is made, all Units held by such Eligible
Director that relate to such annual Grant shall be immediately
forfeited; provided, however, that this sentence shall not apply
to any annual Grant of Units made prior to 1996.
<PAGE> 5
6.3. Distribution on Death. Except as provided in Section
6.2, in the event of the death of an Eligible Director, the Shares
corresponding to such Units or, at the election of the Eligible
Director's beneficiary or estate, the value thereof in cash shall
be delivered to the beneficiary designated by the Eligible
Director on a form provided by the Company, or, in the absence of
such designation, to the Eligible Director's estate.
SECTION 7. CHANGE IN CONTROL.
7.1. Immediate Vesting. Upon the occurrence of a Change in
Control, each Eligible Director's right and interest in Units
which have not previously vested under Section 6 shall become
vested and nonforfeitable regardless of the period of the Eligible
Director's service since the date such Units were granted.
7.2. Cash Settlement. Upon the occurrence of a Change in
Control, in lieu of delivering Shares with respect to the Units
then held by an Eligible Director, the Company shall pay such
Eligible Director, not later than 60 days after the Change in
Control occurs, cash in an aggregate amount equal to the product
of (i) the number of Shares that are subject to all Units credited
to such Eligible Director at the time of the Change in Control
multiplied by (ii) the Fair Market Value on the date of the Change
in Control.
7.3. Definition. "Change in Control" shall mean the
occurrence of any of the following events:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act but
excluding the Company and any Subsidiary thereof and any employee
benefit plan sponsored or maintained by the Company or any
Subsidiary (including any trustee of such plan acting as trustee),
directly or indirectly, becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent or
more of the combined voting power of the Company's then
outstanding securities;
(ii) When, during any period of 24 consecutive months the
individuals who, at the beginning of such period, constitute the
Board (the "Incumbent Directors") cease for any reason other than
death to constitute at least a majority thereof, provided that a
Director who was not a Director at the beginning of such 24-month
period shall be deemed to have satisfied such 24-month requirement
(and be an Incumbent Director) if such Director was elected by, or
on the recommendation of or with the approval of, at least two-
thirds of the Directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning of
such 24-month period) or by prior operation of this Paragraph
(ii); or
(iii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other
than the Company or a Subsidiary through purchase of assets, or by
merger, or otherwise.
<PAGE> 6
SECTION 8. DEFERRED COMPENSATION PROGRAM.
8.1. Election to Defer. On or before December 31 of any
calendar year, an Eligible Director may elect to defer receipt of
all or any part of any Compensation payable in respect of the
calendar year following the year in which such election is made,
and to have such amounts credited, in whole or in part, to a Stock
Unit Account or an Interest Account. Any person who shall become
an Eligible Director during any calendar year may elect, not later
than the 30th day after his or her term as a Director begins, to
defer payment of all or any part of his or her Compensation
payable for the portion of such calendar year following such
election.
8.2. Method of Election. A deferral election shall be made
by written notice filed with the Corporate Secretary of the
Company. Such election shall continue in effect (including with
respect to Compensation payable for subsequent calendar years)
unless and until the Eligible Director revokes or modifies such
election by written notice filed with the Corporate Secretary of
the Company. Any such revocation or modification of a deferral
election shall become effective as of the end of the calendar year
in which such notice is given and only with respect to
Compensation payable for services rendered thereafter; provided,
however, that it shall in no event become effective if the
modification would cause liability under Section 16(b) of the
Exchange Act. Amounts credited to the Eligible Director's Stock
Unit Account prior to the effective date of any such revocation or
modification of a deferral election shall not be affected by such
revocation or modification and shall be distributed only in
accordance with the otherwise applicable terms of the Plan. An
Eligible Director who has revoked an election to participate in
the Plan may file a new election to defer Compensation payable for
services to be rendered in the calendar year following the year in
which such election is filed.
8.3. Investment Election. At the time an Eligible Director
elects to defer receipt of Compensation pursuant to Section 8.1,
the Eligible Director shall designate in writing the portion of
such Compensation, stated as a whole percentage, to be credited to
the Interest Account (or such other account as may be established
from time to time by the Committee) and the portion to be credited
to the Stock Unit Account. If an Eligible Director fails to
notify the Corporate Secretary as to how to allocate any
Compensation between the Accounts, 100% of such Compensation shall
be credited to the Interest Account. By written notice to the
Corporate Secretary of the Company, an Eligible Director may
change the manner in which the Compensation payable with respect
to services rendered after the end of such calendar year are
allocated among the Accounts, provided that any such election
shall not be effective if the change would cause liability under
Section 16(b) of the Exchange Act.
8.4. Dividend Equivalents. In addition to the deferral of
Compensation permitted under Section 8.1, an Eligible Director may
elect, in the manner and at the time described in Section 5.4, to
have Dividend Equivalents payable in respect of his or her Units
credited to his or her Interest Account in the manner and at the
time described in such Section 5.4.
8.5. Interest Account. Any Compensation allocated to the
Interest Account shall be credited to the Interest Account as of
the date such Fees would have been paid to the Eligible Director.
Any amounts credited to the Interest Account shall be credited
with interest at the same rate and in the manner in which interest
is credited under the Fixed
<PAGE> 7
Investment Fund (or, if such fund no longer exists, the fund with
the investment criteria most clearly comparable to that of such
Fund) under the Aetna Inc. Incentive Savings Plan (or any
successor thereto).
8.6. Stock Unit Account. Any Compensation allocated to the
Stock Unit Account shall be deemed to be invested in a number of
Units equal to the quotient of (i) such Compensation divided by
(ii) the Fair Market Value on the date the Fees then being
allocated to the Stock Unit Account would otherwise have been
paid. Fractional Units shall be credited, but shall be rounded to
the nearest hundredth percentile, with amounts equal to or greater
than .005 rounded up and amounts less than .005 rounded down.
Whenever a dividend other than a dividend payable in the form of
Shares is declared with respect to the Shares, the number of Units
in the Eligible Director's Stock Unit Account shall be increased
by the number of Units determined by dividing (i) the product of
(A) the number of Units in the Eligible Director's Stock Unit
Account on the related dividend record date, and (B) the amount of
any cash dividend declared by the Company on a Share (or, in the
case of any dividend distributable in property other than Shares,
the per share value of such dividend, as determined by the Company
for purposes of income tax reporting), by (ii) the Fair Market
Value on the related dividend payment date. In the case of any
dividend declared on Shares which is payable in Shares, the
Eligible Director's Stock Unit Account shall be increased by the
number of Units equal to the product of (i) the number of Units
credited to the Eligible Director's Stock Unit Account on the
related dividend record date, and (ii) the number of Shares
(including any fraction thereof) distributable as a dividend on a
Share. In the event of any stock split, stock dividend,
recapitalization, reorganization or other corporate transaction
affecting the capital structure of the Company, the Committee
shall make such adjustments to the number of Units credited to
each Eligible Director's Stock Unit Account as the Committee shall
deem necessary or appropriate to prevent the dilution or
enlargement of such Eligible Director's rights.
8.7. Distribution Election. At the time an Eligible
Director makes a deferral election pursuant to Section 8.1, the
Eligible Director shall also file with the Corporate Secretary of
the Company a written election (a "Distribution Election") with
respect to whether:
(i) the aggregate amount, if any, credited to the Interest
Account at any time and the value of any Units credited to the
Stock Unit Account shall be distributed in cash, in Shares or in a
combination thereof at the election of the Director;
(ii) such distribution shall commence as soon as
practicable following the first business day of the calendar month
following the date the Eligible Director ceases to be a Director
or on the first business day of any calendar year following the
calendar year in which the Eligible Director ceases to be a
Director, and
(iii) such distribution shall be in one lump sum payment or
in such number of annual installments (not to exceed ten) as the
Eligible Director may designate.
<PAGE> 8
The amount of any installment payment shall be determined by
multiplying the amount credited to the Accounts of an Eligible
Director immediately prior to the distribution by a fraction, the
numerator of which is one and the denominator of which is the
number of installments (including the current installment)
remaining to be paid. An Eligible Director may at any time, and
from time to time, change any Distribution Election applicable to
his or her Accounts, provided that no election to change the
timing of any final distribution shall be effective unless it is
made in writing and received by the Corporate Secretary of the
Company at least one full calendar year prior to the time at which
the Eligible Director ceases to be a director.
8.8. Financial Hardship Withdrawal. Any Eligible Director
may, after submission of a written request to the Corporate
Secretary of the Company and such written evidence of the Eligible
Director's financial condition as the Committee may reasonably
request, withdraw from his Interest Account up to such amount as
the Committee shall determine to be necessary to alleviate the
Eligible Director's financial hardship.
8.9. Timing and Form of Distributions. Any distribution to
be made hereunder, whether in the form of a lump sum payment or
installments, following the termination of an Eligible Director's
service as a Director shall commence in accordance with the
Distribution Election made by the Eligible Director pursuant to
Section 8.7. If an Eligible Director fails to specify a form of
payment for a distribution in accordance with Section 8.7, the
distribution from the Interest Account shall be made in cash and
the distribution from the Stock Unit Account shall be made in
Shares. If an Eligible Director fails to specify in accordance
with Section 8.7 a commencement date for a distribution or whether
such distribution shall be made in a lump sum payment or a number
of installments, such distribution shall be made in a lump sum
payment and commence on the first business day of the month
immediately following the date on which the Eligible Director
ceases to be a Director. In the case of any distribution being
made in annual installments, each installment after the first
installment shall be paid on the first business day of each
subsequent calendar year, or as soon as practical thereafter,
until the entire amount subject to such Distribution Election
shall have been paid.
8.10. Effect on Prior Plan. Subject to the approval of the
Company's shareholders and the shareholders of Aetna Life and
Casualty Company and U.S. Healthcare, Inc., upon the consummation
of the transactions contemplated by the Merger Agreement, the
amounts standing to the credit of each Eligible Director under the
Prior Plan shall be transferred to the Plan and credited to the
Eligible Director's Interest and/or Stock Unit Accounts, as
applicable. Any elections in effect under such Prior Plan shall
be deemed to be an election made pursuant to and in accordance
with the terms of this Section 8 unless and until the Eligible
Director elects to change such elections in accordance with the
provisions of this Section 8.
<PAGE> 9
SECTION 9. UNFUNDED STATUS.
The Company shall be under no obligation to establish a fund
or reserve in order to pay the benefits under the Plan. A Unit
represents a contractual obligation of the Company to deliver
Shares or pay cash to a Director as provided herein. The Company
has not segregated or earmarked any Shares or any of the Company's
assets for the benefit of a Director or his/her beneficiary or
estate, and the Plan does not, and shall not be construed to,
require the Company to do so. The Director and his/her
beneficiary or estate shall have only an unsecured, contractual
right against the Company with respect to any Units granted or
amounts credited to a Director's Accounts hereunder, and such
right shall not be deemed superior to the right of any other
creditor. Units shall not be deemed to constitute options or
rights to purchase Stock.
SECTION 10. AMENDMENT AND TERMINATION.
The Plan may be amended at any time by the Board of
Directors, provided that, except as provided in Section 4.2, the
Board of Directors may not, without approval of the shareholders
of the Company: (i) modify the number of Shares with respect to
which Units may be awarded under the Plan; (ii) modify the vesting
requirements established under Section 6 or Section 7; or (iii)
otherwise change the times at which, or the period within which,
Shares may be delivered under the Plan. The Plan shall terminate
on April 30, 2001, except with respect to previously awarded
Grants and amounts credited to the Accounts of Directors.
Notwithstanding the foregoing, no termination of the Plan shall
materially and adversely affect any rights of any Director under
any Grant made pursuant to the Plan. Unless the Board otherwise
specifies at the time of such termination, a termination of the
Plan will not result in the distribution of the amounts credited
to an Eligible Director's Accounts.
SECTION 11. GENERAL PROVISIONS.
11.1. No Right to Serve as a Director. This Plan shall not
impose any obligations on the Company to retain any Eligible
Director as a Director nor shall it impose any obligation on the
part of any Eligible Director to remain as a Director of the
Company.
11.2. Construction of the Plan. The validity, construction,
interpretation, administration and effect of the Plan, and the
rights relating to the Plan, shall be determined solely in
accordance with the laws of the State of Connecticut.
11.3. No Right to Particular Assets. Nothing contained in
this Plan and no action taken pursuant to this Plan shall create
or be construed to create a trust of any kind or any fiduciary
relationship between the Company and any Eligible Director, the
executor, administrator or other personal representative or
designated beneficiary of such Eligible Director, or any other
persons. Any reserves that may be established by the Company in
connection with Units granted under this Plan shall continue to be
treated as the assets of the Company for federal income tax
purposes and remain subject to the claims of the Company's
creditors. To the extent that any Eligible Director or the
executor, administrator, or other personal representative of such
Eligible Director, acquires a right to receive any payment from
the Company pursuant to this Plan, such right shall be no greater
than the right of an unsecured general creditor of the Company.
<PAGE> 10
11.4. Listing of Shares and Related Matters. If at any time
the Board of Directors shall determine in its discretion that the
listing, registration or qualification of the Shares covered by
this Plan upon any national securities exchange or under any state
or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or
in connection with, the delivery of Shares under this Plan, no
Shares will be delivered unless and until such listing,
registration, qualification, consent or approval shall have been
effected or obtained, or otherwise provided for, free of any
conditions not acceptable to the Board of Directors.
11.5. Severability of Provisions. If any provision of this
Plan shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provisions hereof, and
this Plan shall be construed and enforced as if such provision had
not been included.
11.6. Incapacity. Any benefit payable to or for the benefit
of a minor, an incompetent person or other person incapable of
receipting therefor shall be deemed paid when paid to such
person's guardian or to the party providing or reasonably
appearing to provide for the care of such person, and such payment
shall fully discharge any liability or obligation of the Board of
Directors, the Company and all other parties with respect thereto.
11.7. Headings and Captions. The headings and captions
herein are provided for reference and convenience only, shall not
be considered part of this Plan, and shall not be employed in the
construction of this Plan.
<PAGE> 1
EXHIBIT 10.2
AETNA 151 Farmington Avenue, RE6A Alfred P. Quirk, Jr.
Hartford, CT 06156 Vice President, Finance
(860) 273-1322
Fax: (806) 273-1314
October 22, 1996
Jerry J. Fall
Morgan Guaranty Trust Company of New York
60 Wall Street, 23rd Floor
New York, NY 10019
Dear Jerry,
Pursuant to Section 2.07(c) of the $2.5 billion Credit Agreement
(the "Credit Agreement") dated as of June 28, 1996, among Aetna
Life and Casualty Company (renamed Aetna Services, Inc) as the
Borrower and Aetna Inc. as Guarantor, the Banks listed therein and
Morgan Guaranty Trust Company of New York, as Administrative
Agent, the Borrower hereby requests the ratable reduction of the
outstanding Commitments by $1 billion. Following this reduction,
the remaining outstanding Commitments under the Credit Agreement
shall be $1.5 billion.
As provided in Section 2.07(c), this reduction shall be effective
three Domestic Business Days from the date hereof.
Capitalized terms used in this letter shall have the meanings as
set forth in the Credit Agreement.
Sincerely,
/s/ Alfred P. Quirk, Jr.
________________________
(Signature)
Alfred P. Quirk, Jr.
<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>
(Millions) 1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations $ 338.7 $ 726.2 $ 627.5 $(1,014.7) $ 145.5
Add back fixed charges 245.1 187.0 170.8 154.7 171.5
Minority interest 16.4 16.1 11.4 7.0 8.6
_________ _________ _________ _________ _________
Income (loss) as adjusted $ 600.2 $ 929.3 $ 809.7 $ (853.0) $ 325.6
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Fixed charges:
Interest on indebtedness $ 168.3 (1) $ 115.9 (1) $ 98.6 (1) $ 77.4 $ 81.4
Portion of rents representative
of interest factor 76.8 71.1 72.2 77.3 90.1
_________ _________ _________ _________ _________
Total fixed charges $ 245.1 $ 187.0 $ 170.8 $ 154.7 $ 171.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Preferred stock dividend
requirements 41.1 - - - -
_________ _________ _________ _________ _________
Total combined fixed charges
and preferred stock dividend
requirements $ 286.2 $ 187.0 $ 170.8 $ 154.7 $ 171.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Ratio of earnings to fixed
charges 2.45 4.97 4.74 (5.51) 1.90
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Ratio of earnings to combined
fixed charges and preferred
stock dividends 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 1996 Annual Report.)
</TABLE>
<PAGE> 2
EXHIBIT 12
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>
(Millions) 1996
____
<S> <C>
Pretax income from
continuing operations $ 335.0
Add back fixed charges 243.8
Minority interest 16.4
_________
Income as adjusted $ 595.2
_________
_________
Fixed charges:
Interest on indebtedness $ 168.3 (2)
Portion of rents representative
of interest factor 75.5
_________
Total fixed charges $ 243.8
_________
_________
Preferred stock dividend
requirements -
_________
Total combined fixed charges
and preferred stock dividend
requirements $ 243.8
_________
_________
Ratio of earnings to fixed
charges 2.44
_________
_________
Ratio of earnings to combined
fixed charges and preferred
stock dividends 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 1996 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the 1996 Annual Report.)
</TABLE>
<PAGE> 1
Exhibit 13
Selected Financial Data
<TABLE>
<CAPTION>
(Millions, except per common share data) 1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Premiums:
Aetna U.S. Healthcare $ 7,765.2 $ 5,949.7 $ 5,611.5 $ 4,700.6 $ 4,586.7
Aetna Retirement Services 180.7 260.2 235.7 189.8 182.3
International 1,166.1 1,038.5 887.1 909.5 814.8
Large Case Pensions 176.8 264.9 234.4 185.9 204.2
__________________________________________________________
Total Premiums 9,288.8 7,513.3 6,968.7 5,985.8 5,788.0
______________________________________________________________________________________________________
Net Investment Income, Fees and Other
Income, and Net Realized Capital Gains
(Losses):
Aetna U.S. Healthcare 1,968.5 1,665.7 1,527.6 1,405.4 1,345.4
Aetna Retirement Services 1,581.5 1,445.9 1,269.1 1,269.6 1,129.9
International 464.9 421.3 409.9 369.8 387.6
Large Case Pensions 1,761.5 2,004.0 2,120.8 2,380.1 2,547.1
Corporate: Other 98.0 9.7 (9.7) (6.9) (42.7)
__________________________________________________________
Total Net Investment Income, Fees
and Other Income, and Net Realized
Capital Gains (Losses) 5,874.4 5,546.6 5,317.7 5,418.0 5,367.3
______________________________________________________________________________________________________
Total Revenue $ 15,163.2 $ 13,059.9 $ 12,286.4 $ 11,403.8 $ 11,155.3
______________________________________________________________________________________________________
__________________________________________________________
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments:
Aetna U.S. Healthcare $ 58.7 $ 286.0 $ 341.7 $ 272.2 $ 274.3
Aetna Retirement Services 186.2 198.0 159.1 111.4 99.0
International 109.9 86.6 71.2 55.0 25.1
Large Case Pensions 258.4 89.2 54.4 (822.3) (17.3)
Corporate: Interest (103.9) (70.4) (60.5) (44.7) (50.9)
Other (304.2) (115.5) (156.5) (173.9) (229.2)
______________________________________________________________________________________________________
Income (Loss) from Continuing
Operations before Extraordinary Item and
Cumulative Effect Adjustments 205.1 473.9 409.4 (602.3) 101.0
______________________________________________________________________________________________________
Net Income (Loss) 651.0 251.7 467.5 (365.9) 56.0
______________________________________________________________________________________________________
Net Realized Capital Gains (Losses),
Net of Tax (included above) 85.9 29.5 (41.2) (42.0) (76.7)
______________________________________________________________________________________________________
Total Assets 92,912.9 84,323.7 75,486.7 81,572.8 77,022.0
______________________________________________________________________________________________________
Total Long-Term Debt 2,380.0 989.1 1,079.2 1,112.2 900.9
______________________________________________________________________________________________________
Aetna-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Limited Liability Company Holding
Primarily Debentures Guaranteed by Aetna 275.0 275.0 275.0 - -
______________________________________________________________________________________________________
Shareholders' Equity 10,889.7 7,272.8 5,503.0 7,043.1 7,238.3
______________________________________________________________________________________________________
__________________________________________________________
Per Common Share Data:
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments $ 1.36 $ 4.16 $ 3.63 $ (5.42) $ .92
Net Income (Loss) 4.74 2.21 4.14 (3.29) .51
Dividends Declared 1.29 2.76 2.76 2.76 2.76
Shareholders' Equity 66.79 63.39 48.85 62.77 65.64
Market Price at Year End 80.00 69.25 47.13 60.38 46.50
______________________________________________________________________________________________________
<FN>
See Notes to Financial Statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations for significant events affecting the comparability of current year
results with 1995 and 1994 results. Refer to Note 2 of Notes to Financial Statements for
matters relating to the merger with U.S. Healthcare, and to Note 9 for matters relating to
discontinued products.
</TABLE>
<PAGE> 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 December 31,
1996 and 1995, and its results of operations for 1996, 1995 and 1994.
Index
Consolidated Results of Operations: Operating Summary 2
Overview 3
Aetna U.S. Healthcare 7
Aetna Retirement Services 11
International 14
Large Case Pensions 16
Corporate 20
Severance and Facilities Charges 21
General Account Investments 23
Liquidity and Capital Resources 30
Regulatory Environment 35
New Accounting Pronouncements 36
Forward-Looking Information 37
Consolidated Results of Operations: Operating Summary
<TABLE>
<CAPTION>
(Millions, except per common share data) 1996 1995 1994
_________________________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 9,288.8 $ 7,513.3 $ 6,968.7
Net investment income 3,565.2 3,575.1 3,631.4
Fees and other income 2,174.8 1,924.3 1,741.5
Net realized capital gains (losses) 134.4 47.2 (55.2)
________________________________________
Total revenue 15,163.2 13,059.9 12,286.4
________________________________________
Current and future benefits 10,341.4 9,109.1 8,719.4
Operating expenses 3,319.8 2,951.8 2,680.3
Interest expense 168.3 115.9 98.6
Amortization of goodwill and
other acquired intangible assets 172.5 17.8 27.0
Amortization of deferred policy
acquisition costs 160.1 139.1 133.6
Reductions of loss on discontinued products (202.3) - -
Severance and facilities charges 864.7 - -
________________________________________
Total benefits and expenses 14,824.5 12,333.7 11,658.9
________________________________________
Income from continuing operations
before income taxes 338.7 726.2 627.5
Income taxes 133.6 252.3 218.1
________________________________________
Income from continuing operations 205.1 473.9 409.4
Discontinued Operations, net of tax:
Income (Loss) from operations 182.2 (222.2) 58.1
Gain on sale 263.7 - -
________________________________________
Net income $ 651.0 $ 251.7 $ 467.5
_________________________________________________________________________________________
________________________________________
Net income applicable to common ownership $ 625.9 $ 251.7 $ 467.5
_________________________________________________________________________________________
________________________________________
Net realized capital gains (losses) from
continuing operations, net of tax
(included above) $ 85.9 $ 29.5 $ (41.2)
_________________________________________________________________________________________
________________________________________
Per common share data:
Income from continuing operations $ 1.36 $ 4.16 $ 3.63
Discontinued Operations, net of tax:
Income (Loss) from operations 1.38 (1.95) .51
Gain on sale 2.00 - -
________________________________________
Net income $ 4.74 $ 2.21 $ 4.14
________________________________________
________________________________________
Dividends declared $ 1.29 $ 2.76 $ 2.76
________________________________________
________________________________________
Shareholders' equity $ 66.79 $ 63.39 $ 48.85
_________________________________________________________________________________________
________________________________________
Sources of earnings:
Aetna U.S. Healthcare $ 58.7 $ 286.0 $ 341.7
Aetna Retirement Services 186.2 198.0 159.1
International 109.9 86.6 71.2
Large Case Pensions 258.4 89.2 54.4
Corporate: Interest (103.9) (70.4) (60.5)
Other (304.2) (115.5) (156.5)
________________________________________
Total from continuing operations 205.1 473.9 409.4
Discontinued Operations 445.9 (222.2) 58.1
________________________________________
Net income $ 651.0 $ 251.7 $ 467.5
_________________________________________________________________________________________
________________________________________
<FN>
* This Management's Discussion and Analysis of Financial Condition and Results of Operations
is as of February 4, 1997.
</TABLE>
<PAGE> 3
Overview
Strategy
Aetna sold its property-casualty operations on April 2, 1996 for
approximately $4.1 billion in cash. Aetna merged with U.S.
Healthcare, Inc. on July 19, 1996 in a cash and stock transaction
valued at approximately $8.9 billion. As a result, Aetna Inc.
became the new parent corporation of Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) and U.S. Healthcare.
As a result of these and other actions taken by Aetna in recent
years to strategically reposition itself, Aetna's current
operations include three core businesses: Aetna U.S. Healthcare,
Aetna Retirement Services and International - with Aetna U.S.
Healthcare being the largest.
For additional information about the merger with U.S. Healthcare,
which has been accounted for as a purchase, see Note 2 of Notes to
Financial Statements. See Note 3 of Notes to Financial Statements
for a discussion of certain indemnifications and other information
related to the property-casualty sale.
Financial Overview
The U.S. Healthcare merger and the property-casualty sale, as well
as severance charges recorded in 1996, reserve reductions for
Large Case Pensions, and certain other factors complicate the
comparison of Aetna's results over the last three years. These
factors are described in more detail below. The discussion of
earnings below excludes these factors because management believes
it provides a comparison of reported results that better reflects
the underlying performance of Aetna's business.
Consolidated Results
Aetna reported income from continuing operations of $205 million
in 1996, $474 million in 1995 and $409 million in 1994. These
results include severance and facilities charges for Aetna U.S.
Healthcare, Aetna Retirement Services and Corporate aggregating
$562 million in 1996 (see "Severance and Facilities Charges"),
reserve reductions for Large Case Pensions' discontinued products
of $132 million in 1996, and net realized capital gains or losses
in all three years. Excluding these factors, income from
continuing operations would have been $550 million in 1996, $444
million in 1995 and $451 million in 1994.
Consolidated 1996 results reflect increased earnings in each
business segment and business growth in each core business, lower
net corporate operating expenses and higher interest expense due
to additional debt incurred in connection with the 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,
1995.) Consolidated 1995 results reflect improved earnings in
each business segment other than health operations, as well as
lower net corporate operating expenses and higher interest
expense.
Total revenue from continuing operations increased 16% in 1996 and
6% in 1995. The 1996 increase was primarily attributable to the
inclusion of U.S. Healthcare results from the merger date.
Increased revenues in the other core businesses contributed to the
1996 and 1995 increases.
<PAGE> 4
Overview (Continued)
Underlying Business Results
Aetna U.S. Healthcare. Earnings improved in 1996 primarily due
to increased earnings from group insurance and noninsured
health products. These increased earnings were due to
favorable mortality experience and higher Group Insurance sales
and enrollment. Results of HMO and other insured health
products were significantly affected in 1996 by increases in
Commercial and Medicare HMO medical costs and decreases in
Commercial HMO premiums on a per member per month basis. The
merger significantly increased revenues in 1996, but it did not
materially affect 1996 earnings because the addition of U.S.
Healthcare's results from July 19, 1996 was substantially
offset by the amortization of goodwill and other acquired
intangible assets created as a result of the merger. Revenue
in 1995 increased because of a movement toward higher revenue
products. However, this segment's 1995 earnings decreased due
to increased investments in managed care and an increase in
medical costs for certain health products.
Aetna Retirement Services. Results improved in 1996 and 1995,
primarily reflecting fees earned on a growing base of assets
under management. Assets under management grew primarily due
to increased deposits for financial services products and to
stock market appreciation. However, business growth and
investments in distribution channels increased operating
expenses in 1996. Results in 1996 also reflect favorable
mortality experience on life products.
International. Results improved in 1996 and 1995. Results in
1996 reflect business and earnings growth in Asia Pacific and
Latin American operations, partially offset by increased losses
from start-up operations and decreased earnings in Mexico.
Results in 1995 reflect growth in Asia Pacific operations and
increased earnings in Mexico.
Large Case Pensions. Results improved in 1996 and 1995
although assets under management declined in both years. These
improved results were caused by increased distributions
received in 1996 on certain investments supporting the capital
in this business, increases in fees and other income in 1995,
and improved interest margins in both years. Earnings of this
segment, however, are expected to decline. (See "Large Case
Pensions - Outlook.")
Corporate. This segment reflects lower staff area expenses and
increased interest expense for both 1996 and 1995. The
increase in interest expense in 1996 was due to additional debt
incurred in connection with the merger. This increase in 1996
was partially offset by interest income on the net proceeds
from the property-casualty sale, from April 2, 1996 to July 19,
1996.
<PAGE> 5
Overview (Continued)
Factors Affecting Comparison of Results
Detailed information regarding certain factors that affect the
comparison of results of continuing operations (after tax) of the
Company for 1996, 1995 and 1994 is set forth below.
Factors Primarily Related to the Merger
Income from continuing operations includes U.S.
Healthcare results from July 19, 1996.
As a result of the merger, severance and facilities
charges of $275 million were recorded in 1996,
principally related to the integration of the health
businesses of Aetna Services and U.S. Healthcare.
Results of continuing operations in 1996 reflected an
increase in amortization of goodwill and other acquired
intangible assets of $126 million, primarily related to
the amortization from July 19, 1996 of approximately $7.9
billion of intangible assets created as a result of the
merger.
A portion of the merger consideration paid consisted of
cash from the net proceeds received from the sale of the
Company's property-casualty operations. Results of
continuing operations in 1996 included $37 million of
interest income earned on such net proceeds from April 2,
1996 through July 19, 1996.
Results of continuing operations in 1996 included an
increase in interest expense of $34 million primarily
related to borrowings incurred in connection with the
merger.
As a result of 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 Notes 1 and 2 of Notes to
Financial Statements.)
Other Significant Factors
Results of continuing operations in 1996 included
additional severance and facilities charges of $287
million.
Results of continuing operations in 1996 included $132
million of benefits from reductions of the reserve for
anticipated future losses on discontinued products,
primarily as a result of favorable developments in real
estate markets.
Results of continuing operations in 1996 included net
after-tax realized capital gains of $86 million compared
with $30 million in 1995 and net after-tax realized
capital losses of $41 million in 1994. Net realized
capital gains in 1996 include $52 million of net gains
related to sales of equity and real estate investments
and $40 million of gains related to sales of
subsidiaries. Net realized capital losses in 1994
primarily reflect impairment losses attributable to
mortgage loans and real estate.
<PAGE> 6
Overview (Continued)
Net Income
The Company's 1996 net income was $651 million, compared with
$252 million in 1995 and $468 million in 1994. Net income in 1996
included income from property-casualty operations ("Discontinued
Operations") of $182 million and a gain from the sale of such
operations of $264 million. Net income in 1995 included a loss
from Discontinued Operations of $222 million compared with income
of $58 million in 1994.
Return on Average Shareholders' Equity
Return on average shareholders' equity for the years ended
December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Return on average shareholders' equity 7.2% 3.9% (1) 7.5% (1)
<FN>
(1) Return on average shareholders' equity excluding additions to environmental and
asbestos-related claims reserves within the Company's Discontinued Operations in
1995 and 1994 were 14.8% and 10.0%, respectively.
</TABLE>
This Overview is a summary of certain information that appears
later in this Management's Discussion and Analysis. Important
additional information about the businesses' 1996, 1995 and 1994
results, as well as their outlook for 1997, 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 the more detailed
information appearing later. Because of the importance of this
detailed information, you should read Management's Discussion and
Analysis in its entirety.
<PAGE> 7
Aetna U.S. Healthcare
<TABLE>
<CAPTION>
Operating Summary (Millions) 1996 1995 1994
____________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 7,765.2 $ 5,949.7 $ 5,611.5
Net investment income 414.6 364.0 351.6
Fees and other income 1,495.9 1,312.3 1,197.2
Net realized capital gains (losses) 58.0 (10.6) (21.2)
_________________________________
Total revenue 9,733.7 7,615.4 7,139.1
_________________________________
Current and future benefits 6,622.4 5,100.4 4,755.1
Operating expenses 2,351.5 2,023.2 1,782.5
Amortization of goodwill and
other acquired intangible assets 169.4 15.2 22.9
Amortization of deferred policy
acquisition costs 11.9 22.2 40.5
Severance and facilities charges 453.0 - -
_________________________________
Income before income taxes 125.5 454.4 538.1
Income taxes 66.8 168.4 196.4
_________________________________
Net income $ 58.7 $ 286.0 $ 341.7
____________________________________________________________________________
_________________________________
Net realized capital gains (losses),
net of tax (included above) $ 37.9 $ (7.1) $ (13.6)
____________________________________________________________________________
_________________________________
</TABLE>
Aetna U.S. Healthcare provides a full spectrum of health products
(managed care and indemnity) and group insurance products (life,
disability and long-term care) on both an insured and an employer-
funded basis. Under insured plans, the Company assumes all or a
majority of health care cost, utilization, mortality, morbidity or
other risk depending on the product. Under employer-funded plans,
the customer, and not the Company, assumes all or a majority of
these risks.
Aetna U.S. Healthcare consists of the Health Risk business and the
Group Insurance and Other Health business. Health products
include health maintenance organization (HMO), point-of-service
(POS), preferred provider organization (PPO) and indemnity
products. The Health Risk business includes such health products
offered on an insured basis. The Group Insurance and Other Health
business includes group life and disability insurance, long-term
care insurance and all health products offered on an employer-
funded basis.
Actual Results
Aetna U.S. Healthcare's net income decreased $227 million in 1996,
following a $56 million decrease in 1995. Results in 1996, 1995
and 1994 include amortization of goodwill and other acquired
intangible assets ($141 million, $15 million and $23 million,
respectively, after tax), and unusual items, primarily severance
and facilities charges (see "Severance and Facilities Charges"),
of $321 million (after tax) in 1996. Excluding these items and
net realized capital gains and losses, 1996 results increased
$174 million, primarily reflecting the inclusion of U.S.
Healthcare from July 19, 1996. On a comparable basis (excluding
the items noted above), results in 1995 decreased $70 million
primarily due to expenses associated with an increase in managed
care investments and an increase in medical costs in the first
half of 1995 on indemnity and PPO health products, partially
offset by increased earnings from HMO operations and improved
operating expense management.
Net realized capital gains for 1996 included a $15 million (after
tax) gain from the sale of an HMO subsidiary. The earnings of
this subsidiary were not material to results.
<PAGE> 8
Aetna U.S. Healthcare (Continued)
Pro Forma Results
The remainder of the discussion of Aetna U.S. Healthcare is on a
pro forma basis as if the merger had occurred at the beginning of
1995.
<TABLE>
<CAPTION>
Pro Forma Operating Summary (1)
(Millions) 1996 1995
__________________________________________________________________
<S> <C> <C>
Premiums $10,096.6 $ 9,436.1
Net investment income 441.3 408.2
Fees and other income 1,549.2 1,368.0
Net realized capital gains 52.5 4.5
______________________
Total revenue 12,139.6 11,216.8
______________________
Current and future benefits 8,387.0 7,627.9
Operating expenses 2,683.3 2,517.6
Amortization of goodwill and other
acquired intangible assets 364.6 371.2
Amortization of deferred policy
acquisition costs 11.9 22.2
Severance and facilities charges 453.0 -
______________________
Income before income taxes 239.8 677.9
Income taxes 146.7 332.7
______________________
Net income $ 93.1 $ 345.2
__________________________________________________________________
______________________
Net realized capital gains, net of
tax (included above) $ 34.4 $ 2.1
__________________________________________________________________
______________________
<FN>
(1) Represents financial information as though U.S. Healthcare had been acquired on
January 1, 1995, 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
acquisition. The pro forma operating summary and information derived from such
summary is not necessarily indicative of the results of operations of Aetna U.S.
Healthcare had the merger occurred at the beginning of 1995, nor is it necessarily
indicative of future results. The 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>
In order to provide a comparison that management believes better
reflects the underlying performance of the Health Risk and Group
Insurance and Other Health businesses, the pro forma earnings
discussion that follows excludes amortization of goodwill and
other acquired intangible assets, severance and facilities
charges, and the other items mentioned above. The table below
sets forth earnings on such a basis for the Health Risk and Group
Insurance and Other Health businesses, and other related
information.
<TABLE>
<CAPTION>
(Millions) 1996 1995
_________________________________________________________________
<S> <C> <C>
Health Risk $ 461.9 $ 499.1
Group Insurance and Other Health 218.2 151.6
_______ _______
Total Aetna U.S. Healthcare $ 680.1 $ 650.7
_______ _______
_______ _______
Health Risk Medical Loss Ratios 81.5% 78.5%
_______ _______
_______ _______
Health Risk SG&A Ratios 14.5% 14.9%
_______ _______
_______ _______
</TABLE>
Although Aetna U.S. Healthcare's 1996 pro forma earnings on this
basis increased $29 million, the segment's results reflect a
decrease in Health Risk earnings of $37 million.
<PAGE> 9
Aetna U.S. Healthcare (Continued)
The decrease in 1996 pro forma earnings in the Health Risk
business resulted from two offsetting components. These earnings
were significantly impacted by 4% lower Commercial HMO premiums
per member per month combined with 4% higher Commercial HMO and
13% higher Medicare HMO medical costs per member per month.
Partially offsetting these negative factors were material benefits
from increased HMO enrollment, favorable adjustments to claim
benefit reserve estimates for indemnity and PPO products,
favorable tax reserve developments, increased net investment
income and slower growth in operating expenses relative to
premiums. The decrease in Commercial HMO premiums per member per
month resulted from competitive pricing pressures and changes in
product mix. The increase in Commercial HMO medical costs per
member per month resulted from higher outpatient facility and
pharmacy costs. The increase in Medicare HMO medical costs per
member per month resulted from increased inpatient facility and
pharmacy costs.
The increase in 1996 pro forma earnings for the Group Insurance
and Other Health business is primarily attributable to favorable
group life mortality experience, as well as increased Group
Insurance sales and enrollment in nonrisk health products,
partially offset by increased costs resulting from higher
disability claim volume.
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995*
______________________________ _____________________________
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
____________________________________________________________ _____________________________
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (1) 3,326 531 3,857 2,950 330 3,280
Medicare 303 19 322 207 18 225
Medicaid 134 - 134 115 - 115
_____ _____ ______ _____ _____ ______
Total HMO 3,763 550 4,313 3,272 348 3,620
POS 325 2,334 2,659 230 1,895 2,125
PPO 776 3,050 3,826 833 3,039 3,872
CHAMPUS - - - 721 - 721
Indemnity 530 2,882 3,412 758 3,300 4,058
_____ _____ ______ _____ _____ ______
Total Health Membership 5,394 8,816 14,210 5,814 8,582 14,396
_____ _____ ______ _____ _____ ______
_____ _____ ______ _____ _____ ______
Group Insurance (2):
Group Life (3) 8,533 8,017
______ ______
______ ______
Disability 2,495 2,155
______ ______
______ ______
Long-Term Care 93 93
______ ______
______ ______
<FN>
* 1995 membership is presented on a basis consistent with 1996.
(1) Includes 806 thousand and 504 thousand POS members who utilize the HMO network at
December 31, 1996 and 1995, respectively.
(2) Many Group Insurance members participate in more than one type of Aetna U.S. Healthcare
coverage and are counted in each.
(3) Group Life includes members with accident coverages.
</TABLE>
Total health membership as of December 31, 1996 increased by .5
million members, or 4% when compared to December 31, 1995,
excluding a reduction of .7 million members resulting from the
nonrenewal of the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS") contract. Membership increases in
Commercial HMO (increased by 18%) and POS (increased by 25%) were
offset by a decline in indemnity enrollment (decreased by 16%),
which includes the continued migration of indemnity members to
POS.
Revenue in 1996 for Aetna U.S. Healthcare, excluding net realized
capital gains, increased by $875 million or 8%, primarily due to
increases in the number of members enrolled in Commercial and
Medicare HMO and POS products and covered by Group Insurance.
These increases were partially offset by the nonrenewal of the
CHAMPUS contract and lower PPO and indemnity premiums resulting
from declines in membership.
<PAGE> 10
Aetna U.S. Healthcare (Continued)
Operating expenses for Aetna U.S. Healthcare increased during 1996
due primarily to the continued migration of members from the
indemnity product to more resource-intensive POS and HMO products.
Such increase was partially offset by the impact of continuing
cost reduction efforts which have resulted in a reduction in
operating expenses as a percentage of revenue.
Outlook
Management expects that Aetna U.S. Healthcare will be the primary
source of earnings for the Company. The Company intends to
continue to enter new geographic markets and expand its presence
in the Medicare and Commercial risk business. In doing so, the
Company may seek investments or divestitures in order to
effectively focus resources and strengthen its market position.
With the market shift from traditional indemnity plans toward HMO,
POS and other managed care products and the increased importance
of managed care to the Company since the merger with U.S.
Healthcare, the ability to profitably grow the managed care risk
business and obtain adequate pricing in an increasingly
competitive environment while effectively managing medical costs
and operating expenses, and successfully integrate the former
separate health operations of Aetna Services and U.S. Healthcare
is of increasing importance.
See "Liquidity and Capital Resources - Health Legislation and
Regulation" and "Forward-Looking Information" for information
regarding other important factors that may materially affect Aetna
U.S. Healthcare.
<PAGE> 11
Aetna Retirement Services
<TABLE>
<CAPTION>
Operating Summary (Millions) 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Premiums (1) $ 180.7 $ 260.2 $ 235.7
Net investment income 1,086.7 1,044.1 958.7
Fees and other income 467.7 359.1 316.0
Net realized capital gains (losses) 27.1 42.7 (5.6)
____________________________________
Total revenue 1,762.2 1,706.1 1,504.8
____________________________________
Current and future benefits (1) 1,035.9 1,061.4 983.5
Operating expenses 337.5 303.8 258.9
Amortization of deferred policy
acquisition costs 74.3 46.1 27.4
Severance and facilities charge 49.0 - -
____________________________________
Income before income taxes 265.5 294.8 235.0
Income taxes 79.3 96.8 75.9
____________________________________
Net income $ 186.2 $ 198.0 $ 159.1
________________________________________________________________________________
____________________________________
Net realized capital gains (losses),
net of tax (included above) $ 17.8 $ 27.0 $ (3.8)
________________________________________________________________________________
____________________________________
Deposits not included in premiums above:
Annuities - fixed options $ 1,362.3 $ 1,306.8 $ 1,307.2
Annuities - variable options 2,759.3 1,939.2 1,340.4
Individual Life Insurance 443.2 539.1 318.7
____________________________________
Total $ 4,564.8 $ 3,785.1 $ 2,966.3
________________________________________________________________________________
____________________________________
Assets under management:(2)
Annuities - fixed options $ 11,692.4 $ 11,076.8 $ 10,070.3
Annuities - variable options (3) 14,468.1 10,489.0 7,146.6
Other investment advisory (4) 3,064.9 968.6 906.0
____________________________________
Financial services 29,225.4 22,534.4 18,122.9
Individual Life Insurance 2,837.3 2,599.7 2,226.9
____________________________________
Total $ 32,062.7 $ 25,134.1 $ 20,349.8
________________________________________________________________________________
____________________________________
Individual life insurance coverage issued $ 5,740.3 $ 6,200.6 $ 5,606.2
________________________________________________________________________________
____________________________________
Individual life insurance coverage in force $ 48,983.4 $ 47,173.5 $ 43,173.8
________________________________________________________________________________
____________________________________
<FN>
(1) Includes $71.8 million, $81.9 million and $67.4 million for 1996, 1995 and 1994,
respectively, for annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies.
(2) Excludes net unrealized capital gains (losses) of $366 million, $797 million and
$(387) million at December 31, 1996, 1995 and 1994, respectively.
(3) Includes $4,724.8 million, $2,604.2 million and $902.9 million at December 31, 1996,
1995 and 1994, respectively, related to assets held and managed by unaffiliated
mutual funds.
(4) 1996 includes $1,957.3 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.
</TABLE>
Aetna Retirement Services ("ARS") offers financial services and
individual life insurance products. Financial services products
include fixed and variable annuity contracts, investment advisory
services and pension plan administrative services and are offered
primarily to individuals, pension plans, small businesses, and
employer-sponsored groups in the health care, government, and
education markets. Individual life insurance products include
universal life, variable universal life, traditional whole life
and term insurance.
<PAGE> 12
Aetna Retirement Services (Continued)
ARS' 1996 net income includes an after-tax severance and
facilities charge of $32 million (see "Severance and Facilities
Charges"). Excluding this charge and net realized capital gains
and losses, ARS' results increased $29 million and $8 million in
1996 and 1995, respectively, reflecting improved earnings from
financial services products, and, in 1996, individual life
insurance products.
The table below sets forth earnings by product type, excluding the
1996 severance and facilities charge and net realized capital
gains and losses:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Financial services $ 120.7 $ 99.8 $ 91.6
Individual life insurance 79.5 71.2 71.3
_______ _______ _______
Total $ 200.2 $ 171.0 $ 162.9
_______ _______ _______
_______ _______ _______
</TABLE>
The increases in 1996 and 1995 earnings for financial services
products reflect increased fee income primarily from increased
assets under management. Assets under management increased from
continued business growth through deposits and appreciation in the
stock market. These improved 1996 earnings also reflect increased
interest margins, primarily related to experience rated contracts.
Partially offsetting increases in fee income were increased
operating expenses associated with business growth and, in 1996,
investments in nontraditional distribution channels such as
broker/dealers and banks.
Earnings from individual life insurance products increased $8
million in 1996, primarily due to favorable mortality experience.
Premiums relate to traditional life insurance and annuity products
containing life contingencies. Premiums decreased by $80 million
in 1996 and increased by $25 million in 1995. The 1996 decrease
resulted primarily from ARS ceasing to write structured settlement
annuities in the fourth quarter of 1995. The 1995 increase
resulted primarily from increases in annuitizations (participants
electing to convert contracts from the accumulation phase to
payout options with life contingencies) and immediate annuity
sales.
Deposits relate to annuity contracts not involving life
contingencies and to universal life contracts. Deposits increased
21% in 1996 reflecting continued business growth. The increase in
1995 reflected the acquisition of a $471 million variable annuity
and universal life block of business.
Assets under management increased by 20% (excluding $2.0 billion
of assets under management that were previously reported in the
Large Case Pensions segment) during 1996 primarily due to
continued business growth and overall improvement in the stock
market.
<PAGE> 13
Aetna Retirement Services (Continued)
Of the $11.7 billion, $11.1 billion and $10.1 billion of fixed
annuity assets under management at December 31, 1996, 1995 and
1994, respectively, 25%, 23% and 20%, respectively, were fully
guaranteed and 75%, 77% and 80%, respectively, were experience
rated. The average earned rate on investments supporting fully
guaranteed investment contracts was 7.9%, 8.2% and 8.5%, and the
average earned rate on investments supporting experience rated
investment contracts was 8.0%, 8.1% and 8.2% for the years ended
December 31, 1996, 1995 and 1994, respectively. The average
credited rate on fully guaranteed investment contracts was 6.7%,
6.9% and 6.7%, and the average credited rate on experience rated
investment contracts was 6.0%, 6.2% and 6.2% for the years ended
December 31, 1996, 1995 and 1994, respectively. The resulting
interest margins on fully guaranteed investment contracts were
1.2%, 1.3% and 1.8% and on experience rated investment contracts
were 2.0%, 1.9% and 2.0% for the years ended December 31, 1996,
1995 and 1994, respectively.
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 (see "General
Account Investments").
Outlook
ARS' strategy involves a variety of actions designed to increase
assets under management or otherwise improve profitability. ARS
recently established, and plans to expand, its financial planning
business, which offers financial advice on planning for
retirement. In connection with broadening its financial planning
relationships with existing customers, ARS intends to increase the
number of products sold per customer. ARS will also seek to
increase sales of proprietary investment products such as variable
funding options, by developing new products and expanding
marketing. ARS will examine opportunities to increase revenue
derived from arrangements with unaffiliated investment managers
whose products are offered as variable funding options. ARS
expects to realize expense savings as a result of the severance
and facilities actions taken in 1996 and will also explore
opportunities to continue to manage expenses to make its
businesses more competitive. Management believes that ARS will be
an important source of earnings to the Company.
See "Forward-Looking Information" for information regarding other
important factors that may materially affect ARS.
<PAGE> 14
International
<TABLE>
<CAPTION>
Operating Summary (Millions) 1996 1995 1994
____________________________________________________________________________
<S> <C> <C> <C>
Premiums $1,166.1 $1,038.5 $ 887.1
Net investment income 334.2 308.7 308.4
Fees and other income 124.2 115.0 97.0
Net realized capital gains (losses) 6.5 (2.4) 4.5
________________________________
Total revenue 1,631.0 1,459.8 1,297.0
________________________________
Current and future benefits 996.8 911.2 782.7
Operating expenses 377.2 340.6 340.2
Interest expense 8.2 7.4 5.6
Amortization of goodwill and other
acquired intangible assets 3.0 2.5 4.0
Amortization of deferred policy
acquisition costs 73.9 70.8 65.7
________________________________
Income before income taxes 171.9 127.3 98.8
Income taxes 62.0 40.7 27.6
________________________________
Net income $ 109.9 $ 86.6 $ 71.2
____________________________________________________________________________
________________________________
Net realized capital gains (losses),
net of tax (included above) $ 4.4 $ (2.1) $ 2.1
____________________________________________________________________________
________________________________
</TABLE>
The International segment, through subsidiaries and joint venture
operations, sells primarily life insurance, health insurance and
financial services products in non-U.S. markets including Taiwan,
Mexico, Canada, Chile, Malaysia, Hong Kong, New Zealand, Peru,
Argentina, Philippines and Indonesia.
International's net income increased $23 million in 1996,
following a $15 million increase in 1995. Excluding net realized
capital gains and losses and amortization of goodwill and other
acquired intangible assets, earnings increased $17 million in
1996, following an $18 million increase in 1995. Results in 1996
reflected continued growth in the established Asia Pacific and
Latin American operations, particularly Taiwan and Chile, despite
the weakening of certain Asia Pacific currencies. Partially
offsetting such improvement were increased losses related to
start-up operations in Peru, Argentina, the Philippines and
Indonesia, and decreased earnings in Mexico due to a decline in
interest rates. Results in 1995 reflected growth in the Asia
Pacific operations and increased earnings in Mexico. Changes in
exchange rates in 1996 and 1995 did not have a material impact on
International's earnings.
Premiums in 1996 were 12% higher than in 1995, following a 17%
increase in 1995 premiums as compared with 1994. The increases in
premiums were primarily due to increased sales in the Asia Pacific
market. Partially offsetting the 1995 increase was a reduction in
premiums due to the Company's change during 1994 of its accounting
for an affiliate from the consolidated basis of accounting to the
equity basis of accounting. Excluding the change in accounting,
1995 premiums increased 29%. The lower premium growth rate in
1996 was primarily due to strategic decisions to exit low margin
product businesses in Canada and Latin America.
In December 1996, the Company acquired a 49.0% stake in a new bank
assurance joint venture with its Mexican partner that offers
insurance products through the partner's bank subsidiary. The
Company invested $115 million in the joint venture and agreed to
invest up to an additional $63 million based on the performance of
the new company over the first five years of operations. The
Company invested approximately $36 million and acquired a 49.0%
stake in a separate joint venture to manage pension funds
privatized under recent Mexican legislation. The Company also
increased its ownership in its existing Mexican insurance joint
venture from 44.5% to 49.0% for an additional $20 million.
<PAGE> 15
International (Continued)
Outlook
International seeks to invest in new emerging markets outside the
U.S. that have the potential for attractive long-term returns.
The Company also explores opportunities for additional investments
in markets where it currently has a presence. These investments
are generally made through the acquisition of part or all of an
existing company or an investment in a start-up operation.
Acquisitions of existing companies generally require large initial
capital expenditures and may result in immediate earnings. These
earnings may, however, be offset in whole or in part, by the
amortization of goodwill and intangible assets related to the
acquisition. Investments in start-up operations generally require
less initial capital, but generally do not generate earnings for a
number of years.
In February 1997, the Company entered into an agreement in
principle to acquire up to 49% of a joint venture to be formed
with Sul America Seguros, Brazil's largest insurance company. The
joint venture would provide health, life and private pension plan
products. The Company would invest approximately $300 million in
the joint venture initially and up to an additional $90 million
over time based on future performance of the joint venture. The
transaction is subject to completion of due diligence, regulatory
approvals, final documentation, and other customary conditions and
is expected to close during the second quarter of 1997.
Management believes that International will be an important source
of earnings to the Company.
See "Forward-Looking Information" for information regarding other
important factors that may materially affect International.
<PAGE> 16
Large Case Pensions
<TABLE>
<CAPTION>
Operating Summary (Millions) 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 176.8 $ 264.9 $ 234.4
Net investment income 1,649.2 1,850.6 2,017.4
Fees and other income 81.4 135.3 128.4
Net realized capital gains (losses) 30.9 18.1 (25.0)
____________________________________
Total revenue 1,938.3 2,268.9 2,355.2
____________________________________
Current and future benefits 1,686.3 2,036.1 2,175.9
Operating expenses 58.6 100.1 98.2
Reductions of loss on discontinued
products (202.3) - -
____________________________________
Income before income taxes 395.7 132.7 81.1
Income taxes 137.3 43.5 26.7
____________________________________
Net income $ 258.4 $ 89.2 $ 54.4
_______________________________________________________________________________
____________________________________
Net realized capital gains (losses),
net of tax (included above) $ 20.8 $ 11.0 $ (17.0)
_______________________________________________________________________________
____________________________________
Deposits not included in premiums above:
Fully guaranteed discontinued
products $ 17.7 $ 31.5 $ 212.3
Experience rated 789.0 719.9 630.8
Nonguaranteed 975.1 848.8 1,139.1
____________________________________
Total $ 1,781.8 $ 1,600.2 $ 1,982.2
_______________________________________________________________________________
____________________________________
Assets under management: (1)(2)
Fully guaranteed discontinued
products $ 8,477.1 $ 9,903.6 $ 12,100.1
Experience rated 16,103.2 17,078.6 16,212.3
Nonguaranteed 10,749.3 18,634.1 18,568.5
____________________________________
Total $ 35,329.6 $ 45,616.3 $ 46,880.9
_______________________________________________________________________________
____________________________________
<FN>
(1) Excludes net unrealized capital gains (losses) of $321 million, $789 million
and $(539) million at December 31, 1996, 1995 and 1994, respectively.
(2) 1996 excludes $1,957.3 million of assets under management which were transferred
to the Aetna Retirement Services segment, reflecting the consolidation of the
Company's investment advisory services.
</TABLE>
The Large Case Pensions segment manages a variety of retirement
products (including pension and annuity products) for primarily
defined benefit and defined contribution plans. These products
provide a variety of funding and benefit payment distribution
options and other services. Certain products provide investment
guarantees.
Large Case Pensions' net income increased $169 million in 1996,
following a $35 million increase in 1995. Large Case Pensions'
earnings, excluding the 1996 reductions of the loss on
discontinued products ($132 million after tax) discussed below,
and net realized capital gains and losses, increased $28 million
in 1996, following a $7 million increase in 1995. Earnings in
1996 included a $10 million increase in investment income from
distributions from leveraged buyout and venture capital limited
partnership investments supporting Large Case Pensions' capital
and an increase in net interest margins. The increase in 1995
earnings reflected an increase in fees and other income and in net
interest margins. Results in 1996 and 1995 were partially offset
by the effect of reduced net investment income as a result of
reducing capital supporting the Large Case Pensions segment and
also lower interest rates in 1995.
After-tax net realized capital gains in 1996 include a gain of $25
million on the sale of Aetna Realty Investors ("ARI"), which was
partially offset by net realized capital losses on bond sales.
The earnings of ARI were not material to Large Case Pensions' net
income.
Assets under management decreased during 1996 primarily as a
result of the sale of Insurance Company Investment Management
("ICIM"), a specialized asset manager. ICIM was not a significant
contributor to Large Case Pensions' earnings.
<PAGE> 17
Large Case Pensions (Continued)
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):
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
___________________________________________________________________________________
<S> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $1,089.1 $1,012.3 $1,000.1
Contractholder withdrawals other than scheduled
contract maturities and benefit payments (2) 506.2 (3) 381.3 590.6
Participant withdrawals (2) 170.8 182.2 183.6
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed in
accordance with contract schedules.
(2) At December 31, 1996, approximately $2.0 billion of experience rated pension contracts
allowed for unscheduled contractholder withdrawals, subject to timing restrictions and
formula-based market value adjustments. Further, at December 31, 1996, approximately
$3.5 billion of such contracts supported by general account assets could be withdrawn or
transferred to other plan investment options at the direction of plan participants
without market value adjustment.
(3) Increase primarily relates to an unscheduled withdrawal by one contractholder in
the first quarter of 1996.
</TABLE>
Outlook
Large Case Pensions' earnings are expected to decline due to
reductions in net interest margins and fees resulting from lower
assets under management as obligations mature and benefits are paid,
and reductions in investment income, as capital supporting Large Case
Pensions is redeployed to other businesses.
See "Forward-Looking Information" for information regarding other
important factors that may materially affect Large Case Pensions.
Discontinued Products
In 1993, the Company discontinued its fully guaranteed large case
pension products (guaranteed investment contracts ("GICs") and
single-premium annuities ("SPAs")). Reserves for anticipated future
losses on each of the discontinued products were established based on
the present value of the difference between (a) the expected cash
flows from the assets supporting discontinued products and (b) the
cash flows expected to be required to meet the obligations of the
outstanding contracts.
Under the Company's accounting for its discontinued fully guaranteed
large case pension products, the reserves for anticipated future
losses are reviewed by management quarterly. Accordingly, as long as
the reserves represent management's then best estimates of expected
future losses, results of operations of the discontinued products,
including net realized capital gains and losses, are credited/charged
to the respective reserve and do not affect the Company's results of
operations. As a result of management's reviews in 1996, $202
million (pretax) of the reserve related to GICs was released
primarily as a result of favorable developments in real estate
markets. The reserves at December 31, 1996 reflect management's best
estimate of the anticipated future net losses for GICs and SPAs. To
the extent that actual future losses are greater or less than
anticipated, the Company's results of operations would be adversely
or positively affected, respectively.
<PAGE> 18
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 each
discontinued product. Interest is accrued on the receivables at
the discount rate 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. During 1996, the GIC receivable of $315
million, 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. At December
31, 1996, for SPAs, the receivable from continuing products, net
of related deferred taxes payable of $32 million on the accrued
interest income, was $493 million. As of December 31, 1996, no
funding of the SPA receivable had taken place.
GIC and SPA results were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
___________________________________________________________________________
<S> <C> <C> <C>
GICs:
Interest margin $ 10.5 $ (61.1) $ (86.1)
Net realized capital gains (losses) 56.7* (38.8) (97.6)
Interest earned on receivable from
continuing products 9.5 13.2 12.6
Other, net 3.1 3.9 6.5
________ _______ ________
Results of GICs, after tax $ 79.8 $ (82.8) $ (164.6)
________ _______ ________
________ _______ ________
Results of GICs, pretax $ 124.9 $(124.2) $ (254.4)
________ _______ ________
________ _______ ________
Net realized capital gains (losses)
from sales of bonds, after tax,
included above $ 3.9 $ (1.8) $ (35.5)
________ _______ ________
________ _______ ________
SPAs:
Interest margin $ 15.8 $ 2.5 $ (.7)
Net realized capital gains (losses) 22.5* 30.2 (38.2)
Interest earned on receivable from
continuing products 20.2 19.8 18.3
Other, net 13.2 4.1 13.1
________ ________ _______
Results of SPAs, after tax $ 71.7 $ 56.6 $ (7.5)
________ ________ ________
________ ________ ________
Results of SPAs, pretax $ 105.4 $ 86.0 $ (18.6)
________ ________ ________
________ ________ ________
Net realized capital gains (losses)
from sales of bonds, after tax,
included above $ 3.8 $ 41.7 $ (15.7)
________ ________ ________
________ ________ ________
<FN>
* Includes net realized capital gains of $52.6 million for GICs and $20.1 million for
SPAs resulting from the sale of a real estate investment and other gains from
favorable developments in the real estate market.
</TABLE>
The interest margin for the discontinued products represents the
difference between the earnings on the invested assets supporting
fully guaranteed large case pension contracts and the interest
credited to the holders of such contracts. The interest margins
for GICs and SPAs for the year ended 1996 were favorably affected
by, and the respective reserves for anticipated future losses were
credited for, nonrecurring items including rental income received
on a foreclosed property of $6 million (after tax) related to GICs
and $3 million (after tax) related to SPAs, as well as other
favorable results on the invested assets. This rental income had
previously not been recognized due to uncertainties associated
with its ultimate collection. The interest margins for the GIC
products for 1996, 1995 and 1994 include losses (pretax) of $4
million, $50 million and $4 million, respectively, due to the
early retirement of $183 million, $728 million and $633 million of
contract liabilities in 1996, 1995 and 1994, respectively. These
losses improve interest margins in future periods.
<PAGE> 19
Large Case Pensions (Continued)
The Company periodically reviews its liquidity needs associated
with GIC and SPA contract liabilities. The Company continually
considers the need for liquidity such as borrowings between GICs
and SPAs or from continuing products, as well as funding of the
SPA receivable from continuing products.
The activity in the reserve for anticipated future losses on
discontinued products was as follows (pretax):
<TABLE>
<CAPTION>
(Millions) GICs SPAs Total
_____________________________________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0
Results of discontinued products (254.4) (18.6) (273.0)
________ ________ ________
Reserve at December 31, 1994 345.6 651.4 997.0
Results of discontinued products (124.2) 86.0 (38.2)
________ ________ ________
Reserve at December 31, 1995 221.4 737.4 958.8
Results of discontinued products 124.9 105.4 230.3
Reserve releases (202.3) - (202.3)
________ ________ ________
Reserve at December 31, 1996 $ 144.0 $ 842.8 $ 986.8
________ ________ ________
________ ________ ________
</TABLE>
Distributions on GICs and SPAs were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
__________________________________________________________________
<S> <C> <C> <C>
GICs:
Scheduled contract maturities,
GIC settlements and benefit
payments (1) $2,082.6 $2,685.6 $2,340.3
Participant directed withdrawals 52.0 92.8 198.5
SPAs:
Scheduled contract maturities
and benefit payments 526.4 522.9 531.6
<FN>
(1) Includes early retirement of GIC liabilities of $183.3 million, $728.0 million
and $632.6 million in 1996, 1995 and 1994, respectively.
</TABLE>
Cash required to fund these distributions was provided by earnings
and scheduled payments on and sales of invested assets and, for
GICs, from the funding of the receivable from continuing products
which was established at the time of discontinuance.
At December 31, 1996, contractholder liabilities were $3.3 billion
and $4.8 billion for GICs and SPAs, respectively. Scheduled
maturities, future benefit payments, and other expected payments
of GICs and SPAs, including future interest, were as follows:
<TABLE>
<CAPTION>
(Millions) GICs SPAs
____________________________________________________________
<S> <C> <C> <C>
1997 $1,205.5 $ 519.1
1998 915.0 511.0
1999 753.0 503.1
2000 396.8 495.1
2001 328.6 489.9
2002-2006 265.1 2,347.3
2007-2011 13.4 2,126.6
2012-2016 1.4 1,787.7
2017-2021 - 1,399.7
Thereafter - 2,548.7
</TABLE>
See Note 9 of Notes to Financial Statements and "General Account
Investments."
<PAGE> 20
Corporate
<TABLE>
<CAPTION>
Operating Summary (Millions, after tax) 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Interest expense $ 103.9 $ 70.4 $ 60.5
Other expense, net (1) $ 304.2 $ 115.5 $ 156.5
<FN>
(1) Includes after-tax net realized capital gains of $5.0 million and $.7 million
in 1996 and 1995, respectively, and net realized capital losses of $8.9 million
in 1994.
</TABLE>
The Corporate segment includes interest expense and other expenses
which are not directly related to the Company's business segments.
"Other expense" includes corporate expenses such as staff area
expenses, advertising and contributions, which are partially
offset by net investment income.
The 1996 increase in interest expense resulted from borrowings
incurred in connection with the U.S. Healthcare merger. The 1995
increase in interest expense resulted primarily from the issuance
by a subsidiary of 9 1/2% cumulative monthly income preferred
securities in November 1994.
Excluding net realized capital gains and losses and an after-tax
severance and facilities charge of $235 million in 1996 (see
"Severance and Facilities Charges"), other expense decreased $43
million in 1996 and $31 million in 1995. Other expense in 1996
included $37 million (after tax) of interest income earned on the
net proceeds from the sale of the Company's property-casualty
operations from April 2, 1996, the date of the property-casualty
sale, through July 19, 1996, the closing date of the merger with
U.S. Healthcare. Other expense in 1996 also reflected
significantly lower corporate staff area expenses due to increased
cost reduction efforts, partially offset by higher advertising
costs. The decrease in other expense in 1995 resulted primarily
from a reduction of corporate staff area expenses as a result of
previous restructurings.
<PAGE> 21
Severance and Facilities Charges
During 1996, the Company recorded the following severance and
facilities charges in connection with its strategic initiatives in
order to make its continuing businesses more competitive.
Aetna U.S. Healthcare - In the fourth quarter, Aetna U.S.
_____________________
Healthcare recorded a charge of $275 million (after tax)
principally related to actions taken or expected to be
taken with respect to the integration of the health
businesses of Aetna Services and U.S. Healthcare. The
severance portion of this charge is based on a plan to
eliminate 7,500 positions (primarily service center,
medical management, administrative and data center
personnel). A charge of $20 million (after tax) was also
recorded by Aetna U.S. Healthcare in the second quarter
primarily related to actions, not related to the U.S.
Healthcare merger, taken or expected to be taken to
reduce information technology costs. The severance
portion of this charge included a plan to eliminate 675
positions. By year-end, a large portion of these actions
was completed.
Aetna Retirement Services - In the third quarter, Aetna
_________________________
Retirement Services recorded a $32 million (after tax)
charge principally related to actions taken or expected
to be taken to improve its cost structure relative to its
competitors. The severance portion of this charge is
based on a plan to eliminate 723 positions (primarily
customer service, sales and information technology
support staff).
Corporate - In connection with the sale of the Company's
_________
property-casualty operations, the Company vacated, and
Travelers subleased, the space that the Company occupied
in the CityPlace office facility in Hartford at market
rates for a period of eight years. The Company recorded
a charge of $190 million (after tax) during the second
quarter representing the present value of the difference
between rent required to be paid by the Company under the
lease and future rentals expected to be received by the
Company. The Company also recorded a charge of
$45 million (after tax) during the second quarter for
actions taken or expected to be taken to reduce the level
of corporate expenses and other costs previously absorbed
by the property-casualty operations. The severance
portion of this charge includes the planned elimination
of 475 positions.
These charges for 1996 include the following components (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased
(Millions) Severance Write-Off Property Other Total
___________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 277.9 $ 84.9 $ 64.5 $ 25.7 $ 453.0
Aetna Retirement Services 42.8 1.5 1.9 2.8 49.0
Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7
________ ________ ________ ________ ________
Total Company $ 349.2 $ 104.4 $ 379.6 $ 31.5 $ 864.7
________ ________ ________ ________ ________
________ ________ ________ ________ ________
<FN>
(1) Includes $292.2 million related to the CityPlace lease.
</TABLE>
<PAGE> 22
Severance and Facilities Charges (Continued)
The Aetna U.S. Healthcare severance actions related to the charge
recorded in the fourth quarter 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 the vacating
of the leased office space are expected to be substantially
completed in 1997. The remaining lease payments (net of expected
subrentals) on these facilities (other than the CityPlace office
facility) are payable over approximately the next three years.
(See Note 8 of Notes to Financial Statements.)
<PAGE> 23
General Account Investments
Overview
Investments disclosed in this section relate to the Company's
total general account portfolio (including assets supporting
discontinued products and experience rated products) excluding
invested assets of the Discontinued Operations.
<TABLE>
<CAPTION>
December 31,
________________________
(Millions) 1996 1995
____________________________________________________________________________
<S> <C> <C>
Invested Assets:
Fully Guaranteed $ 11,075.5 $ 13,490.3
Experience Rated 18,810.2 19,188.7
Other 13,600.5 11,371.3
__________ _________
Total General Account Invested Assets, net of
impairment reserves $ 43,486.2 $ 44,050.3
____________________________________________________________________________
________________________
Net investment income $ 3,565.2 $ 3,575.1
____________________________________________________________________________
________________________
</TABLE>
The Company's investment objective is to fund policyholder and
other liabilities in a manner that enhances shareholder and
contractholder value, subject to appropriate risk constraints.
The Company seeks to meet this investment objective through a mix
of investments that reflect the characteristics of the liabilities
they support, diversify the types of investment risks by interest
rate, liquidity, credit and equity price risk, and achieve asset
diversification by investment type, industry, issuer and
geographic location. The Company regularly projects duration and
cash flow characteristics of its liabilities and makes appropriate
adjustments in its investment portfolios.
Interest rate risk is managed within a tight duration band, and
credit risk is managed by maintaining high average quality ratings
and diversified sector exposure within the debt securities
portfolio. In pursuing its investment and risk management
objectives, the Company uses assets whose 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. (See "Use of Derivatives and Other
Investments.")
Using financial modeling and other techniques, the Company
regularly evaluates the appropriateness of investments relative to
its management-approved investment guidelines and the business
objectives of the portfolios (including evaluating the interest
rate, liquidity, credit and equity price risk resulting from
derivative and other portfolio activities). During 1996, the
Company operated within these investment guidelines by maintaining
a mix of investments that diversified its assets and reflected the
characteristics of the liabilities that they support.
The risks associated with investments supporting experience rated
pension and annuity products are assumed by those customers
subject to, among other things, certain minimum guarantees. The
anticipated future losses associated with investments supporting
discontinued fully guaranteed large case pension products are
provided for in the reserve for anticipated future losses. (See
"Large Case Pensions - Discontinued Products.")
<PAGE> 24
General Account Investments (Continued)
Debt Securities
As of December 31, 1996 and 1995, debt securities represented 74%
and 72%, respectively, of the Company's total general account
invested assets and were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 5,189.3 $ 5,765.2
Supporting experience rated products 14,888.9 14,243.4
Supporting remaining products 12,258.1 11,851.7
____________________________________________________________________________
Total debt securities $32,336.3 $31,860.3
____________________________________________________________________________
____________________________
</TABLE>
The increase in debt securities primarily reflects the addition of
approximately $655 million of debt securities acquired in
connection with the U.S. Healthcare merger and the investment of
net cash flow from mortgage loans, real estate and deposits to ARS
fixed funding options. These increases were partially offset by a
decrease in net unrealized capital gains included in the debt
securities portfolio due to an increase in interest rates. Debt
securities reflected net unrealized capital gains of $895 million
at December 31, 1996 compared with $1.9 billion at December 31,
1995. Of these net unrealized capital gains at December 31, 1996,
$205 million and $399 million related to assets supporting
discontinued products and experience rated pension
contractholders, respectively.
The debt securities in the Company's portfolio are generally rated
by external rating agencies, and, if not externally rated, are
rated by the Company on a basis believed to be similar to that
used by the rating agencies. As of December 31, 1996 and 1995,
the Company's investments in debt securities had average quality
ratings of AA- (38% and 40%, respectively, were AAA). "Below
investment grade" debt securities which include "problem" debt
securities and "potential problem" debt securities (see page 25)
and carry a rating of below BBB-/Baa3 represented 5% of the
portfolio at December 31, 1996 and 1995. See Note 4 of Notes to
Financial Statements for disclosures related to debt securities by
market sector.
Below Investment Grade, Problem and Potential Problem Debt Securities
Included in the Company's debt securities were the following:
<TABLE>
<CAPTION>
(Millions) December 31,
__________________________________________________________________________
1996 1995
____ ____
<S> <C> <C>
"Below Investment Grade" Securities (1)(2) $1,666.0 $1,623.8
"Problem" Debt Securities (included above) 36.4 81.0
"Potential Problem" Debt Securities (included above) 82.5 90.4
<FN>
(1) "Below Investment Grade" securities at December 31, 1996 and 1995 include
24% and 33%, respectively, supporting discontinued products and 49% and
43%, respectively, supporting experience rated products.
(2) "Below Investment Grade" securities at December 31, 1996 and 1995 include
$441.6 million and $625.1 million, respectively, of securities that were
investment grade when purchased, but have since deteriorated in quality.
</TABLE>
<PAGE> 25
General Account Investments (Continued)
"Problem" debt securities are securities for which payment is in
default, securities of issuers which are currently in bankruptcy
or in out-of-court reorganizations, or securities of issuers for
which bankruptcy or reorganization within six months is considered
likely.
"Potential problem" debt securities are currently performing debt
securities for which neither payment default nor debt
restructuring is anticipated within six months, but whose issuers
are experiencing significant financial difficulties. Identifying
such potential problem debt securities requires significant
judgment as to likely future market conditions and developments
specific to individual debt securities.
The Company does not accrue interest on problem debt securities
when management believes the likelihood of collection of interest
is doubtful.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities were residential
collateralized mortgage obligations ("CMOs") supporting the
following:
<TABLE>
<CAPTION>
(Millions) 1996 1995
___________________________________________________________________________________________
Fair Amortized Fair Amortized
Value Cost Value Cost
_________ _________ ________ _________
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 2,764.7 $ 2,665.8 $ 3,073.9 $ 2,866.5
_________ _________ _________ _________
_________ _________ _________ _________
Percentage of total:
Supporting discontinued products 8.0% 7.7%
Supporting experience rated products 77.3 78.3
Supporting remaining products 14.7 14.0
_________ _________
100.0% 100.0%
_________ _________
_________ _________
<FN>
(1) At December 31, 1996 and 1995, approximately 66% and 70%, respectively, of the
Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA and FHLMC.
</TABLE>
There are various categories of CMOs which are subject to
different degrees of risk from changes in interest rates and, for
nonagency-backed CMOs, defaults. The principal risks inherent in
holding CMOs are prepayment and extension risks related to
dramatic decreases and increases in interest rates resulting in
the repayment of principal from the underlying mortgages either
earlier or later than originally anticipated.
At December 31, 1996 and 1995, approximately 67% and 76%,
respectively, of the Company's CMO holdings were in planned
amortization class ("PAC") and sequential structure tranches,
which are subject to less prepayment and extension risk than other
types of CMO instruments. At December 31, 1996 and 1995,
approximately 3% and 2%, respectively, of the Company's CMO
holdings were in interest-only ("IOs") and principal-only ("POs")
tranches, which are subject to more prepayment and extension risks
than other types of CMO instruments. Remaining CMO holdings have
prepayment and extension risks falling between the degree of risk
associated with PACs and sequentials, and IOs and POs.
<PAGE> 26
General Account Investments (Continued)
Mortgage Loans
At December 31, 1996 and 1995, the Company's mortgage loan
investments, net of impairment reserves, supported the following
types of business:
<TABLE>
<CAPTION>
(Millions) 1996 1995
______________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 2,730.7 $ 3,388.6
Supporting experience rated products 2,370.5 3,013.4
Supporting remaining products 1,599.7 1,925.2
______________________________________________________________________
Total mortgage loans $ 6,700.9 $ 8,327.2
______________________________________________________________________
___________________________
</TABLE>
During 1996, 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 $1.6 billion
decrease in the total mortgage loan portfolio primarily reflects
loan prepayments, repayments of maturing loans and foreclosures.
The Company has a comprehensive process for assessing individual
mortgage loans which includes an ongoing evaluation of key
attributes of the mortgage investment, specifically, debt service
coverage, cash flow sustainability, property condition, loan to
value, market/economic trends, deal structure, borrower strength
and ability to refinance. Management establishes action plans
intended to reduce potential risk and maximize return on the
investment. In addition, management performs a collateral
valuation on a regular basis for mortgage loans with a balance
greater than $5 million (approximately 83% of the total principal
balance of the portfolio) to help determine whether adjustments to
impairment reserves are warranted.
In 1996, the Company foreclosed on loans with a principal balance
of $261 million and collateral with a fair market value of $139
million. Additional loans with a principal balance of $69 million
were in the process of foreclosure at year end. In certain cases,
the Company has taken substantive possession of the property
supporting its loan, coupled with the borrower surrendering its
interest in the future economic benefits in the property. Where
this has occurred, the loans are considered in-substance
foreclosures, and the Company writes them down to their fair
market value less selling costs and classifies them as real estate
held for sale.
Problem, Restructured and Potential Problem Loans
"Problem loans" are loans with payments over 60 days past due,
loans on properties in the process of foreclosure, loans on
properties involved in bankruptcy proceedings and loans on
properties subject to redemption.
"Restructured loans" are loans where the Company modified the
original contract terms to grant concessions to the borrower and
are currently performing pursuant to the modified terms.
Restructured loans yielded cash returns of approximately 7% during
1996 and 1995.
<PAGE> 27
General Account Investments (Continued)
If a restructured loan has a market rate of interest at the time
of the restructure (which represents the interest rate the Company
would charge for a new loan with comparable risk) and demonstrates
sustainable performance (as generally evidenced by six months of
pre- or post-restructuring payment performance in accordance with
the restructured terms), the Company may return the loan to
performing status.
"Potential problem loans" are loans which are performing pursuant
to existing terms, but are loans the Company considers likely to
become classified as problem or restructured loans. The Company
identifies these loans through the portfolio review process on the
basis of known information about the ability of borrowers to
comply with present loan terms. Identifying potential problem
loans requires significant judgment as to likely future market
conditions and developments specific to individual properties and
borrowers. The Company includes provision for losses that
management believes are likely to arise from such potential
problem loans in the specific impairment reserves.
Included in the Company's mortgage loan balances were the
following categories of mortgage loans:
<TABLE>
<CAPTION>
(Millions) December 31,
___________________________________________________________________
1996 1995
____ ____
<S> <C> <C>
Problem loans $ 183.6 $ 160.3
Restructured loans 377.6 514.1
Potential problem loans 239.9 839.1
________ ________
Total (1) $ 801.1 $1,513.5
________ ________
________ ________
Specific impairment reserves on loans (2) $ 144.1 $ 361.2
________ ________
________ ________
<FN>
(1) Total problem, restructured and potential problem loans at December 31, 1996
and 1995 include 48% and 50%, respectively, supporting discontinued products
and 32% and 34%, respectively, supporting experienced rated products.
(2) See Note 4 of Notes to Financial Statements.
</TABLE>
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 such problem and restructured
loans outstanding at December 31 and the portion thereof actually
recorded as income were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____________________________________________________________________
<S> <C> <C> <C>
Income which would have been recorded
under original terms of loans $ 56.0 $ 72.2 $ 127.2
Income recorded 38.6 42.4 64.5
_______ _______ _______
Lost investment income (1) $ 17.4 $ 29.8 $ 62.7
_______ _______ _______
_______ _______ _______
<FN>
(1) Lost investment income for 1996, 1995 and 1994 included 66%, 35% and 46%,
respectively, related to income allocated to investments supporting discontinued
products, and 22%, 52% and 36%, respectively, related to income allocated to
investments supporting experience rated products.
</TABLE>
<PAGE> 28
General Account Investments (Continued)
Real Estate
The Company's equity real estate balances, net of write-downs and
reserves, were as follows:
<TABLE>
<CAPTION>
(Millions) December 31,
____________________________________________________________
1996 1995
____ ____
<S> <C> <C>
Investment real estate $ 192.0 $ 153.0
Properties held for sale (1)(2)(3) 658.2 1,124.3
________ ________
Total $ 850.2 $1,277.3
________ ________
________ ________
<FN>
(1) Includes $133.2 million and $190.4 million of in-substance foreclosures
at December 31, 1996 and 1995, respectively.
(2) Properties held for sale at December 31, 1996 and 1995 include 48% and 56%,
respectively, supporting discontinued products and 36% and 29%, respectively,
supporting experience rated products.
(3) Foreclosed real estate classified as properties held for sale was carried at 57%
and 61% of the Company's cash investment (unpaid mortgage balance plus capital
additions) at December 31, 1996 and 1995, respectively.
</TABLE>
During 1996, 1995 and 1994, the Company sold real estate with a
carrying value of $666 million, $262 million and $415 million,
respectively, (including real estate supporting discontinued and
experience rated products). These sales generated $113 million
(substantially all of which was allocable to discontinued and
experience rated products), $18 million and $11 million of after-
tax net realized capital gains in those years, respectively.
Total after-tax net realized capital (gains) losses from real
estate write-downs and changes in the valuation reserves were as
follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
___________________________________________________________________________
<S> <C> <C> <C>
Allocable to discontinued products $ (1.6) $ 30.9 $ 12.8
Allocable to experience rated products 2.9 5.1 2.9
Allocable to remaining products 17.6 2.2 (3.0)
</TABLE>
The Company intends to sell a significant amount of properties
held for sale over the next three years, real estate and capital
market conditions permitting.
<PAGE> 29
General Account Investments (Continued)
Use of Derivatives and Other Investments
The Company's use of derivatives is generally limited to hedging
activity and has principally consisted 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 5 of
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
December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
________________________________________________________________________________
<S> <C> <C>
Residential collateralized mortgage obligations: $2,665.8 $2,764.7
Principal-only strips (included above) 44.5 53.3
Interest-only strips (included above) 10.9 23.0
Other structured securities with derivative
characteristics (1) 126.3 129.2
<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> 30
Liquidity and Capital Resources
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Consolidated Assets $92,912.9 $84,323.7 (1) $75,486.7 (1)
________________________________________________________________________________
______________________________________
Shareholders' Equity $10,889.7 $ 7,272.8 $ 5,503.0
________________________________________________________________________________
______________________________________
Cash and Cash Equivalents
and Short-Term Investments $ 2,185.8 $ 2,320.5 $ 2,621.6
________________________________________________________________________________
______________________________________
Aetna-obligated mandatorily redeemable
preferred securities of subsidiary
limited liability company holding
primarily debentures guaranteed by Aetna $ 275.0 $ 275.0 $ 275.0
________________________________________________________________________________
______________________________________
Long-Term Debt $ 2,380.0 $ 989.1 $ 1,079.2
________________________________________________________________________________
______________________________________
Average Short-Term Debt $ 427.4 $ 96.0 $ 213.7
________________________________________________________________________________
______________________________________
Interest Expense $ 168.3 $ 115.9 $ 98.6
________________________________________________________________________________
______________________________________
<FN>
(1) Includes net assets of Discontinued Operations of $3,932.8 million and
$3,167.3 million in 1995 and 1994, respectively.
</TABLE>
The liquidity needs of the Company's businesses have generally
been met by cash provided by premiums, deposits, asset maturities
and income received on investments. Cash provided from these
sources is used primarily for claim and benefit payments, contract
withdrawals and operating expenses.
See "Large Case Pensions" for a discussion of the liquidity
requirements specific to that business. The following discussion
addresses the sources of liquidity available to meet the needs of
all of the Company's businesses.
Debt securities and mortgage loans have durations that were
selected to approximate the durations of the liabilities they
support. The duration of these investments is monitored, and
investment purchases and sales are executed with the objective of
having adequate funds available to satisfy the Company's maturing
liabilities.
As the Company's investment strategy focuses on matching asset and
liability durations, and not specific cash flows, and since these
duration assessments are dependent on numerous cash flow
assumptions, asset sales may, from time to time, be required to
satisfy liability obligations and/or rebalance asset portfolios.
The investment portfolios are closely monitored to assess asset
and liability matching in order to rebalance the portfolios as
conditions warrant.
<PAGE> 31
Liquidity and Capital Resources (Continued)
The Company has significant short-term liquidity supporting its
businesses. At year-end 1996, cash and cash equivalents were
$1.5 billion and short-term securities were $.7 billion.
Given the high quality of the debt securities portfolio (see
"General Account Investments"), management expects the vast
majority of the Company's investments in debt securities to be
repaid in accordance with contractual terms. In addition, most of
the debt securities in the portfolio are highly marketable and can
be sold to enhance cash flow before maturity.
At December 31, 1996, scheduled mortgage loan principal repayments
were as follows:
<TABLE>
<CAPTION>
(Millions)
________________________________________
<S> <C> <C>
1997 $ 702.2
1998 636.2
1999 757.4
2000 1,037.4
2001 268.6
Thereafter 3,546.1
</TABLE>
Consolidated Cash Flows
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
___________________________________________________________________________
<S> <C> <C> <C>
Net cash provided by (used for)
operating activities $ (883.2) $ 647.7 $ 840.8
_______________________________________
_______________________________________
Net cash provided by investing
activities $ 425.4 $ 122.2 $ 1,496.8
______________________________________
______________________________________
Net cash used for financing
activities $ (558.6) $ (1,336.4) $ (1,609.8)
______________________________________
______________________________________
Cash and cash equivalents $ 1,462.6 $ 1,712.7 $ 2,277.2
______________________________________
______________________________________
</TABLE>
The Company's cash flow requirements for 1996 were met by funds
provided from operations, from the maturity and sale of
investments (including the sale of the property-casualty
operations) and from financing activities (including common and
preferred equity and debt securities issued in conjunction with
the U.S. Healthcare acquisition).
Net cash provided by (used for) investing activities included
$1,937 million, $2,048 million and $2,359 million from net sales,
including a securitization in 1995, as well as maturities and
repayments of mortgage loans and real estate in 1996, 1995 and
1994, respectively.
<PAGE> 32
Liquidity and Capital Resources (Continued)
Net cash used for financing activities included cash generated by
sales of investment contracts which was lower in 1996, 1995 and
1994 than cash paid for maturing investment contracts and other
withdrawals. During 1996, the Company paid dividends to common
stock shareholders of $1.78 per share (approximately $219 million
in total) (reflecting lower dividends per share in 1996 following
the merger), and paid $2.76 per share in 1995 and 1994. During
1996, the Company also paid dividends to Class C preferred stock
shareholders of $1.55955 per share or approximately $18 million.
(See "Parent Company Cash Flow" below and "Financings and
Financing Capacity" on page 33.)
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 6, 1996 * A ** A2 A- **
February 4, 1997 * A A2 A-
Aetna Services, Inc.
(commercial paper) ***
February 6, 1996 * D-1 ** P-1 A-2 **
February 4, 1997 * D-1 P-1 A-2
Aetna Life Insurance Company
(claims paying)
February 6, 1996 A AA- ** Aa3 A+ **
February 4, 1997 A AA- Aa3 A
Aetna Life Insurance and Annuity Company
(claims paying)
February 6, 1996 A+ AA+ Aa2 AA **
February 4, 1997 A+ AA+ Aa2 AA-
<FN>
* Not rated by the agency.
** On rating watch-up or credit watch with positive implications.
*** 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.
Parent Company Cash Flow
Aetna Inc.'s recurring cash flow needs are primarily shareholder
dividends. The Board of Directors (the "Board") reviews Aetna
Inc.'s common stock dividend each quarter. Among the factors
considered by the Board in determining the dividend are the
Company's results of operations, and the capital requirements,
growth and other characteristics of its businesses. Aetna Inc.
also may fund growth or meet capital needs of the Company's
businesses. Parent company cash flow may be met through dividends
from operating subsidiaries which may reflect excess capital or
borrowings. The Company continually monitors existing and
alternative financing sources to support the Company's capital and
liquidity needs, including, but not limited to, debt issuance,
preferred or common stock issuance, intercompany borrowings and
pledging or selling of assets.
<PAGE> 33
Liquidity and Capital Resources (Continued)
Financings and Financing Capacity
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 13 of Notes to
Financial Statements.)
The Company uses short-term borrowings from time to time to address
timing differences between receipts and disbursements. In 1996, the
Company used funds made available from the issuance of $1.4 billion of
commercial paper to fund a portion of the consideration paid in
connection with the U.S. Healthcare merger.
On August 19, 1996, Aetna Services issued $300,000,000 of 6.75% Notes
due 2001; $350,000,000 of 7.125% Notes due 2006; $450,000,000 of 7.625%
Debentures due 2026; and $300,000,000 of 6.97% Debentures due 2036
(putable at par in 2004). The Company used the net proceeds from these
securities to refinance outstanding short-term borrowings.
Aetna Services has a revolving credit facility in an aggregate amount of
$1.5 billion with a worldwide group of banks. The facility terminates
in June 2001. (See Note 13 of Notes to Financial Statements.)
Aetna-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Limited Liability Company Holding Primarily Debentures
Guaranteed by Aetna
In November 1994, Aetna Capital L.L.C. ("ACLLC"), a subsidiary of Aetna
Services, issued $275 million (11,000,000 shares) of 9 1/2% cumulative
monthly income preferred securities. ACLLC loaned the proceeds from the
preferred stock issuance to Aetna Services. Aetna Services used the
proceeds of the loan for general corporate purposes. (See Note 14 of
Notes to Financial Statements.)
Common Stock Transactions
The Company issued 34,988,615 shares of common stock on July 19, 1996 in
connection with the U.S. Healthcare merger.
The Company issued 1,563,491 shares, 2,069,335 shares and 457,191 shares
of treasury stock or previously unissued shares for benefit plans in
1996, 1995 and 1994, respectively.
On October 25, 1996, the Board adopted a resolution authorizing Aetna
Inc. to repurchase up to 5 million shares of its common stock from time
to time. As of December 31, 1996, 1,194,400 shares of common stock had
been repurchased at a cost of $83 million. In 1995 and 1994, the
Company did not acquire any shares of its common stock.
Restrictions on Certain Payments by the Company
The Company's business operations are conducted through Aetna Services
and U.S. Healthcare and their respective subsidiaries (which principally
consist of HMOs and insurance companies). In addition to general state
law restrictions on payments of dividends and other distributions to
shareholders applicable to all corporations, HMOs and insurance
companies are subject to further state regulations that, among other
things, may require those companies to maintain certain levels of
equity, and restrict the amount of dividends and other distributions
that may be paid to their parent corporations. These regulations are
not directly applicable to Aetna Services, U.S. Healthcare, or Aetna
Inc., as none is an HMO or insurance company. The additional
regulations applicable to the Company's indirect HMO and insurance
company subsidiaries are not expected to affect the ability of Aetna
Inc. to pay dividends, or the ability of any of the Company's
subsidiaries to service their outstanding debt or preferred stock
obligations.
<PAGE> 34
Liquidity and Capital Resources (Continued)
Solvency Regulation
In recent years, state insurance regulators have been considering
changes in statutory accounting practices and other initiatives to
strengthen solvency regulation. The National Association of
Insurance Commissioners ("NAIC") adopted risk-based capital ("RBC")
standards for life insurers which are designed to identify weakly
capitalized companies by comparing the adjusted surplus to the
required surplus, which reflects the risk profile of the company
("RBC ratio"). Within certain ratio ranges, regulators have
increasing authority to take action as the RBC ratio decreases.
There are four levels of regulatory action ranging from requiring
insurers to submit a comprehensive plan to the state insurance
commissioner to when the state insurance commissioner places the
insurer under regulatory control. The RBC ratio for each of the
Company's primary life insurance subsidiaries as measured at
December 31, 1996 was significantly above the levels which would
require regulatory action. Rating agencies use their own RBC
standards as part of determining a company's rating.
The NAIC has developed a model investment law providing for limits on
the types and amounts of investments by insurance companies, as well
as certain amendments to the model holding company law. Management
believes that these changes to the model laws, if adopted by states
regulating the Company, will not materially affect the Company. The
NAIC also is considering several other solvency-related laws or
regulations, such as RBC standards for health plans, including HMOs
and an alternative to the new model investment law. Because these
other initiatives are in a preliminary stage, management cannot
assess the potential impact of their adoption on the Company.
<PAGE> 35
Regulatory Environment
A variety of legislative and regulatory proposals have been made at
both the federal and state government levels to address various
aspects of the health care system.
Presently under consideration are various legislative proposals which
would reform the federal Medicare program. Although certain proposed
changes may provide the Company with additional opportunities to
increase its Medicare risk HMO enrollment, others would reduce
premiums paid by the Health Care Financing Administration ("HCFA") to
the Company. The Company's financial results could be adversely
affected to the extent such reductions are not offset by increases in
member premiums, benefit reductions or reductions in rates of payment
to contracted providers. Also being explored by HCFA are various
competitive bidding and other changes to Medicare risk HMO program
regulations which, if enacted, could adversely affect the Company's
financial results.
The Health Insurance Portability and Accountability Act of 1996
("Kennedy-Kassebaum Bill"), was enacted to (i) ensure portability of
coverage to individuals changing jobs or moving to individual
coverage by limiting preexisting condition exclusions, (ii) guarantee
availability of coverage to employees in the small group market, and
(iii) prevent exclusion of individuals from coverage under group
plans based on health status. This legislation will become effective
on July 1, 1997 and will be subject to differing interpretation and
potential expansion under state laws. Other federal legislation,
effective January 1, 1998, mandates minimum hospital stays after
childbirth and parity applying lifetime limits to mental health
benefits.
In New York, the Health Care Reform Act of 1996 ("the Act"),
effective January 1, 1997, allowed all private health care payors to
negotiate payment rates for inpatient hospital services; previously
only HMOs were permitted to negotiate such rates. The Act also
provides for direct funding by private payors of hospital bad debt
and charity care and graduate medical education by payments to state
funding pools rather than through surcharges on payments for hospital
services. The Company is negotiating arrangements with hospitals in
its New York network to adjust the payments it makes to network
hospitals to reflect the direct payments from the Company required by
the Act. However, there can be no assurance that the Company will
reach agreement on these adjustments with all such hospitals or that
premium increases will offset all of the payments required under the
Act.
Several other states, including states in which the Company has
substantial managed care membership, have enacted legislation or
regulation related to the operation of managed care plans. Such
legislation or regulation varies, but has included, among other
things, mandatory maternity lengths of stay, regulation of
utilization review, mandated consumer disclosures, required payment
for emergency room services, mandated grievance and appeal
procedures, hearings on termination of physicians from networks,
prohibition of so-called "gag" clauses, and provisions similar to
those in the Kennedy-Kassebaum legislation. There can be no
assurance that the Company can recoup, through higher premiums or
other measures, the increased costs of mandated lengths of stay or
other benefits, or other increased costs caused by such legislation
or regulation.
<PAGE> 36
Regulatory Environment (Continued)
Other potential legislative and regulatory changes related to managed
care products that are receiving a high level of attention at both
the state and federal levels include, but are not limited to (i)
prohibition or limitation of arrangements designed to manage medical
costs and improve quality of care, such as capitated arrangements
with providers or provider financial incentives, (ii) limitations on
utilization management methods, (iii) additional benefit mandates
(including mandatory lengths of stay for certain procedures such as
mastectomies), (iv) regulation of the composition of the Company's
provider networks, such as any willing provider or pharmacy laws, (v)
changes to licensure or certification requirements, (vi) mandatory
participation in governmental programs such as Medicaid, (vii)
assessments, surcharges or taxes on premiums or provider payments to
fund uncompensated care, graduate medical education or government
programs, (viii) extension of malpractice and other liability for
medical decisions from providers to managed care plans, (ix)
limitations on the marketing of Medicare plans directly to Medicare
beneficiaries, (x) mandatory direct access to specialists, (xi)
mandatory point-of-service benefits, (xii) mandatory coverage of
experimental procedures and drugs, (xiii) third party review of
denials of benefits, (xiv) enhanced liability for negligent denials
of benefits, and (xv) prohibition of so-called "gag" clauses in
provider contracts. At this time, the Company is unable to predict
the impact of the foregoing federal or state legislation or
regulation, or of any future legislation or regulatory changes that
may be enacted, although it can be anticipated that certain of these
measures, if enacted, would adversely affect the Company.
For other important information regarding regulation of the Company's
health and other businesses, see the Company's 1996 Annual Report on
Form 10-K.
New Accounting Pronouncements
See Note 1 of Notes to Financial Statements for a discussion of
recently issued accounting pronouncements.
<PAGE> 37
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements, so long as
those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from
those discussed in the statement. The Company desires to take
advantage of these safe harbor provisions. Certain information
contained herein is forward-looking within the meaning of the Act or
Securities and Exchange Commission rules including, but not limited
to, the information that appears under the headings "Outlook" in the
discussion of results of operations of each of the Company's
businesses. Words such as expects, anticipates, intends, plans,
believes, seeks or estimates, or variations of such words and similar
expressions are also intended to identify forward-looking statements.
These forward-looking statements are subject to significant
uncertainties and contingencies, many of which are beyond the control
of the Company. Set forth below are certain important factors that,
in addition to general economic conditions and other factors, some of
which are discussed elsewhere in this Annual Report or the Company's
1996 Annual Report on Form 10-K, may affect these forward-looking
statements and the Company's businesses generally.
Certain Factors Particular to Health Operations
Premiums; Medical Cost Increases. Premiums in the Company's Health
Risk business are generally fixed for one-year periods and actual
cost levels in excess of those estimated and reflected in pricing
cannot be recovered in the contract year through higher premiums from
customers. Increased utilization, increases in provider contract
rates, changes in legislation or regulation, changes in health
practices and medical technologies and price increases in
pharmaceuticals and durable medical equipment and other factors may
increase medical costs.
Health Business Legislative and Regulatory Environment. As
discussed above (see "Regulatory Environment"), certain
legislative and regulatory changes related to health products have
recently been enacted or proposed, and a variety of other
potential legislative and regulatory changes are receiving a high
level of attention at both the state and federal levels. At this
time the Company is unable to predict the impact of these changes,
although it can be anticipated that certain of these measures, if
enacted, would adversely affect health operations through (i)
reducing premiums, (ii) increasing, or reducing the ability to
manage medical costs, (iii) increasing other operating expenses,
(iv) regulating levels and permitted lines of business, or (v)
regulating other business practices.
Business Mix. The selection by employers and individuals of plans
with higher copayments or deductibles, or of coinsurance plans,
may lower certain medical costs, but generally results in lower
premiums to the Company. In addition, continued migration of
employers to self-funded coverage, or increased membership in
Medicare risk plans (plans which the Company intends to expand),
or the selection by plan participants of other health products
with higher medical loss ratios may make the Company's margins
more sensitive to changes in medical costs and premiums. Adverse
publicity regarding managed care may influence the selection of
health care coverages by plan participants.
<PAGE> 38
Forward-Looking Information (Continued)
Government Payors. In government-funded health programs such as
Medicare and Medicaid, premium levels are determined by the
government payor. Unilateral reduction of premium levels or
limits on governmentally funded programs could adversely affect
these lines of business. In addition, for plans covering
government employees, the Company may be subject to retroactive
reductions of premium rates by the government payor.
Accreditation. For certain of the Company's health plans,
accreditation by independent quality accrediting agencies such as the
National Committee for Quality Assurance is an important competitive
factor. Any loss of or denial of accreditation may adversely affect
customer selection of health products, and, in some jurisdictions may
affect licensure status.
Integration of Health Operations. Growth in the Company's
profitability is dependent, in part, on its ability to successfully
integrate the separate health operations of Aetna Services and U.S.
Healthcare. Factors affecting successful integration include, but
are not limited to, timely integration of management and information
systems, the application of U.S. Healthcare's managed care expertise
to a broader membership base, and the timely elimination of
duplicative administrative and customer service functions.
Certain Factors Particular to Financial Services Operations
Ratings. Adverse changes in the claims-paying ratings of the
Company's financial services subsidiaries could have the effect of
decreasing new sales and deposits and increasing withdrawals and
surrenders in the Company's Aetna Retirement Services and Large Case
Pensions businesses, which would adversely affect the level of asset-
based fees of those businesses.
Product Retention. The Company incurs up-front costs, such as
commissions, in sales of its annuity, life insurance and other
financial services products, including international financial
services products. These costs are generally deferred and recognized
by the Company over time, and the retention of assets under those
products is an important component of profitability. The Company
generally seeks to structure its products and sales to encourage
retention of assets under management, through surrender charges, more
favorable credited rates to customers on assets the Company retains
for longer periods, renewal commissions, service fees or other terms.
However, customer withdrawal of assets earlier than anticipated by
the Company in pricing its products would adversely affect
profitability.
Significant Changes in Financial Markets. Significant changes in
financial markets could impact the level of assets under management
in the Company's Aetna Retirement Services, Large Case Pensions and
International businesses, and, in turn, the Company's level of asset-
based fees in those businesses. For example, significant increases
in interest rates or decreases in equity markets, in addition to
directly affecting the level of assets under management, may increase
the level of withdrawals and decrease the level of deposits by
customers. Customers under those circumstances may seek to diversify
among asset managers or seek investment alternatives not offered by
the Company. Significant declines in the value of investments may
also affect the Company's ability to pass through investment losses
to certain experience rated customers, whether due to triggering
minimum guarantees or other business reasons.
<PAGE> 39
Forward-Looking Information (Continued)
Certain Factors Particular to International Operations
Currency Devaluation. The Company generally does not hedge the
currency exposure of investments in its foreign affiliates, because
it views these investments as long term. In preparing its
consolidated financial statements, the Company translates its results
from the foreign currency in which it operates in a particular
country into U.S. dollars. Devaluation of a country's currency,
however, would adversely affect results of operations when translated
into U.S. dollars. Also, when economies, such as Mexico and Brazil,
are considered highly inflationary (generally, cumulative inflation
levels in excess of 100% over a three-year period), changes in the
value of net monetary assets or liabilities would be recognized
currently in earnings, rather than through shareholders' equity,
making reported earnings potentially more volatile. In addition,
although the Company considers foreign exchange trends when deciding
to invest in particular countries, currency devaluation may also
affect the value of international investments when translated to U.S.
dollars.
International Market Factors. The Company's International
operations involve certain other risks not typically associated
with doing business in the United States. These risks include
investment and other controls that may be imposed by governments,
such as permitted levels of equity ownership of companies by
foreign persons, remittances of foreign earnings or repatriation
of capital, exchange of currency and restrictions on entry into
new lines of business, requirements that portions of business be
reinsured through state-affiliated institutions and other
requirements affecting the conduct of business. Additionally,
interest rate risk management may be more difficult due to the
relatively short durations of investments available in currencies
that match long-term liabilities for international fixed-rate
products. Foreign economies may also experience increased
volatility of equity markets and high rates of inflation and be
subject to other political and economic factors such as more rapid
change of regulatory policy.
Other Factors Affecting All of the Company's Businesses
Retention of Key Senior Executives. The Company's success is
dependent, in part, on its ability to attract and retain key
senior executives. The Company has entered into employment
agreements with certain of these executives, although an
employment agreement does not guarantee that an executive's
services with the Company will continue.
Other Adverse Changes in Regulation. In addition to its health
business, each of Aetna's other businesses is subject to
comprehensive regulation. These businesses could be adversely
affected by (i) increases in minimum capital and other financial
viability requirements for health and other insurance operations,
(ii) removal of barriers preventing banks from engaging in
insurance and mutual fund businesses, (iii) the taxation of
insurance companies, and (iv) changes in the tax treatment of
insurance products.
<PAGE> 40
Management's Responsibility for Financial Statements
Management is responsible for the financial statements of
Aetna Inc., which have been prepared in accordance with generally
accepted accounting principles. The financial statements are the
product of a number of processes that include the gathering of
financial data developed from the records of the Company's day-to-
day business transactions. Informed judgments and estimates are
used for those transactions not yet complete or for which the
ultimate effects cannot be measured precisely. The Company
emphasizes the selection and training of personnel who are
qualified to perform these functions. In addition, Company
personnel are subject to rigorous standards of ethical conduct
that are widely communicated throughout the organization.
The Company's internal controls are designed to reasonably assure
that Company assets are safeguarded from unauthorized use or
disposition and that Company transactions are authorized, executed
and recorded properly. Company personnel maintain and monitor
these internal controls on an ongoing basis. In addition, the
Company's internal auditors review and report upon the functioning
of these controls with the right of full access to all Company
personnel.
The Company engages KPMG Peat Marwick LLP as independent auditors
to audit its financial statements and express their opinion
thereon. Their audits include reviews and tests of the Company's
internal controls to the extent they believe necessary to
determine and conduct the audit procedures that support their
opinion. Members of that firm also have the right of full access
to each member of management in conducting their audits. The
report of KPMG Peat Marwick LLP appears on page 95.
Aetna's Board of Directors has an Audit Committee composed solely
of independent directors. The Committee meets periodically with
management, the internal auditors and KPMG Peat Marwick LLP to
oversee and monitor the work of each and to inquire of each as to
their assessment of the performance of the others in their work
relating to the Company's financial statements. Both the
independent and internal auditors have, at all times, the right of
full access to the Audit Committee, without management present, to
discuss any matter they believe should be brought to the attention
of the Committee.
<PAGE> 41
Consolidated Statements of Income
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions, except share and per common share data) 1996 1995 1994
__________________________________________________________________________________________________
<S> <C> <C> <C>
Revenue:
Premiums $ 9,288.8 $ 7,513.3 $ 6,968.7
Net investment income 3,565.2 3,575.1 3,631.4
Fees and other income 2,174.8 1,924.3 1,741.5
Net realized capital gains (losses) 134.4 47.2 (55.2)
______________________________________________
Total revenue 15,163.2 13,059.9 12,286.4
__________________________________________________________________________________________________
Benefits and Expenses:
Current and future benefits 10,341.4 9,109.1 8,719.4
Operating expenses 3,319.8 2,951.8 2,680.3
Interest expense 168.3 115.9 98.6
Amortization of goodwill and other acquired
intangible assets 172.5 17.8 27.0
Amortization of deferred policy
acquisition costs 160.1 139.1 133.6
Reductions of loss on discontinued products (202.3) - -
Severance and facilities charges 864.7 - -
______________________________________________
Total benefits and expenses 14,824.5 12,333.7 11,658.9
__________________________________________________________________________________________________
Income from continuing operations
before income taxes 338.7 726.2 627.5
Income taxes 133.6 252.3 218.1
______________________________________________
Income from continuing operations 205.1 473.9 409.4
Discontinued Operations, net of tax:
Income (Loss) from operations 182.2 (222.2) 58.1
Gain on sale 263.7 - -
______________________________________________
Net income $ 651.0 $ 251.7 $ 467.5
______________________________________________
______________________________________________
Net income applicable to common ownership $ 625.9 $ 251.7 $ 467.5
__________________________________________________________________________________________________
______________________________________________
Results Per Common Share:
Income from continuing operations $ 1.36 $ 4.16 $ 3.63
Discontinued Operations, net of tax:
Income (Loss) from operations 1.38 (1.95) .51
Gain on sale 2.00 - -
______________________________________________
Net income $ 4.74 $ 2.21 $ 4.14
__________________________________________________________________________________________________
______________________________________________
Weighted average common shares and common
share equivalents 132,155,336 113,897,633 112,848,653
__________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 42
Consolidated Balance Sheets
As of December 31,
<TABLE>
<CAPTION>
(Millions, except share and per common share data) 1996 1995
__________________________________________________________________________________
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value
(amortized cost $31,441.4 and $29,962.5) $ 32,336.3 $ 31,860.3
Equity securities, at fair value (cost $963.4
and $597.8) 1,332.8 659.7
Short-term investments 723.2 607.8
Mortgage loans 6,700.9 8,327.2
Real estate 850.2 1,277.3
Policy loans 707.3 629.4
Other 835.5 688.6
____________________________
Total investments 43,486.2 44,050.3
__________________________________________________________________________________
Cash and cash equivalents 1,462.6 1,712.7
Accrued investment income 598.6 618.3
Premiums due and other receivables 1,190.4 1,080.9
Deferred income taxes - 271.5
Deferred policy acquisition costs 2,226.9 1,953.1
Goodwill and other acquired intangible assets 8,432.6 147.3
Other assets 1,070.1 857.1
Separate Accounts assets 34,445.5 29,699.7
Net assets of Discontinued Operations - 3,932.8
____________________________
Total assets $ 92,912.9 $ 84,323.7
__________________________________________________________________________________
__________________________________________________________________________________
Liabilities:
Future policy benefits $ 18,983.3 $ 18,372.9
Unpaid claims 1,829.3 1,563.1
Unearned premiums 333.6 142.4
Policyholders' funds left with the Company 19,901.7 22,898.7
____________________________
Total insurance liabilities 41,047.9 42,977.1
Dividends payable to shareholders 36.9 79.2
Short-term debt 282.8 389.6
Long-term debt 2,380.0 989.1
Current income taxes 164.3 154.0
Deferred income taxes 31.7 -
Other liabilities 3,202.3 2,344.2
Participating policyholders' interests 221.7 204.8
Separate Accounts liabilities 34,380.6 29,637.9
____________________________
Total liabilities 81,748.2 76,775.9
__________________________________________________________________________________
Minority Interest:
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 3, 5 and 18)
Shareholders' Equity:
Class C Voting Mandatorily Convertible Preferred
Stock ($.01 par value; 15,000,000 shares
authorized in 1996; 11,655,546 issued and
outstanding) 865.4 -
Common Stock ($.01 par value and no par value;
500,000,000 and 250,000,000 shares authorized;
150,084,799 and 115,013,675 issued, and
150,084,799 and 114,727,093 outstanding) 4,032.8 1,448.2
Net unrealized capital gains 340.0 641.1
Retained earnings 5,651.5 5,195.6
Treasury stock, at cost (286,582 shares) - (12.1)
____________________________
Total shareholders' equity 10,889.7 7,272.8
__________________________________________________________________________________
Total liabilities, minority interest and
shareholders' equity $ 92,912.9 $ 84,323.7
__________________________________________________________________________________
__________________________________________________________________________________
Shareholders' equity per common share $ 66.79 $ 63.39
__________________________________________________________________________________
__________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 43
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Class C Voting Net
Mandatorily Unrealized
Convertible Capital
(Millions, except share data) Preferred Common Gains Retained Treasury
Three years ended December 31, 1996 Total Stock Stock (Losses) Earnings Stock
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 7,043.1 $ - $ 1,422.0 $ 648.2 $ 5,103.3 $ (130.4)
_____________________________________________________________________________________________________
Net income 467.5 467.5
Change in net unrealized capital
gains or losses (1,719.7) (1,719.7)
Common stock issued for benefit plans
(457,191 shares) 26.1 26.1
Loss on issuance of treasury stock (2.8) (2.8)
Common stock dividends (311.2) (311.2)
_______________________________________________________________
Balances at December 31, 1994 5,503.0 - 1,419.2 (1,071.5) 5,259.6 (104.3)
_____________________________________________________________________________________________________
_______________________________________________________________
Net income 251.7 251.7
Change in net unrealized capital
gains or losses 1,712.6 1,712.6
Common stock issued for benefit plans
(2,069,335 shares) 97.4 5.2 92.2
Gain on issuance of treasury stock 23.8 23.8
Common stock dividends (315.7) (315.7)
_______________________________________________________________
Balances at December 31, 1995 7,272.8 - 1,448.2 641.1 5,195.6 (12.1)
_____________________________________________________________________________________________________
_______________________________________________________________
Net income 651.0 651.0
Change in net unrealized capital
gains or losses (301.1) (301.1)
Class C Voting Mandatorily Convertible
Preferred stock issued for U.S.
Healthcare merger (11,655,546 shares) 865.4 865.4
Common shares issued for U.S.
Healthcare merger (34,988,615 shares) 2,580.1 2,580.1
Stock options issued for U.S.
Healthcare merger 24.8 24.8
Common stock issued for benefit plans
(1,563,491 shares) 75.1 75.1
Repurchase of common shares (1,194,400
shares) (83.3) (83.3)
Common stock dividends (170.0) (170.0)
Preferred stock dividends (25.1) (25.1)
Treasury stock retired - (12.1) 12.1
_______________________________________________________________
Balances at December 31, 1996 $10,889.7 $ 865.4 $ 4,032.8 $ 340.0 $ 5,651.5 $ -
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 44
Consolidated Statements of Cash Flows
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
_____________________________________________________________________________________________________
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 651.0 $ 251.7 $ 467.5
Adjustments to reconcile net income to
net cash (used for) provided by operating activities:
(Income) Loss from Discontinued Operations (182.2) 222.2 (58.1)
Decrease (increase) in accrued investment income 24.9 (21.0) (25.9)
Decrease (increase) in premiums due and other
receivables 12.0 (250.7) 144.3
Increase in deferred policy acquisition costs (275.1) (267.1) (193.5)
Depreciation and amortization 338.9 175.8 174.1
(Decrease) increase in income taxes (155.8) 263.0 321.9
Net decrease (increase) in other assets and
other liabilities 184.0 (55.5) 10.3
(Decrease) increase in other insurance liabilities (956.8) 522.4 95.8
Net realized capital (gains) losses (134.4) (47.2) 55.2
Gain on sale of Discontinued Operations (263.7) - -
Amortization of net investment discounts (131.5) (123.7) (141.3)
Other, net 5.5 (22.2) (9.5)
__________________________________________
Net cash (used for) provided by operating activities (883.2) 647.7 840.8
__________________________________________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 13,625.6 13,747.2 14,801.6
Equity securities 565.6 355.9 124.2
Mortgage loans 154.9 668.4 162.1
Real estate 689.5 317.1 543.4
Other investments 838.6 761.4 718.1
Short-term investments 34,679.2 48,763.1 51,936.7
Discontinued Operations 4,134.1 - -
Investment maturities and repayments of:
Debt securities available for sale 3,567.0 2,190.9 2,499.6
Debt securities held for investment - - 573.5
Mortgage loans 1,569.7 1,404.2 1,960.5
Cost of investments in:
Debt securities available for sale (16,922.5) (16,842.1) (17,639.5)
Debt securities held for investment - - (350.3)
Equity securities (859.5) (353.2) (353.7)
Mortgage loans (360.5) (244.9) (247.7)
Real estate (116.4) (96.9) (59.1)
Other investments (1,064.9) (841.1) (998.8)
Short-term investments (34,703.0) (49,024.1) (51,811.1)
U.S. Healthcare (5,243.9) - -
Increase in property and equipment (78.2) (155.3) (135.9)
(Increase) decrease in Separate Accounts (3.2) 57.3 4.1
Other, net (46.7) (585.7) (230.9)
__________________________________________
Net cash provided by investing activities 425.4 122.2 1,496.8
__________________________________________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,968.1 2,017.1 3,063.7
Withdrawals of investment contracts (3,561.1) (3,442.3) (4,609.1)
Issuance of long-term debt 1,389.3 52.4 62.5
Repayment of long-term debt - (144.6) (91.8)
Net (decrease) increase in short-term debt (109.4) 375.5 (22.2)
Issuance of preferred securities by subsidiary - - 275.0
Stock issued under benefit plans 75.1 121.2 23.3
Common stock acquired during the year (83.3) - -
Dividends paid to shareholders (237.3) (315.7) (311.2)
__________________________________________
Net cash used for financing activities (558.6) (1,336.4) (1,609.8)
_____________________________________________________________________________________________________
Effect of exchange rate changes on cash
and cash equivalents (0.3) 2.0 (4.2)
____________________________________________________________________________________________________
Net (decrease) increase in cash and cash equivalents (1,016.7) (564.5) 723.6
Cash acquired from U.S. Healthcare 766.6 - -
Cash and cash equivalents, beginning of year 1,712.7 2,277.2 1,553.6
__________________________________________
Cash and cash equivalents, end of year $ 1,462.6 $ 1,712.7 $ 2,277.2
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 45
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Aetna Inc., through its subsidiaries, provides health care
benefits, group insurance, financial services and individual life
insurance. Aetna U.S. Healthcare provides a full spectrum of
managed care, indemnity and group life and disability insurance
products in the U.S. Aetna Retirement Services offers financial
services and individual life insurance products, including fixed
and variable annuity contracts, investment advisory services and
pension plan administrative services, universal life, variable
universal life, traditional whole life and term insurance in the
U.S. The International segment, through subsidiaries and joint
venture operations, sells primarily life insurance, health
insurance and financial services products in non-U.S. markets.
The Large Case Pensions segment manages a variety of retirement
products (including pension and annuity products) for primarily
defined benefit and defined contribution plans in the U.S.
Discontinued Operations included commercial and personal property-
casualty operations. (Refer to Note 3.) All footnote disclosures
reflect continuing operations only, unless otherwise noted.
Principles of Consolidation
The consolidated financial statements include Aetna Inc. and its
majority-owned subsidiaries (collectively, the "Company"),
including Aetna Services, Inc. (formerly Aetna Life and Casualty
Company), and, from July 19, 1996, U.S. Healthcare, Inc. (Refer
to Note 2.) 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.
Certain reclassifications have been made to 1995 and 1994
financial information to conform to the 1996 presentation.
Accounting Changes
Accounting for Stock-Based Compensation
As of December 31, 1996, the Company adopted Financial Accounting
Standard ("FAS") No. 123, Accounting for Stock-Based Compensation.
This statement addresses the accounting for the cost of stock-
based compensation, such as stock options. The Company has
selected the disclosure alternative. (Refer to Note 11.)
<PAGE> 46
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Accounting Changes (Continued)
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of
As of January 1, 1996, the Company adopted FAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This statement requires long-lived assets to
be held and used to be written down to fair value when they are
considered impaired. Long-lived assets to be disposed of (e.g.,
real estate held for sale) are to be carried at the lower of cost
or fair value less estimated selling costs. In addition, this
statement does not allow long-lived assets to be disposed of to be
depreciated. As a result of the adoption of FAS No. 121,
valuation reserves at January 1, 1996 were increased by
$53 million in connection with the reversal of previously recorded
accumulated depreciation related to properties held for sale. The
adoption of FAS No. 121 did not materially impact results of
operations.
Accounting by Creditors for Impairment of a Loan
As of January 1, 1995, the Company adopted FAS No. 114, Accounting
by Creditors for Impairment of a Loan and FAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. Under these standards, a loan is considered impaired
when it is probable that the Company will be unable to collect
amounts due according to the contractual terms of the loan
agreement.
Prior to the adoption of FAS Nos. 114 and 118, general reserves
were established for estimated losses on potential problem loans
(other than those allocable to experience rated products) which
management believed were likely to become classified as problem or
restructured in the next 12 months or so. Adoption of these
standards had no impact on results of operations.
<PAGE> 47
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, was issued in June
1996. This statement provides accounting and reporting standards
for transfers of financial assets and extinguishments of
liabilities. Transactions covered by this statement would include
securitizations, sales of partial interests in assets, repurchase
agreements and securities lending. This statement requires that
after a transfer of financial assets, an entity would recognize
any assets it controls and liabilities it has incurred. An entity
would not recognize assets when control has been surrendered or
liabilities which have been satisfied. Portions of this statement
are effective for each of 1997 and 1998 financial statements and
early adoption is not permitted. The Company does not expect
adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market
instruments and other debt issues with a maturity of 90 days or
less when purchased.
<PAGE> 48
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments
Debt and equity securities are classified as available for sale
and carried at fair value. These securities are written down (as
realized capital losses) for other than temporary declines in
value. Unrealized capital gains and losses related to available
for sale investments, other than amounts allocable to experience
rated contractholders and discontinued products, are reflected in
shareholders' equity, net of related taxes.
Fair values for debt and equity securities are based on quoted
market prices or dealer quotations. Where quoted market prices or
dealer quotations are not available, fair values are measured
utilizing quoted market prices for similar securities or by using
discounted cash flow methods. Cost for mortgage-backed securities
is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on
the trade date. Sales of mortgage loans and real estate are
recorded on the closing date.
Mortgage loans and policy loans are carried at unpaid principal
balances, net of impairment reserves. A mortgage loan is
considered impaired when it is probable that the Company will be
unable to collect amounts due according to the contractual terms
of the loan agreement (delays of up to 60 days may not result in a
loan being considered impaired). For impaired loans, a specific
impairment reserve is established for the difference between the
recorded investment in the loan and the estimated fair value of
the collateral. The Company applies this loan impairment policy
individually to all loans in the portfolio and does not aggregate
loans for the purpose of applying such provisions. The Company
records full or partial charge-offs of loans at the time an event
occurs affecting the legal status of the loan, typically at the
time of foreclosure (actual or in-substance) or upon a loan
modification giving rise to forgiveness of debt. A general
reserve is established for losses management believes are likely
to arise from loans in the portfolio, other than those which have
been specifically reserved for.
<PAGE> 49
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Investment real estate, which the Company has the intent to hold
for the production of income, is carried at depreciated cost,
including capital additions, net of write-downs for other than
temporary declines in fair value. Properties held for sale
(primarily acquired through foreclosure) are carried at the lower
of cost or fair value less estimated selling costs. As a result
of adopting FAS No. 121, the Company no longer depreciates
properties held for sale. Adjustments to the carrying value of
properties held for sale are recorded in a valuation reserve when
the fair value less estimated selling costs is below cost. Fair
value is generally estimated using a discounted future cash flow
analysis in conjunction with comparable sales information.
Property valuations are reviewed regularly by investment
management.
Short-term investments, consisting primarily of money market
instruments and other debt purchased with a maturity of 91 days to
one year, are considered available for sale and are carried at
fair value, which approximates amortized cost.
Other invested assets consist primarily of partnerships and equity
subsidiaries. Partnerships and equity subsidiaries are carried on
an equity basis.
The Company utilizes foreign exchange forward contracts, futures
contracts, warrants and swap agreements for other than trading
purposes in order to manage investment returns and price risk and
to align maturities, interest rates, currency rates and funds
availability with its obligations. (Refer to Note 5.)
Foreign exchange forward contracts which are designated at
inception and are effective as hedges of foreign translation
exposures and foreign transaction exposures related to investments
classified as available for sale are accounted for using the
deferral method. Accordingly, realized and unrealized gains and
losses from these forward contracts are deferred on the
Consolidated Balance Sheets, net of tax, in net unrealized capital
gains or losses. Upon disposal of the hedged item, deferred gains
and losses are recognized in net realized capital gains or losses.
Excess realized or unrealized gain or loss, if any, from the
foreign exchange forward contract compared to the foreign
investment being hedged, is reported as a net realized capital
gain or loss.
<PAGE> 50
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that
qualify as hedges are deferred and recognized as an adjustment to
the hedged asset or liability. Deferred gains or losses on such
futures contracts are amortized over the life of the acquired
asset or liability as a yield adjustment or through net realized
capital gains or losses upon disposal of an asset. Changes in the
fair value of futures contracts that do not qualify as hedges are
recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position
underlying the hedge, and that high correlation be maintained
throughout the hedge period. If a hedging instrument ceases to be
highly correlated with the position underlying the hedge, hedge
accounting ceases at that date and excess gains and losses on the
hedging instrument are reflected in net realized capital gains or
losses.
Warrants represent the right to purchase specific securities and
are accounted for as hedges. Upon exercise, the cost of the
warrants are added to the basis of the securities purchased.
Swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the
accrual method. Accordingly, the difference between amounts paid
and received on such agreements is reported in net investment
income. There is no recognition in the Consolidated Balance
Sheets of changes in the fair value of the agreement.
<PAGE> 51
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries,
where the local currency is the functional currency, are
translated into U.S. dollars at the exchange rate in effect at
each year end for assets and liabilities and average exchange
rates during the year for results of operations. The related
unrealized gains or losses resulting from translation of the net
assets are included in shareholders' equity. If the economy of
the country where a foreign subsidiary is located is considered
highly inflationary (generally, cumulative inflation levels in
excess of 100% over a three-year period), changes in the value of
net monetary assets or liabilities would be recognized currently
in earnings.
Goodwill and Other Acquired Intangible Assets
Goodwill, which represents the excess of cost over the fair value
of net assets acquired, is amortized on a straight-line basis over
periods not exceeding 40 years. Other acquired intangible assets,
which are primarily customer lists, provider networks and computer
systems, are amortized on a straight-line basis over various
periods not exceeding 25 years.
The Company regularly evaluates the recoverability of goodwill and
other acquired intangible assets. The carrying value of such
assets would be reduced through a direct write-off if, in
management's judgment, it was probable that projected future
operating income (before amortization of goodwill and other
acquired intangible assets) would not be sufficient on an
undiscounted basis to recover the carrying value. Operating
earnings considered in such an analysis are those of the entity
acquired, if separately identifiable, or the business segment that
acquired the entity if the entity's earnings are not separately
identifiable.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These
costs, all of which vary with and are primarily related to the
production of new and renewal business, consist principally of
commissions, certain expenses of underwriting and issuing
contracts, and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying
periods (up to 20 years). For universal life and certain annuity
and pension contracts, such costs are amortized in proportion to
estimated gross profits and adjusted to reflect actual gross
profits over the life of the contracts (up to 20 years for annuity
and pension contracts).
Deferred policy acquisition costs are written off to the extent
that it is determined that future policy premiums and investment
income or gross profits are not adequate to cover related losses
and expenses.
<PAGE> 52
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Separate Accounts
Separate Accounts assets and liabilities generally represent funds
maintained to meet specific investment objectives of
contractholders who bear the investment risk, subject, in some
cases, to minimum guaranteed rates. Investment income and
investment gains and losses generally accrue directly to such
contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any
other business of the Company. The assets and liabilities are
carried at market value. Deposits, net investment income and
realized capital gains and losses on Separate Accounts assets are
not reflected in the Consolidated Statements of Income.
Management fees charged to contractholders are included in fees
and other income.
Insurance Liabilities
Future policy benefits include reserves for universal life,
limited payment and traditional life insurance contracts.
Reserves for universal life contracts are equal to cumulative
premiums less charges plus credited interest thereon. Reserves
for limited payment and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality,
morbidity and expenses, including a margin for adverse deviation.
Such assumptions generally vary by plan, year of issue and policy
duration. Reserve interest rates range from 2.25% to 12.00%.
Investment yield is based on the Company's experience. Mortality,
morbidity and withdrawal rate assumptions are based on the
experience of the Company and are periodically reviewed against
both industry standards and experience.
Policyholders' funds left with the Company include reserves for
pension and annuity investment contracts. Reserves on such
contracts are equal to cumulative deposits less charges plus
credited interest thereon (rates range from 2.50% to 17.75%) net
of adjustments for investment experience that the Company is
entitled to reflect in future credited interest. Reserves on
contracts subject to experience rating reflect the rights of
contractholders, plan participants and the Company.
<PAGE> 53
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Insurance Liabilities (Continued)
Unpaid claims related to the Company's prepaid health care
services (primarily health maintenance organizations) consist
principally of medical claims and capitation costs. Medical
claims include estimates of payments to be made on claims reported
and estimates of health care services rendered but not reported to
the Company as of the balance sheet date. Such estimates include
the cost of services which will continue to be rendered after the
balance sheet date if the Company is obligated to pay for such
services in accordance with contract provisions or regulatory
requirements. Medical claims payable are estimated periodically
and any resulting adjustments are included in current operations.
Unpaid claim reserves for other group health products and medical
claims payable reflect estimates, derived from past experience, of
the ultimate cost of incurred claims, including claims that have
been incurred but not reported, and claims that have been
reported, but not settled.
Revenue Recognition
For universal life and certain annuity contracts, charges assessed
against policyholders' funds for the cost of insurance, surrender
charges, actuarial margin and other fees are recorded as revenue
in fees and other income. Other amounts received for these
contracts are reflected as deposits and are not recorded as
revenue. Life insurance premiums, other than premiums for
universal life and certain annuity contracts, are recorded as
premium revenue when due. Related policy benefits are recorded in
relation to the associated premiums or gross profit so that
profits are recognized over the expected lives of the contracts.
When annuity payments begin under contracts that were initially
investment contracts, the accumulated balance in the account is
treated as a single premium for the purchase of an annuity,
reflected as an offsetting amount in both premiums and current and
future benefits in the Consolidated Statements of Income.
Group health and group insurance premiums are generally recorded
as premium revenue over the term of the coverage. Some group
contracts allow for premiums to be adjusted to reflect actual
experience. Such premiums are recognized as the experience
emerges.
Fees and other income are derived primarily from contracts for
claim processing or other administrative services and are recorded
over the period the service is provided.
<PAGE> 54
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain
items. The Company files a consolidated federal income tax
return. Foreign subsidiaries and U.S. subsidiaries operating
outside of the United States are taxed under applicable foreign
statutes. Deferred income tax expenses/benefits result from
changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities.
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
Preferred Stock ("Class C Stock") is not considered a common stock
equivalent. It 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 for 1996 was 5.3
million. There is not a material difference between primary and
fully diluted earnings per common share.
Reinsurance
The Company utilizes reinsurance agreements to reduce exposure to
large losses in all aspects of its insurance business.
Reinsurance permits recovery of a portion of losses from
reinsurers, although it does not discharge the primary liability
of the Company as direct insurer of the risks reinsured. Only
those reinsurance recoverables deemed probable of recovery are
reflected as assets.
<PAGE> 55
Notes to Financial Statements (Continued)
2. Merger with U.S. Healthcare
The merger with U.S. Healthcare was consummated on July 19, 1996.
As a result of the merger, Aetna Services and U.S. Healthcare are
each direct, wholly owned subsidiaries of Aetna Inc. Pursuant to
the merger, each outstanding share of Aetna Services common stock
(115,721,039 shares) became a share of common stock of Aetna Inc.
Each outstanding share of U.S. Healthcare common stock and Class B
Stock became a right to receive $34.20 in cash, 0.2246 shares of
Aetna Inc. common stock and 0.0749 shares of Aetna Inc. Class C
Stock resulting in the issuance of 34,951,077 shares of Aetna Inc.
common stock and 11,655,546 shares of Class C Stock.
The merger has been accounted for as a purchase. Total
consideration of approximately $8.9 billion has been allocated to
the assets acquired and liabilities assumed based on estimates of
their fair values. Assets acquired totaled $1.8 billion and
liabilities assumed were $.8 billion. A total of $7.9 billion,
net of related deferred taxes, representing the excess of the
purchase price over the fair values of the net assets acquired,
has been allocated to goodwill and other acquired intangible
assets and is being amortized over a 40-year period for goodwill
and over a range of five to 25 years for other acquired intangible
assets.
The Company's consolidated results of operations include U.S.
Healthcare from July 19, 1996. The pro forma information below
presents combined results of operations as if the merger (as well
as the sale of Aetna's property-casualty operations - refer to
Note 3) had occurred at the beginning of 1995 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 the Company's and to remove the effect of merger-
related costs incurred by U.S. Healthcare prior to the
acquisition. Severance and facility charges incurred as a result
of the integration ($275 million, after tax) are included in 1996
results (refer to Note 8), but no adjustment has been made to give
effect to any synergies which may be realized as a result of the
merger.
<PAGE> 56
Notes to Financial Statements (Continued)
2. Merger with U.S. Healthcare (Continued)
The following 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 1995, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(Millions, except per common share data) December 31,
____________________________________________________________________
1996 1995
_____ ____
<S> <C> <C>
Revenue $17,528.5 $16,611.9
_________ _________
_________ _________
Net realized capital gains
included in revenue $ 128.9 $ 62.3
_________ _________
_________ _________
Income before income taxes $ 354.6 $ 849.2
_________ _________
Income taxes $ 180.7 $ 377.7
_________ _________
Net income $ 173.9 $ 471.5
_________ _________
_________ _________
Net income per common share $ .78 $ 2.79
_________ _________
_________ _________
</TABLE>
3. Sale of Subsidiaries
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 and net assets 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 and for the years ended December 31, 1995 and 1994
were:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
_______________________________________________________________________________________
<S> <C> <C> <C>
Total revenue $ 1,539.3 $ 5,258.2 $ 5,338.9
_________ _________ _________
_________ _________ _________
Income (loss) before income taxes $ 262.7 $ (384.3) $ 30.8
Income taxes (benefits) 80.5 (162.1) (27.3)
_________ _________ _________
Income (loss) $ 182.2 $ (222.2) $ 58.1
_____________________________________________________________ ______________________
_________ _________ _________
</TABLE>
Net assets at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
(Millions)
_____________________________________________________________
<S> <C>
Total investments $13,986.5
_________
Total assets $23,502.4
_________
Total insurance liabilities $18,008.7
_________
Total liabilities $19,569.6
_____________________________________________________________
</TABLE>
<PAGE> 57
Notes to Financial Statements (Continued)
3. Sale of Subsidiaries (Continued)
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.
<PAGE> 58
Notes to Financial Statements (Continued)
4. Investments
<TABLE>
<CAPTION>
Debt securities available for sale at December 31 were as follows:
Gross Gross
(Millions) Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and
authorities $ 3,723.0 $ 82.9 $ 32.8 $ 3,773.1
States, municipalities and political
subdivisions 348.4 7.3 .4 355.3
U.S. corporate securities:
Utilities 2,355.3 85.8 20.8 2,420.3
Financial 4,486.0 82.5 22.0 4,546.5
Transportation/capital goods 2,373.7 136.6 17.5 2,492.8
Health care/consumer products 1,754.0 64.6 14.9 1,803.7
Natural resources 1,287.7 44.1 13.9 1,317.9
Other corporate securities 1,488.1 46.4 14.7 1,519.8
____________________________________________________
Total U.S. corporate securities 13,744.8 460.0 103.8 14,101.0
Foreign:
Government, including political subdivisions 2,407.5 111.2 13.3 2,505.4
Utilities 740.3 55.0 5.1 790.2
Other 3,376.3 148.3 11.5 3,513.1
____________________________________________________
Total foreign securities 6,524.1 314.5 29.9 6,808.7
Residential mortgage-backed securities:
Pass-throughs 1,771.5 88.6 11.7 1,848.4
Collateralized mortgage obligations 2,665.8 117.6 18.7 2,764.7
____________________________________________________
Total residential mortgage-backed securities 4,437.3 206.2 30.4 4,613.1
Commercial/Multifamily mortgage-backed
securities 1,131.5 27.8 15.0 1,144.3
Other asset-backed securities (1) 1,458.0 10.3 3.7 1,464.6
____________________________________________________
Total Bonds 31,367.1 1,109.0 216.0 32,260.1
Redeemable Preferred Stocks 74.3 1.9 - 76.2
____________________________________________________
Total Debt Securities $ 31,441.4 $ 1,110.9 $ 216.0 $ 32,336.3
_______________________________________________________________________________________________________
____________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
(Millions) Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and
authorities $ 3,528.5 $ 193.0 $ 1.0 $ 3,720.5
States, municipalities and political subdivisions 69.1 12.7 .3 81.5
U.S. corporate securities:
Utilities 2,172.8 163.4 3.2 2,333.0
Financial 4,527.8 185.4 8.9 4,704.3
Transportation/capital goods 2,486.6 245.9 2.6 2,729.9
Health care/consumer products 1,783.6 149.5 8.3 1,924.8
Natural resources 1,186.3 93.7 1.2 1,278.8
Other corporate securities 1,732.0 137.3 10.1 1,859.2
____________________________________________________
Total U.S. corporate securities 13,889.1 975.2 34.3 14,830.0
Foreign:
Government, including political subdivisions 1,892.6 86.8 11.1 1,968.3
Utilities 706.8 73.4 .1 780.1
Other 2,792.6 201.3 7.6 2,986.3
____________________________________________________
Total foreign securities 5,392.0 361.5 18.8 5,734.7
Residential mortgage-backed securities:
Pass-throughs 1,738.1 136.9 10.6 1,864.4
Collateralized mortgage obligations 2,866.5 213.1 5.7 3,073.9
____________________________________________________
Total residential mortgage-backed securities 4,604.6 350.0 16.3 4,938.3
Commercial/Multifamily mortgage-backed
securities 741.9 32.3 .2 774.0
Other asset-backed securities (1) 1,728.5 45.2 1.2 1,772.5
____________________________________________________
Total Bonds 29,953.7 1,969.9 72.1 31,851.5
Redeemable Preferred Stocks 8.8 .5 .5 8.8
____________________________________________________
Total Debt Securities $ 29,962.5 $ 1,970.4 $ 72.6 $ 31,860.3
_______________________________________________________________________________________________________
____________________________________________________
(1) Includes approximately $108.0 million of subordinate and residual certificates from a mortgage loan
securitization in 1995 which were retained by the Company.
</TABLE>
<PAGE> 59
Notes to Financial Statements (Continued)
4. Investments (Continued)
At December 31, 1996 and 1995, net unrealized appreciation on
available for sale debt securities included $399 million and
$960 million, respectively, related to experience rated contracts
and $205 million and $421 million, respectively, related to
discontinued products (refer to Note 9), which were not reflected
in shareholders' equity.
The carrying and fair value of debt securities are shown below by
contractual maturity. Actual maturities may differ from
contractual maturities because securities may be restructured,
called or prepaid.
<TABLE>
<CAPTION>
1996 Amortized Fair
(Millions) Cost Value
____________________________________________________________________
<S> <C> <C>
Due to mature:
One year or less $ 1,515.5 $ 1,522.3
After one year through five years 7,190.7 7,296.4
After five years through ten years 7,215.9 7,391.4
After ten years 8,492.5 8,904.2
Mortgage-backed securities 5,568.8 5,757.4
Other asset-backed securities 1,458.0 1,464.6
____________________________________________________________________
Total $31,441.4 $32,336.3
____________________________________________________________________
________________________
</TABLE>
The Company engages in securities lending whereby certain
securities from its portfolio are loaned to other institutions for
short periods of time. Collateral, primarily cash, which is in
excess of the market value of the loaned securities, is deposited
by the borrower with a lending agent, and retained and invested by
the lending agent to generate additional income for the Company.
The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the
market value fluctuates. At December 31, 1996 and 1995, the
Company had loaned securities (which are reflected as invested
assets) with a market value of approximately $1.3 billion.
Investments in equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
________________________________________________________________________________
<S> <C> <C> <C> <C>
1996
________________________________________________________________________________
Equity securities $ 963.4 $ 397.9 $ 28.5 $ 1,332.8
________________________________________________________________________________
___________________________________________________
1995
________________________________________________________________________________
Equity securities $ 597.8 $ 85.1 $ 23.2 $ 659.7
________________________________________________________________________________
___________________________________________________
</TABLE>
<PAGE> 60
Notes to Financial Statements (Continued)
4. Investments (Continued)
Real Estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________
<S> <C> <C>
Properties held for sale $ 771.7 $ 1,230.2
Investment real estate 220.6 177.7
______________________
992.3 1,407.9
Valuation reserve 142.1 130.6
______________________
Net carrying value of real estate $ 850.2 $ 1,277.3
____________________________________________________________________
______________________
Net carrying value of real estate of
discontinued products (included above) $ 367.7 $ 635.0
_____________________________________________________________________
_______________________
</TABLE>
Accumulated depreciation for real estate was $21 million and
$117 million at December 31, 1996 and 1995, respectively.
Total real estate write-downs included in the net carrying value
of the Company's real estate holdings at December 31, 1996 and
1995 were $347 million and $555 million, respectively, (including
$224 million and $299 million, respectively, attributable to
assets of discontinued products).
At December 31, 1996 and 1995, 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 as follows:
<TABLE>
<CAPTION>
1996 1995
___________________________________________________
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
_________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Supporting discontinued products $ 387.3 $ 86.9 $ 755.4 $ 200.9
Supporting experience rated products 258.3 40.0 439.2 115.1
Supporting remaining products 160.1 17.2 329.8 45.2
___________________________________________________
Total Impaired Loans $ 805.7 (1) $ 144.1 $ 1,524.4(1) $ 361.2
_________________________________________________________________________________________________
___________________________________________________
<FN>
(1) Includes impaired loans of $227.0 million and $417.0 million, respectively, for which no
specific reserves are considered necessary.
</TABLE>
<PAGE> 61
Notes to Financial Statements (Continued)
4. Investments (Continued)
The activity in the specific and general mortgage loan impairment
reserves as of December 31 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, 1994 $ 372.1 $ 364.6 $ 119.3 $ 856.0
_________________________________________________________________________________
_____________________________________________________
Charged to
net realized capital loss - - 10.4 10.4
Charged (credited) to
other accounts (1) 25.2 (30.2) - (5.0)
Principal write-offs (109.8) (106.1) (40.6) (256.5)
_____________________________________________________
Balance at
December 31, 1995 (2) 287.5 228.3 89.1 604.9
_________________________________________________________________________________
____________________________________________________
Credited to
net realized capital gain - - (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
_________________________________________________________________________________
_____________________________________________________
<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 December 31, 1996 and 1995 include $144.1 million and
$361.2 million of specific reserves and $102.9 million and $243.7 million of
general reserves, respectively.
</TABLE>
<PAGE> 62
Notes to Financial Statements (Continued)
4. Investments (Continued)
The Company accrues interest income on impaired loans to the
extent it is deemed collectible and the loan continues to perform
under its original or restructured terms. Interest income on
problem loans is generally recognized on a cash basis. Cash
payments on loans in the process of foreclosure are generally
treated as a return of principal.
Income earned (pretax) and received on the average recorded
investment in impaired loans for the twelve months ended
December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
__________________________________________________________________
Average Average
Impaired Income Income Impaired Income Income
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 675.0 $ 54.6 $ 55.8 $ 952.9 $ 81.9 $ 81.0
Supporting experience rated products 474.7 33.1 33.2 739.8 50.6 51.6
Supporting remaining products 211.6 16.6 16.8 292.5 21.6 22.1
__________________________________________________________________
Total $ 1,361.3 $ 104.3 $ 105.8 $ 1,985.2 $ 154.1 $ 154.7
________________________________________________________________________________________________________
__________________________________________________________________
</TABLE>
The carrying values of investments that were nonincome producing
for the twelve months preceding the Consolidated Balance Sheet
date were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
________________________________________________________
<S> <C> <C>
Debt securities $ 13.7 $ 6.9
Mortgage loans 21.5 57.9
Real estate 60.0 95.8
_____________________
Total nonincome producing
assets $ 95.2 $ 160.6
________________________________________________________
_____________________
Nonincome producing
assets of discontinued
products (included above) $ 32.5 $ 33.9
________________________________________________________
_____________________
</TABLE>
Significant noncash investing and financing activities include
acquisition of real estate through foreclosures (including in-
substance foreclosures) of mortgage loans amounting to
$141 million and $264 million for 1996 and 1995, respectively.
<PAGE> 63
Notes to Financial Statements (Continued)
4. Investments (Continued)
At December 31, 1996 and 1995, the Company's mortgage loan
balances, net of specific impairment reserves, by geographic
region and property type were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 (Millions) 1996 1995
_________________________________________ ________________________________________
<S> <C> <C> <C> <C>
South Atlantic $ 1,311.6 $ 1,755.6 Office $ 3,056.4 $ 3,619.9
Middle Atlantic 1,592.9 1,562.7 Retail 1,369.3 1,834.4
New England 745.1 985.4 Apartment 428.8 600.6
South Central 334.5 656.6 Hotel/Motel 572.0 921.9
North Central 749.4 933.1 Industrial 584.7 726.9
Pacific and Mountain 1,412.4 1,902.8 Mixed Use 430.0 360.8
Other 657.9 774.7 Other 362.6 506.4
____________________ ____________________
Total 6,803.8 8,570.9 Total 6,803.8 8,570.9
Less general Less general
impairment reserve 102.9 243.7 impairment reserve 102.9 243.7
____________________ ____________________
Net mortgage Net mortgage
loan balance $ 6,700.9 $ 8,327.2 loan balance $ 6,700.9 $ 8,327.2
__________________________________________ ________________________________________
____________________ ____________________
</TABLE>
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the
Company's financial instruments at December 31, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
_________________________________________________
Carrying Fair Carrying Fair
Value Value Value Value
________ _____ ________ _____
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 6,700.9 $ 6,705.0 $ 8,327.2 $ 8,544.0
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 7,328.2 $ 7,336.2 $ 9,779.6 $ 9,738.2
Without a fixed maturity 11,859.1 11,764.3 12,316.2 12,332.7
Long-term debt 2,380.0 2,374.6 989.1 988.3
</TABLE>
<PAGE> 64
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Estimated Fair Value (Continued)
Fair value estimates are made at a specific point in time, based
on available market information and judgments about the financial
instrument, such as estimates of timing and amount of future cash
flows. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument, nor do they
consider the tax impact of the realization of unrealized capital
gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the
instrument. In evaluating the Company's management of interest
rate, price and liquidity risks, and currency exposures, the fair
values of all assets and liabilities should be taken into
consideration, not only those presented above.
The following valuation methods and assumptions were used by the
Company in estimating the fair value of the above financial
instruments:
Mortgage loans: Fair values are estimated by discounting expected
mortgage loan cash flows at market rates which reflect the rates
at which similar loans would be made to similar borrowers. The
rates reflect management's assessment of the credit quality and
the remaining duration of the loans. The fair value estimates of
mortgage loans of lower credit quality, including problem and
restructured loans, are based on the estimated fair value of the
underlying collateral.
Investment contract liabilities (included in policyholders' funds
left with the Company):
With a fixed maturity: Fair value is estimated by discounting
cash flows at interest rates currently being offered by, or
available to, the Company for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount
payable to the contractholder upon demand. However, the Company
has the right under such contracts to delay payment of withdrawals
which may ultimately result in paying an amount different than
that determined to be payable on demand.
Long-term debt: Fair value is based on quoted market prices for
the same or similar issued debt or, if no quoted market prices are
available, on the current rates estimated to be available to the
Company for debt of similar terms and remaining maturities.
<PAGE> 65
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments:
The notional amounts, carrying values and estimated fair values of
the Company's off-balance-sheet and other financial instruments at
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
____________________________ ____________________________
Carrying Carrying
Value Value
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange forward
contracts - sell:
Related to net investments in
foreign affiliates $ 29.7 $ (.6) $ (.6) $ 210.4 $ (2.0) $ (3.5)
Related to investments in
nondollar denominated assets 213.1 3.0 3.4 54.0 (.1) (.1)
Foreign exchange forward
contracts - buy:
Related to net investments in
foreign affiliates 25.3 - - 2.7 .2 .4
Related to investments in
nondollar denominated assets 23.5 .5 .5 43.8 .1 .6
Interest rate swaps 43.0 - 6.4 43.0 - 9.5
Futures contracts to sell
debt securities - - - 20.9 .2 .2
Forward swap agreements - - - 100.0 - .1
Warrants to purchase debt
securities 19.0 3.9 3.9 19.0 4.5 4.5
</TABLE>
The notional amounts of these instruments do not represent the
Company's risk of loss. The fair value of these instruments was
estimated based on quoted market prices, dealer quotations or
internal price estimates believed to be comparable to dealer
quotations. These fair value amounts reflect the estimated
amounts that the Company would have to pay or would receive if the
contracts were terminated.
<PAGE> 66
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Continued):
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 in the above table. All of these instruments involve, to
varying degrees, elements of market risk and credit risk in excess
of the amounts recognized in the Consolidated Balance Sheets. The
Company evaluates the risks associated with these instruments in a
manner similar to that used to evaluate the risks associated with
on-balance-sheet financial instruments. Market risk is the
possibility that changes in market prices may decrease the market
value of one or all of these financial instruments. For off-
balance-sheet financial instruments used for hedging, such market
price changes are generally offset by the market price changes in
the hedged instruments held by the Company. Credit risk arises
from the possibility that counterparties may fail to perform under
the terms of the contract, which could result in an unhedged
position. However, unlike on-balance-sheet financial instruments,
where credit risk generally is represented by the notional or
principal amount, the off-balance-sheet financial instruments'
risk of credit loss generally is significantly less than the
notional value of the instrument and is represented by the
positive fair value of the instrument. The Company generally does
not require collateral or other security to support the financial
instruments discussed below. However, the Company controls its
exposure to credit risk through credit approvals, credit limits
and regular monitoring procedures. There were no material
concentrations of off-balance-sheet financial instruments at
December 31, 1996.
<PAGE> 67
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Continued):
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange
fixed amounts of two different currencies at a specified future
date and at a specified price. The Company utilizes foreign
exchange forward contracts to hedge its foreign currency exposure
arising from certain investments in foreign affiliates (primarily
Canada) and nondollar denominated investment securities. The
Company generally utilizes foreign currency contracts with terms
of up to three months.
At December 31, 1996 and 1995, the Company had unhedged foreign
currency exposures (for which either no market exists for hedging
or a decision was made not to hedge the risk) of $727 million and
$677 million, respectively, related to net investments in foreign
affiliates (primarily Taiwan, Mexico, Chile and Malaysia) and
$67 million and $69 million, respectively, related to investments
in nondollar denominated assets.
Interest Rate Swaps:
The Company utilizes interest rate swaps to manage certain
exposures related to changes in interest rates primarily by
exchanging variable rate returns for fixed rate returns.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or
yield. Futures contracts trade on organized exchanges and,
therefore, have minimal credit risk.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified
period.
<PAGE> 68
Notes to Financial Statements (Continued)
6. Net Investment Income
Sources of net investment income were as follows:
(Millions) 1996 1995 1994
__________ __________ ________
Debt securities $ 2,312.1 $ 2,275.9 $ 2,250.0
Equity securities 34.0 22.0 29.2
Short-term investments 29.0 25.1 14.0
Mortgage loans 761.8 962.6 1,146.8
Real estate 300.2 306.4 302.0
Policy loans 37.2 30.6 28.0
Other 120.0 133.2 86.2
Cash equivalents 168.6 151.8 109.1
___________________________________
Gross investment
income 3,762.9 3,907.6 3,965.3
Less: investment
expenses 197.7 332.5 333.9
___________________________________
Net investment
income (1)(2) $ 3,565.2 $ 3,575.1 $ 3,631.4
_______________________________________________________________
___________________________________
(1) Includes $67.1 million and $76.2 million from real estate properties
held for sale at the end of 1996 and 1995, respectively.
(2) Includes amounts allocable to experience rated contractholders of $1.4
billion, $1.5 billion and $1.4 billion during 1996, 1995 and 1994,
respectively. Interest credited to contractholders is included in
current and future benefits.
7. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the
carrying value and sale proceeds of specific investments sold.
Provisions for impairments and changes in the fair value of real
estate held for sale are also included in net realized capital
gains or losses.
Net realized capital gains (losses) on investments were as
follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
_________ _________ ________
<S> <C> <C> <C>
Debt securities $ (11.8) $ 34.4 $ (42.3)
Equity securities 46.3 18.2 .8
Mortgage loans 33.9 (9.4) (39.0)
Real estate 4.7 3.5 30.0
Sales of subsidiaries (1) 60.1 - (3.9)
Other 1.2 .5 (.8)
___________________________________
Pretax realized
capital gains (losses) $ 134.4 $ 47.2 $ (55.2)
_______________________________________________________________
___________________________________
After-tax realized
capital gains (losses) $ 85.9 $ 29.5 $ (41.2)
_______________________________________________________________
___________________________________
<FN>
(1) Realized capital gains in 1996 include pretax gains of $39.3 million
from the sale of Aetna Realty Investors and $20.8 million
from the sale of Aetna Health Plans of Western Pennsylvania.
</TABLE>
<PAGE> 69
Notes to Financial Statements (Continued)
7. Capital Gains and Losses on Investment Operations
(Continued)
Net realized capital gains of $199 million and $97 million for
1996 and 1995, respectively, and net realized capital losses of
$195 million for 1994 allocable to experience rated
contractholders were deducted from net realized capital gains
(losses) and an offsetting amount was reflected in policyholders'
funds left with the Company.
Net realized capital gains of $122 million for 1996 and net
realized capital losses of $7 million and $209 million for 1995
and 1994, respectively, allocable to discontinued products were
deducted from net realized capital gains (losses) and an
offsetting amount was reflected in the reserve for anticipated
future losses on discontinued products.
Proceeds from the sale of available for sale debt securities and
the related gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
__________ _________ _________
<S> <C> <C> <C>
Proceeds on sales $ 13,625.6 $13,747.2 $14,801.6
Gross gains 77.6 124.0 62.3
Gross losses 89.4 89.6 100.8
</TABLE>
Changes in shareholders' equity related to changes in unrealized
capital gains (losses) (excluding those related to experience
rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
______________________________________________________________________________________
<S> <C> <C> <C>
Continuing Operations:
Debt securities $ (225.8) $ 984.8 $ (867.9)
Equity securities 307.5 41.3 (28.9)
Foreign exchange and other, net (70.9) (23.3) (82.5)
Discontinued Operations (474.0) 900.9 (910.5)
________________________________________
Subtotal (463.2) 1,903.7 (1,889.8)
Increase (Decrease) in deferred
income taxes (162.1) 191.1 (170.1)
________________________________________
Net changes in unrealized capital gains
(losses) $ (301.1) $ 1,712.6 $ (1,719.7)
______________________________________________________________________________________
________________________________________
</TABLE>
<PAGE> 70
Notes to Financial Statements (Continued)
7. Capital Gains and Losses on Investment Operations
(Continued)
Shareholders' equity included the following unrealized capital
gains (losses), which are net of amounts allocable to experience
rated contractholders and discontinued products, at December 31:
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________
<S> <C> <C>
Continuing Operations:
Debt securities available for sale:
Gross unrealized capital gains $ 378.5 $ 574.9
Gross unrealized capital losses (87.6) (58.2)
______________________
290.9 516.7
Equity securities:
Gross unrealized capital gains 397.9 85.1
Gross unrealized capital losses (28.5) (23.2)
______________________
369.4 61.9
Foreign exchange and other, net (137.2) (66.3)
Discontinued Operations - 474.0
Deferred income taxes 183.1 345.2
______________________
Net unrealized capital gains $ 340.0 $ 641.1
____________________________________________________________________
______________________
</TABLE>
8. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below,
included the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased
(Millions) Severance Write-Off Property Other Total
________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $277.9 $ 84.9 $ 64.5 $ 25.7 $453.0
Aetna Retirement Services 42.8 1.5 1.9 2.8 49.0
Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7
_________________________________________________________
Total Company $349.2 $104.4 $379.6 $ 31.5 $864.7
________________________________________________________________________________________
_________________________________________________________
<FN>
(1) Includes $292.2 million related to the CityPlace lease.
</TABLE>
In the fourth quarter of 1996, Aetna U.S. Healthcare recorded a
charge of $275 million after tax ($423 million pretax) principally
related to actions taken or expected to be taken with respect to
the integration of the health businesses of Aetna Services and
U.S. Healthcare. The severance portion of this charge is based on
a plan to eliminate 7,500 positions (primarily service center,
medical management, administrative and data center personnel). A
charge of $20 million after tax ($30 million pretax) also was
recorded by Aetna U.S. Healthcare in the second quarter of 1996
primarily related to actions, not related to the U.S. Healthcare
merger, taken or expected to be taken to reduce information
technology costs. The severance portion of this charge included a
plan to eliminate 675 positions. By year-end, a large portion of
these actions was completed.
<PAGE> 71
Notes to Financial Statements (Continued)
8. Severance and Facilities Charges (Continued)
In the third quarter of 1996, Aetna Retirement Services recorded a
$32 million after tax ($49 million pretax) charge principally
related to actions taken or expected to be taken to improve its
cost structure relative to its competitors. The severance portion
of the charge is based on a plan to eliminate 723 positions
(primarily customer service, sales and information technology
support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
In connection with the sale of the Company's property-casualty
operations, the Company vacated, and Travelers subleased, the
space that the Company occupied in the CityPlace office facility
in Hartford at market rates for a period of eight years. The
Company recorded a charge of $190 million after tax ($292 million
pretax) during the second quarter representing the present value
of the difference between rent required to be paid by the Company
under the lease and future rentals expected to be received by the
Company. (Refer to Note 18). The Company also recorded a charge
of $45 million after tax ($71 million pretax) during the second
quarter for actions taken or expected to be taken to reduce the
level of corporate expenses and other costs previously absorbed by
the property-casualty operations. The severance portion of this
charge includes the planned elimination of 475 positions.
The activity during 1996 within the severance and facilities
reserve (pretax, in millions) and the number of positions
eliminated related to such actions were as follows:
<TABLE>
<CAPTION>
Reserve Positions
_______________________________________________________________________________
<S> <C> <C>
Beginning of year $ - -
Severance and facilities charges 864.7 9,373
Actions taken 139.5 (1) 2,421
______ _____
End of year $725.2 6,952
_______________________________________________________________________________
_____________________________
<FN>
(1) Includes $84.6 million of severance-related actions.
</TABLE>
<PAGE> 72
Notes to Financial Statements (Continued)
8. Severance and Facilities Charges (Continued)
The 2,421 positions eliminated during 1996 related to the
following segments: 78% - Aetna U.S. Healthcare, 8% - Aetna
Retirement Services and 14% - Corporate. The Aetna U.S.
Healthcare severance actions related to the charge recorded in the
fourth quarter 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 the vacating of the leased office
space are expected to be substantially completed in 1997. The
remaining lease payments (net of expected subrentals) on these
facilities (other than the CityPlace office facility) are payable
over approximately the next three years.
9. Discontinued Products
Under the Company's accounting for its discontinued fully
guaranteed large case pension products (guaranteed investment
contracts ("GICs") and single-premium annuities ("SPAs")), the
respective reserves for anticipated future losses on these
products are reviewed by management quarterly. Accordingly, as
long as the reserves represent management's then best estimates of
expected future losses, results of operations of the discontinued
products, including net realized capital gains and losses, are
credited/charged to the respective reserve and do not affect the
Company's results of operations. As a result of management's
reviews during 1996, $202 million (pretax) of the reserve related
to GICs was released primarily as a result of favorable
developments in real estate markets. The reserves at December 31,
1996 reflect management's best estimate of the anticipated future
net losses for GICs and SPAs. To the extent that actual future
losses are greater than anticipated, the Company's results of
operations would be adversely affected. Conversely, if actual
future losses are less than anticipated, the Company's results of
operations would be favorably affected.
<PAGE> 73
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax):
<TABLE>
<CAPTION>
Charged
(Credited)
to Reserve for
(Millions) GICs SPAs Total Future Losses Net(1)
________________________________________________________________________________________________________
1996
<S> <C> <C> <C> <C> <C>
Net investment income $ 376.1 $ 442.2 $ 818.3 $ - $ 818.3
Net realized capital gains 87.2 34.6 121.8 (121.8) -
Interest earned on receivable from
continuing products 14.6 31.1 45.7 - 45.7
Change in Accounting Policy -
FAS No. 121 (2) 5.4 2.9 8.3 - 8.3
Other income 9.7 21.8 31.5 - 31.5
___________________________________________________________________
Total revenue 493.0 532.6 1,025.6 (121.8) 903.8
___________________________________________________________________
Current and future benefits (3) 360.0 417.8 777.8 108.5 886.3
Operating expenses 8.1 9.4 17.5 - 17.5
___________________________________________________________________
Total benefits and expenses 368.1 427.2 795.3 108.5 903.8
___________________________________________________________________
Results of discontinued products $ 124.9 $ 105.4 $ 230.3 $ (230.3) $ -
________________________________________________________________________________________________________
________________________________________________________________________________________________________
1995
Net investment income $ 515.4 $ 447.5 $ 962.9 $ - $ 962.9
Net realized capital gains (losses) (56.4) 49.3 (7.1) 7.1 -
Interest earned on receivable from
continuing products 20.3 30.5 50.8 - 50.8
Other income 8.8 11.9 20.7 - 20.7
___________________________________________________________________
Total revenue 488.1 539.2 1,027.3 7.1 1,034.4
___________________________________________________________________
Current and future benefits (3) 609.4 443.7 1,053.1 (31.1) 1,022.0
Operating expenses 2.9 9.5 12.4 - 12.4
___________________________________________________________________
Total benefits and expenses 612.3 453.2 1,065.5 (31.1) 1,034.4
___________________________________________________________________
Results of discontinued products $ (124.2) $ 86.0 $ (38.2) $ 38.2 $ -
________________________________________________________________________________________________________
________________________________________________________________________________________________________
1994
Premiums $ - $ 57.3 $ 57.3 $ - $ 57.3
Net investment income 633.1 433.0 1,066.1 - 1,066.1
Net realized capital losses (150.2) (58.8) (209.0) 209.0 -
Interest earned on receivable from
continuing products 19.4 28.1 47.5 - 47.5
Other income 14.9 16.2 31.1 - 31.1
___________________________________________________________________
Total revenue 517.2 475.8 993.0 209.0 1,202.0
___________________________________________________________________
Current and future benefits (3) 765.5 491.4 1,256.9 (64.0) 1,192.9
Operating expenses 6.1 3.0 9.1 - 9.1
___________________________________________________________________
Total benefits and expenses 771.6 494.4 1,266.0 (64.0) 1,202.0
___________________________________________________________________
Results of discontinued products $ (254.4) $ (18.6) $ (273.0) $ 273.0 $ -
________________________________________________________________________________________________________
________________________________________________________________________________________________________
<FN>
(1) Amounts are reflected in the 1996, 1995 and 1994 Consolidated Statements of Income, except for
interest earned on the receivable from continuing products which is eliminated in consolidation.
(2) Refer to Note 1 for a discussion of FAS No. 121.
(3) 1995 current and future benefits include losses of $49.5 million (pretax) due to early retirement of
GICs. Such losses were immaterial in 1996 and 1994.
</TABLE>
Deposits of $18 million, $32 million and $212 million were
received during 1996, 1995 and 1994, respectively, under
preexisting GICs.
<PAGE> 74
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
Net realized capital gains (losses) from the sale of bonds
supporting GICs and SPAs were as follows (pretax):
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
_____________________________________________________________
<S> <C> <C> <C>
GICs $ 6.0 $ (2.8) $ (54.6)
SPAs 5.9 64.2 (24.1)
_____________________________________________________________
</TABLE>
Assets and liabilities of discontinued products were as follows:
(1)(2)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
__________________________________________________________________________
(Millions) GICs SPAs Total GICs SPAs Total
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Debt securities
available for sale $ 1,556.0 $ 3,633.3 $ 5,189.3 $ 2,120.3 $ 3,644.9 $ 5,765.2
Mortgage loans 1,438.1 1,292.6 2,730.7 1,883.0 1,505.6 3,388.6
Real estate 266.1 101.6 367.7 457.3 177.7 635.0
Short-term and other
investments 234.1 160.4 394.5 425.3 110.5 535.8
__________________________________________________________________________
Total investments 3,494.3 5,187.9 8,682.2 4,885.9 5,438.7 10,324.6
Current and deferred
income taxes 56.2 109.8 166.0 135.7 123.1 258.8
Receivable from continuing
products (1) - 524.7 524.7 429.7 493.6 923.3
______________________________________________________________________________________________________
Total Assets $ 3,550.5 $ 5,822.4 $ 9,372.9 $ 5,451.3 $ 6,055.4 $ 11,506.7
______________________________________________________________________________________________________
______________________________________________________________________________________________________
Future policy benefits $ - $ 4,793.7 $ 4,793.7 $ - $ 4,924.5 $ 4,924.5
Policyholders' funds left
with the Company 3,288.7 - 3,288.7 5,058.9 - 5,058.9
Reserve for anticipated
future losses
on discontinued products 144.0 842.8 986.8 221.4 737.4 958.8
Other 117.8 185.9 303.7 171.0 393.5 564.5
Total Liabilities $ 3,550.5 $ 5,822.4 $ 9,372.9 $ 5,451.3 $ 6,055.4 $ 11,506.7
______________________________________________________________________________________________________
______________________________________________________________________________________________________
<FN>
(1) The receivable from continuing products is eliminated in consolidation.
(2) Assets supporting the discontinued products are distinguished from other continuing
operation assets.
</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 on GICs is included in policyholders' funds left
with the Company, and the reserve for anticipated future losses on
SPAs is included in future policy benefits on the Consolidated
Balance Sheets.
<PAGE> 75
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
The reserve for anticipated future losses on discontinued products
represents the present value (at the risk-free rate at the time of
discontinuance, consistent with the duration of the liabilities)
of the difference between (a) the expected cash flows from the
assets supporting discontinued products, and (b) the cash flows
expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future
losses requires projection of both the amount and the timing of
cash flows over approximately the next 30 years, including
consideration of, among other things, future investment results,
participant withdrawal and mortality rates, and cost of asset
management and customer service. Projections of future investment
results consider both industry and Company data and are based on
performance of mortgage loan and real estate assets, projections
regarding levels of future defaults and prepayments, and
assumptions regarding future real estate market conditions, which
assumptions management believes are reasonable. Management
believes that the reserve for anticipated future losses is
adequate to provide for the future losses associated with the
runoff of the liabilities.
At December 31, estimated future net realized capital losses
attributable to mortgage loans and real estate expected to be
charged to the reserve for anticipated future losses were as
follows (pretax):
<TABLE>
<CAPTION>
(Millions) 1996 1995
________________________________________________________________________
<S> <C> <C>
GICs $ 93.6 $ 142.8
SPAs 87.2 58.5
________________________________________________________________________
</TABLE>
<PAGE> 76
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
The activity in the reserve for anticipated future losses since
December 31, 1993 was as follows (pretax):
(Millions) GICs SPAs Total
_____________________________________________________________________________
[S] [C] [C] [C]
Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0
Results of discontinued products (254.4) (18.6) (273.0)
_____________________________________
Reserve at December 31, 1994 345.6 651.4 997.0
Results of discontinued products (124.2) 86.0 (38.2)
_____________________________________
Reserve at December 31, 1995 221.4 737.4 958.8
Results of discontinued products 124.9 105.4 230.3
Reserve releases (202.3) - (202.3)
_____________________________________
Reserve at December 31, 1996 $ 144.0 $ 842.8 $ 986.8
_____________________________________________________________________________
_____________________________________________________________________________
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 each
discontinued product. Interest is accrued on the receivables at
the discount rate 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. During 1996, the GIC receivable of
$315 million, 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. At
December 31, 1996, for SPAs, the receivable from continuing
products, net of the related deferred taxes payable of $32 million
on the accrued interest income, was $493 million. As of
December 31, 1996, no funding of the SPA receivable had taken
place. At December 31, 1995, for GICs and SPAs, the receivables
from continuing products, net of the related deferred taxes
payable of $14 million and $21 million, respectively, on the
accrued interest income were $416 million and $473 million,
respectively. These amounts are eliminated in consolidation.
<PAGE> 77
Notes to Financial Statements (Continued)
10. Income Taxes
Income taxes (benefits) for continuing operations consist of:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Current taxes
(benefits):
Income Taxes:
Federal $ 190.8 $ 225.7 $ 267.8
State (1) 15.6 - -
Foreign 10.4 8.0 6.6
Realized capital
gains (losses) 41.1 34.4 (292.5)
__________________________________
257.9 268.1 (18.1)
__________________________________
Deferred taxes
(benefits):
Income Taxes:
Federal (150.8) (10.2) (44.2)
State (1) 2.4 - -
Foreign 13.2 9.9 .5
Realized capital
gains (losses) 10.9 (15.5) 279.9
__________________________________
(124.3) (15.8) 236.2
__________________________________
Total $ 133.6 $ 252.3 $ 218.1
_________________________________________________________
__________________________________
<FN>
(1) For years prior to the merger with U.S. Healthcare, state income taxes
were immaterial and were included in operating expenses.
</TABLE>
Income taxes were different from the amount computed by applying
the federal income tax rate to income from continuing operations
before income taxes for the following reasons:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Income from U.S.
operations $ 162.5 $ 544.8 $ 502.2
Income from non-U.S.
operations 176.2 181.4 125.3
_________________________________
Income before income
taxes 338.7 726.2 627.5
Tax rate 35% 35% 35%
_________________________________
Application of the tax
rate 118.5 254.2 219.6
Tax effect of:
Tax-exempt interest (4.4) (4.3) (7.8)
Foreign operations (4.9) 10.1 (1.8)
Excludable dividends (10.5) (9.8) (8.8)
Goodwill amortization 30.7 5.5 8.6
State income tax 11.7 - -
Other, net (7.5) (3.4) 8.3
_________________________________
Income taxes $ 133.6 $ 252.3 $ 218.1
____________________________________________________________________________
_________________________________
</TABLE>
<PAGE> 78
Notes to Financial Statements (Continued)
10. Income Taxes (Continued)
The tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities at December 31,
are presented below:
<TABLE>
<CAPTION>
(Millions) 1996 1995
_______________________________________________________________
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 391.5 $ 284.6
Reserve for anticipated future
losses on discontinued products 335.6 325.4
Reserve for severance and
facilities charges 308.9 13.9
Impairment reserves 42.4 49.2
Other postretirement benefits 224.1 229.4
Net operating loss carryforward 59.1 79.4
Deferred compensation plans 91.3 46.5
Other 10.4 47.5
______________________
Total gross assets 1,463.3 1,075.9
Less valuation allowance 23.0 34.3
______________________
Assets, net of valuation allowance 1,440.3 1,041.6
Deferred tax liabilities:
Deferred policy acquisition costs 645.5 571.8
Acquired intangibles other than
goodwill 496.1 -
Net unrealized capital gains 175.8 117.7
Market discount 57.3 62.1
Other 97.3 18.5
______________________
Total gross liabilities 1,472.0 770.1
______________________
Net deferred tax (liability) asset $ (31.7) $ 271.5
_______________________________________________________________
______________________
</TABLE>
Valuation allowances are provided when it is not considered more
likely than not that deferred tax assets will be realized. The
valuation allowances relate to future tax benefits on certain
purchased domestic and foreign net operating losses.
The Company has not recognized U.S. deferred taxes related to the
estimated cumulative amount of undistributed earnings of
approximately $265 million on its foreign corporations because the
Company does not expect to repatriate these earnings. A U.S.
deferred tax liability will be recognized when the Company expects
that it will recover these undistributed earnings in a taxable
manner, such as through a receipt of dividends or a sale of the
investment.
<PAGE> 79
Notes to Financial Statements (Continued)
10. Income Taxes (Continued)
The "Policyholders' Surplus Account," which arose under prior tax
law, is generally that portion of a life insurance company's
statutory income that has not been subject to taxation. As of
December 31, 1983, no further additions could be made to the
Policyholders' Surplus Account for tax return purposes under the
Deficit Reduction Act of 1984. The balance in such account was
$908 million at December 31, 1996 adjusted for Internal Revenue
Service (the "Service") audits finalized to date. This amount
would be taxed only under certain conditions. No income taxes
have been provided on this amount since management believes the
conditions under which such taxes would become payable are remote.
The Service has completed examination of the consolidated federal
income tax returns of Aetna Services and affiliated companies
through 1990 and U.S. Healthcare through 1992. Discussions are
being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or
sufficient reserves to provide for, any such adjustments. The
Service has commenced its examination for the years 1991 through
1994 for Aetna Services and for the years 1993 and 1994 for
U.S. Healthcare.
The Company paid net income taxes of $249 million and $135 million
in 1996 and 1995, respectively, and received net income tax
refunds of $18 million in 1994.
11. Benefit Plans
Pension Plans - The Company has noncontributory defined benefit
pension plans covering substantially all Aetna Services employees
and certain agents. The plans provide pension benefits based on
years of service and average annual compensation (measured over 60
consecutive months of highest earnings in a 120-month period).
Contributions are determined by using the Projected Unit Credit
Method and, for qualified plans subject to ERISA requirements, are
limited to amounts that are tax deductible.
<PAGE> 80
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
Components of the net periodic pension cost in continuing
operations were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
Return on plan assets $ 373.1 $ 427.5 $ 8.2
Service cost - benefits earned
during the period (77.7) (86.7) (92.7)
Interest cost on projected
benefit obligation (217.0) (192.9) (175.2)
Net amortization and deferral (128.8) (222.0) 202.3
________________________________________________________________________________
Net periodic cost (1) $ (50.4) $ (74.1) $ (57.4)
________________________________________________________________________________
__________________________________
<FN>
(1) A curtailment loss of $95.6 million (pretax) is included in the
gain on the sale of Discontinued Operations in 1996.
</TABLE>
As of the measurement date (September 30), the funded status of
plans for which assets exceeded accumulated benefits was as
follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________
<S> <C> <C>
Actuarial present value of vested
benefit obligation $ 2,820.8 $ 2,451.0
____________________________________________________________________
Actuarial present value of
accumulated benefit obligation $ 2,840.2 $ 2,472.1
____________________________________________________________________
Plan assets at fair value $ 2,932.3 $ 2,506.3
Actuarial present value of
projected benefit obligation 3,006.9 2,650.5
______________________
Plan assets less than
projected benefit obligation (74.6) (144.2)
Unrecognized net loss 86.7 129.1
Unrecognized service cost - prior
period 3.4 7.5
Unrecognized net asset at date of
adoption of FAS No. 87 (2.0) (30.1)
______________________
Prepaid (accrued) pension cost $ 13.5 $ (37.7)
____________________________________________________________________
______________________
</TABLE>
Nonfunded plans had projected benefit obligations of $143 million
and $167 million for 1996 and 1995, respectively. The 1996 and
1995 accumulated benefit obligations for these plans were
$126 million and $156 million, respectively, and the related
accrued pension cost was $132 million and $121 million,
respectively.
<PAGE> 81
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
The weighted average discount rate was 7.5% for 1996 and 1995, and
8.0% for 1994. The expected long-term rate of return on plan
assets was 8.5% for 1996, 1995 and 1994. The rate of increase in
future compensation was 4.5% for 1996 and 1995, and 5.0% for 1994.
The future annual cost-of-living adjustment was 2.8% for 1996 and
3% for 1995 and 1994.
Plan assets, primarily investments in domestic equities and fixed-
income instruments, are held in trust and benefit payments are
administered by Aetna Life Insurance Company and affiliates.
Approximately 15% of the fixed income investments at December 31,
1996 are held in the general account of Aetna Life Insurance
Company.
U.S. Healthcare has a defined contribution pension plan which
covers substantially all of its employees, subject to certain age
and service requirements. U.S. Healthcare's contribution for each
eligible employee is a percentage of the employee's compensation,
as defined. Pretax charges for the U.S. Healthcare defined
contribution pension plan were $7 million from July 19, 1996.
Postretirement Benefits - In addition to providing pension
benefits, the Company currently provides certain health care and
life insurance benefits for retired employees of Aetna Services.
A comprehensive medical and dental plan is offered to all full-
time employees retiring at age 50 with 15 years of service or at
age 65 with 10 years of service. Retirees are generally required
to contribute to the plans based on their years of service with
the Company.
Effective March 1, 1994, the Company modified its postretirement
benefit plan to cap the portion of the cost paid by the Company
relating to medical and dental benefits.
Components of the net periodic postretirement benefit cost in
continuing operations were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
_________________________________________________________________________________
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ (7.3) $ (8.3) $ (8.6)
Interest cost (34.7) (34.7) (34.2)
Net amortization 26.4 28.3 31.2
Return on plan assets 1.4 2.0 3.2
___________________________________
Net periodic cost (1) $ (14.2) $ (12.7) $ (8.4)
_________________________________________________________________________________
___________________________________
<FN>
(1) A curtailment gain of $77.4 million (pretax) is included in the
gain on the sale of Discontinued Operations in 1996.
</TABLE>
<PAGE> 82
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
As of the measurement date (September 30), the funded status of
the postretirement benefit plans was as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 329.1 $ 313.5
Fully eligible active employees 17.9 70.9
Active employees not eligible to
retire 70.2 107.6
______________________
Total 417.2 492.0
Plan assets at fair value 54.0 54.3
______________________
Accumulated postretirement benefit
obligation in excess of plan assets 363.2 437.7
Unrecognized net gain 84.0 24.8
Prior service cost 100.0 173.6
____________________________________________________________________
Accrued postretirement benefit cost $ 547.2 $ 636.1
____________________________________________________________________
______________________
</TABLE>
The weighted average discount rates were 7.5% for 1996 and 1995,
and 8.0% for 1994. The health care cost trend rate for the 1996
valuation decreased gradually from 10.5% for 1997 to 5.5% by the
year 2005. For the 1995 valuation, the rates decreased gradually
from 10.5% for 1996 to 5.5% by the year 2005. Increasing the
health care cost trend rate by one percentage point would increase
the accumulated postretirement benefit obligation at 1996 by
$29 million and would increase the net periodic cost for 1996 by
$3 million (pretax).
It is the Company's practice to fund amounts for postretirement
life insurance benefits to the extent the contribution is
deductible for federal income taxes. The plan assets are held in
trust and administered by Aetna Life Insurance Company. The
assets are in the general account of Aetna Life Insurance Company,
and the expected rate of return on the plan assets was 7% for
1996, 1995 and 1994.
<PAGE> 83
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
The U.S. Healthcare retiree health benefit plan is a defined
contribution plan which covers substantially all of
U.S. Healthcare's employees, subject to certain age and service
requirements. Contributions are at U.S. Healthcare's sole
discretion. Accumulated contributions and interest thereon are
used to fund all or a portion of the premiums for health care
benefit coverage for eligible retired employees and their eligible
spouses. When funds are exhausted, U.S. Healthcare has no
obligation to make any further contributions or payments. No
contributions have been made to the U.S. Healthcare retiree health
benefit plan since July 19, 1996.
Incentive Savings Plans - Substantially all Aetna Services
employees are eligible to participate in a savings plan under
which designated contributions, which may be invested in common
stock of Aetna Inc. or certain other investments, are matched, up
to 5% of compensation, by the Company. The U.S. Healthcare
savings plan, which has not been merged into the Company's
incentive savings plan, provides for a match of up to 2% of
compensation in common stock of Aetna Inc. Pretax charges to
operations (including continuing and Discontinued Operations) for
the incentive savings plans were $50 million for 1996, and $60
million for 1995 and 1994. Plan trustees held 4,252,001 shares,
5,015,075 shares and 6,380,355 shares of the Company's common
stock for plan participants at the end of 1996, 1995 and 1994,
respectively.
1996 Stock Incentive Plan - The Company's 1996 Stock Incentive
Plan (the "1996 Plan") replaced the Company's and U.S.
Healthcare's previous stock incentive plans. Effective with the
merger, stock options of Aetna Inc. were substituted for options
outstanding under the previous Aetna Life and Casualty Company
plans and for that portion of options outstanding under the
previous U.S. Healthcare plans that were not satisfied in cash
pursuant to the merger agreement. The 1996 Plan provides for
stock options (see "Stock Options" below), deferred contingent
common stock or equivalent cash awards (see "Incentive Units"
below) or restricted stock to certain key employees. The maximum
number of shares of common stock initially issuable under the 1996
Plan (including shares issuable in respect of options and units
granted under predecessor plans that were outstanding prior to the
merger) is 13,270,000. At December 31, 1996, 5,570,875 shares
were available for grant under the 1996 Plan.
<PAGE> 84
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
The compensation expense charged to operations related to the
Incentive Units was $27 million, $36 million and $19 million,
pretax, for 1996, 1995 and 1994, respectively. The Company does
not recognize compensation expense for stock options granted at or
above the market price on the date of grant under its stock
incentive plans. Had compensation expense for grants since January
1, 1995 been determined based upon the fair value at the grant
date as prescribed by FAS No. 123, the Company's net income and
earnings per share, on a pro forma basis, which may not be
indicative of pro forma effects in future years, would have been
as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
______________________________________________________________________
<S> <C> <C>
Net income:
As reported $ 651.0 $ 251.7
Pro forma $ 638.4 $ 247.3
Primary earnings per common share:
As reported $ 4.74 $ 2.21
Pro forma $ 4.64 $ 2.17
______________________________________________________________________
</TABLE>
The fair value of the stock options included in the pro forma
amounts shown above was estimated as of the grant date using the
Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
1996 1995
____________________________________________________________________
<S> <C> <C>
Dividend yield 2% 5%
Expected volatility 26% 22%
Risk-free interest rate 6% 7%
Expected life 4 years 4 years
_____________________________________________________________________
</TABLE>
The weighted-average grant date fair values for options granted in
1996 and 1995 were $17.00 and $9.22, respectively.
Stock Options - Executive and middle management employees may be
granted options to purchase common stock of the Company at or
above the market price on the date of grant. Options generally
become 100% vested three years after the grant is made, with one-
third of the options vesting each year. From time to time, the
Company has issued options with different vesting provisions.
Vested options may be exercised at any time during the 10 years
after grant, except in certain circumstances generally related to
employment termination or retirement. At the end of the
10-year period, any unexercised options expire.
<PAGE> 85
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
Stock option transactions for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
_______________________________________________________________________________________________________
<S> <C> <C> <C>
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
_____________________________________________________________________
Outstanding, beginning of year 4,883,661 $ 53.72 5,072,958 $ 52.44 4,609,523 $ 51.42
Granted 3,185,180 $ 70.78 2,131,100 $ 55.61 1,140,100 $ 54.97
Exchanged for
U.S. Healthcare options (1) 800,610 $ 32.72 - $ - - $ -
Exercised (1,438,730) $ 51.94 (2,198,219) $ 52.46 (464,790) $ 46.75
Expired or forfeited (202,171) $ 62.02 (122,178) $ 56.19 (211,875) $ 56.23
___________ __________ _________
Outstanding, end of year 7,228,550 $ 58.99 4,883,661 $ 53.72 5,072,958 $ 52.44
_______________________________________________________________________________________________________
_____________________________________________________________________
Options exercisable at year end 2,749,017 $ 47.47 2,110,474 $ 51.43 3,967,608 $ 51.74
_______________________________________________________________________________________________________
_____________________________________________________________________
<FN>
(1) Effective with the merger, stock options of Aetna Inc. were substituted for that portion
of options outstanding under the previous U.S. Healthcare plans that were not satisfied
in cash pursuant to the merger agreement.
</TABLE>
The following is a summary of information about options
outstanding and options exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
_________________________________________________________________
<C> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
_____________________________________________________________________________________
$ 6.50 - $ 38.72(1) 704,103 8 $ 33.58 704,103 $ 33.58
$41.50 - $ 46.75 615,142 6 $ 45.10 606,576 $ 45.08
$50.50 - $ 59.38 2,627,770 8 $ 54.70 1,365,346 $ 54.76
$61.63 - $ 75.50 3,281,535 10 $ 70.50 72,992 $ 64.88
___________ ___________
7,228,550 2,749,017
_____________________________________________________________________________________
___________ ___________
<FN>
(1) This range of exercise prices relates to Aetna Inc. options which were substituted for
U.S. Healthcare stock options effective with the merger.
</TABLE>
<PAGE> 86
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
Incentive Units - Executives may be granted incentive units which
are rights to receive common stock or an equivalent value in cash.
There have been two cycles of incentive unit grants made, each of
which vests at the end of a four-year vesting period (currently
1996 and 1998) conditioned upon the employee's continued
employment during that period and achievement of specified Company
performance goals related to the Company's total return to
shareholders over the four-year measurement period. The incentive
units may vest within a range from 0% to 175% at the end of the
four-year period based on the attainment of these performance
goals. The incentive unit holders are not entitled to dividends
during the vesting period.
Incentive unit transactions related to the 1996 Plan under which
holders may be entitled to receive common stock, are as follows:
<TABLE>
<CAPTION>
Number of Incentive Units
_________________________________________________________________________
<S> <C> <C> <C>
1996 1995 1994
________ _______ _______
Outstanding, beginning of year 564,920 345,800 -
Granted 3,425 243,440 362,800
Vested (191,928) (24,320) -
Expired or forfeited (8,200) - (17,000)
________ _______ _______
Outstanding end of year 368,217 564,920 345,800
_________________________________________________________________________
___________________________________
</TABLE>
The weighted-average grant date fair values for units granted in
1996 and 1995 were $71.88 and $54.33, respectively.
12. Participating Policyholders' Interests
Under participating life insurance contracts issued by the
Company, the policyholder is entitled to share in the earnings of
such contracts. This business is accounted for in the Company's
consolidated financial statements on a statutory basis since any
adjustments to policy acquisition costs and reserves on this
business would have no effect on the Company's net income or
shareholders' equity. Premiums and assets allocable to the
participating policyholders were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
______________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 48.4 $ 50.1 $ 52.0
______________________________________________________________________________
Assets $ 702.1 $ 688.3 $ 700.8
______________________________________________________________________________
</TABLE>
<PAGE> 87
Notes to Financial Statements (Continued)
13. Debt and Guarantee of Debt Securities
<TABLE>
<CAPTION>
(Millions) 1996 1995
____________________________________________________________________________
<S> <C> <C>
Long-term debt:
Domestic:
Notes, 8.625% due 1998 $ 99.9 $ 99.8
Notes, 6.75% due 2001 299.6 -
Notes, 6.375% due 2003 199.1 198.9
Notes, 7.125% due 2006 347.5 -
Debentures, 6.75% due 2013 199.8 198.4
Eurodollar Notes, 7.75% due 2016 63.6 63.5
Debentures, 8% due 2017 (1) 200.0 199.1
Mortgage Notes and Other Notes, 3%-11%
due in varying amounts to 2018 6.0 13.1
Debentures, 7.25% due 2023 200.0 198.3
Debentures, 7.625% due 2026 445.9 -
Debentures, 6.97% due 2036 (putable at
par in 2004) 300.0 -
International:
Mortgage Notes, 6.5%-11.875% due in
varying amounts to 2006 18.6 18.0
______________________
Total $ 2,380.0 $ 989.1
____________________________________________________________________________
______________________
<FN>
(1) Subject to various redemption options beginning on January 15, 1997.
</TABLE>
On August 19, 1996, Aetna Services issued the following debt:
$300,000,000 6.75% Notes due 2001; $350,000,000 7.125% Notes due
2006; $450,000,000 7.625% Debentures due 2026; and $300,000,000
6.97% Debentures due 2036 (putable at par in 2004).
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 (refer to Note 14) (collectively the "Aetna Services
Debt").
At December 31, 1996, $283 million of short-term borrowings were
outstanding. 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 applicable 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 December 31, 1996 is at an annual rate of .08%.
The facility also supports Aetna Services' commercial paper
borrowing program.
As a guarantor to the credit facility, Aetna Inc. is required to
maintain shareholders' equity, excluding net unrealized capital
gains and losses, of at least $7.5 billion.
<PAGE> 88
Notes to Financial Statements (Continued)
13. Debt and Guarantee of Debt Securities (Continued)
Aggregate maturities of long-term debt and sinking fund
requirements for 1997 through 2001 are $10 million, $101 million,
$2 million, $4 million and $301 million, respectively, and $1,962
million thereafter.
Total interest paid by the Company was $130 million, $122 million
and $99 million in 1996, 1995 and 1994, respectively.
Consolidated 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 for the year ended December 31, 1996, is as follows (in
millions):
Balance Sheet Information:
Total investments (excluding
Separate Accounts) $ 42,555.0
__________
Total assets $ 83,171.6
__________
Total insurance liabilities $ 40,357.4
__________
Total liabilities $ 80,352.8
__________
Total redeemable preferred stock $ 275.0
__________
Total shareholder's equity $ 2,543.8
__________
Statement of Income Information:
Total revenue $ 13,011.4
__________
Total benefits and expenses $ 12,676.4
__________
Income from
continuing operations
before income taxes $ 335.0
__________
Income from
continuing operations $ 233.9
__________
Net income $ 679.8
__________
<PAGE> 89
Notes to Financial Statements (Continued)
14. Aetna-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Limited Liability Company
Holding Primarily Debentures Guaranteed by Aetna
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly
owned subsidiary of Aetna Services, issued $275 million
(11,000,000 shares) of 9.5% Cumulative Monthly Income Preferred
Securities, Series A. The securities are redeemable, at the
option of ACLLC with Aetna Services' consent, in whole or in part,
from time to time, on or after November 30, 1999, or at any time
under certain limited circumstances related to tax events, at a
redemption price of $25 per security plus accumulated and unpaid
dividends to the redemption date. The securities are scheduled to
become due and payable in 2024. The maturity date may be changed
under certain circumstances.
ACLLC loaned the proceeds from the preferred stock issuance and
the common capital contributions to Aetna Services. In return,
Aetna Services issued to ACLLC approximately $348 million
principal amount of 9.5% Subordinated Debentures due in 2024 which
are fully and unconditionally guaranteed by Aetna Inc. on a
subordinated basis. (Refer to Note 13.) These Subordinated
Debentures represent substantially all of the assets of ACLLC.
Interest on these debentures is payable monthly, and under certain
circumstances, principal may be due prior to or later than the
original maturity date. This loan is eliminated in the
Consolidated Balance Sheets. The interest and other payment dates
on the debentures correspond to the distribution and other payment
dates on the preferred and common securities of ACLLC. Aetna
Inc.'s obligations under the debentures and related agreements,
taken together, constitute a full and unconditional guarantee of
payments due on the preferred securities of ACLLC.
15. Capital Stock
In addition to the capital stock disclosed on the Consolidated
Balance Sheets, Aetna Inc. has the following authorized capital
stock: 15,000,000 shares of Class A Voting Preferred Stock, $.01
par value per share; 15,000,000 shares of Class B Voting Preferred
Stock, $.01 par value per share; and 15,000,000 shares of Class D
Non-Voting Preferred Stock, par value $.01 per share.
<PAGE> 90
Notes to Financial Statements (Continued)
15. Capital Stock (Continued)
Each share of Class C Stock is mandatorily convertible into one
share of common stock on July 19, 2000. Dividends accrue on a
daily basis at an annual rate of $4.7578 per share and are payable
upon declaration by Aetna Inc.'s Board of Directors (the "Board").
Aetna Inc. may, at its option, redeem the Class C Stock from
July 19, 1999 prior to July 19, 2000 for shares of Aetna Inc.
common stock based on specified formulas. The number of shares of
common stock to be issued for each share of Class C Stock pursuant
to an optional redemption will be based on a ratio, calculated as
the greater of: (a) $76.125 (plus any accrued but unpaid
dividends) divided by the then current market price of the common
stock determined two trading days prior to the notice date of the
intent to redeem; or (b) .8197 of a share of common stock. Each
share of Class C Stock is also convertible, prior to the mandatory
redemption date in whole or part, at the option of the holder,
into .8197 of a share of common stock.
At December 31, 1996 and 1995, 13,204,381 and 10,732,316 common
shares, respectively, were reserved for Aetna Inc.'s stock option
plans.
Pursuant to Aetna Inc.'s Rights Agreement, one share purchase
right (a "Right") is attached to each share of outstanding common
stock and common stock subsequently issued, prior to the time at
which the Rights become exercisable, expire or are redeemed.
The Rights trade with the common stock until they become
exercisable. The Rights become exercisable 10 days after: (i) a
public announcement that a person or group ("person") has acquired
15% or more of the outstanding shares of common stock or, 10% or
more of the outstanding shares of common stock if such person is
declared by the Board to be an "adverse person" ("triggering
acquisition"); or (ii) a person commences a tender offer or
exchange offer, the consummation of which could result in such
person owning 15% or more of the common stock; or (iii), in either
event, such later date as the Board may determine.
<PAGE> 91
Notes to Financial Statements (Continued)
15. Capital Stock (Continued)
Upon becoming exercisable, each Right will entitle the holder
thereof (the "Holder") to purchase one one-hundredth of a share of
Aetna Inc.'s Class B Voting Preferred Stock, Series A (a
"Fractional Preferred Share") at a price of $200 (the "Exercise
Price"). Each Fractional Preferred Share has dividend, voting and
liquidation rights designed to make it approximately equal in
value to one share of common stock. Under certain circumstances,
including a triggering acquisition, each Right (other than Rights
that were or are owned by the acquirer, which are void) thereafter
will entitle the Holder to purchase common stock (or economically
equivalent securities, under certain circumstances) worth twice
the Exercise Price. Under certain circumstances, including
certain acquisitions of Aetna Inc. in a merger or sale of its
assets, each Right thereafter will entitle the Holder to purchase
equity securities of the acquirer at a 50% discount.
Under certain circumstances, Aetna Inc. may redeem all of the
Rights at a price of $.01 per Right. The Rights will expire on
November 7, 1999, unless earlier redeemed. The Rights have no
dilutive effect on earnings per share until exercised.
16. Dividend Restrictions and Shareholders' Equity
The Company's business operations are conducted through Aetna
Services and U.S. Healthcare and their respective subsidiaries
(which principally consist of HMOs and insurance companies). In
addition to general state law restrictions on payments of
dividends and other distributions to shareholders applicable to
all corporations, HMOs and insurance companies are subject to
further state regulations that, among other things, may require
such companies to maintain certain levels of equity, and restrict
the amount of dividends and other distributions that may be paid
to their parent corporations. These regulations are not directly
applicable to Aetna Services, U.S. Healthcare, or Aetna Inc., as
none are an HMO or insurance company. The additional regulations
applicable to the Company's indirect HMO and insurance company
subsidiaries are not expected to affect the ability of Aetna Inc.
to pay dividends, or the ability of any of the Company's
subsidiaries to service their outstanding debt or preferred stock
obligations.
The amount of dividends that may be paid to Aetna Services or
U.S. Healthcare by their domestic insurance and HMO subsidiaries
in 1997 without prior approval by state regulatory authorities is
limited to approximately $476 million in the aggregate. There are
no such restrictions on distributions from Aetna Services or U.S.
Healthcare to Aetna Inc. or on distributions from Aetna Inc. to
its shareholders.
<PAGE> 92
Notes to Financial Statements (Continued)
16. Dividend Restrictions and Shareholders' Equity (Continued)
The combined statutory net income (loss) for the years ended and
statutory surplus as of December 31 for the domestic insurance and
HMO subsidiaries of the Company, reflecting intercompany
eliminations, were as follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
________________________________________________________
<S> <C> <C>
Statutory net income (loss)(1) $ 418.5 $ (13.4)
Statutory surplus $ 3,512.7 $ 4,275.1
________________________________________________________
(1) Statutory net income includes results for U.S. Healthcare from July 19, 1996.
<FN>
As of December 31, 1996, the Company does not utilize any
statutory accounting practices which are not prescribed by state
regulatory authorities that, individually or in the aggregate,
materially affect statutory surplus.
<PAGE> 93
Notes to Financial Statements (Continued)
17. Segment Information (1)(2)
Summarized financial information for the Company's principal
operations was as follows:
</TABLE>
<TABLE>
<CAPTION>
(Millions) 1996 1995 1994
__________________________________________________________________________________
<S> <C> <C> <C>
Revenue:
Aetna U.S. Healthcare (3) $ 9,733.7 $ 7,615.4 $ 7,139.1
Aetna Retirement Services 1,762.2 1,706.1 1,504.8
International 1,631.0 1,459.8 1,297.0
Large Case Pensions 1,938.3 2,268.9 2,355.2
Corporate: Other 98.0 9.7 (9.7)
_________________________________
Total revenue $15,163.2 $13,059.9 $12,286.4
__________________________________________________________________________________
_________________________________
Income from continuing operations
before income taxes:
Aetna U.S. Healthcare $ 125.5 $ 454.4 $ 538.1
Aetna Retirement Services 265.5 294.8 235.0
International 171.9 127.3 98.8
Large Case Pensions 395.7 132.7 81.1
Corporate: Interest (159.9) (108.3) (94.8)
Other (460.0) (174.7) (230.7)
_________________________________
Total income from continuing
operations before income taxes $ 338.7 $ 726.2 $ 627.5
__________________________________________________________________________________
_________________________________
Net income:
Aetna U.S. Healthcare $ 58.7 $ 286.0 $ 341.7
Aetna Retirement Services 186.2 198.0 159.1
International 109.9 86.6 71.2
Large Case Pensions 258.4 89.2 54.4
Corporate: Interest (103.9) (70.4) (60.5)
Other (304.2) (115.5) (156.5)
_________________________________
Income from continuing operations 205.1 473.9 409.4
Discontinued Operations, net of tax 445.9 (222.2) 58.1
_________________________________
Net income $ 651.0 $ 251.7 $ 467.5
__________________________________________________________________________________
_________________________________
</TABLE>
<TABLE>
<CAPTION>
(Millions) 1996 1995
__________________________________________________________________
<S> <C> <C>
Assets:
Aetna U.S. Healthcare $ 15,831.0 $ 6,317.0
Aetna Retirement Services 32,310.1 27,509.6
International 5,999.6 5,265.3
Large Case Pensions (4) 38,123.4 40,833.4
Corporate 648.8 465.6
Discontinued Operations, net - 3,932.8
________________________
Total assets $ 92,912.9 $ 84,323.7
__________________________________________________________________
________________________
<FN>
(1) The 1996 results include severance and facilities charges of $561.8 million, after
tax. Of this charge $294.5 million related to Aetna U.S. Healthcare, $31.8 million
related to Aetna Retirement Services and $235.5 million related to Corporate.
(2) The 1996 results include a benefit of $131.5 million, after tax, from reductions of
the loss on discontinued products in Large Case Pensions.
(3) Premiums and fees from the federal government accounted for 18% of Aetna U.S.
Healthcare's revenue in 1996, as determined on a pro forma basis for the U.S.
Healthcare acquisition. (Refer to Note 2.) Contracts with the Health Care Financing
Administration accounted for 70% of these premiums and fees, with the balance from
other federal employee benefit programs.
(4) Assets at December 31, 1996 and 1995 include $8.8 billion and $10.6 billion,
respectively, of assets attributable to discontinued products.
</TABLE>
<PAGE> 94
Notes to Financial Statements (Continued)
18. Commitments and Contingent Liabilities
Commitments
The Company has agreed with its Mexican partner to invest up to an
additional $63 million in a joint venture that offers insurance
products through the partner's bank subsidiary based on the
performance of the new company over the first five years of
operations.
In February 1997, the Company entered into an agreement in
principle to invest $300 million in a joint venture with Sul
America Seguros. In addition, the Company would invest up to an
additional $90 million over time, based on future performance of
the joint venture.
Leases
The Company has entered into operating leases for office space and
certain computer and other equipment. Rental expenses for these
items were $179 million, $203 million and $206 million for 1996,
1995 and 1994, respectively. The unrecorded obligations for
future net minimum payments under noncancelable leases for 1997
through 2001 are estimated to be $142 million, $115 million,
$84 million, $59 million, $43 million, respectively, and
$246 million thereafter.
In connection with the sale of the Discontinued Operations, the
Company vacated, and Travelers subleased, the space that the
Company occupied in the CityPlace office facility in Hartford at
market rates for a period of eight years. The Company recorded a
charge of $292 million pretax ($190 million after tax) which
represents the present value of the difference between rent
required to be paid by the Company under the lease and future
rentals expected to be received by the Company. Future payments
under the lease, net of expected subrentals (which are to be
applied against the reserve and are not included in the unrecorded
obligations above), are $145 million and $280 million,
attributable to the next five and subsequent seven years,
respectively.
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> 95
Independent Auditors' Report
The Shareholders and Board of Directors
Aetna Inc.:
We have audited the consolidated balance sheets of Aetna Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial
statements present fairly, in all material respects, the financial
position of Aetna Inc. and Subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
<PAGE> 96
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
(Millions, except per common share data)
__________________________________________________________________________________________________
<S> <C> <C> <C> <C>
1996 (1)(2) First Second Third Fourth
__________________________________________________________________________________________________
Total revenue $ 3,330.3 $ 3,169.4 $ 4,173.6 $ 4,489.9
__________________________________________________________________________________________________
Income (Loss) from continuing operations
before income taxes (benefits) $ 246.3 $ 35.9 $ 205.4 $ (148.9)
Income taxes (benefits) 80.8 11.6 83.0 (41.8)
_________________________________________________________
Income (Loss) from continuing
operations 165.5 24.3 122.4 (107.1)
Income from Discontinued
Operations, net of tax 182.2 - - -
Gain on sale of Discontinued Operations,
net of tax - 263.7 - -
_________________________________________________________
Net income (loss) $ 347.7 $ 288.0 $ 122.4 $ (107.1)
__________________________________________________________________________________________________
________________________________________________________
Net income (loss) applicable to common
shareholders $ 347.7 $ 288.0 $ 111.2 $ (121.0)
__________________________________________________________________________________________________
________________________________________________________
Per Common Share Results: (3)
Income (Loss) from continuing operations $ 1.43 $ .21 $ .77 $ (.80)
Income from Discontinued
Operations, net of tax 1.57 - - -
Gain on sale of Discontinued Operations,
net of tax - 2.26 - -
________________________________________________________
Net income (loss) $ 3.00 $ 2.47 $ .77 $ (.80)
__________________________________________________________________________________________________
________________________________________________________
Common Stock Data: (4)
Dividends Declared $ .69 $ - $ .40 $ .20
Common Stock Prices, High 78.50 75.13 73.63 81.63
Common Stock Prices, Low 67.13 67.13 58.00 60.13
__________________________________________________________________________________________________
<FN>
(1) Second, third and fourth quarters include after-tax severance and facilities charges
of $255.0 million, $31.8 million and $275.0 million, respectively, after tax.
(2) Second and fourth quarters include benefits of $110.5 million and $21.0 million,
respectively, after tax, from a reduction of the loss on discontinued products.
(3) Calculation of the earnings per share is based on average shares outstanding at the end of each
quarter and the sum does not equal the total for the year.
(4) Aetna Life and Casualty Company common shares through the date of the merger with U.S. Healthcare,
Aetna Inc. common shares thereafter.
</TABLE>
<TABLE>
<CAPTION>
_________________________________________________________________________________________________
<S> <C> <C> <C> <C>
1995 First Second Third Fourth
_________________________________________________________________________________________________
Total revenue $ 3,217.3 $ 3,263.4 $ 3,212.4 $ 3,366.8
_________________________________________________________________________________________________
Income from continuing
operations before income taxes $ 143.4 $ 181.6 $ 176.0 $ 225.2
Income taxes 51.0 60.5 63.4 77.4
_______________________________________________________
Income from continuing operations 92.4 121.1 112.6 147.8
Income (Loss) from Discontinued
Operations, net of tax (1)(2) 68.4 (418.0) 99.5 27.9
_______________________________________________________
Net income (loss) $ 160.8 $ (296.9) $ 212.1 $ 175.7
_________________________________________________________________________________________________
_______________________________________________________
Per Common Share Results: (3)
Income from continuing operations $ .82 $ 1.07 $ .99 $ 1.28
Income (Loss) from Discontinued
Operations, net of tax (1)(2) .60 (3.69) .87 .25
_______________________________________________________
Net income (loss) $ 1.42 $ (2.62) $ 1.86 $ 1.53
_________________________________________________________________________________________________
_______________________________________________________
Common Stock Data:
Dividends Declared $ .69 $ .69 $ .69 $ .69
Common Stock Prices, High 57.00 64.25 74.38 75.88
Common Stock Prices, Low 46.88 54.50 60.38 67.88
_________________________________________________________________________________________________
<FN>
(1) Second quarter includes reserve additions of $487.5 million, after tax,
related to environmental-related claims.
(2) Fourth quarter includes reserve additions of $218.1 million, after tax,
related to asbestos-related claims.
(3) Earnings per share calculations are based on results of stand-alone quarters.
</TABLE>
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
____________________________________ ______________ _____________________________________________
<S> <C> <C>
Aetna Inc. CT -
Aetna Services, Inc. CT 100% owned by Aetna Inc.
U.S. Healthcare, Inc. PA 100% owned by Aetna Inc.
Aetna Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Retirement Services, Inc. CT 100% owned by Aetna Services, Inc.
Aetna Health and Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Capital L.L.C. DE 95% owned by Aetna Services, Inc. (2)
Imperial Fire & Marine Re-Insurance
Company Limited United Kingdom 10% owned by Aetna Services, Inc.
Aetna International, Inc. CT 100% owned by Aetna Services, Inc.
U.S. Healthcare Dental Plan, Inc. PA 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare Dental Plan, Inc. NJ 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare Dental Plan, Inc. DE 100% owned by U.S. Healthcare, Inc.
U.S. Health Insurance Company NY 100% owned by U.S. Healthcare, Inc.
Primary Holdings, Inc. DE 100% owned by U.S. Healthcare, Inc.
Corporate Health Insurance Company MN 100% owned by U.S. Healthcare, Inc.
Health Maintenance Organization of
New Jersey, Inc. NJ 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare, Inc. NY 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare, Inc. CT 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare, Inc. MA 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare, Inc. DE 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare of New Hampshire, Inc. NH 100% owned by U.S. Healthcare, Inc.
U.S. Healthcare Financial Services,
Inc. DE 100% owned by U.S. Healthcare, Inc.
CMBS Holding, Inc. TX 100% owned by Aetna Life Insurance Company
CDI Equity, Inc. DE 100% owned by Aetna Life Insurance Company
AHP Holdings, Inc. CT 100% owned by Aetna Life Insurance Company
Aetna Insurance Company of Connecticut CT 100% owned by Aetna Life Insurance Company
Aetna Retirement Holdings, Inc. CT 100% owned by Aetna Retirement Services, Inc.
Aetna Canada Holdings Limited Canada 100% owned by Aetna International, Inc.
Aetna Life Insurance Company of
America CT 100% owned by Aetna International, Inc.
Aetna Capital Holdings, Inc. CT 100% owned by Aetna International, Inc.
Aetna Life & Casualty (Bermuda) Ltd. Bermuda 100% owned by Aetna International, Inc.
Primary Investments, Inc. DE 100% owned by Primary Holdings, Inc.
Aetna Health Plans of Ohio, Inc. OH 100% owned by AHP Holdings, Inc.
Aetna Dental Care of California, Inc. CA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Illinois, Inc. IL 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Texas, Inc. TX 100% owned by AHP Holdings, Inc.
Human Affairs International,
Incorporated UT 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Tennessee, Inc. TN 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Georgia, Inc. GA 100% owned by AHP Holdings, Inc.
Aetna Professional Management
Corporation CT 100% owned by AHP Holdings, Inc.
Aetna Dental Care of Texas, Inc. TX 100% owned by AHP Holdings, Inc.
Aetna Health Plans of the
Mid-Atlantic, Inc. VA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Florida, Inc. FL 100% owned by AHP Holdings, Inc.
Aetna Health Plans of the
Carolinas, Inc. NC 100% owned by AHP Holdings, Inc.
Aetna Dental Care of Kentucky, Inc. KY 100% owned by AHP Holdings, Inc.
PHPSNE Parent Corporation DE 55% owned by AHP Holdings, Inc.
Aetna Health Plans of Central and
Eastern Pennsylvania, Inc. PA 100% owned by AHP Holdings, Inc.
Healthways Systems, Inc. DE 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Louisiana, Inc. LA 100% owned by AHP Holdings, Inc.
Aetna Health Management, Inc. DE 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Arizona, Inc. AZ 100% owned by AHP Holdings, Inc.
Med Southwest, Inc. TX 55% owned by AHP Holdings, Inc.
Aetna Life Insurance and Annuity
Company CT 100% owned by Aetna Retirement Holdings, Inc.
Aeltus Investment Management, Inc. CT 100% owned by Aetna Retirement Holdings, Inc.
Aetna Life Insurance Company of
Canada Canada 100% owned by Aetna Canada Holdings
Limited
<FN>
(1) Percentages are rounded to the nearest whole percent and are based on ownership of
voting rights.
(2) Aetna Capital Holdings, Inc. owns 5% of Aetna Capital L.L.C.
</TABLE>
<PAGE> 2
EXHIBIT 21 (Continued)
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
_____________________________________ ______________ __________________________________________
<S> <C> <C>
United States Health Care Systems of
Pennsylvania, Inc. PA 100% owned by Primary Investments, Inc.
U.S. Healthcare, Inc. VA 100% owned by Primary Investments, Inc.
U.S. Healthcare, Inc. OH 100% owned by Primary Investments, Inc.
U.S. Healthcare of the Carolinas, Inc. NC 100% owned by Primary Investments, Inc.
U.S. Healthcare of Georgia, Inc. GA 100% owned by Primary Investments, Inc.
U.S. Health Insurance Company CT 100% owned by Primary Investments, Inc.
Aetna Health Plans of Southern
New England, Inc. CT 100% owned by PHPSNE Parent Corporation
Aetna Health Plans of New York, Inc. NY 100% owned by Healthways Systems, Inc.
Aetna Health Plans of New Jersey, Inc. NJ 100% owned by Healthways Systems, Inc.
Aetna Health Plans of California, Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna Government Health Plans, Inc. CA 100% owned by Aetna Health Management, Inc.
Southwest Physicians Life Insurance
Company TX 100% owned by Med Southwest, Inc.
Aetna Health Plans of North Texas, Inc. TX 100% owned by Med Southwest, Inc.
Aetna Get Fund MA 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Encore Fund MA 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Fund MA 98% owned by Aetna Life Insurance
and Annuity Company
Aetna Income Shares MA 99% owned by Aetna Life Insurance
and Annuity Company
Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Series Fund, Inc. MD 13% owned by Aetna Life Insurance
and Annuity Company
Aetna Investment Advisers Fund, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Aeltus Capital, Inc. CT 100% owned by Aeltus Investment Management,
Inc.
Smith Whiley & Company DE 35% owned by Aeltus Investment Management,
Inc.
<FN>
(1) Percentages are rounded to the nearest whole percent and are based on ownership of
voting rights.
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
_______________________________
The Board of Directors
Aetna Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 333-07167 on Form S-3, No. 333-07169 on Form S-3, No. 33-52819 and
No. 33-52819-01 on Form S-3, No. 333-08427 on Form S-8 and No. 333-08429
on Form S-8 and No. 333-08431 on Form S-8) of Aetna Inc. or its
Subsidiaries of our reports dated February 4, 1997, relating to the
consolidated balance sheets of Aetna Inc. and Subsidiaries as of
December 31, 1996 and 1995 and the related consolidated statements of
income, shareholders' equity, and cash flows and related schedules for
each of the years in the three-year period ended December 31, 1996,
which reports appear in or are incorporated by reference in the December
31, 1996 annual report on Form 10-K of Aetna Inc.
By /s/ KPMG Peat Marwick LLP
_____________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
February 28, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Inc. (the
"Company"), hereby severally constitute and appoint Thomas J.
Calvocoressi, Richard L. Huber and Robert J. Price, and each of them
individually, our true and lawful attorneys, with full power to them and
each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1996 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K
and to any and all amendments thereto.
WITNESS our hands and common seal on this 24th day of February, 1997.
<TABLE>
<CAPTION>
<S> <C>
_____________________________ _____________________________
Ronald E. Compton Gerald Greenwald
Chairman, President and Director Director
(Principal Executive Officer)
/s/ Leonard Abramson
_____________________________ _____________________________
Leonard Abramson Ellen M. Hancock
Director Director
_____________________________ _____________________________
Betsy Z. Cohen Michael H. Jordan
Director Director
_____________________________ _____________________________
William H. Donaldson Jack D. Kuehler
Director Director
_____________________________ _____________________________
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
_____________________________ _____________________________
Jerome S. Goodman Judith Rodin
Director Director
____________________________ _____________________________
Earl G. Graves Richard L. Huber
Director Vice Chairman for Strategy and Finance
(Principal Financial Officer) and Director
</TABLE>
<PAGE> 2
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Inc. (the
"Company"), hereby severally constitute and appoint Thomas J.
Calvocoressi, Richard L. Huber and Robert J. Price, and each of them
individually, our true and lawful attorneys, with full power to them and
each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1996 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K
and to any and all amendments thereto.
WITNESS our hands and common seal on this 28th day of February, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/ Ronald E. Compton /s/ Gerald Greenwald
_____________________________ ____________________________
Ronald E. Compton Gerald Greenwald
Chairman, President and Director Director
(Principal Executive Officer)
/s/ Ellen M. Hancock
_____________________________ ____________________________
Leonard Abramson Ellen M. Hancock
Director Director
/s/ Betsy Z. Cohen /s/ Michael H. Jordan
_____________________________ ____________________________
Betsy Z. Cohen Michael H. Jordan
Director Director
/s/ William H. Donaldson /s/ Jack D. Kuehler
_____________________________ ____________________________
William H. Donaldson Jack D. Kuehler
Director Director
/s/ Barbara Hackman Franklin /s/ Frank R. O'Keefe, Jr.
_____________________________ ____________________________
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
/s/ Jerome S. Goodman /s/ Judith Rodin
_____________________________ ____________________________
Jerome S. Goodman Judith Rodin
Director Director
/s/ Richard L. Huber
_____________________________ ____________________________
Earl G. Graves Richard L. Huber
Director Vice Chairman for Strategy and Finance
(Principal Financial Officer) and Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 1996 for Aetna Inc. and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 32,336
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,333
<MORTGAGE> 6,701
<REAL-ESTATE> 850
<TOTAL-INVEST> 43,486
<CASH> 1,463
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,227
<TOTAL-ASSETS> 92,913
<POLICY-LOSSES> 18,983
<UNEARNED-PREMIUMS> 334
<POLICY-OTHER> 1,829
<POLICY-HOLDER-FUNDS> 19,902
<NOTES-PAYABLE> 2,380
865
0
<COMMON> 4,033
<OTHER-SE> 5,992
<TOTAL-LIABILITY-AND-EQUITY> 92,913
9,289
<INVESTMENT-INCOME> 3,565
<INVESTMENT-GAINS> 134
<OTHER-INCOME> 2,175
<BENEFITS> 10,341
<UNDERWRITING-AMORTIZATION> 160
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 339
<INCOME-TAX> 134
<INCOME-CONTINUING> 205
<DISCONTINUED> 446
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 651
<EPS-PRIMARY> 4.74
<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>