<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
____________________
Commission file number 1-11913
_________
Aetna Inc.
___________________________________________________________________________
(Exact name of registrant as specified in its charter)
Connecticut 02-0488491
___________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
___________________________________________________________________________
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
______________________
Not Applicable
___________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _____
_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at September 30, 1997
________________ _____________________
Common Capital Stock
$.01 par value 148,598,715
<PAGE> 2
TABLE OF CONTENTS
_________________
Page
____
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Condensed Notes to Financial Statements 8
Independent Auditors' Review Report 24
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 52
Item 5. Other Information. 52
Item 6. Exhibits and Reports on Form 8-K. 53
Signatures 54
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
___________________________ _________________________
(Millions, except share and per common share data) 1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenue:
Premiums...................................... $ 3,152.0 $ 2,722.0 $ 9,417.5 $ 6,328.0
Net investment income......................... 818.9 897.9 2,506.1 2,678.0
Fees and other income......................... 567.7 558.5 1,693.8 1,624.8
Net realized capital gains.................... 93.7 7.5 129.9 73.9
____________ ____________ ____________ ____________
Total revenue............................. 4,632.3 4,185.9 13,747.3 10,704.7
____________ ____________ ____________ ____________
Benefits and expenses:
Current and future benefits................... 3,318.3 2,894.3 9,684.0 7,241.9
Operating expenses............................ 887.9 862.9 2,591.1 2,388.1
Interest expense.............................. 60.3 50.8 177.1 111.1
Amortization of goodwill and other
acquired intangible assets................... 96.0 75.1 284.0 80.8
Amortization of deferred policy
acquisition costs............................ 58.6 48.4 159.4 123.5
Reductions of loss on discontinued products... - - (172.5) (170.0)
Severance and facilities charges
(reserve reductions)......................... - 49.0 (45.0) 441.7
____________ ____________ ____________ ____________
Total benefits and expenses................ 4,421.1 3,980.5 12,678.1 10,217.1
____________ ____________ ____________ ____________
Income from continuing operations
before income taxes............................ 211.2 205.4 1,069.2 487.6
Income taxes (benefits)
Current....................................... 40.7 76.7 280.3 201.5
Deferred...................................... 52.7 6.3 161.7 (26.1)
____________ ____________ ____________ ____________
Total income taxes........................ 93.4 83.0 442.0 175.4
____________ ____________ ____________ ____________
Income from continuing operations............... 117.8 122.4 627.2 312.2
Discontinued Operations, net of tax:
Income from operations......................... - - - 182.2
Gain on sale................................... - - - 263.7
____________ ____________ ____________ ____________
Net income ............................... $ 117.8 $ 122.4 $ 627.2 $ 758.1
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Net income applicable to
common ownership........................ $ 104.0 $ 111.2 $ 585.6 $ 746.9
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Results per common share:
Income from continuing operations............... $ .69 $ .77 $ 3.87 $ 2.39
Discontinued Operations, net of tax:
Income from operations......................... - - - 1.44
Gain on sale................................... - - - 2.09
____________ ____________ ____________ ____________
Net income ................................... $ .69 $ .77 $ 3.87 $ 5.92
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Dividends declared............................ $ .20 $ .40 $ .60 $ 1.09
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Weighted average common shares and
common share equivalents..................... 150,933,885 145,149,973 151,147,103 126,138,464
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1997 1996
_____________ ____________
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale,
at fair value (amortized cost
$31,258.1 and $31,441.4).................. $ 32,611.7 $ 32,336.3
Equity securities, at fair value
(cost $980.7 and $963.4).................... 1,401.7 1,332.8
Short-term investments......................... 1,117.9 723.2
Mortgage loans................................. 6,013.7 6,700.9
Real estate.................................... 532.6 850.2
Policy loans................................... 744.6 707.3
Other.......................................... 892.2 835.5
___________ ___________
Total investments........................ 43,314.4 43,486.2
Cash and cash equivalents...................... 1,333.3 1,462.6
Accrued investment income...................... 575.0 598.6
Premiums due and other receivables............. 1,524.2 1,190.4
Deferred policy acquisition costs.............. 2,373.4 2,226.9
Goodwill and other acquired intangible assets.. 8,591.7 8,432.6
Other assets................................... 1,003.8 1,070.1
Separate Accounts assets....................... 40,430.8 34,445.5
___________ ___________
Total assets............................. $ 99,146.6 $ 92,912.9
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 5
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
September 30, December 31,
(Millions, except share and per common share data) 1997 1996
_____________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits........................ $ 18,114.6 $ 17,783.4
Unpaid claims................................. 3,262.5 3,029.2
Unearned premiums............................. 199.1 333.6
Policyholders' funds left with the Company.... 18,939.0 19,901.7
___________ ___________
Total insurance liabilities............... 40,515.2 41,047.9
Dividends payable to shareholders............. 36.7 36.9
Short-term debt............................... 535.0 282.8
Long-term debt................................ 2,373.5 2,380.0
Current income taxes.......................... 154.3 164.3
Deferred income taxes......................... 302.1 31.7
Other liabilities............................. 2,961.6 3,202.3
Minority and participating policyholders'
interests.................................... 239.6 221.7
Separate Accounts liabilities................. 40,389.8 34,380.6
___________ ___________
Total liabilities......................... 87,507.8 81,748.2
___________ ___________
Aetna-obligated mandatorily redeemable
preferred securities of subsidiary
limited liability company holding
primarily debentures guaranteed by Aetna.... 275.0 275.0
___________ ___________
Commitments and Contingent Liabilities
(Notes 5 and 12)
Shareholders' Equity:
Class C Voting Mandatorily Convertible
Preferred Stock ($.01 par value; 15,000,000
shares authorized; 11,655,335 in 1997 and
11,655,546 in 1996 issued and outstanding)... 865.4 865.4
Common Stock ($.01 par value; 500,000,000
shares authorized; 148,598,715 in 1997 and
150,084,799 in 1996 issued and outstanding).. 3,862.2 4,032.8
Net unrealized capital gains.................. 488.6 340.0
Retained earnings............................. 6,147.6 5,651.5
___________ ___________
Total shareholders' equity................ 11,363.8 10,889.7
___________ ___________
Total liabilities, redeemable preferred
securities and shareholders' equity...... $ 99,146.6 $ 92,912.9
___________ ___________
___________ ___________
Shareholders' equity per common share......... $ 70.65 $ 66.79
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 6
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Millions, except share data)
Class C Voting
Mandatorily Net
Convertible Unrealized
Preferred Common Capital Retained Treasury
Nine Months Ended September 30, 1997 Total Stock Stock Gains Earnings Stock
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $10,889.7 $ 865.4 $ 4,032.8 $ 340.0 $ 5,651.5 $ -
_______________________________________________________________________________________________________
Net income.......................... 627.2 627.2
Change in net unrealized capital
gains............................. 148.6 148.6
Common stock issued for benefit
plans and other (1,819,516 shares) 131.0 131.0
Repurchase of common shares
(3,305,600 shares)................ (301.6) (301.6)
Common stock dividends.............. (89.5) (89.5)
Preferred stock dividends........... (41.6) (41.6)
__________________________________________________________________
Balances at September 30, 1997 $11,363.8 $ 865.4 $ 3,862.2 $ 488.6 $ 6,147.6 $ -
_______________________________________________________________________________________________________
__________________________________________________________________
Nine Months Ended September 30, 1996
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 7,272.8 $ - $ 1,448.2 $ 641.1 $ 5,195.6 $ (12.1)
_______________________________________________________________________________________________________
Net income.......................... 758.1 758.1
Change in net unrealized capital
gains............................. (501.4) (501.4)
Class C Voting Manditorily
Convertible Preferred Stock
issued for U.S. Healthcare
merger (11,655,546 shares)........ 865.4 865.4
Common stock 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 and other (1,205,185 shares) 63.0 63.0
Common stock dividends.............. (140.0) (140.0)
Preferred stock dividends........... (11.2) (11.2)
Treasury stock retired.............. - (12.1) 12.1
__________________________________________________________________
Balances at September 30, 1996 $10,911.6 $ 865.4 $ 4,104.0 $ 139.7 $ 5,802.5 $ -
_______________________________________________________________________________________________________
__________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
________________________
(Millions) 1997 1996
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................ $ 627.2 $ 758.1
Adjustments to reconcile net income to net
cash used for operating activities:
Income from Discontinued Operations............................ - (182.2)
Decrease in accrued investment income.......................... 20.3 39.3
Increase in premiums due and other receivables................. (254.9) (151.6)
Increase in deferred policy acquisition costs.................. (216.3) (186.7)
Depreciation and amortization.................................. 392.0 206.9
Increase (decrease) in income taxes............................ 163.0 (177.1)
Net (increase) decrease in other assets and other liabilities.. (923.6) 131.0
Decrease in insurance liabilities.............................. (148.3) (1,208.1)
Net realized capital gains..................................... (129.9) (73.9)
Gain on sale of Discontinued Operations........................ - (263.7)
Amortization of net investment discounts....................... (111.4) (95.9)
Other, net..................................................... 9.1 15.9
_________ _________
Net cash used for operating activities....................... (572.8) (1,188.0)
_________ _________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 12,098.5 10,373.6
Equity securities.............................................. 551.0 405.0
Mortgage loans................................................. 125.8 104.7
Real estate.................................................... 411.4 387.7
Other investments.............................................. 458.8 745.7
Short-term investments......................................... 12,934.6 27,947.7
Discontinued Operations........................................ - 4,134.1
Investment maturities and repayments of:
Debt securities available for sale............................. 2,990.9 2,579.1
Mortgage loans................................................. 766.6 1,123.3
Cost of investments in:
Debt securities available for sale............................. (14,817.1) (11,899.8)
Equity securities.............................................. (479.9) (777.1)
Mortgage loans................................................. (210.6) (282.6)
Real estate.................................................... (44.7) (50.7)
Other investments.............................................. (516.5) (805.3)
Short-term investments......................................... (13,305.4) (27,905.1)
U.S. Healthcare................................................ - (5,243.9)
Increase in property and equipment................................ (46.8) (67.4)
Decrease (increase) in Separate Accounts.......................... 23.9 (2.0)
Other, net........................................................ 48.3 62.5
_________ _________
Net cash provided by investing activities.................... 988.8 829.5
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 1,424.6 1,456.4
Withdrawals of investment contracts............................... (1,896.5) (2,647.2)
Issuance of long-term debt........................................ 1.2 1,389.3
Repayment of long-term debt....................................... (4.1) -
Common stock issued under benefit plans and other................. 131.0 56.5
Common stock acquired............................................. (301.6) -
Net increase (decrease) in short-term debt........................ 234.5 (23.4)
Dividends paid to shareholders.................................... (131.4) (193.2)
_________ _________
Net cash (used for) provided by financing activities......... (542.3) 38.4
_________ _________
Effect of exchange rate changes on cash and cash equivalents......... (3.0) .1
_________ _________
Net decrease in cash and cash equivalents. .......................... (129.3) (320.0)
Cash acquired from U.S. Healthcare................................... - 766.6
Cash and cash equivalents, beginning of period....................... 1,462.6 1,712.7
_________ _________
Cash and cash equivalents, end of period............................. $ 1,333.3 $ 2,159.3
_________ _________
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 221.3 $ 113.8
_________ _________
_________ _________
Income taxes paid ................................................ $ 287.4 $ 206.4
_________ _________
_________ _________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 8
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include Aetna Inc. and its
majority-owned subsidiaries (collectively, the "Company"),
including Aetna Services, Inc. ("Aetna Services") (formerly Aetna
Life and Casualty Company) and Aetna U.S. Healthcare Inc. ("Aetna
U.S. Healthcare") (formerly U.S. Healthcare, Inc. ("U.S.
Healthcare")). Less than majority-owned entities in which the
Company has at least a 20% interest are reported on the equity
basis. These consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and
are unaudited. Certain reclassifications have been made to 1996
financial information to conform to the 1997 presentation. These
interim statements necessarily rely heavily on estimates,
including assumptions as to annualized tax rates. In the opinion
of management, all adjustments necessary for a fair statement of
results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related
notes as presented in the Company's 1996 Annual Report on
Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance
with generally accepted accounting principles, but that is not
required for interim reporting purposes, has been condensed or
omitted.
(2) Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was issued in June 1996 and provides accounting and
reporting standards for transfers of financial assets and
extinguishments of liabilities.
FAS No. 125 is effective for 1997 financial statements; however,
certain provisions relating to accounting for repurchase
agreements and securities lending are not effective until January
1, 1998. Provisions effective in 1997 did not have a material
effect on the Company's financial position or results of
operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material
effect on its financial position or results of operations.
<PAGE> 9
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Future Application of Accounting Standards (Continued)
FAS No. 128, Earnings per Share, was issued in February 1997.
This statement provides new accounting and reporting standards for
earnings per share. It will replace the currently used primary
and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share represents
the potential dilution that could occur if all stock options and
other stock-based awards, as well as convertible securities, were
exercised and converted into common stock if their effect is
dilutive. This statement, effective for year-end 1997 financial
statements, requires that prior period earnings per share data be
restated. The Company does not expect adoption of this statement
to have a material impact on earnings per common share amounts.
FAS No. 130, Reporting Comprehensive Income, was issued in June
1997 and establishes standards for the reporting and presentation
of comprehensive income and its components in a full set of
financial statements. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from
transactions with owners) and includes net income, net unrealized
capital gains or losses on available for sale securities and
foreign currency translation adjustments. As this new standard
only requires additional information in a financial statement, it
will not affect the Company's financial position or results of
operations. FAS No. 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives
permitted by the statement.
FAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued in June 1997 and establishes
standards for the reporting of information relating to operating
segments in annual financial statements, as well as disclosure of
selected information in interim financial reports. This statement
supersedes FAS No. 14, Financial Reporting for Segments of a
Business Enterprise, which requires reporting segment information
by industry and geographic area (industry approach). Under FAS
No. 131, operating segments are defined as components of a company
for which separate financial information is available and is used
by management to allocate resources and assess performance
(management approach). This statement is effective for year-end
1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information).
The Company does not anticipate that this standard will
significantly impact the composition of its current operating
segments, which are consistent with the management approach.
<PAGE> 10
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Earnings Per Common Share
Primary earnings per common share are computed using net income
less preferred stock dividends divided by the weighted average
number of common shares outstanding (including common share
equivalents). Fully diluted earnings per common share are computed
using net income divided by the weighted average number of common
shares outstanding (including common share equivalents and other
potentially dilutive securities). In determining primary earnings
per common share, the 6.25% Class C Voting Mandatorily Convertible
Preferred Stock ("Class C Stock") is not considered to be a common
stock equivalent. The Class C Stock is included in the
calculation of the Company's fully diluted earnings per common
share. The weighted average number of shares of Class C Stock
outstanding was 11.7 million for the three and nine months ended
September 30, 1997. There is not a material difference between
primary and fully diluted earnings per common share.
<PAGE> 11
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Merger with U.S. Healthcare
The merger with U.S. Healthcare was consummated on July 19, 1996,
and the Company's consolidated results of operations include U.S.
Healthcare from that date.
The unaudited pro forma information below presents combined
results of the Company's operations as if the merger with U.S.
Healthcare (as well as the sale of Aetna's property-casualty
operations - see Note 5) had occurred on January 1, 1996 and
reflects adjustments which include interest expense related to the
assumed financing of a portion of the cash consideration paid,
interest income foregone related to the balance of the cash
consideration paid, amortization of goodwill and other acquired
intangible assets, and adjustments to conform U.S. Healthcare's
accounting policies with Aetna Services' and to remove the effect
of merger-related costs incurred by U.S. Healthcare prior to the
merger. No adjustment has been made to give effect to any
synergies which may be realized in future periods as a result of
the merger.
The unaudited pro forma information is not necessarily indicative
of the consolidated results of operations of the combined company
had the merger occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in millions, except per common share data) September 30, 1996 September 30, 1996
___________________________________________ ___________________ __________________
<S> <C> <C>
Revenue $ 4,389.6 $13,070.0
_________ _________
_________ _________
Net realized capital gains (losses)
included in revenue $ (.8) $ 68.4
_________ _________
_________ _________
Income before income taxes $ 183.7 $ 503.5
Income taxes 78.6 222.5
_________ _________
Net income $ 105.1 $ 281.0
_________ _________
_________ _________
Net income per common share $ .60 $ 1.58
_________ _________
_________ _________
</TABLE>
<PAGE> 12
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Other Acquisitions and Dispositions
On April 2, 1996, the Company sold its property-casualty
operations to an affiliate of The Travelers Insurance Group Inc.
("Travelers") for approximately $4.1 billion in cash. The sale
resulted in an after-tax gain of $264 million ($218 million
pretax).
The operating results of the property-casualty operations were
presented as Discontinued Operations through the sale date.
Operating results for the period from January 1 to April 2, 1996
were:
<TABLE>
<CAPTION>
(Millions) 1996
_____________________________________________________________
<S> <C>
Total revenue $ 1,539.3
_____________________________________________________________
_________
Income before taxes $ 262.7
Income taxes 80.5
_________
Net income $ 182.2
_____________________________________________________________
_________
</TABLE>
As a result of the sale, the Company retained no property-casualty
liabilities other than those associated with indemnifying
Travelers for a portion of certain potential liability exposures.
While there can be no assurances, management currently does not
believe that the aggregate ultimate loss arising from these
indemnifications, if any, will be material to the annual net
income, liquidity or financial condition of the Company, although
it is reasonably possible.
In April 1997, the Company acquired a 49.0% stake in a joint
venture formed with Sul America Seguros, Brazil's largest
insurance company. The joint venture provides health and life
insurance, as well as private pension plan, products. The joint
venture is being accounted for on the equity basis. The initial
purchase price of approximately $300 million was funded through
the issuance of commercial paper.
On May 1, 1997, the Company sold Aetna Professional Management
Corporation, a physician management business. The sale resulted
in an after-tax capital loss of $44 million ($43 million pretax).
On August 3, 1997, the Company sold Healthcare Data Interchange
Corporation, a provider of health care electronic data interchange
services. The sale resulted in an after-tax capital gain of $21
million ($36 million pretax).
<PAGE> 13
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments
Net investment income includes amounts allocable to experience
rated contractholders of $333 million and $345 million for the
three months ended September 30, 1997 and 1996, respectively, and
$1,006 million and $1,042 million for the nine months ended
September 30, 1997 and 1996, respectively. Interest credited to
contractholders is included in current and future benefits.
Net realized capital gains allocable to experience rated
contractholders of $93 million and $30 million for the three
months ended September 30, 1997 and 1996, respectively, and $141
million and $114 million for the nine months ended September 30,
1997 and 1996, respectively, were deducted from net realized
capital gains as reflected on the Consolidated Statements of
Income, and an offsetting amount is reflected on the Consolidated
Balance Sheets in policyholders' funds left with the Company.
The total recorded investment in mortgage loans that are
considered to be impaired (including problem loans, restructured
loans and potential problem loans) and related specific reserves
are presented in the table below.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
____________________ ______________________
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Supporting discontinued products $ 328.4 $ 47.2 $ 387.3 $ 86.9
Supporting experience rated products 177.3 38.0 258.3 40.0
Supporting remaining products 101.0 15.3 160.1 17.2
_________________________________________________
Total Impaired Loans $ 606.7(1) $ 100.5 $ 805.7(1) $ 144.1
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Includes impaired loans of $207.6 million and $227.0 million at September 30, 1997
and December 31, 1996, respectively, for which no specific reserves are considered
necessary.
</TABLE>
<PAGE> 14
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments (Continued)
The activity in the specific and general reserves for the nine
months ended September 30, 1997 and the twelve months ended
December 31, 1996 is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 287.5 $ 228.3 $ 89.1 $ 604.9
Credited to net realized capital gains - - (33.0) (33.0)
Credited to other accounts(1) (10.0) (57.6) - (67.6)
Principal write-offs (140.8) (96.0) (20.5) (257.3)
______________________________________________________________________________________________
Balance at December 31, 1996(2) 136.7 74.7 35.6 247.0
Charged to net realized capital gains - - (10.6) (10.6)
Credited to other accounts(1) (25.0) (20.0) .6 (44.4)
Principal write-offs (18.8) (1.5) (3.9) (24.2)
______________________________________________________________________________________________
Balance at September 30, 1997 (2) $ 92.9 $ 53.2 $ 21.7 $ 167.8
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Reflects adjustments to reserves related to assets supporting experience rated products,
discontinued products and participating policyholder products which do not affect the
Company's results of operations.
(2) Total reserves at September 30, 1997 and December 31, 1996 include $100.5 million and
$144.1 million of specific reserves, respectively, and $67.3 million and $102.9 million
of general reserves, respectively.
</TABLE>
Income earned (pretax) and cash received on the average recorded
investment in impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
__________________________ _________________________
Average Averaged
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________ __________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 350.0 $ 13.9 $ 8.5 $ 368.3 $ 31.4 $ 24.3
Supporting experience rated products 195.1 5.7 3.5 216.4 14.1 11.2
Supporting remaining products 109.4 4.1 2.3 125.7 9.2 7.1
_______________________________________________________
Total $ 654.5 $ 23.7 $ 14.3 $ 710.4 $ 54.7 $ 42.6
_____________________________________________________________________________________________
_______________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
__________________________ __________________________
Average Averaged
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________ __________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 744.9 $ 17.5 $ 16.8 $ 711.1 $ 47.5 $ 48.4
Supporting experience rated products 509.4 8.5 8.4 505.7 28.3 28.0
Supporting remaining products 219.6 4.5 4.4 222.1 14.2 14.1
_______________________________________________________
Total $1,473.9 $ 30.5 $ 29.6 $1,438.9 $ 90.0 $ 90.5
_____________________________________________________________________________________________
_______________________________________________________
</TABLE>
<PAGE> 15
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Supplemental Cash Flow Information
Significant noncash investing and financing activities include
acquisition of real estate through foreclosures of mortgage loans
amounting to $25 million and $75 million for the nine months ended
September 30, 1997 and 1996, respectively.
(8) Financial Instruments
The Company engages in hedging activities to manage interest rate,
price and currency risks. Such hedging activities have
principally consisted of using off-balance-sheet instruments such
as those presented in the table below. (See General Account
Investments - Use of Derivatives and Other Investments on page 49
of the Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note 5 of the Company's 1996 Annual
Report for a description of the Company's hedging activities).
The notional amounts, carrying values and estimated fair values of
the Company's off-balance-sheet and other financial instruments
are as follows (in millions):
<TABLE>
<CAPTION>
Carrying
Value
Notional Asset Fair
September 30, 1997 Amount (Liability) Value
______________________________________________________________________________
<S> <C> <C> <C>
Foreign exchange forward contracts - sell:
Related to net investments in foreign
affiliates $ 149.9 $ (.3) $ (.2)
Related to investments in nondollar
denominated assets 42.5 (.6) (.6)
Foreign exchange forward contracts - buy:
Related to investments in nondollar
denominated assets 25.4 .9 .9
Futures contracts to purchase
debt securities 247.0 2.3 2.3
Interest rate swaps 43.0 - 6.5
Warrants to purchase securities 20.1 6.7 6.7
</TABLE>
<PAGE> 16
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Severance and Facilities Charges
During 1996, the Company established severance and facilities
reserves in the Aetna U.S. Healthcare, Aetna Retirement Services
and Corporate segments to reflect the integration of the health
businesses and certain other actions taken or to be taken in order
to make its businesses more competitive.
Activity for the nine months ended September 30, 1997 within the
severance and facilities reserves (pretax, in millions) and
positions eliminated related to such actions were as follows:
<TABLE>
<CAPTION>
Reserve Positions
_______________________________________________________________________________
<S> <C> <C>
Balance at December 31, 1996 $ 725.2 6,952
Actions taken(1) (196.7) (2,275)
Adjustments(2) (45.0) (1,200)
________ __________
Balance at September 30, 1997 $ 483.5 3,477
_______________________________________________________________________________
_____________________________
<FN>
(1) Includes $98.4 million of severance-related actions.
(2) Reflects reductions in anticipated severance actions resulting from higher
attrition than was contemplated in the establishment of the reserve in the
Aetna U.S. Healthcare segment.
</TABLE>
The 2,275 positions eliminated during the nine months ended
September 30, 1997 related to the following segments: 89% - Aetna
U.S. Healthcare, 6% - Aetna Retirement Services and 5% -
Corporate. The Aetna U.S. Healthcare severance actions are
expected to be substantially completed by the end of 1998. The
Aetna Retirement Services severance actions are expected to be
substantially completed by March 31, 1998. The Corporate
severance actions and vacating of certain leased office space are
expected to be substantially completed by the end of 1997. In
connection with the sale of the Company's property-casualty
operations, the Company vacated, and the purchaser subleased, at
market rates for a period of eight years, the space that the
Company occupied in the CityPlace office facility in Hartford.
The remaining lease payments (net of expected subrentals) on the
facilities (other than the CityPlace office facility) are payable
over approximately the next three years.
<PAGE> 17
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products
The Company discontinued the sale of its fully guaranteed large
case pension products (single-premium annuities ("SPAs")and
guaranteed investment contracts ("GICs")) in 1993. Under the
Company's accounting for these discontinued products, a reserve
for anticipated future losses from these products was established,
and the reserve is reviewed by management quarterly. As long as
the reserve continues to represent management's then best estimate
of expected future losses, results of operations of the
discontinued products, including net realized capital gains and
losses, are credited/charged to the reserve and do not affect the
Company's results of operations. As a result of management's
detailed review in the first quarter of 1997, the Company released
$173 million (pretax), constituting the remaining portion of the
reserve related to GICs, primarily as a result of continued
favorable developments in real estate markets. The current reserve
reflects management's best estimate of anticipated future net
losses. To the extent that aggregate future losses on GICs and
SPAs are greater or less than anticipated, the Company's results
of operations would be adversely or positively affected,
respectively. The discussion below presents information for the
discontinued SPA and GIC products on a combined basis. (Refer to
the Company's 1996 Annual Report for a more complete discussion of
the reserve for anticipated future losses on discontinued
products.)
At the time of discontinuance, a receivable from Large Case
Pensions' continuing products equivalent to the net present value
of the anticipated cash flow shortfalls was established for the
discontinued products. Interest on the receivable is accrued at
the discount rate which was used to calculate the loss on
discontinuance. The offsetting payable, on which interest is
similarly accrued, is reflected in continuing products. Interest
on the payable generally offsets the investment income on the
assets available to fund the shortfall. At September 30, 1997,
the receivable from continuing products, net of related deferred
taxes payable of $40 million on the accrued interest income, was
$510 million. During 1996, $315 million of the receivable, net of
the related deferred taxes payable on the accrued interest income
of $19 million, was funded from continuing products to meet
liquidity needs from maturing GICs. As of September 30, 1997, no
additional funding of the receivable had taken place. This amount
is eliminated in consolidation.
<PAGE> 18
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged
(Credited) to
Reserve for
Future
Three months ended September 30, 1997 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 151.1 $ - $ 151.1
Net realized capital gains 48.6 (48.6) -
Interest earned on receivable
from continuing products 8.3 - 8.3
Other income 7.9 - 7.9
__________________________________
Total revenue 215.9 (48.6) 167.3
__________________________________
Current and future benefits 160.4 3.2 163.6
Operating expenses 3.7 - 3.7
__________________________________
Total benefits and expenses 164.1 3.2 167.3
__________________________________
Results of discontinued products $ 51.8 $ (51.8) $ -
__________________________________________________________________________
__________________________________
Charged
(Credited) to
Reserve for
Future
Three months ended September 30, 1996 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 188.6 $ - $ 188.6
Net realized capital gains 12.1 (12.1) -
Interest earned on receivable
from continuing products 11.8 - 11.8
Other income 16.7 - 16.7
__________________________________
Total revenue 229.2 (12.1) 217.1
__________________________________
Current and future benefits 189.4 24.7 214.1
Operating expenses 3.0 - 3.0
__________________________________
Total benefits and expenses 192.4 24.7 217.1
__________________________________
Results of discontinued products $ 36.8 $ (36.8) $ -
__________________________________________________________________________
__________________________________
<FN>
(1) Amounts are reflected in the 1997 and 1996 Consolidated Statements of Income, except for interest
earned on the receivable from continuing products which is eliminated in consolidation.
</TABLE>
<PAGE> 19
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
<TABLE>
<CAPTION>
Charged
(Credited) to
Reserve for
Future
Nine months ended September 30, 1997 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 504.3 $ - $ 504.3
Net realized capital gains 142.9 (142.9) -
Interest earned on receivable
from continuing products 24.9 - 24.9
Other income 17.9 - 17.9
__________________________________
Total revenue 690.0 (142.9) 547.1
__________________________________
Current and future benefits 495.5 42.1 537.6
Operating expenses 9.5 - 9.5
__________________________________
Total benefits and expenses 505.0 42.1 547.1
__________________________________
Results of discontinued products $ 185.0 $ (185.0) $ -
__________________________________________________________________________
__________________________________
Charged
(Credited) to
Reserve for
Future
Nine months ended September 30, 1996 Results Losses Net(1)
__________________________________________________________________________
<S> <C> <C> <C>
Net investment income $ 612.4 $ - $ 612.4
Net realized capital gains 36.1 (36.1) -
Interest earned on receivable
from continuing products 38.0 - 38.0
Change in Accounting Policy -
FAS No. 121(2) 8.3 - 8.3
Other income 28.5 - 28.5
__________________________________
Total revenue 723.3 (36.1) 687.2
__________________________________
Current and future benefits 598.0 74.8 672.8
Operating expenses 14.4 - 14.4
__________________________________
Total benefits and expenses 612.4 74.8 687.2
__________________________________
Results of discontinued products $ 110.9 $(110.9) $ -
__________________________________________________________________________
__________________________________
<FN>
(1) Amounts are reflected in the 1997 and 1996 Consolidated Statements of Income, except for interest
earned on the receivable from continuing products which is eliminated in consolidation.
(2) Refer to Note 1 in the Company's 1996 Annual Report for a discussion of FAS No. 121.
</TABLE>
<PAGE> 20
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
Assets and liabilities of discontinued products at September 30, 1997
were as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Debt securities available for sale $5,145.5
Mortgage loans 2,458.8
Real estate 214.4
Short-term and other investments 214.1
________
Total investments 8,032.8
Current and deferred income taxes 160.2
Receivable from continuing products 549.6
________
Total assets $8,742.6
_______________________________________________________________
________
Future policy benefits $4,786.2
Policyholders' funds left with the Company 2,568.5
Reserve for anticipated future losses
on discontinued products 999.3
Other 388.6
________
Total liabilities $8,742.6
_______________________________________________________________
________
</TABLE>
Net unrealized capital gains on available for sale debt securities
are included above in other liabilities and are not reflected in
consolidated shareholders' equity. The reserve for anticipated
future losses is included in future policy benefits on the
Consolidated Balance Sheets.
The activity in the reserve for anticipated future losses on
discontinued products during the first nine months of 1997 was as
follows (pretax, in millions):
<TABLE>
<CAPTION>
<S> <C>
Reserve at December 31, 1996 $ 986.8
Results of discontinued products 185.0
Reserve reduction (172.5)
________
Reserve at September 30, 1997 $ 999.3
_______________________________________________________________
________
</TABLE>
<PAGE> 21
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities
Aetna Inc. has fully and unconditionally guaranteed the payment of
all principal, premium, if any, and interest on all outstanding
debt securities of Aetna Services, including the $348,000,000
9.5% Subordinated Debentures due 2024 (the "Subordinated
Debentures") issued to Aetna Capital L.L.C., a wholly owned
subsidiary of Aetna Services (collectively, the "Aetna Services
Debt"). Aetna Capital L.L.C. has issued $275,000,000 of
redeemable preferred stock and the Subordinated Debentures
represent substantially all of the assets of Aetna Capital L.L.C.
Aetna Services has a revolving credit facility in an aggregate
amount of $1.5 billion with a worldwide group of banks that
terminates in June 2001. Various interest rate options are
available under the facility and any borrowings mature on the
expiration date of the credit commitment. Aetna Services pays
facility fees ranging from .065% to .20% per annum, depending upon
its long-term senior unsecured debt rating. The facility fee at
September 30, 1997 is at an annual rate of .08%. The facility
also supports Aetna Services' commercial paper borrowing program.
As a guarantor of any amounts outstanding under the credit
facility, Aetna Inc. is required to maintain shareholders' equity,
excluding net unrealized capital gains or losses, of at least $7.5
billion.
<PAGE> 22
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (Continued)
Separate financial statements of Aetna Services have not been
presented herein or in any separate reports filed with the
Securities and Exchange Commission because management has
determined that such financial statements would not be material to
holders of the Aetna Services Debt. Summarized consolidated
financial information for Aetna Services is as follows (in
millions):
Balance Sheets Information:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
____________ ____________
<S> <C> <C>
Total investments (excluding
Separate Accounts) $ 41,866.6 $ 42,555.0
___________ ___________
___________ ___________
Total assets $ 88,571.1 $ 83,171.6
___________ ___________
___________ ___________
Total insurance liabilities $ 39,104.1 $ 40,357.4
___________ ___________
___________ ___________
Total liabilities $ 85,646.5 $ 80,352.8
___________ ___________
___________ ___________
Total redeemable preferred stock $ 275.0 $ 275.0
___________ ___________
___________ ___________
Total shareholder's equity $ 2,649.5 $ 2,543.8
___________ ___________
___________ ___________
</TABLE>
Statements of Income Information:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
__________________ __________________
<S> <C> <C>
Total revenue $ 2,566.6 $ 9,008.4
Total benefits and expenses 2,246.2 7,904.3
___________ ___________
Income before income taxes $ 320.4 $ 1,104.1
___________ ___________
___________ ___________
Net income $ 207.9 $ 707.3
___________ ___________
___________ ___________
</TABLE>
<PAGE> 23
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (Continued)
The amount of dividends which may be paid to Aetna Services or
Aetna U.S. Healthcare by their domestic insurance and HMO
subsidiaries at September 30, 1997 without prior approval by state
regulatory authorities is limited to approximately $107 million in
the aggregate. There are no such restrictions on distributions
from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.
(12) Litigation
The Company is involved in numerous lawsuits arising, for the most
part, in the ordinary course of its business operations, including
litigation in its health business concerning benefit plan coverage
and other decisions made by the Company, and alleged medical
malpractice by participating providers. While the ultimate
outcome of litigation against the Company cannot be determined at
this time, after consideration of the defenses available to the
Company and any related reserves established, it is not expected
to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results
of operations in future periods.
<PAGE> 24
Independent Auditors' Review Report
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Aetna Inc. and Subsidiaries as of September 30, 1997, and
the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1997 and
1996, and the related condensed consolidated statements of
shareholders' equity and cash flows for the nine-month periods
ended September 30, 1997 and 1996. These condensed consolidated
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Aetna Inc.
and Subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our
report dated February 4, 1997, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1996, is fairly presented, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
November 3, 1997
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations addresses the financial condition of Aetna
Inc. and its subsidiaries (collectively, the "Company") as of
September 30, 1997 and 1996, and its results of operations for the
three and nine-month periods ended September 30, 1997 and 1996.
Consolidated Results of Operations
__________________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions, except per common share data) Three Months Ended September 30, Nine Months Ended September 30,
________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 3,152.0 $ 2,722.0 15.8 % $ 9,417.5 $ 6,328.0 48.8%
Net investment income................ 818.9 897.9 (8.8) 2,506.1 2,678.0 (6.4)
Fees and other income................ 567.7 558.5 1.6 1,693.8 1,624.8 4.2
Net realized capital gains........... 93.7 7.5 - 129.9 73.9 75.8
_________ _________ _________ _________
Total revenue.................... 4,632.3 4,185.9 10.7 13,747.3 10,704.7 28.4
Current and future benefits.......... 3,318.3 2,894.3 14.6 9,684.0 7,241.9 33.7
Operating expenses................... 887.9 862.9 2.9 2,591.1 2,388.1 8.5
Interest expense..................... 60.3 50.8 18.7 177.1 111.1 59.4
Amortization of goodwill and
other acquired intangible assets.... 96.0 75.1 27.8 284.0 80.8 -
Amortization of deferred policy
acquisition costs................... 58.6 48.4 21.1 159.4 123.5 29.1
Reductions of loss on discontinued
products............................ - - - (172.5) (170.0) 1.5
Severance and facilities charges
(reserve reductions)................ - 49.0 (100.0) (45.0) 441.7 -
_________ _________ _________ _________
Total benefits and expenses...... 4,421.1 3,980.5 11.1 12,678.1 10,217.1 24.1
_________ _________ _________ _________
Income from continuing operations
before income taxes................. 211.2 205.4 2.8 1,069.2 487.6 119.3
Income taxes......................... 93.4 83.0 12.5 442.0 175.4 152.0
_________ _________ _________ _________
Income from continuing operations.... 117.8 122.4 (3.8) 627.2 312.2 100.9
Discontinued Operations, net of tax:
Income from operations.............. - - - - 182.2 (100.0)
Gain on sale........................ - - - - 263.7 (100.0)
_________ _________ _________ _________
Net income....................... $ 117.8 $ 122.4 (3.8) $ 627.2 $ 758.1 (17.3)
_________ _________ _________ _________
_________ _________ _________ _________
Net income applicable
to common ownership............ $ 104.0 $ 111.2 (6.5) $ 585.6 $ 746.9 (21.6)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains from
continuing operations, net of
tax (included above)................ $ 58.7 $ 5.2 - $ 67.1 $ 49.2 36.4
_________ _________ _________ _________
_________ _________ _________ _________
Results per common share:
Income from continuing operations.... $ .69 $ .77 (10.4) $ 3.87 $ 2.39 61.9
Discontinued Operations, net of tax:
Income from operations.............. - - - - 1.44 (100.0)
Gain on sale........................ - - - - 2.09 (100.0)
_________ _________ _________ _________
Net income....................... $ .69 $ .77 (10.4) $ 3.87 $ 5.92 (34.6)
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview
________
Consolidated Results
The Company reported income from continuing operations of
$118 million and $627 million for the three and nine months ended
September 30, 1997, respectively, compared with $122 million and
$312 million for the same periods a year ago. Excluding the
factors below, income from continuing operations would have been
$59 million and $422 million for the three and nine months ended
September 30, 1997, respectively, and $149 million and $439
million for the same periods a year ago.
benefits in the first quarter of 1997 and the second
quarter of 1996 related to discontinued products reserve
reductions for Large Case Pensions;
benefits for the nine months ended September 30, 1997
related to reductions of Aetna U.S. Healthcare's
severance and facilities reserve and severance and
facilities charges for the nine months ended September
30, 1996 related to Aetna U.S. Healthcare;
severance and facilities charges for the third quarter of
1996 related to Aetna Retirement Services ("ARS") and
also for the nine months ended September 30, 1996 related
to the sale of the Company's property-casualty
operations; and
net realized capital gains in all periods.
These results primarily reflect decreased earnings in Aetna U.S.
Healthcare. The three months ended September 30, 1997 also
reflect increased earnings in Aetna Retirement Services and
International and decreased earnings in Large Case Pensions. The
nine months ended September 30, 1997 also reflect increased
earnings in Aetna Retirement Services, International and Large
Case Pensions, offset by higher interest expense primarily due to
additional debt incurred in connection with the financing of the
U.S. Healthcare, Inc. ("U.S. Healthcare") merger. (See "Aetna
U.S. Healthcare" for a discussion of pro forma results as though
the merger had occurred on January 1, 1996.)
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Underlying Business Results
Aetna U.S. Healthcare's earnings declined during the
three and nine months ended September 30, 1997 due to
decreased earnings from health risk products resulting
from increased HMO medical costs partially offset by
increased earnings from group insurance and other health
products when compared to pro forma earnings for the
same periods a year ago.
Aetna Retirement Services' earnings improved during the
three and nine months ended September 30, 1997,
primarily reflecting improved financial services results
due to increased fee income earned on a growing base of
assets under management.
International's earnings improved during the three and
nine months ended September 30, 1997, reflecting
earnings growth in Taiwan and favorable investment
performance in certain Asia Pacific and Latin American
operations partially offset by increased losses from
start-up operations, primarily those in the Philippines
and Argentina. International's earnings for the nine
months ended September 30, 1997 also reflect earnings
from the Company's newly acquired Brazilian operations.
Large Case Pensions' earnings decreased during the three
months ended September 30, 1997 reflecting decreased
investment income partially offset by lower expenses.
Earnings increased during the nine months ended
September 30, 1997 reflecting lower expenses partially
offset by decreased income on the declining capital in
this business.
The Corporate segment reflects higher interest expense
in 1997, primarily resulting from additional debt
incurred in connection with the financing of the U.S.
Healthcare merger. The segment also reflects the
absence, in 1997, of interest income earned in the
second quarter of 1996 on the reinvestment of proceeds
received from the sale of the Company's property-
casualty operations (discussed below).
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Factors Affecting Comparison of Actual Results
The U.S. Healthcare merger, the property-casualty sale, reserve
reductions for Large Case Pensions and certain other factors
complicate the comparison of the Company's results for the periods
presented. Detailed information regarding certain of these
factors (after tax) is set forth below.
Factors Primarily Related to the Merger
Income from continuing operations for the three and nine
months ended September 30, 1997 includes U.S. Healthcare
results while income from continuing operations for the
same periods a year ago includes U.S. Healthcare results
for approximately two and one-half months of the third
quarter only.
Income from continuing operations for the three and nine
months ended September 30, 1997 reflects an increase in
amortization of goodwill and other acquired intangible
assets of $18 million and $168 million, respectively,
primarily related to the amortization of intangible
assets created as a result of the U.S. Healthcare
merger.
Income from continuing operations for the three and nine
months ended September 30, 1997 includes an increase in
interest expense of $6 million and $43 million,
respectively, primarily due to additional debt incurred
in connection with the financing of the U.S. Healthcare
merger.
Income from continuing operations for the three and nine
months ended September 30, 1996 includes $7 million and
$37 million, respectively, of interest income earned on
the net proceeds received from the sale of the Company's
property-casualty operations.
Income from continuing operations for the nine months
ended September 30, 1997 includes a benefit of $29
million related to reductions of Aetna U.S. Healthcare's
severance and facilities reserve. (See "Severance and
Facilities Charges".)
In connection with the merger, the Company issued
approximately 35.0 million shares of common stock and
11.7 million shares of mandatorily convertible preferred
stock. The increase in the number of common shares
outstanding and the dividends on the mandatorily
convertible preferred stock affect the comparability of
per common share amounts. (See Note 3 of Condensed
Notes to Financial Statements for further discussion.)
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Other Significant Factors
Income from continuing operations for the three and nine
months ended September 30, 1996, includes severance and
facilities charges of $32 million and $287 million,
respectively, in connection with the Company's strategic
initiatives in order to make its continuing businesses
more competitive. (See "Severance and Facilities
Charges".)
Income from continuing operations for the nine months
ended September 30, 1997 and 1996 includes $108 million
and $111 million, respectively, of benefits from
reductions of the reserve for anticipated future losses
on discontinued products, primarily as a result of
continued favorable developments in real estate markets.
(See "Large Case Pensions - Discontinued Products".)
Income from continuing operations for the three and nine
months ended September 30, 1997 includes $59 million and
$67 million, respectively, of net realized capital
gains, compared with $5 million and $49 million,
respectively, for the same periods a year ago. Net
realized capital gains for the three and nine months
ended September 30, 1997 include a $21 million gain
related to the sale of Healthcare Data Interchange
Corporation ("HDIC"), a provider of health care
electronic data interchange services. Net realized
capital gains for the nine months ended September 30,
1997 include a $34 million gain related to the sale of a
portion of the Company's investment in Travelers
Property Casualty Corp. Net realized capital gains for
the nine months ended September 30, 1997 also include
losses of $44 million related to the disposition of
Aetna Professional Management Corporation ("APMC"), a
physician practice management business, which was
completed in the second quarter of 1997. Net realized
capital gains for the nine months ended September 30,
1996 include a $25 million gain related to the sale of
Aetna Realty Investors ("ARI") and a $15 million gain
from the sale of an HMO subsidiary.
Net Income
The Company reported net income of $118 million and $627 million
for the three and nine months ended September 30, 1997,
respectively, and $122 million and $758 million, respectively, for
the same periods a year ago. Net income for the nine months ended
September 30, 1996 includes a gain from the sale of the Company's
property-casualty operations (reflected as Discontinued
Operations) of $264 million and income from such operations of
$182 million.
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Merger with U.S. Healthcare and Property-Casualty Sale
Aetna Inc. became the parent corporation of Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. (formerly U.S.
Healthcare) as a result of the merger transaction effected on July
19, 1996. The merger was accounted for as a purchase of U.S.
Healthcare. (See Note 4 of Condensed Notes to Financial
Statements.) Aetna sold its property-casualty operations on April
2, 1996. (See Note 5 of Condensed Notes to Financial Statements
for a discussion of certain indemnifications and other information
related to the property-casualty sale.)
This Overview is a summary of certain information that appears
later in this Management's Discussion and Analysis. Important
additional information about the businesses' results for the three
and nine months ended September 30, 1997 and 1996 and about the
Company's financial condition and liquidity and capital resources
follows. Because it has been summarized, the information
presented in the Overview is qualified by more detailed
information appearing later. Because of the importance of this
detailed information, you should read this Management's Discussion
and Analysis in its entirety.
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare
_____________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended September 30, Nine Months Ended September 30,
________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 2,698.7 $ 2,315.4 16.6% $ 8,122.1 $ 5,223.2 55.5%
Net investment income................ 115.9 116.1 (.2) 328.7 307.1 7.0
Fees and other income................ 355.5 387.8 (8.3) 1,121.9 1,125.0 (.3)
Net realized capital gains (losses).. 57.3 (1.3) - 22.4 24.0 (6.7)
_________ _________ _________ _________
Total revenue..................... 3,227.4 2,818.0 14.5 9,595.1 6,679.3 43.7
Current and future benefits.......... 2,421.4 1,951.2 24.1 6,967.2 4,474.0 55.7
Operating expenses................... 622.3 627.0 (.7) 1,822.7 1,682.3 8.3
Amortization of goodwill and other
acquired intangible assets.......... 90.9 74.1 22.7 271.8 78.3 -
Amortization of deferred policy
acquisition costs................... 2.9 3.7 (21.6) 16.0 8.8 81.8
Severance and facilities charges
(reserve reductions)................ - - - (45.0) 30.0 -
_________ _________ _________ _________
Total benefits and expenses....... 3,137.5 2,656.0 18.1 9,032.7 6,273.4 44.0
_________ _________ _________ _________
Income before income taxes........... 89.9 162.0 (44.5) 562.4 405.9 38.6
Income taxes......................... 51.1 69.3 (26.3) 270.2 154.2 75.2
_________ _________ _________ _________
Net income........................... $ 38.8 $ 92.7 (58.1) $ 292.2 $ 251.7 16.1
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ 35.1 $ (.8) - $ (4.1) $ 16.8 -
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
Aetna U.S. Healthcare's net income for the three and nine months
ended September 30, 1997 decreased by $54 million and increased by
$41 million, respectively, compared with the same periods a year ago.
These results reflect amortization of goodwill and other acquired
intangible assets ($75 million and $224 million after tax, for the
three and nine months ended September 30, 1997, respectively, and $61
million and $65 million, respectively, for the same periods a year
ago) and net realized capital gains or losses. Net income for the
nine months ended September 30, 1997 reflects after-tax benefits of
$29 million related to reductions in the severance and facilities
reserve due to higher attrition than was contemplated in the
establishment of the reserve. Net income for the nine months ended
September 30, 1996 reflects an after-tax severance and facilities
charge of $20 million. Excluding the above items, results for the
three and nine months ended September 30, 1997 decreased $76 million
and increased $171 million, respectively, from the prior year. The
decrease for the three months ended September 30, 1997 primarily
reflects increased HMO medical costs, including an after-tax charge
of $103 million related to a reestimation of HMO medical claims
reserves associated with prior period claims (discussed below). The
increase for the nine months ended September 30, 1997, reflects the
inclusion of U.S. Healthcare since July 19, 1996 partially offset by
increased HMO medical costs. (See Note 4 of Condensed Notes to
Financial Statements.)
On August 3, 1997, the Company sold HDIC and recognized a gain of $21
million after tax. Net realized capital losses for the nine months
ended September 30, 1997 also include after-tax losses of $44 million
related to the disposition of APMC. Net realized capital gains for
the nine months ended September 30, 1996 include a $15 million after-
tax gain from the sale of an HMO subsidiary. The earnings of HDIC,
APMC and the HMO subsidiary were not material to the results of Aetna
U.S. Healthcare.
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
Aetna U.S. Healthcare's effective tax rates of 57% and 48% for the
three and nine months ended September 30, 1997, respectively, when
compared to 43% and 38% for the same periods a year ago, primarily
reflect an increase in amortization of goodwill (which is
nondeductible for income tax purposes) as well as for the nine
months ended September 30, 1997, the tax treatment of the
disposition of APMC.
The remainder of the discussion related to Aetna U.S. Healthcare
presents 1996 results on a pro forma basis as if the merger had
occurred at the beginning of 1996.
<TABLE>
<CAPTION>
Operating Summary
(Millions) Pro Forma (1) Pro Forma (1)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 % Change 1997 1996 % Change
__________________________________________________________________ _____________________________________
<S> <C> <C> <C> <C> <C> <C>
Premiums.................... $ 2,698.7 $ 2,529.5 6.7% $ 8,122.1 $ 7,554.6 7.5%
Net investment income....... 115.9 119.7 (3.2) 328.7 333.8 (1.5)
Fees and other income....... 355.5 392.6 (9.4) 1,121.9 1,178.3 (4.8)
Net realized capital
gains (losses)............. 57.3 (9.6) - 22.4 18.5 21.1
_________ _________ _________ _________
Total revenue............ 3,227.4 3,032.2 6.4 9,595.1 9,085.2 5.6
Current and future benefits. 2,421.4 2,110.1 14.8 6,967.2 6,238.6 11.7
Operating expenses.......... 622.3 670.8 (7.2) 1,822.7 2,014.1 (9.5)
Amortization of goodwill
and other acquired
intangible assets.......... 90.9 91.3 (.4) 271.8 273.5 (.6)
Amortization of deferred
policy acquisition costs... 2.9 3.7 (21.6) 16.0 8.8 81.8
Severance and facilities
charges (reserve reductions) - - - (45.0) 30.0 -
________ _________ _________ _________
Total benefits and
expenses................ 3,137.5 2,875.9 9.1 9,032.7 8,565.0 5.5
________ _________ _________ _________
Income before income taxes.. 89.9 156.3 (42.5) 562.4 520.2 8.1
Income taxes................ 51.1 70.5 (27.5) 270.2 234.1 15.4
_________ _________ _________ _________
Net income.................. $ 38.8 $ 85.8 (54.8) $ 292.2 $ 286.1 2.1
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital
gains (losses), net of
tax (included above)....... $ 35.1 $ (6.0) - $ (4.1) $ 13.3 -
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
(1) Represents financial information as though the merger with U.S. Healthcare occurred on
January 1, 1996, reflecting adjustments which include: (a) amortization of goodwill
and other acquired intangible assets; (b) interest income foregone related to a $500
million dividend paid by U.S. Healthcare to the Company; and (c) adjustments to
conform U.S. Healthcare's accounting policies with Aetna Services' and to remove the
effect of merger-related costs incurred by U.S. Healthcare prior to the merger. The
1996 pro forma operating summary and information derived from the summary is not
necessarily indicative of the results of operations of the Aetna U.S. Healthcare
segment had the merger occurred at the beginning of 1996, nor is it necessarily
indicative of future results. The 1996 pro forma operating summary does not give
effect to (a) any synergies which may be realized in future periods as a result of
the merger or (b) the costs of financing the merger (see "Corporate").
</TABLE>
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
In order to provide a comparison that management believes better
reflects the underlying performance of Aetna U.S. Healthcare's two
businesses, Health Risk, and Group Insurance and Other Health, the
earnings discussion that follows excludes amortization of goodwill
and other acquired intangible assets, severance and facilities
actions, and net realized capital gains or losses. The table
below sets forth earnings on this basis for the Health Risk, Group
Insurance and Other Health businesses, and other related
information.
<TABLE>
<CAPTION>
(Millions, after tax, except Pro Forma Pro Forma
ratios) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
_____________ _____________ _____________ _____________
<S> <C> <C> <C> <C>
Health Risk $ (9.4)(1) $ 106.3 $ 226.6 $ 362.2
Group Insurance and Other Health 88.0 60.8 264.3 155.8
________ ________ ________ ________
Total Aetna U.S. Healthcare $ 78.6 $ 167.1 $ 490.9 $ 518.0
________ ________ ________ ________
________ ________ ________ ________
Health Risk Medical Loss Ratio 90.7%(1) 82.0% 85.6%(1) 80.9%
________ ________ ________ ________
________ ________ ________ ________
Commercial HMO Medical Loss Ratio 90.7%(1) 80.8% 84.9%(1) 78.2%
________ ________ ________ ________
________ ________ ________ ________
Medicare HMO Medical Loss Ratio 99.4%(1) 88.2% 94.1%(1) 88.0%
________ ________ ________ ________
________ ________ ________ ________
Health Risk SG&A Ratio 12.6% 15.0% 12.1% 14.7%
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes the effect of a charge of $161 million (pretax) ($103 million, after tax)
related to a reestimation of HMO medical claims reserves associated with prior period
claims, a majority of which relate to the first and second quarters of 1997. This charge
primarily affects Commercial and Medicare HMO medical claims reserves. Excluding the
effect of this charge, the Health Risk, Commercial and Medicare medical loss ratios for
the three months ended September 30, 1997 would have been 83.9%, 82.6% and 91.0%,
respectively.
</TABLE>
Aetna U.S. Healthcare's earnings for the three and nine months
ended September 30, 1997 decreased by $89 million, or 53%, and $27
million, or 5%, respectively, compared with the pro forma earnings
for the same periods a year ago. The segment's results reflect
decreased Health Risk earnings partially offset by improved Group
Insurance and Other Health earnings.
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. Medical
claims payable are estimated periodically, and any resulting
adjustments are reflected in current period results in current and
future benefits. In the three months ended September 30, 1997,
the Company received new information indicating that HMO medical
costs for prior periods had been higher than estimated. As a
result, the Company revised its estimate of its HMO medical claims
reserves and increased its reserves by recording a $103 million
after-tax charge.
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
Earnings for the three and nine months ended September 30, 1997 in
the Health Risk business were affected by several factors. An
after-tax charge of $103 million related to a reestimation of HMO
medical claims reserves associated with prior period claims
(discussed above) was taken during the three months ended
September 30, 1997. Commercial and Medicare HMO medical costs per
member per month increased by 14% and 18%, respectively, for the
three months ended September 30, 1997 and 10% and 14%,
respectively, for the nine months ended September 30, 1997 when
compared to the same periods a year ago primarily resulting from
higher inpatient facility and physician costs. The increases in
Medicare HMO medical costs per member per month also reflect
higher pharmacy costs. Partially offsetting the increase in HMO
medical costs were benefits resulting from increased HMO
enrollment and increased Commercial and Medicare HMO premiums per
member per month of 2% and 5%, respectively, for the three months
ended September 30, 1997 and 1% and 6%, respectively, for the nine
months ended September 30, 1997 when compared to the same periods
a year ago. The increases in Commercial HMO premiums per member
per month for the three and nine months ended September 30, 1997
resulted from premium rate increases instituted in 1997, the
effect of which were partially offset by customers selecting lower
premium plans and a shift in geographic mix. Health Risk results
also benefited from improvement in operating expenses as a result
of continuing cost savings initiatives, and lower preferred
provider organization (PPO) and Indemnity medical costs resulting
from favorable prior year reserve development.
The increase in earnings for the three and nine months ended
September 30, 1997 for the Group Insurance and Other Health
business is primarily attributable to higher earnings related to
Group Insurance products and higher earnings related to Other
Health products, respectively. Results for the three months ended
September 30, 1997 primarily reflect higher earnings from Group
Insurance products due to favorable adjustments to claim benefit
reserve estimates for life and disability products, as well as
increased product sales. Favorable results related to Other
Health products for the nine months ended September 30, 1997
reflect lower operating expenses due to continuing cost savings
initiatives and higher administrative service contract fees
resulting from rate increases and changes in product mix.
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
September 30, 1997 (1)(2) September 30, 1996 (1)(2)
_________________________ _________________________
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
____________________________________________________________ _________________________
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial 3,588 577 4,165 3,280 527 3,807
Medicare 373 19 392 286 19 305
Medicaid 101 - 101 134 27 161
_____ _____ ______ _____ _____ ______
Total HMO 4,062 596 4,658 3,700 573 4,273
POS 309 2,446 2,755 308 2,310 2,618
PPO 609 3,046 3,655 765 2,957 3,722
Indemnity 299 2,338 2,637 483 2,647 3,130
_____ _____ ______ _____ _____ ______
Total Health Membership 5,279 8,426 13,705 5,256 8,487 13,743
_____ _____ ______ _____ _____ ______
_____ _____ ______ _____ _____ ______
Group Insurance: (3)
Group Life 9,928 9,544
______ ______
______ ______
Disability 2,638 2,377
______ ______
______ ______
Long-Term Care 96 96
______ ______
______ ______
<FN>
(1) Health membership as of September 30, 1997 reflects system and plan conversions. The
conversions predominately affect Indemnity and PPO membership and have an immaterial
impact on all other Health products. September 30, 1996 reflects adjustments computed
for December 31, 1996 membership (a decrease of approximately 472 thousand members),
based on known corrected data from these conversions, as applied to September 30, 1996
membership previously reported.
(2) Group Insurance membership as of September 30, 1997 reflects the conversion to a new
membership reporting system. September 30, 1996 reflects adjustments computed for
December 31, 1996 membership (an increase of approximately 1 million members), as
applied to September 30, 1996 membership previously reported.
(3) Many Group Insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.
</TABLE>
Total Health membership as of September 30, 1997 decreased by 38
thousand members, or .3%, when compared to September 30, 1996.
Membership increases in Commercial HMO, Medicare HMO and POS were
offset by a decline in Indemnity and PPO enrollment. The decline in
Indemnity enrollment reflects the continued migration of Indemnity
members to other managed care products. Total HMO membership as of
September 30, 1997 increased by 385 thousand members or 9% when
compared to September 30, 1996.
Revenue for Aetna U.S. Healthcare increased by $145 million, or 5%,
and $679 million, or 8%, for the three and nine months ended
September 30, 1997, respectively, compared to the same periods a year
ago, excluding revenues of $173 million for the nine months ended
September 30, 1996 from the Civilian Health and Medical Program of
the Uniformed Services contract which was not renewed, and net
realized capital gains or losses. This growth was primarily due to
membership growth in Commercial and Medicare HMO products, partially
offset by lower Indemnity membership, as well as to premium rate
increases instituted at the beginning of 1997.
Operating expenses for Aetna U.S. Healthcare decreased by $49
million, or 7%, and $191 million, or 10%, for the three and nine
months ended September 30, 1997, respectively, compared with the same
periods a year ago primarily due to the impact of continuing cost
reduction efforts and operating expenses in 1996, not present in
1997, associated with investments in primary care physician
practices.
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
Outlook
Premiums in the Health Risk business are generally fixed for one-year
periods and, accordingly, cost levels in excess of those reflected in
pricing, such as those being experienced during 1997, cannot be
recovered in the year through higher premiums. Earnings in the
Health Risk business for the remainder of 1997 will continue to be
adversely affected by the increased level of medical costs. In
addition, a significant portion of the Company's contracts for 1998
were priced prior to the Company's receipt of information during the
third quarter of 1997 regarding increased medical cost levels, so
those contracts cannot be repriced to factor in the higher medical
cost levels.
For remaining 1998 contracts, the Company has targeted further
premium increases to improve Health Risk profitability. The Company
also attempts to improve profitability by addressing cost increases
in its contracting with providers and through other cost management
techniques. There can be no assurances, however, that premium
increases and cost savings achieved through recontracting will be
sufficient to offset the increases in medical costs as well as any
increases in other operating costs, as governmental action (including
rate decreases or reduction of rate increases), business conditions
(including intensification of competition) and other factors may
adversely affect the Company's ability to realize such premium
increases and cost savings.
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services
_________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended September 30, Nine Months Ended September 30,
__________________________________ ________________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums (1)...................... $ 37.1 $ 46.6 (20.4)% $ 115.5 $ 134.3 (14.0)%
Net investment income............. 278.6 272.5 2.2 830.6 804.4 3.3
Fees and other income (2)......... 158.7 122.2 29.9 429.6 336.3 27.7
Net realized capital gains........ 10.6 .9 - 19.8 18.2 8.8
_________ _________ _________ _________
Total revenue.................. 485.0 442.2 9.7 1,395.5 1,293.2 7.9
Current and future benefits....... 256.7 263.7 (2.7) 778.9 769.8 1.2
Operating expenses (2)............ 98.4 86.4 13.9 271.5 254.0 6.9
Amortization of deferred policy
acquisition costs................ 33.6 18.2 84.6 80.9 49.7 62.8
Severance and facilities charge... - 49.0 (100.0) - 49.0 (100.0)
_________ _________ _________ _________
Total benefits and expenses.... 388.7 417.3 (6.9) 1,131.3 1,122.5 .8
_________ _________ _________ _________
Income before income taxes........ 96.3 24.9 - 264.2 170.7 54.8
Income taxes...................... 29.0 6.8 - 81.5 48.3 68.7
_________ _________ _________ _________
Net income........................ $ 67.3 $ 18.1 - $ 182.7 $ 122.4 49.3
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains, net
of tax (included above).......... $ 6.8 $ .6 - $ 12.8 $ 11.9 7.6
_________ _________ _________ _________
_________ _________ _________ _________
Deposits not included in premiums
above:
Annuities - fixed options....... $ 322.7 $ 323.1 (.1) $ 901.8 $ 1,046.7 (13.8)
Annuities - variable options.... 806.0 655.9 22.9 2,420.0 1,996.2 21.2
Individual Life Insurance....... 113.3 119.3 (5.0) 351.2 328.0 7.1
_________ _________ _________ _________
Total......................... $ 1,242.0 $ 1,098.3 13.1 $ 3,673.0 $ 3,370.9 9.0
_________ _________ _________ _________
_________ _________ _________ _________
Assets under management: (3)(4)
Annuities - fixed options....... $11,997.4 $11,589.1 3.5
Annuities - variable options.... 19,895.5 13,240.6 50.3
_________ _________
Subtotal Annuities............ 31,892.9 24,829.7 28.4
Investment advisory (2)......... 6,666.9 2,341.0 184.8
_________ _________
Financial services............ 38,559.8 27,170.7 41.9
Individual Life Insurance....... 3,056.6 2,765.0 10.5
_________ _________
Total......................... $41,616.4 $29,935.7 39.0
_________ _________
_________ _________
Individual life insurance
coverage issued.................. $ 3,805.4 $ 4,080.7 (6.7)
_________ _________
_________ _________
Individual life insurance
coverage in force................ $49,641.7 $48,334.0 2.7
_________ _________
_________ _________
<FN>
(1) Includes $17.1 million and $47.2 million for the three and nine months ended
September 30, 1997, respectively, and $21.3 million and $53.5 million, respectively,
for the same periods a year ago, for annuity premiums on contracts converting
from the accumulation phase to payout options with life contingencies.
(2) The nine months ended September 30, 1997 include $17.8 million of fees and other
income and $13.1 million of operating expenses and, at September 30, 1997 and 1996,
$2,907.6 million and $1,062.1 million, respectively, of assets under management that
were previously reported in the Large Case Pensions segment, reflecting the consolidation
of the Company's investment advisory services and certain other pension products which
complement Aetna Retirement Services' business strategy.
(3) Excludes net unrealized capital gains of $520.7 million and $205.6 million at
September 30, 1997 and 1996, respectively.
(4) Includes $7,134.1 million and $4,286.5 million at September 30, 1997 and 1996,
respectively, of assets invested through ARS' products in unaffiliated mutual funds.
</TABLE>
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
____________________________________
ARS' net income for the three and nine months ended September 30,
1997 increased $49 million and $60 million, respectively, when
compared with the same periods a year ago. Net income for the three
and nine months ended September 30, 1996 reflects an after-tax
severance and facilities charge of $32 million primarily related to
actions taken or to be taken to improve ARS' cost structure relative
to its competitors. (See "Severance and Facilities Charges.")
Excluding net realized capital gains and the third quarter 1996
severance and facilities charge, results for the three and nine
months ended September 30, 1997 increased $11 million, or 23%, and
$28 million, or 19%, respectively, from the prior year periods,
reflecting improved earnings from financial services products and,
for the three months ended September 30, 1997, improved earnings
related to individual life insurance products. For the nine months
ended September 30, 1997, the favorable financial services results
were partially offset by lower individual life insurance earnings.
The table below sets forth earnings by product type, excluding net
realized capital gains and the third quarter 1996 severance and
facilities charge (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Millions) September 30, September 30,
___________________ __________________
1997 1996 1997 1996
____ _______ ____ _______
<S> <C> <C> <C> <C>
Financial services $ 38.7 $ 29.8 $ 115.2 $ 82.4
Individual life insurance 21.8 19.5 54.7 59.9
_______ _______ _______ _______
Total $ 60.5 $ 49.3 $ 169.9 $ 142.3
_______ _______ _______ _______
_______ _______ _______ _______
</TABLE>
The $9 million and $33 million increases in earnings for the three
and nine months ended September 30, 1997, respectively, for financial
services products reflects increased fee income primarily from
increased assets under management. Assets under management
(excluding assets under management that were previously reported in
the Large Case Pensions segment) increased by 33% when compared to
the same period a year ago primarily due to appreciation in the stock
market, additional net deposits (i.e., deposits less surrenders) and
the inclusion of assets from the acquisition of Financial Network
Investment Corporation ("FNIC") (discussed below).
Earnings for the three and nine months ended September 30, 1997 from
individual life insurance products increased $2 million and decreased
$5 million, respectively, when compared to the same periods a year
ago primarily reflecting improved mortality experience during the
three months ended September 30, 1997.
Earnings for financial services products reflect lower operating
expenses relative to assets under management primarily resulting from
increased assets under management, and for the nine months ended
September 30, 1997, individual life insurance earnings reflect lower
operating expenses. In both cases, these lower operating expenses
result from cost savings associated with previous restructurings.
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
____________________________________
Of the $12.0 billion and $11.6 billion of fixed annuity assets
under management at September 30, 1997 and 1996, respectively, 25%
were fully guaranteed and 75% were experience rated. The average
annualized earned rate on investments supporting fully guaranteed
investment contracts was 7.8% and 7.9% and the average annualized
earned rate on investments supporting experience rated investment
contracts was 8.0% and 8.0% for the nine months ended September
30, 1997 and 1996, respectively. The average annualized credited
rate on fully guaranteed investment contracts was 6.6% and 6.7%
and the average annualized credited rate on experience rated
investment contracts was 5.9% and 6.0% for the nine months ended
September 30, 1997 and 1996, respectively. The resulting
annualized interest margins on fully guaranteed investment
contracts were 1.2% and 1.2% and on experience rated investment
contracts were 2.1% and 2.0% for the nine months ended September
30, 1997 and 1996, 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. For a fuller
discussion of the Company's asset/liability management practices,
see the Company's 1996 Annual Report.
In July 1997, in connection with the Company's efforts to expand
its financial planning business, the Company acquired FNIC. FNIC
is a broker/dealer licensed in all 50 states and includes more
than 2,400 registered representatives and 177 branch offices in 35
states. The purchase price was not material to the Company.
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
International
_____________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended September 30, Nine Months Ended September 30,
_________________________________ ________________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 380.1 $ 316.9 19.9% $1,056.5 $ 834.5 26.6%
Net investment income................ 90.3 81.7 10.5 276.4 247.5 11.7
Fees and other income................ 41.6 30.1 38.2 108.3 92.0 17.7
Net realized capital gains........... 6.0 1.7 - 16.8 3.0 -
________ ________ ________ ________
Total revenue..................... 518.0 430.4 20.4 1,458.0 1,177.0 23.9
Current and future benefits.......... 316.1 265.7 19.0 892.6 715.9 24.7
Operating expenses................... 113.5 91.9 23.5 328.5 263.8 24.5
Interest expense..................... 2.3 2.5 (8.0) 5.5 6.0 (8.3)
Amortization of goodwill and
other acquired intangible assets.... 4.7 1.0 - 11.8 2.4 -
Amortization of deferred policy
acquisition costs................... 22.1 26.5 (16.6) 62.5 65.0 (3.8)
________ ________ ________ ________
Total benefits and expenses....... 458.7 387.6 18.3 1,300.9 1,053.1 23.5
________ ________ ________ ________
Income before income taxes........... 59.3 42.8 38.6 157.1 123.9 26.8
Income taxes ........................ 21.5 14.2 51.4 51.9 43.3 19.9
________ ________ ________ ________
Net income........................... $ 37.8 $ 28.6 32.2 $ 105.2 $ 80.6 30.5
________ ________ ________ ________
________ ________ ________ ________
Net realized capital gains,
net of tax (included above)......... $ 3.8 $ 1.4 171.4 $ 11.5 $ 2.2 -
________ ________ ________ ________
________ ________ ________ ________
</TABLE>
International's net income for the three and nine months ended
September 30, 1997 increased by $9 million and $25 million,
respectively, compared with the same periods a year ago.
Excluding net realized capital gains, results for the three and
nine months ended September 30, 1997 increased $7 million, or 25%,
and $15 million, or 20%, respectively, from the prior year,
primarily reflecting earnings growth in Taiwan and favorable
investment performance in certain Asia Pacific and Latin American
operations, partially offset by increased losses related to start-
up operations, primarily those in the Philippines and Argentina.
The Company's operations in Brazil, which were acquired in April
1997, also contributed to International's improved results for the
nine months ended September 30, 1997.
<PAGE> 41
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions
___________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended September 30, Nine Months Ended September 30,
_________________________________ ________________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 36.1 $ 43.1 (16.2)% $ 123.4 $ 136.0 (9.3)%
Net investment income................ 328.7 411.0 (20.0) 1,055.5 1,249.4 (15.5)
Fees and other income (1)............ 8.4 15.5 (45.8) 25.7 68.0 (62.2)
Net realized capital gains (losses).. 19.7 (.2) - 18.5 12.5 48.0
__________ __________ _________ _________
Total revenue..................... 392.9 469.4 (16.3) 1,223.1 1,465.9 (16.6)
Current and future benefits.......... 324.1 413.7 (21.7) 1,045.3 1,282.2 (18.5)
Operating expenses (1)............... 6.6 8.7 (24.1) 22.4 51.9 (56.8)
Reductions of loss on discontinued
products............................ - - - (172.5) (170.0) 1.5
__________ __________ _________ _________
Total benefits and expenses....... 330.7 422.4 (21.7) 895.2 1,164.1 (23.1)
__________ __________ _________ _________
Income before income taxes........... 62.2 47.0 32.3 327.9 301.8 8.6
Income taxes......................... 24.9 17.3 43.9 124.2 107.4 15.6
__________ __________ _________ _________
Net income........................... $ 37.3 $ 29.7 25.6 $ 203.7 $ 194.4 4.8
__________ __________ _________ _________
__________ __________ _________ _________
Net realized capital gains (losses),.
net of tax (included above)......... $ 12.8 $ (.2) - $ 12.9 $ 8.1 59.3
__________ __________ _________ _________
__________ __________ _________ _________
Deposits not included in premiums
above............................... $ 411.6 $ 418.5 (1.6) $ 1,333.8 $ 1,340.9 (.5)
__________ __________ _________ _________
__________ __________ _________ _________
Assets under management (1)(2)(3).... $33,889.9 $35,797.1 (5.3)
_________ _________
_________ _________
<FN>
(1) The nine months ended September 30, 1996 include $15.7 million of fees and other income
and $12.7 million of operating expenses and, at September 30, 1996, assets under management
valued at $1,620.4 million which are currently reported in the ARS segment, reflecting the
consolidation of the Company's investment advisory services and certain other pension products
which complement ARS' business strategy.
(2) Excludes net unrealized capital gains of $494.6 million and $166.2 million at September 30, 1997
and 1996, respectively.
(3) Includes assets under management of $7,751.0 million and $8,781.9 million at September 30, 1997
and 1996, respectively, related to discontinued products.
</TABLE>
Large Case Pensions' net income for the three and nine months
ended September 30, 1997 increased by $8 million and $9 million,
respectively, compared with the same periods a year ago.
Excluding the reductions of the loss on discontinued products for
the nine months ended September 30, 1997 and 1996 (discussed
below) and net realized capital gains or losses, results for the
three and nine months ended September 30, 1997 decreased
$5 million, or 18%, and increased $7 million, or 9%, respectively,
from the prior year, reflecting decreased investment income
partially offset by lower expenses. Earnings increased during the
nine months ended September 30, 1997, reflecting lower expenses
partially offset by decreased income on the declining capital in
the business.
Assets under management at September 30, 1997 were 5% lower than a
year earlier, primarily as a result of the continuing runoff of
the underlying liabilities and the consolidation into the ARS
segment of the Company's investment advisory services and certain
other pension products which complement ARS' business strategy.
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
Net realized capital gains for the nine months ended September 30,
1996 include a gain of $25 million related to the sale of ARI
which was partially offset by net realized capital losses related
to bond sales. The earnings of ARI for the nine months ended
September 30, 1996 were not material to Large Case Pensions'
earnings.
General account assets supporting experience rated products may be
subject to participant or contractholder withdrawal. Participant
withdrawals are generally subject to significant tax and plan
constraints. Experience rated contractholder and participant
withdrawals and transfers were as follows (excluding
contractholder transfers to other Company products) (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
________________________________ _______________________________
1997 1996 1997 1996
_____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $ 224.6 $ 259.8 $ 682.0 $ 867.7
________ ________ ________ ________
________ ________ ________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments $ 122.0 $ 67.3 $ 258.1 $ 429.6 (2)
________ ________ ________ ________
________ ________ ________ ________
Participant withdrawals $ 31.5 $ 34.6 $ 96.3 $ 135.7
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
(2) Primarily relates to an unscheduled withdrawal by one contractholder.
</TABLE>
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case
pension products (single-premium annuities ("SPAs") and guaranteed
investment contracts ("GICs")) in 1993. Under the Company's
accounting for these discontinued products, a reserve for anticipated
future losses from these products was established, and the reserve is
reviewed by management quarterly. As long as the reserve continues to
represent management's then best estimate of expected future losses,
results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the
reserve and do not affect the Company's results of operations. As a
result of management's detailed review in the first quarter of 1997,
the Company released $173 million (pretax), constituting the
remaining portion of the reserve related to GICs, primarily as a
result of continued favorable developments in real estate markets.
The current reserve reflects management's best estimate of
anticipated future net losses. To the extent that aggregate future
losses on GICs and SPAs are greater or less than anticipated, the
Company's results of operations would be adversely or positively
affected, respectively. The discussion below presents information
for the discontinued SPA and GIC products on a combined basis.
(Refer to the Company's 1996 Annual Report.)
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
At the time of discontinuance, a receivable from Large Case
Pensions' continuing products equivalent to the net present value
of the anticipated cash flow shortfalls was established for the
discontinued products. Interest on the receivable is accrued at
the discount rate which was used to calculate the loss on
discontinuance. The offsetting payable, on which interest is
similarly accrued, is reflected in continuing products. Interest
on the payable generally offsets the investment income on the
assets available to fund the shortfall. At September 30, 1997,
the receivable from continuing products, net of related deferred
taxes payable of $40 million on the accrued interest income, was
$510 million. During 1996, $315 million of the receivable, net of
the related deferred taxes payable on the accrued interest income
of $19 million, was funded from continuing products to meet
liquidity needs from maturing GICs. As of September 30, 1997, no
additional funding of the receivable had taken place.
Results of discontinued products were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
________________________________ _______________________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Interest margin (a) $ (6.1) $ (.5) $ 5.7 $ 9.3
Net realized capital gains 31.5* 7.8 92.8* 23.4
Interest earned on receivable from
continuing products 5.4 7.7 16.2 24.7
Other, net 1.1 8.3 1.4 13.4
_______ _______ _______ _______
Results of discontinued products,
after tax $ 31.9 $ 23.3 $ 116.1 $ 70.8
_______ _______ _______ _______
_______ _______ _______ _______
Results of discontinued products,
pretax $ 51.8 $ 36.8 $ 185.0 $ 110.9
_______ _______ _______ _______
_______ _______ _______ _______
<FN>
(a) Represents the difference between interest credited to holders of fully guaranteed
large case pension contracts and interest earned on invested assets supporting
such contracts.
* Includes net realized capital gains of $21.3 million and $41.4 million for the three
and nine months ended September 30, 1997, respectively, related to continued favorable
developments in real estate markets, and also $37.3 million for the nine months ended
September 30, 1997 resulting from the sale of investments in order to meet liquidity
needs.
</TABLE>
The activity in the reserve for anticipated future losses on
discontinued products during the first nine months of 1997 was as
follows (pretax, in millions):
<TABLE>
<CAPTION>
<S> <C>
Reserve at December 31, 1996 $ 986.8
Results of discontinued products 185.0
Reserve reduction (172.5)
________
Reserve at September 30, 1997 $ 999.3
________
________
</TABLE>
<PAGE> 44
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
Distributions on discontinued products were as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
________________________________ ________________________________
1997 1996 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities,
settlements and benefit
payments (1) $ 392.1 $ 652.7 $1,259.0 $2,019.6
________ ________ ________ ________
________ ________ ________ ________
Participant directed withdrawals $ 9.6 $ 12.8 $ 29.3 $ 43.3
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes early retirement of guaranteed investment contracts liabilities of $1.5
million and $183.3 million for the three and nine months ended September 30, 1996,
respectively. There were no such retirements for the three and nine months ended
September 30, 1997.
</TABLE>
Cash required to fund these distributions was provided by earnings
and scheduled payments on and sales of invested assets and, for
the three and nine months ended September 30, 1996, the funding of
a portion of the receivable from continuing products.
See "General Account Investments" on page 47.
<PAGE> 45
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Corporate
_________
<TABLE>
<CAPTION>
Operating Summary
(Millions, after tax) Three Months Ended September 30, Nine Months Ended September 30,
________________________________ _______________________________
1997 1996 % Change 1997 1996 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Interest expense.................... $ 37.7 $ 31.4 20.1% $ 111.4 $ 68.3 63.1%
Other expense, net (1).............. 25.7 15.3 68.0 45.2 268.6 (83.2)
<FN>
(1) Includes after-tax net realized capital gains of $.2 million and $34.0 million for
the three and nine months ended September 30, 1997, respectively, and $4.2 million and
$10.2 million for the same periods a year ago. After-tax net realized capital gains for
the nine months ended September 30, 1997, include gains of $33.6 million related to the
sale of a portion of the Company's investment in Travelers Property Casualty Corp.
</TABLE>
The increase in interest expense of $6 million and $43 million for
the three and nine months ended September 30, 1997, respectively,
compared to the same periods a year ago primarily results from
additional debt incurred in connection with the financing of the
U.S. Healthcare merger.
Excluding net realized capital gains, other expense increased $6
million and decreased $200 million for the three and nine months
ended September 30, 1997, respectively, compared with the same
periods a year ago. Other expense for the nine months ended
September 30, 1996 includes a $235 million (after tax) severance
and facilities charge related to actions associated with the sale
of the Company's property-casualty operations in the second
quarter of 1996 (see "Severance and Facilities Charges") and
interest income of $7 million and $37 million (after tax) for the
three and nine months ended September 30, 1996, respectively,
earned from the investment of the net proceeds received from the
sale of the Company's property-casualty operations. Excluding
these items, other expense for the three and nine months ended
September 30, 1997 was approximately level compared with the same
periods a year ago.
<PAGE> 46
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Severance and Facilities Charges
________________________________
During 1996, the Company established severance and facilities
reserves in the Aetna U.S. Healthcare, ARS and Corporate segments
to reflect the integration of the health businesses and certain
other actions taken or to be taken in order to make its businesses
more competitive. During the nine months ended September 30,
1997, the Company charged costs of $197 million to such reserves.
In addition, the Company also reduced the Aetna U.S. Healthcare
severance and facilities reserve by $45 million (pretax) during
the nine months ended September 30, 1997 due to higher attrition
than was contemplated in the establishment of the reserve. Of the
approximately 9,400 positions expected to be eliminated by the
Company in the aggregate, 5,896 had been eliminated through
severance actions and the effects of higher attrition by September
30, 1997 and the related severance benefits charged against the
reserve.
The Aetna U.S. Healthcare severance actions are expected to be
substantially completed by the end of 1998. The ARS severance
actions are expected to be substantially completed by March 31,
1998. The Corporate severance actions and the vacating of certain
leased office space are expected to be substantially completed by
the end of 1997. In connection with the sale of the Company's
property-casualty operations, the Company vacated, and the
purchaser subleased, at market rates for a period of eight years,
the space that the Company occupied in the CityPlace office
facility in Hartford. The remaining lease payments (net of
expected subrentals) on the facilities (other than the CityPlace
office facility) are payable over approximately the next three
years.
See Note 9 of Condensed Notes to Financial Statements for
additional information.
<PAGE> 47
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
Debt Securities
As of September 30, 1997 and December 31, 1996, debt securities
represented 75% and 74%, respectively, of the Company's total
general account invested assets as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1997 1996
______________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 5,145.5 $ 5,189.3
Supporting experience rated products 15,009.2 14,888.9
Supporting remaining products 12,457.0 12,258.1
________________________________
Total debt securities (1) $ 32,611.7 $ 32,336.3
________________________________
________________________________
<FN>
(1) Total debt securities at September 30, 1997 and December 31, 1996 include "Below
Investment Grade" securities of $1.7 billion of which 63% and 73%, respectively,
support discontinued and experience rated products. See the Company's 1996 Annual
Report for a discussion of "Below Investment Grade" securities.
</TABLE>
Debt securities reflect net unrealized capital gains of
$1.4 billion at September 30, 1997, compared with $895 million at
December 31, 1996. Of the net unrealized capital gains at
September 30, 1997, $281 million and $593 million relate to assets
supporting discontinued products and experience rated pension
contractholders, respectively.
Mortgage Loans
At September 30, 1997 and December 31, 1996, the Company's
mortgage loan investments, net of impairment reserves, supported
the following types of business:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1997 1996
______________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 2,458.8 $ 2,730.7
Supporting experience rated products 1,991.1 2,370.5
Supporting remaining products 1,563.8 1,599.7
__________________________
Total mortgage loan investments (1) $ 6,013.7 $ 6,700.9
__________________________
__________________________
<FN>
(1) Mortgage loans at September 30, 1997 and December 31, 1996 include $576.3 million and
$801.1 million of restructured, potential problem and problem loans, respectively,
of which 84% and 80% support discontinued and experience rated products, respectively.
(See the Company's 1996 Annual Report for a discussion of problem, restructured and
potential problem loans). Specific impairment reserves on these loans were $100.5
million and $144.1 million at September 30, 1997 and December 31, 1996, respectively.
(See Note 6 of Condensed Notes to Financial Statements).
</TABLE>
<PAGE> 48
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
During the first nine months of 1997, the Company continued to
manage its mortgage loan portfolio to reduce the balance in
absolute terms and relative to invested assets, and to reduce its
overall risk. The $687 million decrease in the mortgage loan
portfolio primarily reflects the effect of loan prepayments and
repayments of maturing loans.
The Company foreclosed on loans with a principal balance of
$27 million and collateral with a fair market value of $25 million
in the first nine months of 1997. Additional loans with a
principal balance of $53 million were in the process of
foreclosure at September 30, 1997.
The Company does not accrue interest on problem loans or
restructured loans when management believes the collection of
interest is unlikely. The amount of pretax investment income
required by the original terms of problem and restructured loans
outstanding at September 30 and the portion actually recorded as
income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ __________________
(Millions) 1997 1996 1997 1996
________________________________________________________________ __________________
<S> <C> <C> <C> <C>
Income which would have been recorded under
original terms of loans $ 8.1 $ 23.4 $ 29.8 $ 70.4
Income recorded 4.9 15.0 21.1 49.8
_______ _______ _______ _______
Lost investment income (1) $ 3.2 $ 8.4 $ 8.7 $ 20.6
_______ _______ _______ _______
_______ _______ _______ _______
<FN>
(1) Lost investment income included 80% and 79% related to income allocated to investments
supporting discontinued and experience rated products, respectively, for the three and
nine months ended September 30, 1997, and 82% and 85%, respectively, for the same periods
a year ago.
</TABLE>
Real Estate
The Company's equity real estate balances, net of write-downs and
reserves, were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1997 1996
_________________________________________________________________________
<S> <C> <C>
Investment real estate $ 147.9 $ 192.0
Properties held for sale (1)(2)(3) 384.7 658.2
_____________________________
Total $ 532.6 $ 850.2
_____________________________
_____________________________
<FN>
(1) Includes $133.2 million of in-substance foreclosures at December 31, 1996.
There were no in-substance foreclosures at September 30, 1997.
(2) Properties held for sale at September 30, 1997 and December 31, 1996 include 86%
and 84%, respectively, supporting discontinued and experience rated products.
(3) Foreclosed real estate classified as properties held for sale was carried at 55%
and 57% of the Company's cash investment (unpaid mortgage balance plus capital
additions) at September 30, 1997 and December 31, 1996, respectively.
</TABLE>
<PAGE> 49
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Total after-tax net realized capital losses (gains) from real
estate write-downs and changes in the valuation reserves were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ _________________
(Millions) 1997 1996 1997 1996
______________________________________________________________________ _________________
<S> <C> <C> <C> <C>
Allocable to discontinued products $ - $ - $ 5.7 $ (3.0)
Allocable to experience rated products - - 3.1 .1
Allocable to remaining products 2.1 - 3.6 16.2
</TABLE>
Use of Derivatives and Other Investments
The Company's use of derivatives is generally limited to hedging
activity and principally consists of using foreign exchange forward
contracts, futures contracts, interest rate swap agreements and
warrants to hedge interest rate, price and currency risks. These
instruments, viewed separately, subject the Company to varying
degrees of market and credit risk. However, when used for hedging,
the expectation is that these instruments would reduce overall market
risk. Market risk is the possibility that future changes in market
prices may decrease the market value of one or all of these financial
instruments. Credit risk arises from the possibility that
counterparties may fail to perform under the terms of the contracts.
Management does not believe that its current hedging activity will
have a material effect on the Company's liquidity or results of
operations. (See Note 8 of Condensed Notes to Financial Statements.)
The Company also has investments in certain debt instruments with
derivative characteristics, including those where market value is
at least partially determined by, among other things, levels of or
changes in domestic and/or foreign interest rates (short-term or
long-term), exchange rates, prepayment rates, equity markets or
credit ratings/spreads. The amortized cost and fair value of
these securities included in the debt securities portfolio as of
September 30, 1997 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
_____________________________________________________________________________
<S> <C> <C>
Residential collateralized mortgage obligations: $ 2,564.8 $ 2,697.8
Principal-only strips (included above) 66.6 76.7
Interest-only strips (included above) 8.3 21.2
Other structured securities with derivative
characteristics (1) 108.1 110.4
<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> 50
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
_______________________________
Financings and Financing Capacity
Cash and cash equivalents at September 30, 1997 and December 31,
1996 were $1.3 billion and $1.5 billion, respectively.
Substantially all of the Company's short-term and long-term
borrowings and financings are conducted through Aetna Services and
are fully and unconditionally guaranteed by Aetna Inc. (See Note
11 of Condensed Notes to Financial Statements).
The Company uses short-term borrowings from time to time to
address timing differences between receipts and disbursements.
The maximum amount of domestic short-term borrowings outstanding
during the first nine months of 1997 was $858 million.
In the second quarter of 1997, the Company issued an additional
$314 million of commercial paper in connection with the Company's
investment in a joint venture in Brazil. The commercial paper was
repaid prior to June 30, 1997.
Common Stock Transactions
In October 1996, the Board of Directors of the Company (the
"Board") authorized the repurchase of up to 5 million shares of
its common stock from time to time. On September 26, 1997, the
Board authorized the repurchase of up to an additional 7.5 million
of its common stock from time to time. As of September 30, 1997,
4,500,000 shares of common stock had been repurchased pursuant to
this authority at a cost of $385 million, of which 3,305,600
shares at a cost of $302 million were repurchased during the nine
months ended September 30, 1997.
Dividends
On September 26, 1997, the Board declared a quarterly dividend of
$.20 per share of common stock and $1.18945 per share of 6.25%
Class C Voting Mandatorily Convertible Preferred Stock to
shareholders of record at the close of business on October 31,
1997, payable November 15, 1997.
New Accounting Pronouncements
_____________________________
See Note 2 of Condensed Notes to Financial Statements for a
discussion of recently issued accounting pronouncements.
<PAGE> 51
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Regulatory Environment
______________________
Legislation to reform the federal Medicare program was passed by
Congress on July 31, 1997 and was signed into law. Certain
provisions of this legislation will phase-in, beginning in 1998,
changes to the Medicare risk HMO premium determination methodology
that will reduce increases in the premiums payable to the Company
as compared with the methodology previously used. The level and
extent of such reductions will vary by geographic market and other
factors, including the amount payable as a "user fee" under the
legislation. While the phase-in provisions will provide the
Company with an opportunity to offset such reductions in premium
increases by increasing the premiums payable by members, reducing
the benefits included in the Company's products, and reducing
payment rates to hospitals, competition and other factors may
result in such actions not fully offsetting such reductions in
premium increases. See "Regulatory Environment" in the Company's
1996 Annual Report for further discussion of certain legislation
and regulation relating to the Company.
Year 2000
_________
The Company is preparing its computer systems, applications and
facilities to accommodate date-sensitive information relating to
the Year 2000. The Company expects to incur internal staff costs,
as well as consulting and other expenses related to infrastructure
and facilities enhancements necessary to prepare its systems for
the Year 2000. While the Company has not determined at this time
total costs associated with the Year 2000 preparation, these costs
are not expected to result in amounts material to the financial
condition of the Company, although they may adversely affect
results of operations in future periods materially.
Forward-Looking Information
___________________________
See "Forward Looking Information", "Regulatory Environment" and
the "Outlook" section of each business segment in the Company's
1996 Annual Report for information regarding important factors
that may materially affect the Company.
<PAGE> 52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most
part, in the ordinary course of its business operations, including
litigation in its health business concerning benefit plan coverage
and other decisions made by the Company, and alleged medical
malpractice by participating providers. While the ultimate
outcome of litigation against the Company cannot be determined at
this time, after consideration of the defenses available to the
Company and any related reserves established, it is not expected
to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results
of operations in future periods.
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following tables set forth the Company's and Aetna Services,
Inc.'s ratios of earnings to fixed charges and ratios of earnings
to combined fixed charges and preferred stock dividends for the
periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Years ended December 31,
____________________________________
Aetna Inc. September 30, 1997 1996 1995 1994 1993 1992
__________ __________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 5.55 2.45 4.97 4.74 (a) 1.90
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 4.28 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>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
Aetna Services, Inc. September 30, 1997 December 31, 1996
____________________ __________________ _________________
<S> <C> <C>
Ratio of Earnings to Fixed Charges 5.75 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 5.75 2.44
</TABLE>
For purposes of computing both the ratio of earnings to fixed
charges and the ratio of earnings to combined fixed charges and
preferred stock dividends, "earnings" represent consolidated
earnings from continuing operations before income taxes,
cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of
interest (and the portion of rental expense deemed representative
of the interest factor) and includes the dividends paid to
preferred shareholders of a subsidiary. (See Note 14 of Notes to
Financial Statements in the Company's 1996 Annual Report.) During
1995, 1994, 1993 and 1992 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined
fixed charges and preferred stock dividends were the same as the
ratios of earnings to fixed charges.
<PAGE> 53
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
(10.1) Amendment, dated as of September 4, 1997, to the
Amended and Restated Agreement, dated as of May 30,
1996, between the Company and Leonard Abramson.
(10.2) Amendment, dated as of September 8, 1997, to
Employment Agreement, as of December 19, 1995, between
Aetna Services, Inc. and Daniel P. Kearney.*
(12) Statement Re Computation of Ratios.
(12.1) Computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and
preferred stock dividends for the nine months ended
September 30, 1997 and for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 for the Company
and for the nine months ended September 30, 1997 and
for the year ended December 31, 1996 for Aetna
Services, Inc.
(15) Letter Re Unaudited Interim Financial Information.
(15.1) Letter from KPMG Peat Marwick LLP acknowledging
awareness of the use of a report on unaudited interim
financial information, dated November 3, 1997.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Aetna Inc.
_____________________________
(Registrant)
Date November 4, 1997 By /s/ Robert J. Price
_____________________________
(Signature)
Robert J. Price
Vice President
and Corporate Controller
(Chief Accounting Officer)
Exhibit 10.1
AEtna 151 Farmington Avenue
Hartford, CT 06156
James H. Gould
Aetna Human Resources, RW2A
860-273-8588
September 4, 1997
Leonard Abramson
376 Regatta Drive
Jupiter, FL 33477
Dear Mr. Abramson:
Per your request, this letter amends the Amended and Restated
Agreement between you and Aetna Inc. dated May 30, 1996
("Agreement"). Section 4.(d) Office and Secretarial Support is
______________________________
hereby amended to add the following language.
"As of August 1, 1997 and for the remaining Term of this
Agreement, the Company will no longer provide Consultant with
secretarial services but will reimburse Consultant for secretarial
service expenses in the amount of $5,479.00 per month. The
Company will continue to reimburse for office space expenses in
the amount of $3,167.00 per month."
All other provisions of such Agreement shall remain in full force
and effect.
Please confirm this agreement by signing below and returning this
letter to me at the above address. Thank you.
Sincerely,
/s/James H. Gould
James H. Gould
Acknowledged and Agreed to:
/s/Leonard Abramson 9/9/97
_______________________ ____________
Leonard Abramson Date
c: Lucille Nickerson, Vice President and Corporate Secretary
Eleanor Oswald, Accounting, Len Abramson Group
Elease Wright, Vice President, Human Resources
Exhibit 10.2
AEtna Interoffice Communication
Richard L. Huber
CEO and President
To Daniel P. Kearney
Date September 8, 1997
Subject Employment Agreement
This memorandum is intended to modify that certain Employment
Agreement dated as of December 19, 1995 by and among Aetna
Services, Inc. (formerly Aetna Life and Casualty Company), Aetna
Inc. (by assumption) and you.
1. As of August 18, 1997, you will no longer serve as Executive
Vice President, I&FS. You agree to continue working,
reporting to me on: (i) structuring and implementing a
possible real estate investment trust or securitization
transaction; and (ii) retained responsibilities as chief
investment officer until a replacement is named, but with
respect to both areas, no later than February 28, 1998. At
that time you will retire from Aetna, however, you may
subsequently elect when you will begin receiving retirement
benefits.
2. In lieu of eligibility for the payment of the Severance
Benefit as defined in the Employment Agreement or any other
severance or salary continuation benefit to which you would
otherwise be eligible, you will be paid beginning August 18,
1997 an amount equivalent to the amount calculated pursuant
to the third definition in Section 6(d) of the Employment
Agreement using August 18, 1997 as the end date of the
Contract Employment Period, such payment conditioned upon
delivery to the Company of an executed copy of a document in
the form of Exhibit B to the Employment Agreement. Upon such
delivery, Section 8(a) of the Employment Agreement will no
longer be applicable.
3. In lieu of any annual bonus for the performance year 1997,
you will be paid a one-time guaranteed payment equal to your
pro rata target bonus for the period January 1st through
August 18th. This payment will be made on or about January
30, 1998.
4. You will vest to the remainder of your performance stock
options as scheduled on April 28, 1998.
5. You will remain eligible to vest to a pro rata share of your
second cycle and third cycle ACEShares awards based on the
period of your active employment at the completion of the
respective performance cycles to the extent performance
criteria are satisfied.
Exhibit 10.2 (Continued)
Page 2
Daniel P. Kearney
September 8, 1997
6. In the event a real estate investment trust or securitization
transaction which results in removal of approximately $1.5
billion of assets from Aetna's books is consummated by February
28, 1998, you will be paid immediately following the closing:
(i) a closing fee of $300,000 and (ii) to the extent the sale
price is above par value, as mutually determined, a success
fee of an additional amount scaled not to exceed $450,000.
It is understood that, should a real estate investment trust
or securitization transaction take place with you as an
executive of the new entity, it may be appropriate for the
new entity to employ certain Aetna employees. We will agree
to work together to identify any employees to be employed by
the new entity and agree that activity will not constitute a
violation of Paragraph 8(b) of the Employment Agreement.
7. Pension and other benefits to operate on a basis equivalent
to what would have been received under the terms of the
Employment Agreement. For purposes of eligibility for the
Company retiree medical benefits, you will be treated on the
same basis as other Aetna employees who retire or otherwise
terminate active employment as of August 18, 1997.
Except as revised in this memorandum the Employment Agreement
shall remain in full force and effect.
Aetna Inc.
Aetna Services, Inc.
By: /s/ Richard L. Huber /s/ Daniel P. Kearney
__________________________ ___________________________
Richard L. Huber Daniel P. Kearney
Date: 9-8-97 9/16/97
__________________________ ___________________________
<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>
Nine Months Ended Years Ended December 31,
___________________________________________________
(Millions) September 30, 1997 1996 1995 1994 1993 1992
__________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $1,069.2 $ 338.7 $ 726.2 $ 627.5 $(1,014.7) $ 145.5
Add back fixed charges........... 237.2 245.1 187.0 170.8 154.7 171.5
Minority interest................ 9.9 16.4 16.1 11.4 7.0 8.6
________ _______ _______ _______ _________ _________
Income (loss) as adjusted..... $1,316.3 $ 600.2 $ 929.3 $ 809.7 $ (853.0) $ 325.6
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Fixed charges:
Interest on indebtedness....... $ 177.1(1) $ 168.3(1)$ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4
Portion of rents representative
of interest factor............ 60.1 76.8 71.1 72.2 77.3 90.1
________ _______ _______ _______ _________ _________
Total fixed charges........... $ 237.2 $ 245.1 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Preferred stock dividend
requirements.................... 70.5 41.1 - - - -
________ _______ _______ _______ _________ _________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 307.7 $ 286.2 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to fixed
charges......................... 5.55 2.45 4.97 4.74 (5.51) 1.90
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 4.28 2.10 4.97 4.74 (5.51) 1.90
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
<FN>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the Company's 1996
Annual Report.)
</TABLE>
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
(Millions) September 30, 1997 December 31, 1996
__________________ _________________
<S> <C> <C>
Pretax income from continuing
operations...................... $1,104.1 $ 335.0
Add back fixed charges........... 234.4 243.8
Minority interest................ 10.3 16.4
________ ________
Income as adjusted............ $1,348.8 $ 595.2
________ ________
________ ________
Fixed charges:
Interest on indebtedness (2)... $ 175.7 $ 168.3
Portion of rents representative
of interest factor............ 58.7 75.5
________ ________
Total fixed charges........... $ 234.4 $ 243.8
________ ________
________ ________
Preferred stock dividend
requirements.................... - -
________ ________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 234.4 $ 243.8
________ ________
________ ________
Ratio of earnings to fixed
charges......................... 5.75 2.44
________ ________
________ ________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 5.75 2.44
________ ________
________ ________
<FN>
(1) Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities
of Aetna Services, Inc. (See Note 13 of Notes to Financial Statements in
the Company's 1996 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the Company's 1996
Annual Report.)
</TABLE>
<PAGE> 1
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Inc.
Hartford, Connecticut
Ladies and Gentlemen:
Re: Registration Statements No. 333-07167, 333-07169, 33-52819,
33-52819-01, 333-08427, 333-08429, 333-08431 and 333-05791
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
November 3, 1997 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11
of the Act.
By /s/ KPMG PEAT MARWICK LLP
_____________________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
November 3, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period
September 30, 1997 for Aetna Inc. and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEPT-30-1997
<DEBT-HELD-FOR-SALE> 32,612
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,402
<MORTGAGE> 6,014
<REAL-ESTATE> 533
<TOTAL-INVEST> 43,314
<CASH> 1,333
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,373
<TOTAL-ASSETS> 99,147
<POLICY-LOSSES> 18,115
<UNEARNED-PREMIUMS> 199
<POLICY-OTHER> 3,263
<POLICY-HOLDER-FUNDS> 18,939
<NOTES-PAYABLE> 2,374
865
0
<COMMON> 3,862
<OTHER-SE> 6,636
<TOTAL-LIABILITY-AND-EQUITY> 99,147
9,418
<INVESTMENT-INCOME> 2,506
<INVESTMENT-GAINS> 130
<OTHER-INCOME> 1,694
<BENEFITS> 9,684
<UNDERWRITING-AMORTIZATION> 159
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,069
<INCOME-TAX> 442
<INCOME-CONTINUING> 627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> 3.87
<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>
