<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 March 31, 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 March 31, 1997
________________ __________________
Common Capital Stock
$.01 par value 149,828,512
<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 22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 43
Item 5. Other Information. 43
Item 6. Exhibits and Reports on Form 8-K. 44
Signatures 45
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
__________________________
(Millions, except share and per common share data) 1997 1996
____ ____
<S> <C> <C>
Revenue:
Premiums.................................... $ 3,087.4 $ 1,878.4
Net investment income....................... 840.1 886.3
Fees and other income....................... 557.7 518.2
Net realized capital gains.................. 1.5 62.0
____________ ____________
Total revenue........................... 4,486.7 3,344.9
____________ ____________
Benefits and expenses:
Current and future benefits................. 3,157.1 2,271.4
Operating expenses.......................... 834.1 755.8
Interest expense............................ 56.0 31.6
Amortization of goodwill and other
acquired intangible assets................. 92.7 2.8
Amortization of deferred policy
acquisition costs.......................... 45.4 37.0
Reduction of loss on discontinued products.. (172.5) -
Reduction of severance and facilities
reserve.................................... (14.0) -
____________ ____________
Total benefits and expenses............. 3,998.8 3,098.6
____________ ____________
Income from continuing operations
before income taxes.......................... 487.9 246.3
Income taxes
Current..................................... 123.9 62.8
Deferred.................................... 84.7 18.0
____________ ____________
Total income taxes...................... 208.6 80.8
____________ ____________
Income from continuing operations............. 279.3 165.5
Income from Discontinued Operations,
net of tax................................... - 182.2
____________ ____________
Net income ............................. $ 279.3 $ 347.7
____________ ____________
____________ ____________
Net income applicable to
common ownership...................... $ 265.4 $ 347.7
____________ ____________
____________ ____________
Results per common share:
Income from continuing operations............. $ 1.76 $ 1.43
Income from Discontinued Operations,
net of tax................................... - 1.57
____________ ____________
Net income ................................. $ 1.76 $ 3.00
____________ ____________
____________ ____________
Dividends declared.......................... $ .20 $ .69
____________ ____________
____________ ____________
Weighted average common shares and
common share equivalents................... 151,134,594 115,765,475
____________ ____________
____________ ____________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1997 1996
___________ ____________
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale,
at fair value (amortized cost
$31,009.1 and $31,441.4).................. $ 31,110.8 $ 32,336.3
Equity securities, at fair value
(cost $1,010.3 and $963.4).................. 1,326.7 1,332.8
Short-term investments......................... 904.6 723.2
Mortgage loans................................. 6,468.0 6,700.9
Real estate.................................... 679.2 850.2
Policy loans................................... 717.5 707.3
Other.......................................... 783.9 835.5
___________ ___________
Total investments........................ 41,990.7 43,486.2
Cash and cash equivalents...................... 1,606.3 1,462.6
Accrued investment income...................... 591.1 598.6
Premiums due and other receivables............. 1,461.2 1,190.4
Deferred income taxes.......................... 33.4 -
Deferred policy acquisition costs.............. 2,305.0 2,226.9
Goodwill and other acquired intangible assets.. 8,468.7 8,432.6
Other assets................................... 1,065.2 1,070.1
Separate Accounts assets....................... 34,291.4 34,445.5
___________ ___________
Total assets............................. $ 91,813.0 $ 92,912.9
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 5
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
March 31, December 31,
(Millions, except share and per common share data) 1997 1996
__________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits........................ $ 17,865.2 $ 17,783.4
Unpaid claims................................. 3,055.2 3,029.2
Unearned premiums............................. 191.3 333.6
Policyholders' funds left with the Company.... 19,063.9 19,901.7
___________ ___________
Total insurance liabilities............... 40,175.6 41,047.9
Dividends payable to shareholders............. 36.9 36.9
Short-term debt............................... 434.3 282.8
Long-term debt................................ 2,376.3 2,380.0
Current income taxes.......................... 218.1 164.3
Deferred income taxes......................... - 31.7
Other liabilities............................. 2,900.5 3,202.3
Participating policyholders' interests........ 215.1 221.7
Separate Accounts liabilities................. 34,273.4 34,380.6
___________ ___________
Total liabilities......................... 80,630.2 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, 8 and 12)
Shareholders' Equity:
Class C Voting Mandatorily Convertible
Preferred Stock ($.01 par value; 15,000,000
shares authorized; 11,655,477 in 1997 and
11,655,546 in 1996 issued and outstanding)... 865.4 865.4
Common Stock ($.01 par value; 500,000,000
shares authorized; 149,828,512 in 1997 and
150,084,799 in 1996 issued and outstanding).. 4,011.5 4,032.8
Net unrealized capital gains.................. 143.9 340.0
Retained earnings............................. 5,887.0 5,651.5
___________ ___________
Total shareholders' equity................ 10,907.8 10,889.7
___________ ___________
Total liabilities, redeemable preferred
securities and shareholders' equity...... $ 91,813.0 $ 92,912.9
___________ ___________
___________ ___________
Shareholders' equity per common share......... $ 67.03 $ 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
Three Months Ended March 31, 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.......................... 279.3 279.3
Change in net unrealized capital
gains............................. (196.1) (196.1)
Common stock issued for benefit
plans and other (856,713 shares).. 68.5 68.5
Repurchase of common shares
(1,113,000 shares)............... (89.8) (89.8)
Common stock dividends.............. (29.9) (29.9)
Preferred stock dividends........... (13.9) (13.9)
__________________________________________________________________
Balances at March 31, 1997 $10,907.8 $ 865.4 $ 4,011.5 $ 143.9 $ 5,887.0 $ -
_______________________________________________________________________________________________________
__________________________________________________________________
Three Months Ended March 31, 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.......................... 347.7 347.7
Change in net unrealized capital
gains............................. (537.9) (537.9)
Common stock issued for benefit
plans (460,098 shares)............ 25.3 25.3
Common stock dividends.............. (79.9) (79.9)
__________________________________________________________________
Balances at March 31, 1996 $ 7,028.0 $ - $ 1,473.5 $ 103.2 $ 5,463.4 $ (12.1)
_______________________________________________________________________________________________________
__________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
________________________
(Millions) 1997 1996
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................ $ 279.3 $ 347.7
Adjustments to reconcile net income to net
cash used for operating activities:
Income from Discontinued Operations............................ - (182.2)
Decrease in accrued investment income.......................... 7.6 31.7
Increase in premiums due and other receivables................. (49.5) (37.3)
Increase in deferred policy acquisition costs.................. (75.3) (51.7)
Depreciation and amortization.................................. 137.6 49.5
Increase (decrease) in income taxes............................ 135.1 (135.2)
Net increase in other assets and other liabilities............. (282.0) (264.3)
Decrease in insurance liabilities.............................. (306.5) (199.8)
Net realized capital gains..................................... (1.5) (62.0)
Amortization of net investment discounts....................... (31.5) (26.5)
Other, net..................................................... 6.5 (8.9)
_________ _________
Net cash used for operating activities....................... (180.2) (539.0)
_________ _________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 4,582.8 3,407.9
Equity securities.............................................. 123.3 108.5
Mortgage loans................................................. 13.6 8.7
Real estate.................................................... 177.5 47.7
Other investments.............................................. 134.2 130.6
Short-term investments......................................... 4,607.0 6,757.2
Investment maturities and repayments of:
Debt securities available for sale............................. 1,023.7 700.1
Mortgage loans................................................. 249.0 407.6
Cost of investments in:
Debt securities available for sale............................. (5,112.4) (3,749.0)
Equity securities.............................................. (157.1) (352.4)
Mortgage loans................................................. (41.7) (53.8)
Real estate.................................................... (8.1) (34.1)
Other investments.............................................. (391.4) (288.5)
Short-term investments......................................... (4,759.1) (6,736.8)
Increase in property and equipment................................ (14.7) (4.1)
Net (increase) decrease in Separate Accounts...................... 46.9 (.4)
Other, net........................................................ (6.7) 377.1
_________ _________
Net cash provided by investing activities.................... 466.8 726.3
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 461.4 618.9
Withdrawals of investment contracts............................... (686.8) (901.3)
Issuance of long-term debt........................................ .1 24.9
Repayment of long-term debt....................................... (3.7) (28.8)
Common stock issued under benefit plans........................... 68.5 25.3
Common stock acquired............................................. (89.8) -
Net increase (decrease) in short-term debt........................ 151.1 (1.3)
Dividends paid to shareholders.................................... (43.8) (79.9)
_________ _________
Net cash used for financing activities....................... (143.0) (342.2)
_________ _________
Effect of exchange rate changes on cash and cash equivalents......... .1 .7
_________ _________
Net increase (decrease) in cash and cash equivalents................. 143.7 (154.2)
Cash and cash equivalents, beginning of period....................... 1,462.6 1,712.7
_________ _________
Cash and cash equivalents, end of period............................. $ 1,606.3 $ 1,558.5
_________ _________
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 96.0 $ 44.6
_________ _________
_________ _________
Income taxes paid ................................................ $ 61.8 $ 59.0
_________ _________
_________ _________
<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") 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. 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.
(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 a common stock equivalent. It is included in the calculation
of the Company's fully diluted earnings per common share. The weighted
average number of shares of Class C Stock outstanding was 11.7 million
for the three months ended March 31, 1997. There is not a material
difference between primary and fully diluted earnings per common share.
<PAGE> 10
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
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 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
(in millions, except per common share data) March 31, 1996
___________________________________________ _______________________
<S> <C>
Revenue $ 4,384.1
_________
_________
Net realized capital gains
included in revenue $ 64.8
_________
_________
Income before income taxes $ 288.0
Income taxes 114.7
_________
Net income $ 173.3
_________
_________
Net income per common share $ 1.05
_________
_________
</TABLE>
<PAGE> 11
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Sales of Subsidiaries
On April 2, 1996, the Company sold its property-casualty operations to
an affiliate of The Travelers Insurance Group Inc. ("Travelers") for
approximately $4.1 billion in cash. The sale resulted in an after-tax
gain of $264 million ($218 million pretax) which was recorded in the
second quarter of 1996.
The operating results of the property-casualty operations were presented
as Discontinued Operations through the sale date. Operating results for
the three months ended January 1 to March 31 were:
<TABLE>
<CAPTION>
(Millions) 1996
_____________________________________________________________
<S> <C>
Total revenue $ 1,539.3
_____________________________________________________________
_________
Income before taxes $ 262.7
Income taxes 80.5
_________
Income from Discontinued Operations $ 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.
On May 1, 1997, the Company sold Aetna Professional Management
Corporation, a physician management business, to MedPartners, Inc. In
connection with the sale, the Company recorded an after-tax capital loss
of $33 million ($24 million pretax) in the first quarter of 1997.
<PAGE> 12
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments
Net investment income includes amounts allocable to experience rated
contractholders of $339 million and $353 million for the three months
ended March 31, 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 $30 million and $38 million for the three months ended March 31, 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>
March 31, 1997 December 31, 1996
_____________________ ______________________
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Supporting discontinued products $ 376.2 $ 84.5 $ 387.3 $ 86.9
Supporting experience rated products 218.6 41.9 258.3 40.0
Supporting remaining products 142.2 17.2 160.1 17.2
_________________________________________________
Total Impaired Loans $ 737.0(1) $ 143.6 $ 805.7(1) $ 144.1
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Includes impaired loans of $258.6 million and $227.0 million, respectively, for which no
specific reserves are considered necessary.
</TABLE>
<PAGE> 13
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments (Continued)
The activity in the specific and general reserves for the three months
ended March 31, 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 gain - - (33.0) (33.0)
Credited to other accounts(1) (10.0) (57.6) - (67.6)
Principal write-offs (140.8) (96.0) (20.5) (257.3)
______________________________________________________________________________________________
Balance at December 31, 1996(2) 136.7 74.7 35.6 247.0
______________________________________________________________________________________________
Credited to other accounts(1) - (.2) - (.2)
Principal write-offs (.1) (1.3) (1.0) (2.4)
______________________________________________________________________________________________
Balance at March 31, 1997(2) $ 136.6 $ 73.2 $ 34.6 $ 244.4
______________________________________________________________________________________________
_________________________________________________
<FN>
(1) Reflects adjustments to reserves related to assets supporting experience rated products and
discontinued products which do not affect the Company's results of operations.
(2) Total reserves at March 31, 1997 and December 31, 1996 include $143.6 million and $144.1
million of specific reserves, respectively, and $100.8 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 Three Months Ended
March 31, 1997 March 31, 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 $ 381.0 $ 10.2 $ 8.5 $ 695.4 $ 15.0 $ 15.5
Supporting experience rated products 238.4 4.7 4.7 501.3 9.5 9.8
Supporting remaining products 139.2 2.5 2.5 218.5 5.5 4.8
________________________________________________________
Total $ 758.6 $ 17.4 $ 15.7 $1,415.2 $ 30.0 $ 30.1
______________________________________________________________________________________________
________________________________________________________
</TABLE>
<PAGE> 14
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Supplemental Cash Flow Information
Significant noncash investing and financing activities of continuing
operations include acquisition of real estate through foreclosures of
mortgage loans amounting to $18 million and $37 million for the three
months ended March 31, 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 41 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
March 31, 1997 Amount (Liability) Value
______________________________________________________________________________
<S> <C> <C> <C>
Foreign exchange forward contracts - sell:
Related to net investments in foreign
affiliates $ 146.6 $ 2.9 $ 2.9
Related to investments in nondollar
denominated assets 67.6 .5 .5
Foreign exchange forward contracts - buy:
Related to net investments in foreign
affiliates 4.1 - -
Related to investments in nondollar
denominated assets 4.3 - -
Futures contracts to purchase
debt securities 87.6 (2.2) (2.2)
Interest rate swaps 43.0 - 5.9
Warrants to purchase debt securities 19.0 3.0 3.0
</TABLE>
<PAGE> 15
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Severance and Facilities Charges
Subsequent to the first quarter of 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 three months ended March 31, 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) (88.6) (799)
Adjustments(2) (14.0) -
______ _____
Balance at March 31, 1997 $622.6 6,153
_______________________________________________________________________________
_____________________________
<FN>
(1) Includes $37.7 million of severance-related actions.
(2) Reflects reductions in anticipated severance actions resulting from
higher than expected attrition in the Aetna U.S. Healthcare
segment.
</TABLE>
The 799 positions eliminated during the three months ended March 31,
1997 related to the following segments: 83% - Aetna U.S. Healthcare,
11% - Aetna Retirement Services and 6% - 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 in 1997. In connection with the
sale of the Company's property-casualty operations, the Company vacated,
and Travelers 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> 16
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products
Under the Company's accounting for its discontinued fully guaranteed
large case pension products (guaranteed investment contracts ("GICs")
and single-premium annuities ("SPAs")), the respective reserves for
anticipated future losses are reviewed by management quarterly.
Accordingly, as long as the reserves continue to represent management's
then best estimates of expected future losses, results of operations of
the discontinued products, including net realized capital gains and
losses, are credited/charged to the respective reserve and do not affect
the Company's results of operations. As a result of management's
detailed review in the first quarter of 1997, the remaining reserve
related to GICs of $173 million (pretax) (comprised of $144 million
related to the reserve at the beginning of the year and $29 million
related to results of operations for the three months ended March 31,
1997) was eliminated primarily as a result of continued favorable
developments in real estate markets. Because there currently is no
remaining reserve related to GICs, future results of operations of those
products will be charged or credited to continuing operations in the
period in which they occur. The SPA reserve at March 31, 1997 reflects
management's best estimate of the anticipated future net losses. To the
extent that actual future losses are greater or less than anticipated,
the Company's results of operations would be adversely or positively
affected, respectively. (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 each discontinued
product. During 1996, the GIC receivable was funded from continuing
products to meet liquidity needs from maturing GICs. Interest on the
SPA 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 March 31, 1997, the SPA
receivable from continuing products, net of related deferred taxes
payable of $34 million on the accrued interest income, was $499 million.
As of March 31, 1997, no funding of the SPA receivable had taken place.
This amount is eliminated in consolidation.
<PAGE> 17
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 March 31, 1997 GICs SPAs Total Losses Net(1)
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 75.0 $ 103.6 $ 178.6 $ - $ 178.6
Net realized capital gains 17.9 12.6 30.5 (30.5) -
Interest earned on receivable
from continuing products - 8.3 8.3 - 8.3
Other income 1.2 6.2 7.4 - 7.4
_____________________________________________________________
Total revenue 94.1 130.7 224.8 (30.5) 194.3
_____________________________________________________________
Current and future benefits 64.7 104.8 169.5 21.9 191.4
Operating expenses .9 2.0 2.9 - 2.9
_____________________________________________________________
Total benefits and expenses 65.6 106.8 172.4 21.9 194.3
_____________________________________________________________
Results of discontinued products $ 28.5 $ 23.9 $ 52.4 $ (52.4) $ -
_____________________________________________________________________________________________________
_____________________________________________________________
Charged
(Credited) to
Reserve for
Future
Three months ended March 31, 1996 GICs SPAs Total Losses Net(1)
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 106.1 $ 116.9 $ 223.0 $ - $ 223.0
Net realized capital gains 10.8 11.1 21.9 (21.9) -
Interest earned on receivable
from continuing products 5.3 7.8 13.1 - 13.1
Change in Accounting Policy -
FAS No. 121(2) 5.4 2.9 8.3 - 8.3
Other income 1.8 3.1 4.9 - 4.9
_____________________________________________________________
Total revenue 129.4 141.8 271.2 (21.9) 249.3
_____________________________________________________________
Current and future benefits 102.4 107.3 209.7 37.2 246.9
Operating expenses 1.7 0.7 2.4 - 2.4
_____________________________________________________________
Total benefits and expenses 104.1 108.0 212.1 37.2 249.3
_____________________________________________________________
Results of discontinued products $ 25.3 $ 33.8 $ 59.1 $ (59.1) $ -
_____________________________________________________________________________________________________
_____________________________________________________________
<FN>
(1) Amounts are reflected in the 1997 and 1996 Consolidated Statements of Income, except for interest
earned on the receivable from continuing products which is eliminated in consolidation.
(2) Refer to Note 1 in the Company's 1996 Annual Report for a discussion of FAS No. 121.
</TABLE>
<PAGE> 18
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (Continued)
Assets and liabilities of discontinued products were as follows (in
millions):
<TABLE>
<CAPTION>
March 31, 1997
_______________________________________
GICs SPAs Total
_______________________________________
<S> <C> <C> <C>
Debt securities available for sale $ 1,491.7 $ 3,477.3 $ 4,969.0
Mortgage loans 1,400.7 1,270.0 2,670.7
Real estate 193.1 60.7 253.8
Short-term and other investments 123.5 250.5 374.0
_______________________________________
Total investments 3,209.0 5,058.5 8,267.5
Current and deferred income taxes 8.7 122.7 131.4
Receivable from continuing products - 533.0 533.0
_______________________________________
Total assets $ 3,217.7 $ 5,714.2 $ 8,931.9
______________________________________________________________________________
_______________________________________
Future policy benefits $ - $ 4,766.9 $ 4,766.9
Policyholders' funds left with
the Company 3,028.1 - 3,028.1
Reserve for anticipated future losses
on discontinued products - 866.7 866.7
Other 189.6 80.6 270.2
_______________________________________
Total liabilities $ 3,217.7 $ 5,714.2 $ 8,931.9
______________________________________________________________________________
_______________________________________
</TABLE>
Net unrealized capital gains on available for sale debt securities are
included above in other liabilities and are not reflected in
consolidated shareholders' equity. The reserve for anticipated future
losses on SPAs is included in future policy benefits on the Consolidated
Balance Sheets.
The activity in the reserve for anticipated future losses on
discontinued products was as follows (pretax, in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
________________________________________
GICs SPAs Total
________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1996 $ 144.0 $ 842.8 $ 986.8
Results of discontinued products 28.5 23.9 52.4
Reserve reduction (172.5) - (172.5)
________________________________________
Reserve at March 31, 1997 $ - $ 866.7 $ 866.7
______________________________________________________________________________
________________________________________
</TABLE>
<PAGE> 19
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 applicable
credit commitment. Aetna Services pays facility fees ranging from .065%
to .20% per annum, depending upon its long-term senior unsecured debt
rating. The facility fee at March 31, 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> 20
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 Sheet Information:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
____________ ____________
<S> <C> <C>
Total investments (excluding
Separate Accounts) $ 41,033.0 $ 42,555.0
___________ ___________
___________ ___________
Total assets $ 82,632.5 $ 83,171.6
___________ ___________
___________ ___________
Total insurance liabilities $ 39,536.0 $ 40,357.4
___________ ___________
___________ ___________
Total liabilities $ 79,834.4 $ 80,352.8
___________ ___________
___________ ___________
Total redeemable preferred stock $ 275.0 $ 275.0
___________ ___________
___________ ___________
Total shareholder's equity $ 2,523.1 $ 2,543.8
___________ ___________
___________ ___________
</TABLE>
Statement of Income Information:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997
__________________
<S> <C>
Total revenue $ 3,155.2
Total benefits and expenses 2,706.0
___________
Income before income taxes $ 449.2
___________
___________
Net income $ 273.8
___________
___________
</TABLE>
<PAGE> 21
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (Continued)
The amount of dividends which may be paid to Aetna Services or Aetna
U.S. Healthcare by their domestic insurance and HMO subsidiaries from
March 31, 1997 through December 31, 1997 without prior approval by state
regulatory authorities is limited to approximately $351 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.
(13) Subsequent Event
In April 1997, the Company acquired a 49.0% stake in a joint venture
formed with Sul America Sequros, Brazil's largest insurance company.
The joint venture will provide health and life insurance, as well as
private pension plan, products. The Company invested approximately $300
million in the joint venture and agreed to invest up to an additional
$90 million over time based on future performance of the joint venture.
The joint venture will be accounted for on the equity basis.
<PAGE> 22
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 March 31, 1997, and the
related condensed consolidated statements of income, shareholders'
equity and cash flows for the three-month periods ended March 31,
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
May 5, 1997
<PAGE> 23
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
March 31, 1997 and 1996, and its results of operations for the
three-month periods ended March 31, 1997 and 1996.
Consolidated Results of Operations
__________________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions, except per common share data) Three Months Ended March 31,
_________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................. $ 3,087.4 $ 1,878.4 64.4%
Net investment income................ 840.1 886.3 (5.2)
Fees and other income................ 557.7 518.2 7.6
Net realized capital gains........... 1.5 62.0 (97.6)
_________ _________
Total revenue.................... 4,486.7 3,344.9 34.1
Current and future benefits.......... 3,157.1 2,271.4 39.0
Operating expenses................... 834.1 755.8 10.4
Interest expense..................... 56.0 31.6 77.2
Amortization of goodwill and
other acquired intangible assets.... 92.7 2.8 -
Amortization of deferred policy
acquisition costs................... 45.4 37.0 22.7
Reduction of loss on discontinued
products............................ (172.5) - -
Reduction of severance and facilities
reserve............................. (14.0) - -
_________ _________
Total benefits and expenses...... 3,998.8 3,098.6 29.1
_________ _________
Income from continuing operations
before income taxes................. 487.9 246.3 98.1
Income taxes......................... 208.6 80.8 158.2
_________ _________
Income from continuing operations.... 279.3 165.5 68.8
Income from Discontinued Operations,
net of tax.......................... - 182.2 (100.0)
_________ _________
Net income....................... $ 279.3 $ 347.7 (19.7)
_________ _________
_________ _________
Net income applicable
to common ownership............ $ 265.4 $ 347.7 (23.7)
_________ _________
_________ _________
Net realized capital gains (losses)
from continuing operations, net of
tax (included above)................ $ (15.9) $ 41.4 -
_________ _________
_________ _________
Results per common share:
Income from continuing operations.... $ 1.76 $ 1.43 23.1
Income from Discontinued Operations,
net of tax.......................... - 1.57 (100.0)
_________ _________
Net income....................... $ 1.76 $ 3.00 (41.3)
_________ _________
_________ _________
</TABLE>
Overview
________
Consolidated Results
The Company reported income from continuing operations of
$279 million for the three months ended March 31, 1997 compared
with $166 million for the same period a year ago. These results
include a benefit of $108 million related to a reserve reduction
for Large Case Pensions in the first quarter of 1997 and net
realized capital gains or losses in both periods. Excluding these
factors, income from continuing operations would have been $187
million and $124 million for the three months ended March 31, 1997
and 1996, respectively.
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
These results reflect increased earnings in each business segment
and business growth in each core business partially offset by
higher interest expense 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.)
Underlying Business Results
Aetna U.S. Healthcare's earnings improved in the first quarter of
1997 due to increased earnings from noninsured health and group
insurance products. Improved earnings in Aetna Retirement
Services during the first quarter of 1997 primarily reflect
improved fee income earned on a growing base of assets under
management. International's earnings also improved in the first
quarter of 1997 reflecting business and earnings growth in Asia
Pacific and Latin American operations, partially offset by
increased losses from start-up operations, primarily those in the
Philippines. Large Case Pensions' first quarter 1997 results
improved, although assets under management declined, reflecting an
increase in income on the investments supporting the capital in
this business and lower operating expenses. The Corporate segment
reflects higher interest expense resulting from additional debt
incurred in connection with the financing of the U.S. Healthcare
merger.
Factors Affecting Comparison of Results
The U.S. Healthcare merger, the property-casualty sale, reserve
reductions for Large Case Pensions and certain other factors
complicate the comparison of the Company's results for the periods
presented. Detailed information regarding certain of these
factors (after tax) is set forth below.
Factors Primarily Related to the Merger
Income from continuing operations for the three months
ended March 31, 1997 reflects the inclusion of U.S.
Healthcare results.
Income from continuing operations for the three months
ended March 31, 1997 reflects an increase in amortization
of goodwill and other acquired intangible assets of $74
million, 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 months
ended March 31, 1997 includes an increase in interest
expense of $16 million due to additional debt incurred in
connection with the financing of the U.S. Healthcare
merger.
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
In connection with the merger, the Company issued
approximately 35.0 million shares of common stock and
11.7 million shares of mandatorily convertible preferred
stock. The increase in the number of common shares
outstanding and the dividends on the mandatorily
convertible preferred stock affect the comparability of
per common share amounts. (See Note 3 of Condensed
Notes to Financial Statements for further discussion.)
Other Significant Factors
Results of continuing operations for the three months ended
March 31, 1997 include a $108 million benefit from a
reduction of the reserve for anticipated future losses on
discontinued products, primarily as a result of continued
favorable developments in real estate markets. (See "Large
Case Pensions - Discontinued Products".)
Results of continuing operations for the three months
ended March 31, 1997 include $16 million of net realized
capital losses, compared with $41 million of net
realized capital gains for the 1996 period. Net
realized capital losses in the 1997 first quarter
include a $33 million loss related to the sale of Aetna
Professional Management Corporation ("APMC"), a
physician practice management business, to MedPartners,
Inc. Net realized capital gains in the first quarter of
1996 include a $15 million gain from the sale of an HMO
subsidiary.
Net Income
The Company reported net income of $279 million and $348 million
for the three months ended March 31, 1997 and 1996, respectively.
Net income for the three months ended March 31, 1996 includes
income from Discontinued Operations of $182 million.
Merger and Property-Casualty Sale
Aetna Inc. became the parent corporation of Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. (formerly U.S.
Healthcare) as a result of the merger transaction effected on July
19, 1996. The merger was accounted for as a purchase of U.S.
Healthcare. (See Note 4 of Condensed Notes to Financial
Statements.) Aetna sold its property-casualty operations
("Discontinued 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
months ended March 31, 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 Management's Discussion and Analysis in its
entirety.
<PAGE> 26
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 March 31,
_________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................. $ 2,686.1 $ 1,552.1 73.1%
Net investment income................ 103.6 93.8 10.4
Fees and other income................ 378.1 355.6 6.3
Net realized capital gains (losses).. (12.9) 31.2 -
_________ _________
Total revenue..................... 3,154.9 2,032.7 55.2
Current and future benefits.......... 2,249.9 1,344.9 67.3
Operating expenses................... 591.4 527.8 12.1
Amortization of goodwill and other
acquired intangible assets.......... 90.4 2.1 -
Amortization of deferred policy
acquisition costs................... 4.5 2.8 60.7
Reduction of severance and facilities
reserve............................. (14.0) - -
_________ _________
Total benefits and expenses....... 2,922.2 1,877.6 55.6
_________ _________
Income before income taxes........... 232.7 155.1 50.0
Income taxes......................... 118.5 53.7 120.7
_________ _________
Net income........................... $ 114.2 $ 101.4 12.6
_________ _________
_________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (26.4) $ 21.5 -
_________ _________
_________ _________
</TABLE>
Aetna U.S. Healthcare's net income for the three months ended
March 31, 1997 increased by $13 million compared with the same
period a year ago. These results reflect amortization of goodwill
and other acquired intangible assets ($74 million and $2 million
after tax, for the three months ended March 31, 1997 and 1996,
respectively) and net realized capital gains and losses.
Excluding these items, results for the three months ended March
31, 1997 increased $133 million from the prior year, primarily
reflecting the inclusion of U.S. Healthcare. (See Note 4 of
Condensed Notes to Financial Statements.)
On May 1, 1997, the Company sold APMC. Net realized capital
losses in the first quarter of 1997 include a $33 million after-
tax loss related to the sale of APMC. Net realized capital gains
in the first quarter of 1996 included a $15 million after-tax gain
from the sale of an HMO subsidiary. The earnings of APMC and the
HMO subsidiary were not material to results.
Aetna U.S. Healthcare's effective tax rate of 51% for the three
months ended March 31, 1997, when compared to 35% for the same
period a year ago, primarily reflects an increase in amortization
of goodwill (which is nondeductible for income tax purposes), as
well as the tax treatment of the sale of APMC.
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
The remainder of the discussion related to Aetna U.S. Healthcare
presents 1996 results on a pro forma basis as if the merger had
occurred at the beginning of 1996.
<TABLE>
<CAPTION>
Operating Summary
(Millions) Pro Forma (1)
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996 % Change
______________ ______________ ________
<S> <C> <C> <C>
Premiums............................. $ 2,686.1 $ 2,590.5 3.7%
Net investment income................ 103.6 104.9 (1.2)
Fees and other income................ 378.1 378.6 (.1)
Net realized capital gains (losses).. (12.9) 34.0 -
_________ _________
Total revenue..................... 3,154.9 3,108.0 1.5
Current and future benefits.......... 2,249.9 2,121.1 6.1
Operating expenses................... 591.4 673.1 (12.1)
Amortization of goodwill and other
acquired intangible assets.......... 90.4 91.1 (.8)
Amortization of deferred policy
acquisition costs................... 4.5 2.8 60.7
Reduction of severance and facilities
reserve............................. (14.0) - -
_________ _________
Total benefits and expenses....... 2,922.2 2,888.1 1.2
_________ _________
Income before income taxes........... 232.7 219.9 5.8
Income taxes......................... 118.5 97.2 21.9
_________ _________
Net income........................... $ 114.2 $ 122.7 (6.9)
_________ _________
_________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (26.4) $ 23.2 -
_________ _________
_________ _________
<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>
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 and net realized capital gains
and losses. The table below sets forth earnings on this basis for
the Health Risk and Group Insurance and Other Health businesses, and
other related information.
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna U.S. Healthcare (Continued)
_________________________________
<TABLE>
<CAPTION>
(Millions) Pro Forma
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
______________ ______________
<S> <C> <C>
Health Risk $ 129.6 $ 128.8
Group Insurance and Other Health 85.4 45.9
_______ _______
Total Aetna U.S. Healthcare $ 215.0 $ 174.7
_______ _______
_______ _______
Health Risk Medical Loss Ratio 82.6% 80.0%
_______ _______
_______ _______
Health Risk SG&A Ratio 11.6% 14.3%
_______ _______
_______ _______
</TABLE>
Aetna U.S. Healthcare's earnings for the three months ended March
31, 1997 increased by $40 million or 23%, compared with the pro
forma earnings for the same period a year ago. The segment's
results reflect essentially flat Health Risk earnings and improved
Group Insurance and Other Health earnings.
Earnings for the three months ended March 31, 1997 in the Health
Risk business were impacted by several offsetting components.
Commercial and Medicare HMO medical costs per member per month
increased by 5% and 6%, respectively, primarily resulting from
higher inpatient facility and physician costs, in addition to
higher unfavorable prior year reserve development in 1997.
Partially offsetting these negative factors were benefits
resulting from increased HMO enrollment and increased Commercial
and Medicare HMO premiums per member per month of 2% and 7%,
respectively, resulting from premium rate increases instituted in
1997. Other favorable results include lower preferred provider
organization ("PPO") and Indemnity medical costs resulting from
prior year reserve runoff, improvement in Health Risk operating
expenses as a result of continuing cost savings initiatives and a
$4 million benefit, after tax, from a reduction of the severance
and facilities reserve (see "Severance and Facilities Charges").
The increase in earnings for the three months ended March 31, 1997
for the Group Insurance and Other Health business is primarily
attributable to higher earnings related to Other Health products.
Favorable results related to Other Health products reflect higher
administrative service contract fees resulting from rate increases
and product mix and lower operating expenses due to continuing
cost savings initiatives. Results also reflect higher earnings
from Group Insurance products due to favorable adjustments to
claim benefit reserve estimates for disability and long-term care
products, as well as increased product sales. Earnings for the
Group Insurance and Other Health business for the three months
ended March 31, 1997 include a $5 million benefit, after tax, from
a reduction of the severance and facilities reserve (see
"Severance and Facilities Charges").
<PAGE> 29
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>
Pro Forma
_March 31, 1997 (1)(2) March 31, 1996 (1)(2)
______________________ ______________________
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
_________________________________________________________ ______________________
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial 3,501 565 4,066 3,186 516 3,702
Medicare 330 18 348 240 20 260
Medicaid 132 - 132 130 - 130
_____ _____ ______ _____ _____ ______
Total HMO 3,963 583 4,546 3,556 536 4,092
POS 330 2,443 2,773 277 2,173 2,450
PPO 748 3,016 3,764 765 2,993 3,758
CHAMPUS - - - 721 - 721
Indemnity 462 2,548 3,010 595 2,977 3,572
_____ _____ ______ _____ _____ ______
Total Health Membership 5,503 8,590 14,093 5,914 8,679 14,593
_____ _____ ______ _____ _____ ______
_____ _____ ______ _____ _____ ______
Group Insurance: (3)
Group Life 9,857 9,450
______ ______
______ ______
Disability 2,499 2,337
______ ______
______ ______
Long-Term Care 97 94
______ ______
______ ______
<FN>
(1) Health membership as of March 31, 1997 reflects system and plan conversions; these
conversions will continue for the remainder of 1997. The conversions predominately
affect Indemnity and PPO membership and have an immaterial impact on all other Health
products. March 31, 1996 reflects adjustments computed for December 31, 1996 membership
(a decrease of approximately 173 thousand members), based on known corrected data from
these conversions, as applied to March 31, 1996 membership previously reported.
(2) Group Insurance membership as of March 31, 1997 reflects the conversion to a new
membership reporting system. March 31, 1996 reflects adjustments computed for
December 31, 1996 membership (an increase of approximately 1 million members), as
applied to March 31, 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 March 31, 1997 increased by 221
thousand members, or 2%, when compared to March 31, 1996,
excluding a reduction of 721 thousand members resulting from the
nonrenewal of the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS") contract. Membership increases in
Commercial HMO, Medicare HMO and POS were partially offset by a
decline in Indemnity enrollment, reflecting the continued
migration of Indemnity members to other managed care products.
Revenue for Aetna U.S. Healthcare, excluding CHAMPUS revenues of
$156 million for the three months ended March 31, 1996, and net
realized capital gains and losses, increased by $249 million, or
9%, for the three months ended March 31, 1997 compared to the same
period a year ago. This growth was primarily due to membership
growth in Commercial and Medicare HMO products, as well as to
premium rate increases instituted at the beginning of 1997. These
increases were partially offset by lower Indemnity membership.
Operating expenses for Aetna U.S. Healthcare decreased by $82
million, or 12%, for the three months ended March 31, 1997
compared with the same period a year ago due primarily 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> 30
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 March 31,
__________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums (1)...................... $ 40.4 $ 45.9 (12.0)%
Net investment income............. 272.6 267.3 2.0
Fees and other income (2)......... 134.4 103.3 30.1
Net realized capital gains........ 5.4 15.7 (65.6)
_________ _________
Total revenue.................. 452.8 432.2 4.8
Current and future benefits....... 266.2 252.0 5.6
Operating expenses (2)............ 81.4 82.8 (1.7)
Amortization of deferred policy
acquisition costs................ 21.4 17.3 23.7
_________ _________
Total benefits and expenses.... 369.0 352.1 4.8
_________ _________
Income before income taxes........ 83.8 80.1 4.6
Income taxes...................... 27.4 23.6 16.1
_________ _________
Net income........................ $ 56.4 $ 56.5 (.2)
_________ _________
_________ _________
Net realized capital gains, net
of tax (included above).......... $ 3.5 $ 10.2 (65.7)
_________ _________
_________ _________
Deposits not included in premiums
above:
Annuities - fixed options....... $ 280.2 $ 307.3 (8.8)
Annuities - variable options.... 818.1 659.3 24.1
Individual Life Insurance....... 120.5 102.8 17.2
_________ _________
Total......................... $ 1,218.8 $ 1,069.4 14.0
_________ _________
_________ _________
Assets under management: (3)(4)
Annuities - fixed options....... $11,767.9 $11,156.3 5.5
Annuities - variable options.... 15,047.7 11,514.4 30.7
_________ _________
Subtotal Annuities............ 26,815.6 22,670.7 18.3
Other investment advisory (2)... 4,095.5 1,106.5 -
_________ _________
Financial services............ 30,911.1 23,777.2 30.0
Individual Life Insurance....... 2,900.7 2,652.8 9.3
_________ _________
Total......................... $33,811.8 $26,430.0 27.9
_________ _________
_________ _________
Individual life insurance
coverage issued.................. $ 1,403.0 $ 1,306.4 7.4
_________ _________
_________ _________
Individual life insurance
coverage in force................ $49,338.8 $47,584.0 3.7
_________ _________
_________ _________
<FN>
(1) Includes $16.4 million and $19.9 million for the three months ended March 31, 1997
and 1996, respectively, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) March 31, 1997 includes $8.0 million of fees and other income, $5.9 million of
operating expenses and the transfer of $2,907.6 million of assets under management
that were previously reported in the Large Case Pensions segment, reflecting the
consolidation of the Company's investment advisory services and certain other
products which complement Aetna Retirement Services' business strategy.
(3) Excludes net unrealized capital gains of approximately $50 million and $302
million at March 31, 1997 and 1996, respectively.
(4) Includes $4,989.3 million and $3,167.0 million at March 31, 1997 and 1996,
respectively, of assets held and managed by unaffiliated mutual funds.
</TABLE>
Aetna Retirement Services' ("ARS") net income for the three months
ended March 31, 1997 was level with the same period a year ago.
Excluding net realized capital gains, results for the three months
ended March 31, 1997 increased $7 million, or 14%, from the prior
year period reflecting improved earnings from financial services
products partially offset by lower earnings related to individual
life insurance products.
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
____________________________________
The table below sets forth earnings by product type, excluding net
realized capital gains (in millions):
<TABLE>
<CAPTION>
(Millions) March 31,
____________________
1997 1996
____ _______
<S> <C> <C>
Financial services $ 36.6 $ 27.1
Individual life insurance 16.3 19.2
_______ _______
Total $ 52.9 $ 46.3
_______ _______
_______ _______
</TABLE>
The $10 million increase in earnings for financial services
products reflects increased fee income primarily from increased
assets under management. Assets under management (excluding
approximately $2.9 billion of assets under management that were
previously reported in the Large Case Pensions segment) increased
by 17% primarily due to continued business growth through deposits
and appreciation in the stock market.
Earnings from individual life insurance products decreased $3
million, primarily due to unfavorable mortality experience.
Earnings for both financial services and life products also
reflect lower operating expenses resulting from cost savings
associated with previous restructurings.
Of the $11.8 billion and $11.2 billion of fixed annuity assets
under management at March 31, 1997 and 1996, respectively, 25% and
23%, respectively, were fully guaranteed and 75% and 77%,
respectively, were experience rated. The average annualized
earned rate on investments supporting fully guaranteed investment
contracts was 7.9% and 8.0% and the average annualized earned rate
on investments supporting experience rated investment contracts
was 8.1% and 8.2% for the three months ended March 31, 1997 and
1996, respectively. The average annualized credited rate on fully
guaranteed investment contracts was 6.7% and 6.6% and the average
annualized credited rate on experience rated investment contracts
was 6.0% for each of the three months ended March 31, 1997 and
1996, respectively. The resulting annualized interest margins on
fully guaranteed investment contracts were 1.2% and 1.4% and on
experience rated investment contracts were 2.1% and 2.2% for the
three months ended March 31, 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 complete
discussion of the Company's asset/liability management practices,
see the Company's 1996 Annual Report.
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
International
_____________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended March 31,
___________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................. $ 317.4 $ 239.6 32.5%
Net investment income................ 92.3 83.0 11.2
Fees and other income................ 34.1 29.4 16.0
Net realized capital gains........... 3.9 1.1 -
________ ________
Total revenue..................... 447.7 353.1 26.8
Current and future benefits.......... 276.3 213.2 29.6
Operating expenses................... 100.4 83.8 19.8
Interest expense..................... 1.7 1.8 (5.6)
Amortization of goodwill and
other acquired intangible assets.... 2.3 .7 -
Amortization of deferred policy
acquisition costs................... 19.5 16.9 15.4
________ ________
Total benefits and expenses....... 400.2 316.4 26.5
________ ________
Income before income taxes........... 47.5 36.7 29.4
Income taxes ........................ 16.5 12.0 37.5
________ ________
Net income........................... $ 31.0 $ 24.7 25.5
________ ________
________ ________
Net realized capital gains,
net of tax (included above)......... $ 3.5 $ .6 -
________ ________
________ ________
</TABLE>
International's net income for the three months ended March 31,
1997 increased by $6 million compared with the same period a year
ago. Excluding net realized capital gains, results for the three
months ended March 31, 1997 increased $3 million, or 14%, from the
prior year, reflecting continued business growth in the
established Asia Pacific and Latin America operations,
particularly Taiwan and Chile. This improvement was partially
offset by increased losses related to start-up operations,
primarily those in the Philippines.
In April 1997, the Company acquired a 49.0% stake in a joint
venture formed with Sul America Seguros, Brazil's largest
insurance company. The joint venture will provide health and life
insurance, as well as private pension plan, products. The Company
invested approximately $300 million in the joint venture and
agreed to invest up to an additional $90 million over time based
on future performance of the joint venture. The joint venture
will be accounted for on the equity basis.
<PAGE> 33
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 March 31,
_________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................. $ 43.5 $ 40.8 6.6%
Net investment income................ 365.6 442.9 (17.5)
Fees and other income (3)............ 8.9 29.3 (69.6)
Net realized capital gains........... 4.9 10.2 (52.0)
__________ __________
Total revenue..................... 422.9 523.2 (19.2)
Current and future benefits.......... 364.7 461.3 (20.9)
Operating expenses (3)............... 7.6 20.3 (62.6)
Reduction of loss on discontinued
products............................ (172.5) - -
__________ __________
Total benefits and expenses....... 199.8 481.6 (58.5)
__________ __________
Income before income taxes........... 223.1 41.6 -
Income taxes......................... 81.7 14.8 -
__________ __________
Net income........................... $ 141.4 $ 26.8 -
__________ __________
__________ __________
Net realized capital gains,
net of tax (included above)......... $ 3.2 $ 6.6 (51.5)
__________ __________
__________ __________
Deposits not included in premiums
above............................... $ 505.0 $ 394.4 28.0
__________ __________
__________ __________
Assets under management (1)(2)(3).... $ 33,567.1 $ 37,300.0 (10.0)
__________ __________
__________ __________
<FN>
(1) Excludes net unrealized capital gains of approximately $17 million and $266
million at March 31, 1997 and 1996, respectively.
(2) Includes assets under management of $8,206.3 million and $9,463.9 million at
March 31, 1997 and 1996, respectively, related to discontinued products.
(3) March 31, 1996 includes $8.2 million of fees and other income, $7.3 million
of operating expenses, and assets under management valued at $2,410.5 million
which are currently reported in the ARS segment, reflecting the consolidation of the
Company's investment advisory services and certain other products which complement
ARS' business strategy.
</TABLE>
Large Case Pensions' net income for the three months ended March
31, 1997 increased by $115 million compared with the same period a
year ago. Excluding the reduction of the loss on discontinued
products (discussed below) and net realized capital gains, results
for the three months ended March 31, 1997 increased $10 million,
or 48%, from the prior year, reflecting an increase in investment
income earned on investments supporting Large Case Pensions'
capital, including increased earnings from leveraged buyout and
venture capital limited partnerships and lower operating expenses
resulting from the runoff of the business.
Assets under management at March 31, 1997 were 10% 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 products which complement ARS' business strategy.
As a result of the first quarter 1997 reserve reduction (discussed
below) there is currently no remaining reserve for anticipated
future losses on discontinued guaranteed investment contract
("GIC") products, and future results of operations related to GICs
will be charged or credited to continuing operations in the period
in which they occur. (See "Discontinued Products".)
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
General account assets supporting experience rated products may be
subject to participant or contractholder withdrawal. Participant
withdrawals are generally subject to significant tax and plan
constraints. Experience rated contractholder and participant
withdrawals and transfers were as follows (excluding
contractholder transfers to other Company products) (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
____________________________
1997 1996
_____ ____
<S> <C> <C>
Scheduled contract maturities
and benefit payments (1) $ 226.8 $ 318.1
________ ________
________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments $ 85.8 $ 315.2 (2)
________ ________
________ ________
Participant withdrawals $ 33.9 $ 56.4
________ ________
________ ________
<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
Under the Company's accounting for its discontinued fully guaranteed
large case pension products, the reserves for anticipated future
losses are reviewed by management quarterly. Accordingly, as long as
the reserves continue to represent management's then best estimates
of expected future losses, results of operations of the discontinued
products, including net realized capital gains and losses, are
credited/charged to the respective reserve and do not affect the
Company's results of operations. As a result of management's
detailed review in the first quarter of 1997, the remaining reserve
related to GICs of $173 million (pretax) (comprised of $144 million
related to the reserve at the beginning of the year and $29 million
related to results of operations for the three months ended March 31,
1997) was eliminated primarily as a result of continued favorable
developments in real estate markets. Because there currently is no
remaining reserve related to GICs, future results of operations of
those products will be charged or credited to continuing operations
in the period in which they occur. The single premium annuity
("SPA") reserve at March 31, 1997 reflects management's best estimate
of the anticipated future net losses. To the extent that actual
future losses are greater or less than anticipated, the Company's
results of operations would be adversely or positively affected,
respectively. (Refer to the Company's 1996 Annual Report.)
<PAGE> 35
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 each
discontinued product. During 1996, the GIC receivable was funded
from continuing products to meet liquidity needs from maturing
GICs. Interest on the SPA 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 March 31, 1997, the SPA receivable from
continuing products, net of related deferred taxes payable of $34
million on the accrued interest income, was $499 million. As of
March 31, 1997, no funding of the SPA receivable had taken place.
GIC and SPA results were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
____________________________
1997 1996
________________
<S> <C> <C>
GICs:
Interest margin (a) $ 6.7 $ 2.4
Net realized capital gains 11.6 7.0
Interest earned on receivable from
continuing products - 3.4
Other, net (.8) 2.7
________ _______
Results of discontinued products,
after tax $ 17.5 $ 15.5
________ _______
________ _______
Results of discontinued products,
pretax $ 28.5 $ 25.3
________ _______
________ _______
Net realized capital gains from sales
of bonds, after tax, included above $ 1.4 $ 2.1
________ _______
________ _______
SPAs:
Interest margin (a) $ (.8) $ 6.2
Net realized capital gains 8.2 7.2
Interest earned on receivable from
continuing products 5.4 5.1
Other, net 2.7 4.1
________ _______
Results of discontinued products,
after tax $ 15.5 $ 22.6
________ _______
________ _______
Results of discontinued products,
pretax $ 23.9 $ 33.8
________ _______
________ _______
Net realized capital gains from sales
of bonds, after tax, included above $ 2.4 $ 4.4
________ _______
________ _______
<FN>
(a) Represents the amount by which interest credited to holders of fully guaranteed
large case pension contracts (exceeds) or is less than interest earned on invested
assets supporting such contracts.
</TABLE>
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
The results of the discontinued products in the first quarter of
1996 were favorably affected by, and the respective reserves for
anticipated future losses were credited for, nonrecurring items of
$10 million and $5 million (after tax) related to GICs and SPAs,
respectively. There were no nonrecurring items affecting the
results of discontinued products in the first quarter of 1997.
The activity in the reserve for anticipated future losses on
discontinued products was as follows (pretax, in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
_________________________________
GICs SPAs Total
____ ____ _____
<S> <C> <C> <C>
Reserve at December 31, 1996 $ 144.0 $ 842.8 $ 986.8
Results of discontinued products 28.5 23.9 52.4
Reserve reduction (172.5) - (172.5)
________ ________ ________
Reserve at March 31, 1997 $ - $ 866.7 $ 866.7
________ ________ ________
________ ________ ________
</TABLE>
Distributions on GICs and SPAs were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
____________________________
1997 1996
________________
<S> <C> <C>
GICs:
Scheduled contract maturities,
GIC settlements and benefit
payments $ 317.6 $ 500.2
________ ________
________ ________
Participant directed withdrawals $ 10.0 $ 15.5
________ ________
________ ________
SPAs:
Scheduled contract maturities
and benefit payments $ 125.5 $ 133.0
________ ________
________ ________
</TABLE>
Cash required to fund these distributions was provided by earnings
and scheduled payments on and sales of invested assets and, for
GICs, from the funding of the receivable from continuing products
which was established at the time of discontinuance.
See "General Account Investments" on page 39.
<PAGE> 37
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 March 31,
_________________________________
1997 1996 % Change
____ ____ ________
<S> <C> <C> <C>
Interest expense.................... $ 35.2 $ 19.4 81.4%
Other expense, net (1).............. 28.5 24.5 16.3
<FN>
(1) Includes after-tax net realized capital gains of $.3 million and $2.5 million
for the three months ended March 31, 1997 and 1996, respectively.
</TABLE>
The increase in interest expense of $16 million for the three
months ended March 31, 1997 compared to the same period a year ago
results from additional debt incurred in connection with the
financing of the U.S. Healthcare merger.
Excluding net realized capital gains, other expense increased $2
million for the three months ended March 31, 1997, compared with
the same period a year ago.
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Severance and Facilities Charges
________________________________
Subsequent to the first quarter of 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
three months ended March 31, 1997, the Company charged costs of
$89 million to such reserves. In addition, the Company also
reduced the Aetna U.S. Healthcare severance and facilities reserve
by $14 million (pretax) during the first quarter of 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, approximately 3,200
had been eliminated by March 31, 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 in
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> 39
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
Debt Securities
As of March 31, 1997 and December 31, 1996, debt securities
represented 74% of the Company's total general account invested
assets and were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1997 1996
_________________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 4,969.0 $ 5,189.3
Supporting experience rated products 14,291.3 14,888.9
Supporting remaining products 11,850.5 12,258.1
__________________________________
Total debt securities (1) $ 31,110.8 $ 32,336.3
__________________________________
__________________________________
<FN>
(1) Total debt securities at March 31, 1997 and December 31, 1996 include "Below
Investment Grade" securities of $1.8 billion and $1.7 billion, respectively, of
which 69% and 73%, respectively, support discontinued and experience rated products.
See the Company's 1996 Annual Report for a discussion of "Below Investment
Grade" securities.
</TABLE>
The decrease in debt securities primarily reflects a decrease in
net unrealized capital gains due to an increase in interest rates
during the first quarter of 1997. Debt securities reflected net
unrealized capital gains of $102 million at March 31, 1997,
compared with $895 million at December 31, 1996. Of the net
unrealized capital gains at March 31, 1997, $55 million and $13
million related to assets supporting discontinued products and
experience rated pension contractholders, respectively.
Mortgage Loans
At March 31, 1997 and December 31, 1996, the Company's mortgage
loan investments, net of impairment reserves, supported the
following types of business:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1997 1996
_________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 2,670.7 $ 2,730.7
Supporting experience rated products 2,236.8 2,370.5
Supporting remaining products 1,560.5 1,599.7
_______________________
Total mortgage loan investments (1) $ 6,468.0 $ 6,700.9
_______________________
_______________________
<FN>
(1) Mortgage loans at March 31, 1997 and December 31, 1996 include $737.0 million and
$801.1 million of restructured, potential problem and problem loans, respectively, of
which 81% and 80% support discontinued and experience rated products, respectively.
(See the Company's 1996 Annual Report for a discussion of problem, restructured and
potential problem loans). Specific impairment reserves on these loans were $143.6
million and $144.1 million at March 31, 1997 and December 31, 1996, respectively.
(See Note 6 of Condensed Notes to Financial Statements).
</TABLE>
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
During the first three 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 $233 million decrease in the mortgage loan portfolio
primarily reflects the effect of loan prepayments, repayments of
maturing loans and foreclosures.
The Company foreclosed on loans with a principal balance of
$19 million and collateral with a fair market value of $18 million in
the first three months of 1997. Additional loans with a principal
balance of $60 million were in the process of foreclosure at March
31, 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 March 31 and the
portion actually recorded as income were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
__________________
(Millions) 1997 1996
________________________________________________________________
<S> <C> <C>
Income which would have been recorded under
original terms of loans $ 16.3 $ 17.9
Income recorded 12.2 11.4
__________________
Lost investment income (1) $ 4.1 $ 6.5
__________________
__________________
<FN>
(1) Lost investment income for the three months ended March 31, 1997 and 1996
included 76% and 88% related to income allocated to investments
supporting discontinued and experience rated products, respectively.
</TABLE>
Real Estate
The Company's equity real estate balances, net of write-downs and
reserves, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1997 1996
____________________________________________________________________
<S> <C> <C>
Investment real estate $ 182.0 $ 192.0
Properties held for sale (1)(2)(3) 497.2 658.2
________________________
Total $ 679.2 $ 850.2
________________________
________________________
<FN>
(1) Includes $133.2 million of in-substance foreclosures at December 31, 1996.
There were no in-substance foreclosures at March 31, 1997.
(2) Properties held for sale at March 31, 1997 and December 31, 1996 include 84%
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 March 31, 1997 and December 31, 1996, respectively.
</TABLE>
<PAGE> 41
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 gains (losses) from real
estate write-downs and changes in the valuation reserves were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
____________________
(Millions) 1997 1996
________________________________________________________________________
<S> <C> <C>
Allocable to discontinued products $ (4.1) $ 3.2
Allocable to experience rated products (1.1) -
Allocable to remaining products (1.1) -
</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
March 31, 1997 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
_____________________________________________________________________________
<S> <C> <C>
Residential collateralized mortgage obligations: $ 2,655.0 $ 2,684.6
Principal-only strips (included above) 42.9 50.3
Interest-only strips (included above) 9.9 25.4
Other structured securities with derivative
characteristics (1) 126.6 127.9
<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> 42
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 March 31, 1997 and December 31, 1996
were $1.6 billion and $1.5 billion, respectively.
Substantially all of the Company's short-term and long-term
borrowings and financings are conducted through Aetna Services and
are fully and unconditionally guaranteed by Aetna Inc. (See Note 11
of Condensed Notes to Financial Statements).
The Company uses short-term borrowings from time to time to address
timing differences between receipts and disbursements. The maximum
amount of domestic short-term borrowings outstanding during the first
three months of 1997 was $554 million.
Common Stock Transactions
In October 1996, the Board of Directors of the Company authorized a
repurchase of up to 5 million shares of its common stock from time to
time. As of March 31, 1997, 2,307,400 shares of common stock had
been repurchased at a cost of $173 million, of which 1,113,000 shares
at a cost of $90 million were repurchased during the three months
ended March 31, 1997.
Dividends
On February 28, 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 April 25, 1997, payable May 15,
1997.
New Accounting Pronouncements
_____________________________
See Note 2 of Condensed Notes to Financial Statements for a
discussion of recently issued accounting pronouncements.
Regulatory Environment
______________________
See "Regulatory Environment" in the Company's 1996 Annual Report
for a discussion of recent regulations relating to insurance
companies.
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> 43
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) NAIC IRIS Ratios
The NAIC IRIS ratios cover 12 categories of financial data with
defined usual ranges for each category. The ratios are intended
to provide insurance regulators "early warnings" as to when a
given company might warrant special attention. An insurance
company may fall out of the usual range for one or more ratios and
such variances may result from specific transactions that are in
themselves immaterial or eliminated at the consolidated level. As
of the date of this filing, none of Aetna Inc.'s significant
subsidiaries had more than two IRIS ratios that were outside of
the NAIC usual ranges for 1996.
(b) Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth the Company's ratio of earnings to
fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Years ended December 31,
____________________________________
March 31, 1997 1996 1995 1994 1993 1992
__________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 7.23 2.45 4.97 4.74 (a) 1.90
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 5.53 2.10 4.97 4.74 (a) 1.90
<FN>
(a) The Company reported a pretax loss from continuing operations in 1993 which
was inadequate to cover fixed charges by $1.0 billion.
</TABLE>
For purposes of computing both the ratio of earnings to fixed
charges and the ratio of earnings to combined fixed charges and
preferred stock dividends, "earnings" represent consolidated
earnings from continuing operations before income taxes,
cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of
interest (and the portion of rental expense deemed representative
of the interest factor) and includes the dividends paid to
preferred shareholders of a subsidiary. (See Note 14 of Notes to
Financial Statements in the Company's 1996 Annual Report.) During
1995, 1994, 1993 and 1992 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined
fixed charges and preferred stock dividends were the same as the
ratios of earnings to fixed charges.
<PAGE> 44
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
(10.1) Amendment No. 1, dated as of December 31, 1996, to the
Supplemental Pension Benefit Plan for Certain
Employees of Aetna Services, Inc.
(10.2) Amendment No. 2, dated as of February 28, 1997, to the
Supplemental Pension Benefit Plan for Certain
Employees of Aetna Services, Inc.
(10.3) Employment Agreement, dated as of March 6, 1997, by and
between the Company and Joseph Sebastianelli.*
(10.4) Amendment, dated as of April 9, 1997, to the Amended
and Restated Agreement, dated as of May 30, 1996,
between the Company and Leonard Abramson.
(10.5) Amendment, dated as of July 22, 1996, to Letter
Agreement, dated as of January 19, 1995, between Aetna
Services, Inc. and Richard L. Huber.*
(10.6) Amendment, dated as of July 22, 1996, to Employment
Agreement, dated as of January 29, 1996, between Aetna
Services, Inc. and Ronald E. Compton.*
(10.7) Amendment, dated as of July 22, 1996, to Employment
Agreement, dated as of December 19, 1995, between
Aetna Services, Inc. and Daniel P. Kearney.*
(10.8) The Supplemental Incentive Savings Plan for Certain
Employees of Aetna Services, Inc., incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on
October 25, 1996.
(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 three months ended
March 31, 1997 and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992 for the Company and
for the three months ended March 31, 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 May 5, 1997.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on March 3, 1997, relating
to the merger with U.S. Healthcare, Inc. including unaudited
condensed consolidated pro forma financial statements
of the Company for the twelve months ended December 31, 1996.
<PAGE> 45
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 May 6, 1997 By /s/ Robert J. Price
______________________________
(Signature)
Robert J. Price
Vice President
and Corporate Controller
(Chief Accounting Officer)
<PAGE> 1
Exhibit 10.1
AMENDMENT NO. 1 TO THE
SUPPLEMENTAL PENSION BENEFIT PLAN
FOR CERTAIN EMPLOYEES OF AETNA SERVICES, INC.
Pursuant to Section 4.1 of the Supplemental Pension Benefit Plan
for Certain Employees of Aetna Services, Inc. (the "Plan"), the
Plan is hereby amended, effective January 1, 1997, except as
specifically noted otherwise, as follows:
1. Section 1.6(b) is amended in its entirety to read as follows:
"(b) With respect to Highly Leveraged Employees, other
than Highly Leveraged Employees who are Aetna U.S. Healthcare
general managers or sales employees, the following adjustment
shall be made:
(1) For the period July 1, 1996 through June 30,
1997, the Earnings of any Participant taken into account under
the Plan shall not exceed $400,000;
(2) For the period July 1, 1997 through December
31, 1997, the Earnings of any Participant taken into account
under the Plan shall not exceed an amount equal to the limit
on compensation imposed on qualified plans by Section
401(a)(17) of the Code for 1997;
(3) For 1998 and subsequent Plan Years, the
Earnings of any Participant taken into account under the Plan
shall not exceed an amount equal to of twice the limit on
compensation imposed on qualified plans by Section 401(a)(17)
of the Code for that Plan Year."
2. New Section 1.6(c) is added to read as follows:
"(c) With respect to Highly Leveraged Employees who are
Aetna U.S. Healthcare general managers or sales employees, the
following adjustment shall be made:
(1) For the period January 1, 1997 through December
31, 1997, the Earnings of any Participant taken into account
under the Plan shall not exceed an amount equal to $300,000;
(2) For 1998 and subsequent Plan Years, the
Earnings of any Participant who is a general manager taken
into account under the Plan shall not exceed an amount equal
to $300,000, and the Earnings of any Participant who is a
sales employee taken into account under the Plan shall not
exceed the limit on compensation imposed on qualified plans by
Section 401(a)(17) of the Code for that Plan Year.
<PAGE> 2
3. The last sentence of Section 1.6 is amended in its entirety to
read as follows:
"Consistent with the Retirement Plan, Earnings shall be
determined as if no elective salary reduction had been made
pursuant to Sections 125 and 401(k) of the Code, or pursuant
to the Supplemental Incentive Savings Plan."
The purpose of this amendment is to further clarify the existing
language of the Plan as in effect. The effective date of this
amendment is January 1, 1996, but the rule stated in the added
language shall apply for all years in which elective salary
reductions have been made.
4. Section 1.12 is amended in its entirety to read as follows:
"1.12 'Highly Leveraged Employees' means employees whose
compensation is highly leveraged by virtue the material
emphasis by the Employer or a Participating Company, as the
case may be, on variable or incentive pay, and who fall within
one of the following groups: (a) Aeltus Investment Management
investment and sales employees; (b) Portfolio Management Group
investment employees (excluding real estate employees whose
incentive targets are based on a company-wide bonus plan); (c)
Aetna Retirement Services sales management and sales
employees; and (d) Aetna U.S. Healthcare general managers and
sales employees. Appendix B contains a non-exclusive list of
Highly Leveraged Employees, but although it is the intention
of the Company to update Appendix B from time to time, the
failure to list an employee designated as a Highly Leveraged
Employee will not prevent the inclusion of such employee as a
Highly Leveraged Employee."
5. Appendix B is amended to add the following persons and plans:
"Aetna U.S. Healthcare
_____________________
General Managers Participating in General Manager
__________________________________________________
Incentive Plan:
______________
Russ Dickhart Amy Williams
Frank McCauley Joseph Blanford, III
Timothy Brown Michael Dobbs
Kenneth Malcolmson Michael Rogers
Philip Pierce Joseph (Lee) Sproiell
Steve Wohlwend Dean Hosmer
Howard Kahn Clifford Klima
William Tait Gail Koziara-Boudreaux
Jon Glaudemans Susan Squires
Jerald Gooden Paul Swenson
Richard (Steve) Warrick
<PAGE> 3
Sales Employees
_______________
Participants in the Following Incentive Plans:
_____________________________________________
- Aetna US Healthcare Sales Incentive Plan
- Aetna US Healthcare Field General Managers Annual
Incentive Plan
- HAI Sales Director Plan
- HAI Sales VP Plan"
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed this 31 day of December, 1996.
__
Aetna Services, Inc.
By:/s/ Mary Ann Champlin
_____________________
Mary Ann Champlin
Senior Vice President
Aetna Human Resources
- 2 -
<PAGE> 1
Exhibit 10.2
AMENDMENT NO. 2 TO
THE SUPPLEMENTAL PENSION BENEFIT PLAN
FOR CERTAIN EMPLOYEES OF
AETNA SERVICES, INC.
Pursuant to Article IV of the Supplemental Benefit Plan for
Employees of Aetna Services, Inc. (the "Plan"), the Plan is hereby
amended as follows:
Effective February 28, 1997, Section 1.6 "Earnings" is
amended by adding new Section (d) follows:
(d) Earnings shall not include certain cash Merger Awards
made to recognize individual employee efforts in
connection with the U.S. Healthcare Merger and
related integration efforts.
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed this 28th day of February 1997.
AETNA SERVICES, INC.
By /s/ Mary Ann Champlin
_____________________
Mary Ann Champlin
Senior Vice President
Aetna Human Resources
<PAGE> 1
Exhibit 10.3
AEtna Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-3122
Ronald E. Compton
Chairman
860-273-3087
Fax: 860-273-6872
March 6, 1997
Mr. Joseph T. Sebastianelli
Dear Joe:
On behalf of the Aetna Board, I am pleased to offer you the position
of President of Aetna on terms as set forth in the attached "Term
Sheet" which is incorporated herein by reference.
If you agree to accept this position on the terms as set forth, please
indicate your acceptance by signing below.
Sincerely yours,
/s/ Ronald E. Compton
_____________________
Ronald E. Compton
Accepted and Agreed:
/s/ Joseph T. Sebastianelli
___________________________
Joseph T. Sebastianelli
<PAGE> 2
TERM SHEET
Definitions See Exhibit A
Employment Contract Term March 6, 1997 through July 19, 2001
Position; Reporting Relationships President of Aetna Inc. reporting
to Chief Executive Officer
Duties Supervise the following Business
Units: Aetna U.S. Healthcare and
Aetna International. These duties
will include liaison with Strategic
Planning.
Supervise the following Staff
Units: Human Resources, Corporate
Communications, Federal Government
Relations and Aetna Business
Resources.
It is anticipated that over the
course of the first year of this
Term Sheet, Executive shall be
given additional duties and
responsibilities as specified from
time to time by the Chief Executive
Officer.
Executive to devote substantially
all of his business time to
performance of duties under this
Term Sheet.
Office Location Hartford, Connecticut
Residence Establish residence immediately (as
soon as possible) in the greater
Hartford area. Establish primary
residence in the greater Hartford
area on a date mutually agreeable
to Executive and the Company.
Cash Compensation Salary: $725,000
Incentive Compensation:
participation in annual and long-
term incentive compensation
programs of the Company made
available to senior executives on a
basis commensurate with position.
Equity Based Compensation Participation in all stock-based
compensation programs of the
Company made available to senior
executives on a basis commensurate
with position.
<PAGE> 3
Benefits Continued participation in all
benefit plans in which Executive
currently participates.
Effect of Termination of
Employment
- by Company without Cause, Earned but unpaid amounts
by Executive with Good (including pro rata target bonus),
Reason severance payments equal to 3x base
salary and target annual bonus,
continued benefits for 3 years,
continued vesting of equity awards
other than restricted stock award
for 1 year, accelerated vesting of
restricted stock award.
- Death Continued payment of base salary
and annual bonus for one year.
- Disability Continued payment of base salary
and annual bonus for one year,
offset by amounts paid under
Company's long-term disability
program.
- by Executive without Good Payment of earned but unpaid
Reason, by Company for amounts (exclusive of pro-rate
Cause bonus) with respect to year of
termination.
Term Expiration If not offered CEO position on or
before February 28, 1998, and
Executive elects to leave Company
no later than February 28, 1999,
earned but unpaid amounts
(including 1997 bonus), severance
equal to 3x base salary and target
annual bonus, continued benefits
for 3 years, continued vesting of
equity awards other than restricted
stock award for 1 year, accelerated
vesting of restricted stock award.
Change of Control Gross-up for excise tax; provided
that if payments to Executive
exceed amount which can be paid
without incurring an excise tax by
less than 5%, the Company may
reduce amounts paid to Executive to
the maximum amount which may be
paid without incurring an excise
tax.
2
<PAGE> 4
Restrictive Covenants Noncompetition: During employment
term and for one year following
termination of employment
(including a termination under
circumstances described above in
"Term Expiration" which entitles
Executive to severance payments and
benefits but excluding a
termination without cause or for
good reason), Executive may not
become associated with an entity
actively engaged in any business
which is in competition with the
business or businesses of the
Company for which Executive
provides substantial services or
for which Executive has substantial
responsibility.
Confidentiality: During the
employment term and thereafter.
Nonsolicitation: During the
employment term and through
February 28, 2003, Executive may
not: induce any employee, agent or
broker of the Company or any of its
subsidiaries or affiliates to
perform services elsewhere; induce
any agent or agency, broker,
broker-dealer, supplier or
healthcare provider of the Company
or any of its subsidiaries or
affiliates to cease providing
services; or solicit customers of
the Company or any of its
subsidiaries or affiliates.
Effect on Current Contract The Agreement will supersede
Executive's current employment
contract in its entirety, including
without limitation, the requirement
that a notice of termination of
employment include a supermajority
resolution of the Board. Executive
shall also waive his rights under
Section 7.11(c) of the Merger
Agreement. The terms of his equity
awards (including his restricted
stock awards) granted under the
Company's long term stock incentive
plan shall be unaffected.
Successors The Company will require any
successor to the assets or business
of the Company to agree to assume
the agreement.
Governing Law Connecticut
3
<PAGE> 5
Dispute Resolution Binding arbitration in Hartford,
Connecticut; provided that the
________
decision as to whether Executive
shall be promoted shall be made by
the Board, in its sole discretion,
and shall not be subject to dispute
resolution.
Legal Fees Fees and expenses of arbitration
borne equally by Executive and the
Company; provided that if Executive
prevails as to any material issue,
the entire cost (including
reasonable attorneys' fees) shall
be borne by the Company.
4
<PAGE> 6
EXHIBIT A
Definitions
"Termination for Cause" means a termination of Executive's employment
by the Company due to (i) the willful failure by Executive to perform
substantially Executive's duties as an employee of the company (other
than due to physical or mental illness) after reasonable notice to
Executive of such failure, (ii) Executive's engaged in serious
misconduct that is injurious to the Company or any subsidiary or any
affiliate of the Company, (iii) Executive's having been convicted of,
or entered a plea of nolo contendere to, a crime involving an act that
____ __________
is immoral or wrong in and of itself (e.g., burglary, larceny, murder
____
or arson) or a crime involving deceit, fraud, perjury or embezzlement,
(iv) the breach by Executive of any written covenant or agreement not
to compete with the Company or any subsidiary or any affiliate or (v)
_
the breach by Executive of his duty of loyalty to the Company which
shall include, without limitation, (A) the disclosure by Executive of
_
any confidential information pertaining to the Company or any
subsidiary or any affiliate of the Company other than (x) in the
_
ordinary course of the performance of his duties on behalf of the
Company or (y) pursuant to a judicial or administrative subpoena from
_
a court or governmental authority with jurisdiction over the matter in
question, (B) the harmful interference by Executive in the business or
_
operations of the Company or any subsidiary or any affiliate of the
Company, (C) any attempt by Executive directly or indirectly to induce
_
any employee, insurance agent, insurance broker or broker-dealer of
the Company or any subsidiary or any affiliate to be employed or
perform services elsewhere, (D) any attempt by Executive directly or
_
indirectly to solicit the trade of any customer or suppliers, or
prospective customer or suppliers, of the Company on behalf of any
person other than the Company or a subsidiary thereof (E) any breach
_
or violation of the company's Code of Conduct, as amended from time to
time. Notwithstanding the foregoing, a breach of Executive's duty of
loyalty to the Company as described in subclause (A) or a breach of
the Company's Code of Conduct as described in the subclause (E) of
clause (v) of the preceding sentence shall not be grounds for a
Termination for Cause unless such breach has had or could reasonably
be expected to have a significant adverse effect on the business or
reputation of the Company.
"Termination due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and
obligations set forth in this Agreement because of physical, mental or
emotional incapacity resulting from injury, sickness or disease for a
period of (i) at least four consecutive months or (ii) more than six
months in any twelve month period. Any question as to the existence,
extent or potentiality of Executive's disability shall be made by a
qualified, independent physician selected by the chief or assistant
chief (or the equivalent position) of the department which treats the
disease giving rise to Executive's absence at a nationally or
regionally recognized teaching hospital chosen by the Company. The
determination of any such physician shall be final and conclusive for
all purposes of this Agreement. Notwithstanding the foregoing, (i) a
Termination for Disability shall not
5
<PAGE> 7
affect Executive's right to receive any amount that would otherwise
have been payable to Executive under the Company's plans, policies,
practices or programs pertaining to short-term or long-term disability
had Executive's employment continued and (ii) if it is determined, at
the time Executive is first eligible to receive long-term disability
benefits under the Company's plans, policies, practices or programs,
that Executive is not entitled to receive such long-term disability
benefits (other than due to Executive's failure to cooperate),
Executive shall, for purposes of the Paragraph __, be deemed to have
been terminated as of the date of such determination pursuant to a
Termination Without Cause and to be entitled to receive any additional
benefits payable hereunder in respect of a Termination Without Cause.
"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following a reduction in
Executive's annual Base Salary or incentive compensation opportunity.
Notwithstanding the foregoing, a termination shall be not be treated
as a Termination for Good Reason (i) if Executive shall have consented
in writing to the occurrence of the event giving rise to the claim of
Termination for Good Reason or (ii) unless Executive shall have
delivered a written notice to the Board within 60 days of his having
actual knowledge of the occurrence of one of such events stating that
he intends to terminate his employment for Good Reason and specifying
the factual basis for such termination, and such event shall not have
been cured within 30 days of the receipt of such notice.
"Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
and as used in Section 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act but
excluding the Company and any subsidiary thereof and any employee
benefit plan sponsored or maintained by the Company or any
Subsidiary (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, as amended from
time to time), of securities of the Company representing 20
percent or more of the combined voting power of the Company's
then outstanding securities.
(ii) When, during any period of 24 consecutive months, after the
Commencement Date, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Director") cease for
any reason other than death to constitute at least a majority
thereof, provided that a director who was not a director at the
________ ____
beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either
actually (because they were directors at the beginning of such
24-month period) or by prior operation of this Paragraph; or
6
<PAGE> 8
(iii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other
than the Company or a subsidiary through purchase of assets, or
by merger, or otherwise.
7
<PAGE> 1
Exhibit 10.4
AEtna Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156
James H. Gould
Aetna Human Resources, RW2A
(860-273-8588)
April 9, 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 April 1, 1997 and for the remaining Term of this Agreement,
the Company will no longer provide Consultant with office space
but will instead reimburse Consultant for office space expenses in
the amount of $3,167.00 per month. The Company will continue to
furnish Consultant with full-time secretarial services as
described above in this Section 4.(d)."
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 4/17/97
____________________ _______
Leonard Abramson Date
c: James Dickerson, Chief Financial Officer, Aetna US Healthcare
Lucille Nickerson, Vice President and Corporate Secretary
Elease Wright, Vice President, Human Resources
<PAGE> 1
Exhibit 10.5
AEtna Interoffice Mary Ann Champlin
Communication Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Richard L. Huber
Date July 22, 1996
Subject LETTER AGREEMENT
I am pleased to inform you that effective July 19, 1996, Aetna
Inc. has assumed all of the obligations of Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) under your Letter
Agreement with Aetna Services, Inc. All references to the
"Company" in your Letter Agreement will hereinafter be deemed to
mean both Aetna Services, Inc. and Aetna Inc. Among other things,
this means that the Change in Control provisions of your Letter
Agreement would be triggered by a change in control of either
Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within
the Aetna holding company system as a result of the merger with
U.S. Healthcare. Your Letter Agreement was entered into with
Aetna Services, Inc., which is now a direct subsidiary of Aetna
Inc. We felt it would be appropriate for the new ultimate parent,
Aetna Inc., to assume these obligations to place you on an
equivalent footing post-merger.
The assumption of your Letter Agreement is self-executing. You do
not need to take any action in response to this letter. If you
have any questions or concerns, please let me know.
/s/ Mary Ann Champlin
<PAGE> 1
Exhibit 10.6
AEtna Interoffice Mary Ann Champlin
Communication Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Ronald E. Compton
Date July 22, 1996
Subject EMPLOYMENT AGREEMENT
I am pleased to inform you that effective July 19, 1996, Aetna
Inc. has assumed all of the obligations of Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) under your Employment
Agreement with Aetna Services, Inc. All references to the
"Company" in your Employment Agreement will hereinafter be deemed
to mean both Aetna Services, Inc. and Aetna Inc. Among other
things, this means that the Change in Control provisions of your
Employment Agreement would be triggered by a change in control of
either Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within
the Aetna holding company system as a result of the merger with
U.S. Healthcare. Your Employment Agreement was entered into with
Aetna Services, Inc., which is now a direct subsidiary of Aetna
Inc. We felt it would be appropriate for the new ultimate parent,
Aetna Inc., to assume these obligations to place you on an
equivalent footing post-merger.
The assumption of your Employment Agreement is self-executing.
You do not need to take any action in response to this letter. If
you have any questions or concerns, please let me know.
/s/ Mary Ann Champlin
<PAGE> 1
Exhibit 10.7
AEtna Interoffice Mary Ann Champlin
Communication Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Daniel P. Kearney
Date July 22, 1996
Subject EMPLOYMENT AGREEMENT
I am pleased to inform you that effective July 19, 1996, Aetna
Inc. has assumed all of the obligations of Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) under your Employment
Agreement with Aetna Services, Inc. All references to the
"Company" in your Employment Agreement will hereinafter be deemed
to mean both Aetna Services, Inc. and Aetna Inc. Among other
things, this means that the Change in Control provisions of your
Employment Agreement would be triggered by a change in control of
either Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within
the Aetna holding company system as a result of the merger with
U.S. Healthcare. Your Employment Agreement was entered into with
Aetna Services, Inc., which is now a direct subsidiary of Aetna
Inc. We felt it would be appropriate for the new ultimate parent,
Aetna Inc., to assume these obligations to place you on an
equivalent footing post-merger.
The assumption of your Employment Agreement is self-executing.
You do not need to take any action in response to this letter. If
you have any questions or concerns, please let me know.
/s/ Mary Ann Champlin
<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>
Three Months Ended Years Ended December 31,
____________________________________________________
(Millions) March 31, 1997 1996 1995 1994 1993 1992
__________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 487.9 $ 338.7 $ 726.2 $ 627.5 $(1,014.7) $ 145.5
Add back fixed charges........... 78.9 245.1 187.0 170.8 154.7 171.5
Minority interest................ 4.0 16.4 16.1 11.4 7.0 8.6
________ _______ _______ _______ _________ _________
Income (loss) as adjusted..... $ 570.8 $ 600.2 $ 929.3 $ 809.7 $ (853.0) $ 325.6
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Fixed charges:
Interest on indebtedness....... $ 56.0(1) $ 168.3(1)$ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4
Portion of rents representative
of interest factor............ 22.9 76.8 71.1 72.2 77.3 90.1
________ _______ _______ _______ _________ _________
Total fixed charges........... $ 78.9 $ 245.1 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Preferred stock dividend
requirements.................... 24.4 41.1 - - - -
________ _______ _______ _______ _________ _________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 103.3 $ 286.2 $ 187.0 $ 170.8 $ 154.7 $ 171.5
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to fixed
charges......................... 7.23 2.45 4.97 4.74 (5.51) 1.90
________ _______ _______ _______ _________ _________
________ _______ _______ _______ _________ _________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 5.53 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>
Three Months Ended Year Ended
(Millions) March 31, 1997 December 31, 1996
__________________ _________________
<S> <C> <C>
Pretax income from continuing
operations...................... $ 449.2 $ 335.0
Add back fixed charges........... 77.8 243.8
Minority interest................ 4.0 16.4
________ ________
Income as adjusted............ $ 531.0 $ 595.2
________ ________
________ ________
Fixed charges:
Interest on indebtedness (2)... $ 55.4 $ 168.3
Portion of rents representative
of interest factor............ 22.4 75.5
________ ________
Total fixed charges........... $ 77.8 $ 243.8
________ ________
________ ________
Preferred stock dividend
requirements.................... - -
________ ________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 77.8 $ 243.8
________ ________
________ ________
Ratio of earnings to fixed
charges......................... 6.83 2.44
________ ________
________ ________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 6.83 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
Exhibit 15
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Inc.
Hartford, Connecticut
Gentlemen:
Re: Registration Statements No. 333-07167, 333-07169, 33-52819,
33-52819-01, 333-08427, 333-08429 and 333-08431
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
May 5, 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
May 5, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period
ended March 31, 1997 for Aetn Inc. and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 31,111
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,327
<MORTGAGE> 6,468
<REAL-ESTATE> 679
<TOTAL-INVEST> 41,991
<CASH> 1,606
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,305
<TOTAL-ASSETS> 91,813
<POLICY-LOSSES> 17,865
<UNEARNED-PREMIUMS> 191
<POLICY-OTHER> 3,055
<POLICY-HOLDER-FUNDS> 19,064
<NOTES-PAYABLE> 2,376
865
0
<COMMON> 4,012
<OTHER-SE> 6,031
<TOTAL-LIABILITY-AND-EQUITY> 91,813
3,087
<INVESTMENT-INCOME> 840
<INVESTMENT-GAINS> 2
<OTHER-INCOME> 558
<BENEFITS> 3,157
<UNDERWRITING-AMORTIZATION> 45
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 488
<INCOME-TAX> 209
<INCOME-CONTINUING> 279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 279
<EPS-PRIMARY> 1.76
<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>
