<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d)of the
Securities Exchange Act of 1934
For the quarter ended SEPTEMBER 30, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-11913
AETNA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
(860) 273-0123
(Registrant's telephone number, including area code)
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.
<TABLE>
<CAPTION>
<S> <C>
Common Capital Stock (par value $.01) 142,946,290
- ------------------------------------- ----------------------------------------
(Class) Shares Outstanding at September 30, 1998
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Condensed Notes to Financial Statements 7
Independent Auditors' Review Report 19
Item 2. Management's Discussion and Analysis of 20
Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About 41
Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 41
Item 5. Other Information. 42
Item 6. Exhibits and Reports on Form 8-K. 43
Signatures 44
Exhibit Index 45
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
(Millions, except per common share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 4,030.3 $ 3,152.0 $ 10,548.0 $ 9,417.5
Net investment income 788.5 818.9 2,424.0 2,506.1
Fees and other income 598.4 567.7 1,702.5 1,693.8
Net realized capital gains 22.0 93.7 226.3 129.9
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 5,439.2 4,632.3 14,900.8 13,747.3
- -----------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Current and future benefits 3,947.9 3,318.3 10,489.2 9,684.0
Operating expenses 978.9 887.9 2,765.5 2,591.1
Interest expense 67.1 60.3 180.5 177.1
Amortization of goodwill and other acquired
intangible assets 102.2 96.0 295.3 284.0
Amortization of deferred policy acquisition 60.8 58.6 176.0 159.4
Reductions of loss on discontinued products (68.0) -- (68.0) (172.5)
Reductions of severance and facilities reserve -- -- -- (45.0)
- -----------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 5,088.9 4,421.1 13,838.5 12,678.1
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 350.3 211.2 1,062.3 1,069.2
Income taxes:
Current 68.4 40.7 374.4 280.3
Deferred 69.5 52.7 42.3 161.7
- -----------------------------------------------------------------------------------------------------------------------
Total income taxes 137.9 93.4 416.7 442.0
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 212.4 $ 117.8 $ 645.6 $ 627.2
=======================================================================================================================
Net income applicable to common ownership $ 198.6 $ 104.0 $ 604.0 $ 585.6
=======================================================================================================================
Results per common share:
Basic $ 1.38 $ .70 $ 4.17 $ 3.91
Diluted 1.36 .69 4.10 3.86
Dividends declared $ .20 $ .20 $ .60 $ .60
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Financial Statements.
Page 3
<PAGE> 4
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Millions, except share and per common share data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value (amortized cost $31,487.2 and $32,694.0) $ 33,194.0 $ 34,245.0
Equity securities, at fair value (cost $685.2 and $824.4) 638.3 1,041.4
Short-term investments 586.4 1,003.9
Mortgage loans 3,653.1 4,207.8
Real estate 276.3 369.5
Policy loans 808.4 746.9
Other 1,205.7 947.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments 40,362.2 42,561.9
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 3,481.9 1,805.8
Short-term investments under securities loan agreement 1,741.6 --
Accrued investment income 562.8 545.8
Premiums due and other receivables 2,235.3 1,381.0
Deferred policy acquisition costs 2,532.5 2,367.3
Goodwill and other acquired intangible assets 9,161.9 8,506.3
Other assets 1,003.6 875.1
Separate Accounts assets 39,813.3 37,957.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 100,895.1 $ 96,000.6
==================================================================================================================================
Liabilities:
Future policy benefits $ 18,429.5 $ 17,837.1
Unpaid claims 4,065.1 3,294.4
Unearned premiums 233.8 359.2
Policyholders' funds left with the Company 17,934.0 18,761.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 40,662.4 40,251.9
Dividends payable to shareholders 35.5 36.1
Short-term debt 1,416.6 252.1
Long-term debt 2,210.0 2,346.2
Payables under securities loan agreement 1,741.6 --
Current income taxes 191.6 320.5
Deferred income taxes 33.6 223.3
Other liabilities 2,994.0 2,931.9
Minority and participating policyholders' interests 224.5 237.7
Separate Accounts liabilities 39,791.1 37,930.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 89,300.9 84,530.2
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company holding primarily
debentures guaranteed by Aetna 275.0 275.0
- ----------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Notes 5 and 12)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock ($.01 par
value; 15,000,000 shares authorized; 11,614,879 in 1998 and 862.1 865.4
11,655,206 in 1997 issued and outstanding)
Common stock ($.01 par value; 500,000,000 shares authorized;
142,946,290 in 1998 and 145,794,844 in 1997 issued and outstanding) 3,422.5 3,644.4
Accumulated other comprehensive income 138.3 307.1
Retained earnings 6,896.3 6,378.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,319.2 11,195.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred securities and shareholders' equity $ 100,895.1 $ 96,000.6
==================================================================================================================================
Shareholders' equity per common share $ 73.15 $ 70.85
==================================================================================================================================
</TABLE>
See Condensed Notes to Financial Statements.
Page 4
<PAGE> 5
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
Nine Months Ended September 30, 1998 Class C Voting
Mandatorily Unrealized Foreign
(Millions, except share data) Convertible Common Gains (Losses) Currency Retained
Total Preferred Stock Stock on Securities Items Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $11,195.4 $ 865.4 $ 3,644.4 $ 504.1 $ (197.0) $ 6,378.5
Comprehensive income:
Net income 645.6 645.6
Other comprehensive loss, net of tax:
Unrealized losses on securities ($ (216.1)
pretax) (1) (140.5) (140.5)
Foreign currency ($(43.6) pretax) (28.3) (28.3)
---------
Other comprehensive loss (168.8)
---------
Total comprehensive income 476.8
=========
Common stock issued for benefit plans
(490,099 shares) 32.9 32.9
Repurchase of common shares
(3,371,700 shares) (258.1) (258.1)
Conversion of preferred securities
(33,047 shares) -- (3.3) 3.3
Common stock dividends (86.2) (86.2)
Preferred stock dividends (41.6) (41.6)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 $11,319.2 $ 862.1 $ 3,422.5 $ 363.6 $ (225.3) $ 6,896.3
==================================================================================================================================
Nine Months Ended September 30, 1997
(Millions, except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $10,889.7 $ 865.4 $ 4,032.8 $ 454.2 $ (114.2) $ 5,651.5
Comprehensive income:
Net income 627.2 627.2
Other comprehensive income, net of tax:
Unrealized gains on securities
($266.8 pretax) (1) 173.4 173.4
Foreign currency ($(38.2) pretax) (24.8) (24.8)
---------
Other comprehensive income 148.6
---------
Total comprehensive income 775.8
=========
Common stock issued for benefit plans
(1,819,516 shares) 131.0 131.0
Repurchase of common shares
(3,305,600 shares) (301.6) (301.6)
Common stock dividends (89.5) (89.5)
Preferred stock dividends (41.6) (41.6)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1997 $11,363.8 $ 865.4 $ 3,862.2 $ 627.6 $ (139.0) $ 6,147.6
==================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Condensed Notes to Financial Statements.
Page 5
<PAGE> 6
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(Millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 645.6 $ 627.2
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization (including investment discounts and premiums) 358.3 280.6
- -------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities and net realized capital gains
before changes in assets and liabilities 1,003.9 907.8
Net realized capital gains (226.3) (129.9)
- -------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities before changes in assets and liabilities 777.6 777.9
Changes in assets and liabilities:
(Increase) Decrease in accrued investment income (18.4) 20.3
Increase in insurance liabilities (including run-off liabilities
funded by investing activities below) 478.5 526.1
Increase in premiums due and other receivables (405.8) (254.9)
Increase in deferred policy acquisitions costs (205.9) (216.3)
(Decrease) Increase in income taxes (94.4) 163.0
Net decrease (increase) in other assets and liabilities 72.8 (500.0)
Other, net (30.1) 9.1
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 574.3 525.2
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale 15,155.8 12,098.5
Equity securities 672.5 551.0
Mortgage loans 63.9 125.8
Real estate 156.8 411.4
Other investments 210.2 458.8
Short-term investments 16,054.8 12,934.6
Investment maturities and repayments of:
Debt securities available for sale 2,411.0 2,990.9
Mortgage loans 776.5 766.6
Cost of investments in:
Debt securities available for sale (15,834.9) (14,817.1)
Equity securities (346.7) (479.9)
Mortgage loans (282.8) (210.6)
Real estate (23.3) (44.7)
Other investments (1,716.7) (940.1)
Short-term investments (15,611.3) (13,305.4)
Increase in property and equipment (100.8) (46.8)
Net decrease in Separate Accounts 4.6 23.9
Other, net (342.9) 48.3
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,246.7 565.2
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits and interest credited for investment contracts 1,510.6 1,424.6
Withdrawals of investment contracts (2,406.2) (2,570.9)
Issuance of long-term debt -- 1.2
Repayment of long-term debt (164.1) (4.1)
Net increase in short-term debt 1,166.0 234.5
Common stock issued under benefit plans 32.9 131.0
Common stock acquired (258.1) (301.6)
Dividends paid to shareholders (128.4) (131.4)
- -------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (247.3) (1,216.7)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (6.4) (3.0)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,567.3 (129.3)
Cash acquired from NYLCare health business 108.8 --
Cash and cash equivalents, beginning of period 1,805.8 1,462.6
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,481.9 $ 1,333.3
===================================================================================================================
Supplemental cash flow information:
Interest paid $ 196.2 $ 221.3
Income taxes paid 506.1 287.4
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Financial Statements.
Page 6
<PAGE> 7
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").
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 1997
financial information to conform to the 1998 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 1997 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) New Accounting Standards
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, issued by the American Institute of Certified Public Accountants ("AICPA").
This statement requires that certain costs incurred in developing internal-use
computer software be capitalized, and provides guidance for determining whether
computer software is considered to be for internal use. The Company will
amortize these costs over a period of 3 to 5 years. Previously, the Company
expensed the cost of internal-use computer software as incurred. The adoption of
this statement resulted in a net after-tax increase to the results of operations
of $9.0 million and $26.7 million, or $.06 and $.17 per diluted common share for
the three and nine months ended September 30, 1998, respectively.
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 was effective
for 1997 financial statements, however, certain provisions relating to
accounting for repurchase agreements and securities lending were not effective
until January 1, 1998. The adoption of those provisions effective in 1998 did
not have a material effect on the Company's financial position or results of
operations.
Page 7
<PAGE> 8
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(3) Future Application of Accounting Standards
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
is currently evaluating the impact of the adoption of this statement and the
potential effect on its financial position and results of operations.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for the Company's
financial statements beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position and results of operations.
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund and other insurance-related assessments and guidance for
measuring the liability. This statement is effective for 1999 financial
statements, with early adoption permitted. The Company does not expect adoption
of this statement to have a material effect on its financial position or results
of operations.
Page 8
<PAGE> 9
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Earnings Per Common Share
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three and nine months ended September
30, was as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Net income $ 212.4
Less: preferred stock dividends 13.8
--------
Basic EPS
Income applicable to common ownership 198.6 143.5 $ 1.38
========
Effect of dilutive securities:
Stock options and other (1) .9
Convertible preferred stock 13.8 11.6
-------- --------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 212.4 156.0 $ 1.36
===========================================================================================================
1997 (2)
Net income $ 117.8
Less: preferred stock dividends 13.8
--------
Basic EPS
Income applicable to common ownership 104.0 149.6 $ .70
======== ========
Effect of dilutive securities:
Stock options and other (1) 1.8
--------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 104.0 151.4 $ .69
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Net income $ 645.6
Less: preferred stock dividends 41.6
Basic EPS --------
Income applicable to common ownership 604.0 144.7 $ 4.17
========
Effect of dilutive securities:
Stock options and other (3) 1.1
Convertible preferred stock 41.6 11.6
-------- --------
Diluted EPS
Income applicable to common ownership and assumed
conversions $ 645.6 157.4 $ 4.10
===========================================================================================================
1997(2)
Net income $ 627.2
Less: preferred stock dividends 41.6
Basic EPS --------
Income applicable to common ownership 585.6 149.8 $ 3.91
======== ========
Effect of dilutive securities:
Stock options and other (3) 1.8
--------
Diluted EPS
Income applicable to common ownership and assumed
conversions $ 585.6 151.6 $ 3.86
===========================================================================================================
</TABLE>
(1) Options to purchase shares of common stock for the three months ended
September 30, 1998 and 1997 of 5,977,913 and 112,441, respectively, (with
exercise prices ranging from $69.00 - $112.63) were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common shares.
(2) The issuable common stock related to Class C voting mandatorily convertible
preferred stock (9,553,878 and 9,665,483 weighted average shares for the
three and nine months ended September 30, 1997, respectively) was not
included in the computation of diluted earnings per common share because to
do so would be antidilutive.
(3) Options to purchase shares of common stock for the nine months ended
September 30, 1998 and 1997 of 2,915,246 and 38,330, respectively, (with
exercise prices ranging from $76.24 - $112.63) were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common shares.
Page 9
<PAGE> 10
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Acquisitions and Dispositions
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided by the related agreements. The transaction is
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance receivable from
Lincoln. The transaction will result in an after-tax gain on the sale of
approximately $135 million, the majority of which will be deferred and amortized
over approximately 15 years.
Revenues for these business lines were $135 million and $399 million for the
three and nine months ended September 30, 1998, respectively, and $141 million
and $409 million for the three and nine months ended September 30, 1997,
respectively. Net income for these business lines, excluding Year 2000 costs in
1998 and net realized capital gains in all periods, was $24 million and $72
million for the three and nine months ended September 30, 1998, respectively,
and $22 million and $55 million for the three and nine months ended September
30, 1997, respectively.
On July 15, 1998, the Company acquired New York Life Insurance Company's NYLCare
health business for $1.05 billion in cash, subject to adjustment as provided by
the related agreements. In addition to the cash purchase price, payments
totaling up to $300 million (up to $150 million in each of two years) may be
made to the extent that predetermined earnings and membership targets are
achieved. No such payments, if any, are payable prior to the year 2000. The
Company's consolidated results of operations include the NYLCare health business
from July 15, 1998.
The acquisition was accounted for as a purchase. The excess of the cash payment
and acquisition costs over the fair value of the net assets acquired resulted in
approximately $950 million, net of related deferred taxes, being allocated to
goodwill and other acquired intangible assets which is being amortized over a
40-year period for goodwill and over a range of 3 to 20 years for other acquired
intangible assets.
(6) Investments
Net investment income includes amounts allocable to experience rated
contractholders of $305 million and $333 million for the three months ended
September 30, 1998 and 1997, respectively, and $926 million and $1,006 million
for the nine months ended September 30, 1998 and 1997, respectively. Interest
credited to contractholders is included in current and future benefits.
Net realized capital gains allocable to experience rated contractholders of $20
million and $93 million for the three months ended September 30, 1998 and 1997,
respectively, and $92 million and $141 million for the nine months ended
September 30, 1998 and 1997, 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.
Page 10
<PAGE> 11
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments (continued)
The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- -------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $161.7 $22.1 $206.5 $25.8
Supporting experience rated products 98.7 13.8 110.8 16.7
Supporting remaining products 44.3 3.5 65.6 8.7
- -----------------------------------------------------------------------------------------
Total impaired loans $304.7(1) $39.4 $382.9(1) $51.2
=========================================================================================
</TABLE>
(1) Includes impaired loans of $89.9 million and $127.7 million at September
30, 1998 and December 31, 1997, respectively, for which no specific
reserves are considered necessary.
The activity in the specific and general reserves for the nine months ended
September 30, 1998 and 1997 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, 1997 $ 68.7 $ 31.6 $ 14.2 $114.5
Credited to net realized capital losses -- -- (2.0) (2.0)
Charged (Credited) to other accounts (30.0)(1) (2.0)(1) 5.0 (27.0)
Principal write-offs (.4) (2.0) (.7) (3.1)
- ----------------------------------------------------------------------------------------------
Balance at September 30, 1998(2) $ 38.3 $ 27.6 $ 16.5 $ 82.4
==============================================================================================
Balance at December 31, 1996 $136.7 $ 74.7 $ 35.6 $247.0
Credited to net realized capital losses -- -- (10.6) (10.6)
Charged (Credited) to other accounts (25.0)(1) (20.0)(1) .6 (44.4)
Principal write-offs (18.8) (1.5) (3.9) (24.2)
- ----------------------------------------------------------------------------------------------
Balance at September 30, 1997(2) $ 92.9 $ 53.2 $ 21.7 $167.8
==============================================================================================
</TABLE>
(1) Reflects adjustments to reserves related to assets supporting discontinued
products and experience rated products which do not affect the Company's
results of operations.
(2) Total reserves at September 30, 1998 and 1997 include $39.4 million and
$100.5 million of specific reserves, respectively, and $43.0 million and
$67.3 million of general reserves, respectively.
Page 11
<PAGE> 12
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Investments (continued)
Income earned (pretax) and cash received on the average recorded investment in
impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------------- ------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $164.3 $ 4.1 $ 4.1 $175.5 $ 10.6 $ 10.9
Supporting experience rated products 103.6 3.8 3.9 106.2 7.9 8.0
Supporting remaining products 44.6 .9 .8 52.1 2.6 2.4
- ------------------------------------------------------------------------------------------------------------
Total $312.5 $ 8.8 $ 8.8 $333.8 $ 21.1 $ 21.3
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------------------- -----------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued product $350.0 $ 13.9 $ 8.5 $368.3 $ 31.4 $ 24.3
Supporting experience rated products 195.1 5.7 3.5 216.4 14.1 11.2
Supporting remaining products 109.4 4.1 2.3 125.7 9.2 7.1
- ------------------------------------------------------------------------------------------------------------
Total $654.5 $ 23.7 $ 14.3 $710.4 $ 54.7 $ 42.6
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(7) Supplemental Cash Flow Information
Significant noncash investing and financing activities include the acquisition
of real estate through foreclosures of mortgage loans amounting to $4 million
and $25 million for the nine months ended September 30, 1998 and 1997,
respectively.
(8) Additional Information - Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains (losses) on securities (excluding those related to experience
rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
---------------------
(Millions) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains arising during the period (1) $ 91.5 $365.8
Less: reclassification adjustment for gains and other items
included in net income (2) 232.0 192.4
- -----------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $(140.5) $173.4
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Pretax unrealized holding gains arising during the period were $140.8
million and $562.8 million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $356.9 million and $296.0 million for 1998 and 1997,
respectively.
Page 12
<PAGE> 13
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Severance and Facilities Charges
In 1996, the Company established severance and facilities reserves in connection
with the integration of its acquired health businesses and certain other actions
taken or to be taken in order to make its businesses more competitive.
Activity for the nine months ended September 30, 1998 within the severance and
facilities reserves (pretax) and positions eliminated related to such actions
were as follows:
<TABLE>
<CAPTION>
(Millions, except positions) Reserve Positions
- ----------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1997 $405.4 2,950
Actions taken (1) (84.1) (1,047)
==========================================================
Balance at September 30, 1998 $321.3 1,903
==========================================================
</TABLE>
(1) Includes $39.9 million of severance related actions. Other actions include
asset write-offs, vacated leased property payments and other exit costs.
The 1,047 positions eliminated during the nine months ended September 30, 1998
related to the following segments: 89.7% Aetna U.S. Healthcare, 7.6% Aetna
Retirement Services and 2.7% Corporate. The Aetna U.S. Healthcare severance
actions are now expected to be substantially completed by March 31, 1999 as a
result of addressing customer service issues during the transition period. The
Aetna Retirement Services severance actions were substantially completed by
September 30, 1998. The severance actions and vacating of certain leased office
space related to the Corporate segment were substantially completed in 1997. In
connection with the sale of the Company's property casualty operations in 1996,
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 two years.
(10) Discontinued Products
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and the reserve is reviewed by management quarterly. As long as the
reserve continues to represent management's then best estimate of expected
future losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. As a result of management's
review in the third quarter of 1998, $68 million (pretax) of the reserve was
released primarily due to favorable investment performance. Also, as a result of
continued favorable developments in real estate markets, in the first quarter of
1997 the Company released $173 million (pretax) of the reserve related to GICs.
The current reserve reflects management's best estimate of anticipated future
losses. The Company's results of operations would be adversely affected to the
extent that future losses on the products are greater than anticipated and
positively affected to the extent that future losses are less than anticipated.
The discussion below presents information for the discontinued SPAs and GICs on
a combined basis. (Refer to the Company's 1997 Annual Report for a more complete
discussion of the reserve for anticipated future losses on discontinued
products.)
Page 13
<PAGE> 14
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (continued)
At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate which was used to calculate the loss
on discontinuance. The offsetting payable on which interest is similarly accrued
is reflected in continuing products. Interest on the payable generally offsets
the investment income on the assets available to fund the shortfall. At
September 30, 1998 the receivable from continuing products, net of related
deferred taxes payable of $52 million on the accrued interest income, was $488
million. During the nine months ended September 30, 1998 and the twelve months
ended December 31, 1997 no funding of the receivable took place. The receivable
is eliminated in consolidation.
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three Months Ended September 30, 1998 Results Future Losses Net (1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $132.3 $ -- $132.3
Net realized capital gains 7.8 (7.8) --
Interest earned on receivable from continuing
products 8.8 -- 8.8
Other income 1.2 -- 1.2
- ----------------------------------------------------------------------------------------
Total revenue 150.1 (7.8) 142.3
- ----------------------------------------------------------------------------------------
Current and future benefits 138.9 .4 139.3
Operating expenses 3.0 -- 3.0
- ----------------------------------------------------------------------------------------
Total benefits and expenses 141.9 .4 142.3
- ----------------------------------------------------------------------------------------
Results of discontinued products $ 8.2 $ (8.2) $ --
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three Months Ended September 30, 1997 Results Future Losses Net (1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $151.1 $ -- $151.1
Net realized capital gains 48.6 (48.6) --
Interest earned on receivable from continuing
products 8.3 -- 8.3
Other income 7.9 -- 7.9
- ----------------------------------------------------------------------------------------
Total revenue 215.9 (48.6) 167.3
- ----------------------------------------------------------------------------------------
Current and future benefits 160.4 3.2 163.6
Operating expenses 3.7 -- 3.7
- ----------------------------------------------------------------------------------------
Total benefits and expenses 164.1 3.2 167.3
- ----------------------------------------------------------------------------------------
Results of discontinued products $ 51.8 $(51.8) $ --
========================================================================================
</TABLE>
(1) Amounts are reflected in the September 30, 1998 and 1997 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which is eliminated in consolidation.
Page 14
<PAGE> 15
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (continued)
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Nine Months Ended September 30, 1998 Results Future Losses Net (1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $404.9 $ -- $404.9
Net realized capital gains 82.8 (82.8) --
Interest earned on receivable from continuing products 26.1 -- 26.1
Other income 17.6 -- 17.6
- -------------------------------------------------------------------------------------------------------
Total revenue 531.4 (82.8) 448.6
- -------------------------------------------------------------------------------------------------------
Current and future benefits 429.4 8.9 438.3
Operating expenses 10.3 -- 10.3
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 439.7 8.9 448.6
- -------------------------------------------------------------------------------------------------------
Results of discontinued products $ 91.7 $(91.7) $ --
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Nine Months Ended September 30, 1997 Results Future Losses Net (1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $504.3 $ -- $504.3
Net realized capital gains 142.9 (142.9) --
Interest earned on receivable from continuing products 24.9 -- 24.9
Other income 17.9 -- 17.9
- -------------------------------------------------------------------------------------------------------
Total revenue 690.0 (142.9) 547.1
- -------------------------------------------------------------------------------------------------------
Current and future benefits 495.5 42.1 537.6
Operating expenses 9.5 -- 9.5
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 505.0 42.1 547.1
- -------------------------------------------------------------------------------------------------------
Results of discontinued products $185.0 $(185.0) $ --
=======================================================================================================
</TABLE>
(1) Amounts are reflected in the September 30, 1998 and 1997 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which is eliminated in consolidation.
Assets and liabilities of discontinued products at September 30, 1998 were as
follows (1):
<TABLE>
<CAPTION>
(Millions)
- ------------------------------------------------------------------------------
<S> <C>
Debt securities available for sale $6,169.3
Mortgage loans 759.9
Real estate 106.0
Short-term and other investments 746.4
- ------------------------------------------------------------------------------
Total investments 7,781.6
Current and deferred income taxes 181.0
Receivable from continuing products (2) 539.7
- ------------------------------------------------------------------------------
Total assets $8,502.3
==============================================================================
Future policy benefits $4,681.9
Policyholders' funds left with the Company 1,694.4
Reserve for anticipated future losses on discontinued products 1,175.4
Other 950.6
- ------------------------------------------------------------------------------
Total liabilities $8,502.3
==============================================================================
</TABLE>
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products is eliminated in consolidation.
Page 15
<PAGE> 16
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Discontinued Products (continued)
Net unrealized capital gains on available for sale debt securities are included
above in other liabilities and are not reflected in consolidated shareholders'
equity. The reserve for anticipated future losses is included in future policy
benefits on the Consolidated Balance Sheets.
The activity in the reserve for anticipated future losses on discontinued
products for the nine months ended September 30, 1998 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------------
<S> <C>
Reserve at December 31, 1997 $1,151.7
Results of discontinued products 91.7
Reserve reduction (68.0)
- ---------------------------------------------------------
Reserve at September 30, 1998 $1,175.4
=========================================================
</TABLE>
(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 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services (collectively the "Aetna Services
Debt"). ACLLC has issued $275 million of redeemable preferred stock and the
Subordinated Debentures represent substantially all of the assets of ACLLC.
Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks and other financing entities 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 September 30, 1998 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 and
losses, of at least $7.5 billion.
Page 16
<PAGE> 17
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Debt and Guarantee of Debt Securities (continued)
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services is as follows (in
millions):
<TABLE>
<CAPTION>
Balance Sheets Information:
September 30, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments (excluding Separate Accounts) $38,673.0 $41,020.9
- ----------------------------------------------------------------------------------------------
Total assets $89,034.9 $85,138.9
- ----------------------------------------------------------------------------------------------
Total insurance liabilities $38,822.0 $38,620.0
- ----------------------------------------------------------------------------------------------
Total liabilities $86,770.2 $82,160.2
- ----------------------------------------------------------------------------------------------
Total redeemable preferred stock $ 275.0 $ 275.0
- ----------------------------------------------------------------------------------------------
Total shareholder's equity $ 1,989.7 $ 2,703.7
- ----------------------------------------------------------------------------------------------
</TABLE>
Statements of Income Information:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $ 2,698.3 $ 7,813.0
- ----------------------------------------------------------------------------------------------
Total benefits and expenses $ 2,447.0 $ 6,926.6
- ----------------------------------------------------------------------------------------------
Income before income taxes $ 251.3 $ 886.4
- ----------------------------------------------------------------------------------------------
Net income $ 171.3 $ 596.8
- ----------------------------------------------------------------------------------------------
</TABLE>
The amount of dividends which may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and health maintenance organization
subsidiaries at September 30, 1998 without prior approval by state regulatory
authorities is limited to approximately $602 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.
Page 17
<PAGE> 18
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(12) Litigation
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions have been
transferred to the United States District Court for the Eastern District of
Pennsylvania for consolidated pretrial proceedings with the cases pending there.
The plaintiffs have filed a Consolidated and Amended Complaint (the "Complaint")
seeking, among other remedies, unspecified damages resulting from defendants'
alleged violations of federal securities laws. The Complaint alleges that the
Company and three of its current or former officers or directors, Ronald E.
Compton, Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. The litigation is still in the preliminary stages, and the
Company is defending the actions vigorously.
The Company is also involved in numerous other 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 these other lawsuits cannot be determined at this time,
after consideration of the defenses available to the Company and any related
reserves established, they are not expected to result in liability for amounts
material to the financial condition of the Company, although they may adversely
affect results of operations in future periods.
Page 18
<PAGE> 19
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of September 30, 1998, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1998 and 1997, and the related condensed consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 1998 and 1997. 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, 1997, 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 3, 1998, 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, 1997, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
November 3, 1998
Page 19
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three and nine months ended
September 30, 1998 and 1997. This review should be read in conjunction with the
consolidated financial statements and other data presented herein.
OVERVIEW
General
The Company's current operations include three core businesses - Aetna U.S.
Healthcare, Aetna Retirement Services and Aetna International. Aetna U.S.
Healthcare provides a full spectrum of managed care, indemnity, and group life
and disability insurance products. Aetna Retirement Services offers a range of
financial services and individual life insurance products. Aetna International,
through subsidiaries and joint venture operations, sells primarily life
insurance, health insurance and financial services products in non-U.S. markets.
The Company also has a Large Case Pensions business which manages a variety of
retirement products for defined benefit and defined contribution plans.
Consolidated Results
The Company reported net income of $212 million for the third quarter of 1998
compared to $118 million for the same period in 1997. Net income per diluted
common share for the three months ended September 30, 1998 was $1.36 compared
with $.69 a year ago.
Net income for the third quarter of 1998 includes Year 2000 costs of $37
million. Results for the third quarter of 1998 also include a benefit of $44
million related to the reserve reduction for losses on discontinued products in
Large Case Pensions. Net income for the third quarter of 1997 included a charge
of $103 million related to a reestimation of HMO medical claims reserves
associated with prior period claims. Net realized capital gains were $16 million
for the three months ended September 30, 1998 and $59 million for the same
period in 1997. Excluding these items, earnings were $189 million for the three
months ended September 30, 1998 compared to $162 million for the same period in
1997.
Net income for the nine months ended September 30, 1998 was $646 million
compared to $627 million for the same period in 1997 while per diluted common
share amounts for the nine months ended September 30, 1998 were $4.10 compared
with $3.86 a year ago.
Year 2000 costs were $77 million for the first nine months of 1998. Also
included in the results for the first nine months of 1998 was the $44 million
related to the reserve reduction for losses on discontinued products for Large
Case Pensions. Results for the first nine months of 1997 included reductions in
the severance and facilities reserve for Aetna U.S. Healthcare of $29 million
and a benefit of $108 million related to a reduction of the reserve for losses
on discontinued products for Large Case Pensions. Net realized capital gains
were $150 million for the nine months ended September 30, 1998 and $67 million
for the same period in 1997. Excluding these items, earnings were $529 million
for the first nine months of 1998 compared to $422 million for the same period
in 1997.
The Company adopted the American Institute of Certified Public Accountants'
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, effective January 1, 1998, which
requires the capitalization and amortization of certain internal-use software.
Previously, the Company expensed these costs. As a result of this new standard,
earnings included a net benefit from capitalizing internal-use software of $9
million for the third quarter of 1998 and $27 million for the nine months ended
September 30, 1998.
Page 20
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (CONTINUED)
Business Results
For the three and nine months ended September 30, 1998, Aetna U.S. Healthcare's
earnings, excluding items discussed above, increased over the same periods a
year ago. The three and nine month increases reflect favorable Commercial HMO
results partially offset by increased operating expenses related to customer
service enhancements. The three and nine month periods also reflect the
acquisition of the NYLCare health business.
Aetna Retirement Services' earnings increased for the three and nine months
ended September 30, 1998 over the same periods a year ago primarily due to
additional fee income earned on a higher base of financial services assets under
management and favorable individual life results. Aetna International's earnings
improved during the three and nine months ended September 30, 1998 primarily due
to favorable results in Brazil and new pension business in Mexico offset in part
by overall weakening of foreign currency. Large Case Pensions' results declined
for the three and nine months ended September 30, 1998 as capital was redeployed
to other businesses of the Company. During the third quarter of 1998, interest
expense increased due to the issuance of commercial paper in connection with the
acquisition of the NYLCare health business.
Acquisition of the NYLCare Health Business
On July 15, 1998, the Company acquired New York Life Insurance Company's NYLCare
health business ("NYLCare") for a purchase price of $1.05 billion in cash,
subject to adjustment as provided in the transaction agreements. In addition to
the cash purchase price, payments totaling up to $300 million (up to $150
million in each of two years) may be made to the extent that predetermined
earnings and membership targets are achieved. No such payments, if any, are
payable prior to the year 2000.
The Company completed the transaction using funds made available from the
issuance of commercial paper. The Company expects to ultimately finance the
transaction in part with medium- or long-term fixed income securities.
Subsequent to the closing, the Company's results have been affected by, among
other things, the operating results of NYLCare, the costs of financing the
transaction and the amortization of intangible assets (primarily goodwill)
created as a result of the transaction. See "Aetna U.S. Healthcare",
"Corporate", as well as Note 5 of Condensed Notes to Financial Statements for
further discussion.
Sale of Domestic Individual Life Insurance Business
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided in the transaction agreements. The transaction
is generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln, and the Company recorded a reinsurance receivable from
Lincoln. The transaction will result in an after-tax gain of approximately $135
million, the majority of which will be deferred and amortized over approximately
15 years, with the remainder recognized in the fourth quarter of 1998. The
amount of the gain will depend on the actual amount of assets transferred and
liabilities contractually assumed from the Company.
Proceeds from the sale are expected to be used for general corporate purposes,
including internal growth, acquisitions, debt repayment and share repurchases.
See "Aetna Retirement Services" for further discussion.
Page 21
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Millions) 1998 (1) 1997 % Change 1998 (1) 1997 % Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 3,584.1 $ 2,698.7 32.8% $ 9,270.1 $ 8,122.1 14.1%
Net investment income 133.3 115.9 15.0 386.6 328.7 17.6
Fees and other income 381.9 355.5 7.4 1,085.0 1,121.9 (3.3)
Net realized capital gains 19.2 57.3 (66.5) 63.4 22.4 183.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 4,118.5 3,227.4 27.6 10,805.1 9,595.1 12.6
- ------------------------------------------------------------------------------------------------------------------------------------
Current and future benefits 3,084.5 2,421.4 27.4 7,957.3 6,967.2 14.2
Operating expenses 725.5 622.3 16.6 1,969.4 1,822.7 8.0
Amortization of goodwill and other
acquired intangible assets 99.1 90.9 9.0 280.5 271.8 3.2
Amortization of deferred policy
acquisition costs .1 2.9 (96.6) .4 16.0 (97.5)
Reductions of severance and
facilities reserve -- -- -- -- (45.0) 100.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 3,909.2 3,137.5 24.6 10,207.6 9,032.7 13.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 209.3 89.9 132.8 597.5 562.4 6.2
Income taxes 95.8 51.1 87.5 274.7 270.2 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (2) $ 113.5 $ 38.8 192.5 $ 322.8 $ 292.2 10.5
====================================================================================================================================
Net realized capital gains (losses),
net of tax (included above) $ 13.2 $ 35.1 (62.4) $ 41.8 $ (4.1) --
====================================================================================================================================
</TABLE>
(1) Operating results for the three and nine months ended September 30, 1998
include NYLCare since July 15, 1998.
(2) Net income includes a net benefit from capitalizing internal-use software
of $5.2 million for the three months ended September 30, 1998 and $13.7
million for the nine months ended September 30, 1998.
Aetna U.S. Healthcare's net income increased $75 million for the three months
ended September 30, 1998 and $31 million for the nine months ended September 30,
1998, compared to the same periods a year ago. These results include costs
related to Year 2000 of $18 million (after tax) for the third quarter of 1998
and $43 million (after tax) for the nine months ended September 30, 1998. The
results for the third quarter of 1997 included a charge of $103 million related
to a reestimation of health maintenance organization ("HMO") medical claims
reserves associated with prior period claims. Results also include reductions in
the severance and facilities reserve of $29 million (after tax) for the nine
months ended September 30, 1997. Excluding these items and net realized capital
gains or losses, results increased $12 million for the third quarter of 1998 and
$57 million for the nine months ended September 30, 1998 when compared to the
same periods a year ago. The increase for the three and nine months ended
September 30, 1998 reflects favorable HMO results and the acquisition of NYLCare
from July 15, 1998 offset in part by increased operating expenses.
The third quarter and nine months ended September 30, 1997 include an after-tax
gain of $21 million from the sale of Healthcare Data Interchange Corporation
("HDIC"), a provider of healthcare electronic data interchange services. Net
realized capital losses for the nine months ended September 30, 1997 include
losses of $44 million (after tax) related to the sale of Aetna Professional
Management Corporation ("APMC"), a physician practice management business. The
earnings of HDIC and APMC were not material to the results of Aetna U.S.
Healthcare.
Page 22
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Business Results
In order to provide a comparison that management believes better reflects the
underlying performance of Aetna U.S. Healthcare, the earnings discussion that
follows excludes amortization of goodwill and other acquired intangible assets
(including the goodwill associated with the NYLCare acquisition), Year 2000
costs in 1998, the reductions in the severance and facilities reserve for the
first nine months of 1997 and net realized capital gains or losses. Also, for
purposes of the comparison of the three month periods ended September 30, 1998
and September 30, 1997, the discussion below excludes the 1997 charge related to
the reestimation of HMO medical claims reserves.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
(Millions) 1998(1) 1997 1998(1) 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Risk $107.6 $ 93.6(2) $296.3 $226.6
Group Insurance and Other Health 91.4 88.0 257.3 264.3
- -----------------------------------------------------------------------------------------------
Total Aetna U.S. Healthcare(3) $199.0 $181.6 $553.6 $490.9
===============================================================================================
Commercial HMO Medical Loss Ratio 82.3% 82.6%(2) 82.0% 84.9%
- -----------------------------------------------------------------------------------------------
Medicare HMO Medical Loss Ratio 91.7% 91.0%(2) 93.2% 94.1%
- -----------------------------------------------------------------------------------------------
Health Risk Medical Loss Ratio 85.6% 83.9%(2) 85.2% 85.6%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Operating results for the three and nine months ended September 30, 1998
include NYLCare since July 15, 1998. Excluding the acquisition of NYLCare,
the medical loss ratios for the third quarter of 1998 would have been 81.0%
for Commercial HMO, 92.5% for Medicare HMO and 84.9% for Health Risk.
Excluding the acquisition of NYLCare, the medical loss ratios for the nine
months ended September 30, 1998 would have been 81.6% for Commercial HMO,
93.6% for Medicare HMO and 85.0% for Health Risk.
(2) Excludes the effect of a charge of $161 million (pretax) ($103 million,
after tax) related to a reestimation of HMO medical claims reserves
associated with prior period claims, a majority of which relate to the
first and second quarters of 1997. This charge primarily affects Commercial
and Medicare HMO medical claims reserves. Including the effect of this
charge, the medical loss ratios for the three months ended September 30,
1997 would have been 90.7% for Commercial HMO, 99.4% for Medicare HMO and
90.7% for Health Risk.
(3) Includes a net benefit from capitalizing internal-use software of $5.2
million for the three months ended September 30, 1998 and $13.7 million for
the nine months ended September 30, 1998.
Health Risk
- -----------
Earnings for the Health Risk business (all health products for which Aetna U.S.
Healthcare assumes all or a majority of health care costs and utilization risk)
for the three and nine months ended September 30, 1998 were affected by several
factors.
The increase in the results for the three and nine months ended September 30,
1998 reflects favorable HMO results due to enrollment growth, premium rate
increases, the impact of medical cost initiatives and the acquisition of
NYLCare.
Indemnity and preferred provider organization ("PPO") results for the three and
nine months ended September 30, 1998 were lower than the same periods a year ago
due to lower membership during the 1998 periods, in part reflecting a shift to
managed care products, as well as higher favorable prior year reserve
development in 1997.
Health Risk earnings for the three and nine months ended September 30, 1998 also
reflect increased operating expenses related to customer service enhancements,
partially offset by higher investment income due to increased equity partnership
income and a shift in strategy to higher yielding investments. The Health Risk
SG&A ratio was 11.4% for the third quarter of 1998 and 11.7% for the nine months
ended September 30, 1998 compared with 12.6% and 12.1% for these periods a year
ago.
Page 23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Commercial HMO premiums per member per month ("PMPM") increased by 1% for the
three and nine months ended September 30, 1998 compared with the same 1997
periods. Medicare HMO premiums PMPM increased by 5% for the three months ended
September 30, 1998 and by 2% for the nine months ended September 30, 1998
compared with the same 1997 periods. These increases were due to premium rate
increases, offset in part by the geographic mix of membership growth (i.e., the
addition of NYLCare members and growth in regions with relatively lower premiums
PMPM).
Commercial HMO medical costs PMPM increased by 1% for the three months ended
September 30, 1998 and decreased by 2% for the nine months ended September 30,
1998 compared with the same 1997 periods. The higher Commercial medical costs
PMPM for the three month period are due primarily to higher pharmacy, physician
and outpatient utilization as well as the impact of the NYLCare acquisition,
partially offset by the favorable results of medical cost initiatives and
geographic mix (i.e., growth in regions with relatively lower medical costs
PMPM). The lower Commercial HMO medical costs PMPM for the nine months ended
September 30, 1998 are due to the favorable results of medical cost initiatives,
geographic mix and lower inpatient utilization.
The Medicare HMO medical costs PMPM increased by 6% for the three months ended
September 30, 1998 and increased by 1% for the nine months ended September 30,
1998 compared with the same 1997 periods. The higher Medicare HMO medical costs
PMPM for the three and nine months ended September 30, 1998 were primarily due
to higher pharmacy, physician and outpatient utilization and medical cost
inflation and unfavorable results in certain markets which will be discontinued
as of January 1, 1999 offset by the impact of the NYLCare acquisition,
geographic mix and benefit changes.
The Commercial HMO medical loss ratio decreased for the three and nine months
ended September 30, 1998 when compared to the same periods a year ago,
reflecting premium rate increases which outpaced medical cost increases,
partially offset by membership growth in regions with higher medical loss ratios
and, for the third quarter of 1998, substantially offset by the impact of the
acquisition of NYLCare. The Medicare HMO medical loss ratio increased for the
three months ended September 30, 1998 when compared to the same period a year
ago due to higher medical costs resulting from increased utilization offset by
the impact of the NYLCare acquisition. The Medicare HMO medical loss ratio
decreased for the nine months ended September 30, 1998 when compared to the same
period a year ago due to medical cost initiatives.
For the Health Risk business, reserves reflect estimates of the ultimate cost of
claims that have been incurred but not yet reported or paid. Claim reserves are
based on a number of factors including those derived from historical claim
experience. Medical claims payable are estimated periodically, and any resulting
adjustments are reflected in current period results in current and future
benefits.
Group Insurance and Other Health
- --------------------------------
Group Insurance and Other Health includes group life and disability insurance
and long-term care insurance, offered on both an insured and employer-funded
basis, and all health products offered on an employer-funded basis. The increase
in the results for the three months ended September 30, 1998 is primarily due to
the acquisition of NYLCare partially offset by unfavorable experience in the
disability product line. The decrease in the results for the nine months ended
September 30, 1998 was primarily due to a decrease in nonrisk health and group
insurance membership in the first two quarters of 1998, and unfavorable
experience in the disability product line. Earnings were favorably impacted by
higher investment income due to increased equity partnership income and a shift
in strategy to higher yielding investments in both periods.
Page 24
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
September 30, 1998 (1) September 30, 1997
----------------------- -----------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2) 5,044 641 5,685 3,588 577 4,165
Medicare 531 -- 531 373 19 392
Medicaid 129 -- 129 101 -- 101
- --------------------------------------------------------------------------------
Total HMO 5,704 641 6,345 4,062 596 4,658
POS 262 2,507 2,769 309 2,446 2,755
PPO 1,225 2,972 4,197 609 3,046 3,655
Indemnity 242 2,247 2,489 299 2,338 2,637
- --------------------------------------------------------------------------------
Total Health Membership 7,433 8,367 15,800 5,279 8,426 13,705
================================================================================
Group Insurance (3)
Group Life 9,994 9,860
Disability 2,821 2,529
Long-Term Care 92 96
- --------------------------------------------------------------------------------
</TABLE>
(1) Health membership includes 2,136 thousand NYLCare members including 1,169
thousand Commercial HMO risk, 115 thousand Medicare HMO risk, 54 thousand
Medicaid HMO risk, 122 thousand HMO nonrisk, 510 thousand PPO risk and 166
thousand PPO nonrisk. Group Insurance membership includes 704 thousand
NYLCare members.
(2) Includes 1,306 thousand POS members who access primary care physicians and
referred care through an HMO network at September 30, 1998 and 878 thousand
at September 30, 1997.
(3) Group Insurance membership as of September 30, 1997 reflects improved data
as a result of the conversion to a new membership reporting system.
September 30, 1997 membership reflects adjustments which continued to occur
through the latter half of 1997 as applied to September 30, 1997 membership
previously reported. Many Group Insurance members participate in more than
one type of Aetna U.S. Healthcare coverage and are counted in each.
Total Health membership as of September 30, 1998 increased by 2 million members,
or 15%, when compared to September 30, 1997 primarily due to the acquisition of
NYLCare. Excluding the impact of the NYLCare acquisition, the membership
increases in Commercial HMO, Medicare HMO and point-of-service ("POS") were more
than offset by declines in Indemnity and PPO enrollment. The decline in
Indemnity enrollment reflects, among other factors, the continued migration of
Indemnity members to managed care products. Excluding the impact of the NYLCare
acquisition and the loss of members associated with the exiting of managed HMO
business in two markets and Medicaid business in one market, total HMO
membership as of September 30, 1998 increased by .5 million, or 10.9% when
compared to September 30, 1997.
Total Revenue and Expense
Revenue for Aetna U.S. Healthcare, excluding revenue in the third quarter and
first nine months of 1997 related to certain Medicare administrative services no
longer provided by Aetna U.S. Healthcare and, excluding net realized capital
gains or losses, increased $939 million, or 30%, for the quarter ended September
30, 1998 and increased $1,229 million or 13%, for the nine months ended
September 30, 1998 compared to the same periods in 1997. These increases were
primarily due to the acquisition of NYLCare, as well as premium rate increases
and membership growth in Commercial and Medicare HMOs partially offset by lower
Indemnity and PPO membership.
Page 25
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Operating expenses for Aetna U.S. Healthcare, excluding operating expenses in
the third quarter and first nine months of 1997 related to certain Medicare
administrative services no longer provided by Aetna U.S. Healthcare, increased
by $108 million or 17%, for the quarter ended September 30, 1998 and increased
$203 million or 11%, for the nine months ended September 30, 1998 compared with
the same periods in 1997. These increases were primarily due to the addition of
NYLCare, as well as HMO membership increases, customer service enhancements and
costs related to Year 2000.
Page 26
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA RETIREMENT SERVICES
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- -------------------------------------
(Millions) 1998 1997 % Change 1998 1997 % Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums (1) $ 38.6 $ 37.1 4.0% $ 113.8 $ 115.5 (1.5)%
Net investment income 271.3 278.6 (2.6) 807.7 830.6 (2.8)
Fees and other income 176.1 158.7 11.0 508.7 429.6 18.4
Net realized capital gains 1.9 10.6 (82.1) 9.8 19.8 (50.5)
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue 487.9 485.0 .6 1,440.0 1,395.5 3.2
- ----------------------------------------------------------------------------------------------------------------------------
Current and future benefits 254.2 256.7 (1.0) 739.8 778.9 (5.0)
Operating expenses 101.9 98.4 3.6 307.6 271.5 13.3
Amortization of deferred
policy acquisition costs 36.2 33.6 7.7 106.7 80.9 31.9
- ----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 392.3 388.7 .9 1,154.1 1,131.3 2.0
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 95.6 96.3 (.7) 285.9 264.2 8.2
Income taxes 29.0 29.0 -- 87.6 81.5 7.5
- ----------------------------------------------------------------------------------------------------------------------------
Net income (2) $ 66.6 $ 67.3 (1.0) $ 198.3 $ 182.7 8.5
============================================================================================================================
Net realized capital gains,
net of tax (included above) $ 1.3 $ 6.8 (80.9) $ 6.4 $ 12.8 (50.0)
============================================================================================================================
Deposits not included in premiums above:
Annuities - fixed options $ 238.8 $ 322.7 (26.0) $ 847.5 $ 901.8 (6.0)
Annuities - variable options 850.3 806.0 5.5 2,704.9 2,420.0 11.8
Individual Life Insurance 113.5 113.3 .2 374.2 351.2 6.5
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 1,202.6 $ 1,242.0 (3.2) $ 3,926.6 $ 3,673.0 6.9
============================================================================================================================
Assets under management: (3)
Annuities - fixed options $ 12,043.8 $ 11,997.4 .4
Annuities - variable options (4) 21,367.0 19,895.5 7.4
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal Annuities 33,410.8 31,892.9 4.8
Other investment advisory (5) 11,693.4 6,666.9 75.4
- ----------------------------------------------------------------------------------------------------------------------------
Financial services 45,104.2 38,559.8 17.0
Individual Life Insurance 3,263.6 3,056.6 6.8
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 48,367.8 $ 41,616.4 16.2
============================================================================================================================
Individual life insurance
coverage issued $ 3,003.7 $ 3,805.4 (21.1)
============================================================================================================================
Individual life insurance
coverage in force $ 49,711.2 $ 49,641.7 .1
============================================================================================================================
</TABLE>
(1) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $14.9 million for the
three months ended September 30, 1998, $17.1 million for the three months
ended September 30, 1997, $42.9 million for the nine months ended September
30, 1998 and $47.2 million for the nine months ended September 30, 1997.
(2) Net income includes a net benefit from capitalizing internal-use software
of $1.4 million for the three months ended September 30, 1998 and $5.7
million for the nine months ended September 30, 1998.
(3) Excludes net unrealized capital gains of $552.3 million at September 30,
1998 and $520.7 million at September 30, 1997.
(4) Includes $6,099.4 million at September 30, 1998 and $7,003.6 million at
September 30, 1997 of assets invested through ARS products in unaffiliated
mutual funds.
(5) The September 30, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously reported in the Large Case Pensions segment,
reflecting the consolidation of certain products which complement Aetna
Retirement Services' business strategy.
Page 27
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA RETIREMENT SERVICES (CONTINUED)
Aetna Retirement Services' ("ARS") net income for the third quarter of 1998
decreased $1 million when compared to the same period in 1997. Net income for
the nine months ended September 30, 1998 increased $16 million when compared to
the same period in 1997. Results include Year 2000 costs of $7 million (after
tax) for the third quarter of 1998 and $16 million (after tax) for the first
nine months of 1998. Excluding Year 2000 costs and net realized capital gains,
results for the third quarter of 1998 increased $11 million, or 19%, compared to
the third quarter of 1997. Results for the nine months ended September 30, 1998
increased $38 million, or 22%, compared to the same period in 1997. The 1998
results reflect improved earnings from both financial services products and
individual life insurance products.
Business Results
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------ ------------- -------------------------------
(Millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial services $47.5 $38.7 $136.1 $115.2
Individual life insurance 24.3 21.8 71.5 54.7
- --------------------------------------------------------------------------------------------------------------
Total $71.8 $60.5 $207.6 $169.9
==============================================================================================================
</TABLE>
The increase in earnings for financial services products for both the three and
nine months ended September 30, 1998 reflect increased fee income from higher
levels of assets under management. Assets under management (excluding
approximately $3 billion of assets under management that were previously
reported in the Large Case Pensions segment) increased by 9% primarily due to
additional net deposits (deposits less surrenders) and appreciation in the stock
markets over the past year. Due to a downturn in the stock markets which
occurred in the latter part of the third quarter, assets under management were
approximately $2 billion less at September 30, 1998 than at June 30, 1998.
For the three months ended September 30, 1998, operating expenses excluding Year
2000 were lower compared to the prior year period primarily due to cost
containment efforts. For the nine months ended September 30, 1998, increases in
fee income were partially offset by increased operating expenses, principally
due to expenses of Financial Network Investment Corporation ("FNIC") which was
acquired in July 1997, as well as increased expenses due to business growth.
However, operating expenses as a percentage of assets under management declined
in both periods.
Individual life insurance earnings increased for the third quarter of 1998
primarily due to favorable expense control. Earnings for the nine months ended
September 30, 1998 increased primarily due to favorable mortality experience and
a benefit from the termination of a reinsurance arrangement related to the
participating life insurance business in the first quarter of 1998.
Of the $12.0 billion of fixed annuity assets under management at September 30,
1998 and 1997, 75% were experience rated and 25% were fully guaranteed. The
average annualized earned rates on investments supporting fully guaranteed
investment contracts were 7.6% and 7.8% and the average annualized earned rates
on investments supporting experience rated investment contracts were 7.9% and
8.0% for the nine months ended September 30, 1998 and 1997. The average
annualized credited rates on fully guaranteed investment contracts were 6.5% and
6.6% and the average annualized credited rates on experience rated investment
contracts were 5.8% and 5.9% for the nine months ended September 30, 1998 and
1997. The resulting annualized interest margins on fully guaranteed investment
contracts were 1.1% and 1.2% and on experience rated investment contracts were
2.1% for the nine months ended September 30, 1998 and 1997.
Page 28
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA RETIREMENT SERVICES (CONTINUED)
Sale of Domestic Individual Life Insurance Business
The Company's sale of its domestic individual life insurance business to Lincoln
on October 1, 1998 included approximately $50 billion of individual life
insurance in force as well as access to a managing general agent and brokerage
distribution channel. The transaction is generally in the form of an indemnity
reinsurance arrangement and covers the following lines of insurance: traditional
life, universal life, participating life, sponsored life and corporate-owned
life insurance and pension life. Pension life results, which are reported in
Financial Services, are not material to ARS' results and therefore are not
included below. Revenues from the business lines sold were $135 million for the
third quarter of 1998 compared to $141 million for the third quarter of 1997;
and $399 million for the first nine months of 1998 compared to $409 million for
the same period in 1997. Net income from the business lines sold, excluding Year
2000 costs in 1998 and net realized capital gains in all periods, was $24
million for the third quarter of 1998 compared to $22 million for the third
quarter of 1997, and $72 million for the first nine months of 1998 compared to
$55 million for the same period in 1997. Comparable results were $75 million for
the year ended December 31, 1997. See "Overview" for further discussion of the
sale.
Page 29
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -----------------------------------
(Millions) 1998 1997 % Change 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 376.0 $ 380.1 (1.1)% $ 1,063.1 $ 1,056.5 .6%
Net investment income 102.6 90.3 13.6 340.2 276.4 23.1
Fees and other income 35.4 41.6 (14.9) 93.8 108.3 (13.4)
Net realized capital gains (losses) 1.2 6.0 (80.0) (3.9) 16.8 --
- ---------------------------------------------------------------------------------------------------------------
Total revenue 515.2 518.0 (.5) 1,493.2 1,458.0 2.4
- ---------------------------------------------------------------------------------------------------------------
Current and future benefits 337.2 316.1 6.7 919.7 892.6 3.0
Operating expenses 98.4 113.5 (13.3) 334.8 328.5 1.9
Interest expense 2.4 2.3 4.3 8.2 5.5 49.1
Amortization of goodwill and
other acquired intangible assets 2.4 4.7 (48.9) 12.7 11.8 7.6
Amortization of deferred
policy acquisition costs 24.5 22.1 10.9 68.9 62.5 10.2
- ---------------------------------------------------------------------------------------------------------------
Total benefits and expenses 464.9 458.7 1.4 1,344.3 1,300.9 3.3
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 50.3 59.3 (15.2) 148.9 157.1 (5.2)
Income taxes 9.5 21.5 (55.8) 35.1 51.9 (32.4)
- ---------------------------------------------------------------------------------------------------------------
Net income (1) $ 40.8 $ 37.8 7.9 $ 113.8 $ 105.2 8.2
===============================================================================================================
Net realized capital gains (losses),
net of tax (included above) $ 1.7 $ 3.8 (55.3) $ (.7) $ 11.5 --
===============================================================================================================
</TABLE>
(1) Net income includes a net benefit from capitalizing internal-use software
of $.5 million for the three months ended September 30, 1998 and $1.5
million for the nine months ended September 30, 1998.
Aetna International's net income for the third quarter of 1998 increased by $3
million and for the first nine months of 1998 increased by $9 million compared
with the same periods in 1997. Results include Year 2000 costs of $3 million
(after tax) for the third quarter of 1998 and $6 million (after tax) for the
first nine months of 1998. Excluding Year 2000 costs and net realized capital
gains or losses, results for the third quarter of 1998 increased $9 million, or
25%, and results for the first nine months of 1998 increased $27 million, or
29%, from the corresponding prior year periods. The increase in 1998 results
primarily reflects the Company's operations in Brazil, which were acquired in
April 1997, and the new pension business in Mexico offset in part by overall
weakening of foreign currency.
Earnings by major geographic location, excluding Year 2000 costs and net
realized capital gains or losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asia Pacific (1) $ 16.6 $ 13.4 $ 44.5 $ 39.2
Americas (2) 26.2 22.4 83.4 57.3
Other (3) (.3) (1.8) (7.2) (2.8)
- ------------------------------------------------------------------------------------------
Total $ 42.5 $ 34.0 $ 120.7 $ 93.7
==========================================================================================
</TABLE>
(1) Includes Hong Kong, Taiwan, Indonesia, Malaysia, Philippines and New
Zealand.
(2) Includes Argentina, Brazil, Canada, Mexico, Venezuela, Chile and Peru.
(3) Includes general and other miscellaneous expenses.
Page 30
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
(Millions) 1998 1997 % Change 1998 1997 % Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 31.6 $ 36.1 (12.5)% $ 101.0 $ 123.4 (18.2)%
Net investment income 278.0 328.7 (15.4) 883.4 1,055.5 (16.3)
Fees and other income(1) 4.7 8.4 (44.0) 14.0 25.7 (45.5)
Net realized capital gains (losses) (.3) 19.7 -- 51.7 18.5 179.5
- -------------------------------------------------------------------------------------------------------
Total revenue 314.0 392.9 (20.1) 1,050.1 1,223.1 (14.1)
- -------------------------------------------------------------------------------------------------------
Current and future benefits 272.0 324.1 (16.1) 872.4 1,045.3 (16.5)
Operating expenses(1) 5.1 6.6 (22.7) 17.0 22.4 (24.1)
Reduction of loss on
discontinued products (68.0) -- -- (68.0) (172.5) (60.6)
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 209.1 330.7 (36.8) 821.4 895.2 (8.2)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 104.9 62.2 68.6 228.7 327.9 (30.3)
Income taxes 40.7 24.9 63.5 86.3 124.2 (30.5)
- -------------------------------------------------------------------------------------------------------
Net income $ 64.2 $ 37.3 72.1 $ 142.4 $ 203.7 (30.1)
=======================================================================================================
Net realized capital gains
(losses), net of tax (included above) $ (.2) $ 12.8 -- $ 33.6 $ 12.9 160.5
=======================================================================================================
Deposits not included in
premiums above $ 263.7 $ 411.6 (35.9) $ 613.7 $ 1,333.8 (54.0)
=======================================================================================================
Assets under management(1)(2)(3) $28,446.9 $ 33,889.9 (16.1)
=======================================================================================================
</TABLE>
(1) Three months ended September 30, 1997 included $2.2 million of fees and
other income and $.2 million of operating expenses and nine months ended
September 30, 1997 included $5.8 million of fees and other income and $1.8
million of operating expenses and at September 30, 1997, assets of $3,303.9
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.
(2) Excludes net unrealized capital gains of $733.2 million at September 30,
1998 and $494.6 million at September 30, 1997.
(3) Includes assets under management of $6,892.1 million at September 30, 1998
and $7,751.0 million at September 30, 1997 related to discontinued
products.
Large Case Pensions' net income for the three months ended September 30, 1998
increased $27 million compared with the same period in 1997. Primarily as a
result of favorable investment performance, the Company released $44 million
(after tax) of the reserve related to discontinued products during the third
quarter of 1998. Results for the third quarter of 1998 include costs of $.4
million (after tax) related to Year 2000. Excluding the reserve release, Year
2000 costs and net realized capital gains or losses, results for the three
months ended September 30, 1998 decreased $4 million from the corresponding
prior year period. Earnings decreased as net investment income on capital
supporting maturing obligations was redeployed to other businesses of the
Company.
Net income for the nine months ended September 30, 1998 decreased $61 million
compared with the first nine months of 1997. During the first nine months of
1998, the Company released $44 million (after tax) of the reserve related to
discontinued products as discussed above. Also, during the first nine months of
1997, as a result of continued favorable developments in real estate markets,
the Company released $108 million (after tax) of the reserve related to
discontinued products. Excluding Year 2000 costs of $.8 million (after tax) for
the first nine months of 1998, the 1998 and 1997 reserve releases and net
realized capital gains or losses, results for the nine months ended September
30, 1998 decreased $17 million from the corresponding prior year period. The
decrease in earnings continues to reflect the reduction of capital supporting
this business.
Page 31
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
Assets under management at September 30, 1998 were 16% lower than a year
earlier, primarily as a result of the continuing runoff of underlying
liabilities and consolidation into the ARS segment of the Company's investment
advisory services and certain other products which complement ARS' business
strategy.
General account assets supporting experience rated products (where the customer,
not the Company, assumes investment and other risks) may be subject to
participant or contractholder withdrawal. Experience rated contractholder and
participant withdrawals and transfers were as follows (excluding contractholder
transfers to other Company products):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $233.2 $224.6 $706.2 $682.0
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments $ 86.8 $122.0 $259.3 $258.1
Participant directed withdrawals $ 22.3 $ 31.5 $ 74.9 $ 96.3
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
Discontinued Products
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that future losses on the products are greater than anticipated and positively
affected to the extent future losses are less than anticipated. Management
reviews the adequacy of the discontinued products reserve quarterly and, as a
result, $68 million (pretax) of the reserve was released in the third quarter of
1998 primarily due to favorable investment performance. Similar reviews in the
first quarter of 1997 resulted in the Company's release of $173 million (pretax)
of the reserve related to guaranteed investment contracts ("GICs") due to
continued favorable developments in real estate markets. The current reserve
reflects management's best estimate of anticipated future losses. The discussion
below presents information for single-premium annuities ("SPAs") and GIC
products on a combined basis.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest margin $ (4.3) $ (6.1) $ (15.9) $ 5.7
Net realized capital gains (1) 5.0 31.5 53.8 92.8
Interest earned on receivable from
continuing products 5.8 5.4 17.0 16.2
Other, net (.6) 1.1 1.0 1.4
- ------------------------------------------------------------------------------------------------------------------
Results of discontinued products, after tax $ 5.9 $ 31.9 $ 55.9 $ 116.1
==================================================================================================================
Results of discontinued products, pretax $ 8.2 $ 51.8 $ 91.7 $ 185.0
==================================================================================================================
Net realized capital (losses) gains from sales
of bonds, after tax (included above) $ (.6) $ 10.0 $ 28.5 $ 21.9
==================================================================================================================
</TABLE>
(1) Includes net realized capital gains of $2.7 million for the three months
ended September 30, 1998, $21.3 million for the three months ended
September 30, 1997, $25.4 million for the nine months ended September 30,
1998 and $41.4 million for the nine months ended September 30, 1997 related
to continued favorable developments in real estate markets. The 1997
results also include net realized capital gains of $37.3 million for the
nine months ended September 30 resulting from the sale of investments to
meet liquidity needs.
The interest margin is the difference between earnings on invested assets and
interest credited to contractholders.
Page 32
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $488 million (after tax) at September 30,
1998. Interest income accrues on this receivable at the discount rate used to
calculate the reserve.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
<TABLE>
<CAPTION>
Nine Months Ended
(Millions) September 30, 1998
- ----------------------------------------------------------------------------
<S> <C>
Reserve at December 31, 1997 $ 1,151.7
Results of discontinued products 91.7
Reserve reduction (68.0)
- ----------------------------------------------------------------------------
Reserve at September 30, 1998 $ 1,175.4
============================================================================
</TABLE>
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scheduled contract maturities,
settlements and benefit payments $264.6 $392.1 $1,124.7 $1,259.0
Participant directed withdrawals $ 4.8 $ 9.6 $ 17.7 $ 29.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Note 10 of Condensed Notes to Financial Statements for additional
information.
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -------------------------------------
(Millions, after tax) 1998 1997 % Change 1998 1997 % Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense $ 42.0 $ 37.7 11.4% $ 111.9 $ 111.4 .4%
Other expense, net(1) 30.7 25.9 18.5 88.3 79.2 11.5
Net realized capital gains(2) -- (.2) 100.0 (68.5) (34.0) 101.5
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a net benefit from capitalizing internal-use software of $1.9
million for the three months ended September 30, 1998 and $5.8 million for
the nine months ended September 30, 1998.
(2) After-tax net realized capital gains for the nine months ended September
30, 1998 include gains of $74.4 million related to the sale of the
Company's remaining investment in Travelers Property Casualty Corporation.
After-tax net realized capital gains for the nine months ended September
30, 1997 include gains of $33.6 million related to the sale of a portion of
the Company's investment in Travelers Property Casualty Corporation.
The Corporate segment includes interest expense and other expenses which are not
directly related to the Company's business segments. "Other Expense" includes
corporate expenses such as staff area expenses, advertising and contributions,
which are partially offset by net investment income. Interest expense increased
due to the issuance of commercial paper in connection with the NYLCare
acquisition. See "Liquidity and Capital Resources".
Included in other expense are costs related to Year 2000 of $8 million (after
tax) for the third quarter of 1998 and $12 million (after tax) for the first
nine months of 1998.
Page 33
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. The Company's use of derivatives
is generally limited to hedging purposes and has principally consisted of using
foreign exchange forward contracts, futures contracts, interest rate swap
agreements and warrants to hedge certain market risks such as interest rate
risk, equity price risk and foreign exchange risk.
The Company regularly evaluates market risk sensitive instruments by examining,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term), duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.
Management also, on a quarterly basis, reviews hypothetical net losses in the
consolidated near-term financial position, results of operations or cash flows
under certain assumed market rate changes.
Based on the Company's overall exposure to interest rate, equity price and
foreign exchange risks, the Company believes that these hypothetical changes in
market rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company as of
September 30, 1998. See the Company's 1997 Annual Report for a more complete
discussion of "Risk Management and Market Sensitive Instruments".
Debt Securities
Debt securities represented 82% of the Company's total general account invested
assets at September 30, 1998 and 80% at December 31, 1997. Debt securities were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 6,169.3 $ 6,471.4
Supporting experience rated products 13,672.6 15,322.8
Supporting remaining products 13,352.1 12,450.8
- ------------------------------------------------------------------------------------
Total debt securities (1) $33,194.0 $34,245.0
====================================================================================
</TABLE>
(1) Total debt securities include "Below Investment Grade" securities of $2.0
billion at September 30, 1998 and December 31, 1997 of which 52.6% at
September 30, 1998 and 61.5% at December 31, 1997 support discontinued and
experience rated products. See the Company's 1997 Annual Report for a
discussion of "Below Investment Grade" securities.
Debt securities reflected net unrealized capital gains of $1.7 billion at
September 30, 1998 and $1.6 billion at December 31, 1997. Of the net unrealized
capital gains at September 30, 1998, $430 million related to assets supporting
discontinued products and $712 million related to experience rated pension
contractholders.
Page 34
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 16.2 $ 104.0
Supporting experience rated products 1,704.7 2,060.8
Supporting remaining products 494.1 545.6
- ----------------------------------------------------------------------------------
Total residential CMOs (1) $ 2,215.0 $ 2,710.4
==================================================================================
</TABLE>
(1) The amortized cost of total residential CMOs was $2,059.2 million at
September 30, 1998 and $2,549.6 million at December 31, 1997.
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for nonagency-backed CMOs, defaults.
The principal risks inherent in holding CMOs are prepayment and extension risks
related to dramatic decreases and increases in interest rates resulting in the
repayment of principal from the underlying mortgages either earlier or later
than originally anticipated. At September 30, 1998, approximately 2% and at
December 31, 1997 approximately 3% of the Company's CMO holdings were subject to
more prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
Mortgage Loans
At September 30, 1998 and December 31, 1997, the Company's mortgage loan
investments, net of impairment reserves, were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 759.9 $ 976.9
Supporting experience rated products 1,266.4 1,671.9
Supporting remaining products 1,626.8 1,559.0
- ----------------------------------------------------------------------------------------
Total mortgage loan investments $3,653.1 $4,207.8
========================================================================================
</TABLE>
Problem, restructured, and potential problem loans included in mortgage loans
were $305 million at September 30, 1998 and $388 million at December 31, 1997 of
which 85% at September 30, 1998 and 84% at December 31, 1997 support
discontinued and experience rated products. See the Company's 1997 Annual Report
for a discussion of problem, restructured and potential problem loans. Specific
impairment reserves on these loans were $39 million at September 30, 1998 and
$51 million at December 31, 1997. (See Note 6 of Condensed Notes to Financial
Statements).
During the first nine months of 1998, 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 $555 million decrease in
the mortgage loan portfolio primarily results from loan prepayments and maturing
loans.
Page 35
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The liquidity needs of the Company's businesses are generally met from cash
provided by investing activities (asset maturities and sales), premiums,
deposits, income received on investments and financings. The Company's
businesses use cash primarily for claim and benefit payments, contract
withdrawals and operating expenses. In addition, the Company uses cash to invest
in core businesses, repurchase common stock and other outstanding securities and
pay shareholder dividends.
During the first nine months of 1998, net cash generated from investing,
financing and operating activities was used to make approximately $967 million
of investments in core businesses, repurchase approximately $258 million of
common stock and pay approximately $129 million of dividends to shareholders.
During the corresponding period of 1997, net cash generated from investing,
financing and operating activities was used to make approximately $492 million
of investments in core businesses, repurchase approximately $302 million of
common stock and pay approximately $131 million of dividends to shareholders.
See "Consolidated Statements of Cash Flows" for additional information.
Dividends
On September 25, 1998, the Company's Board of Directors declared a quarterly
dividend of $.20 per share of common stock and $1.18945 per share of 6.25% Class
C Voting Mandatorily Convertible Preferred Stock to shareholders of record at
the close of business on October 30, 1998, payable November 15, 1998.
Financings and Financing Capacity
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services, Inc. and are fully and unconditionally guaranteed by
Aetna Inc. (See Note 11 of Condensed Notes to Financial Statements).
The Company has significant short-term liquidity supporting its businesses. 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 was $1,732 million during the first nine
months of 1998 and $858 million during the first nine months of 1997.
The NYLCare acquisition was completed using funds made available from the
issuance of commercial paper. The Company expects to ultimately finance the
transaction in part with medium- or long-term fixed income securities.
Common Stock Transactions
In September 1997, the Board authorized the repurchase of up to 7,500,000 shares
of common stock. As of September 30, 1998, 5,740,000 shares of common stock had
been repurchased under this authorization at a cost of $441 million, of which
3,371,700 shares at a cost of $258 million were repurchased during the nine
months ended September 30, 1998.
NEW ACCOUNTING STANDARDS
See Note 2 of Condensed Notes to Financial Statements for a discussion of
recently issued accounting standards.
Page 36
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.
State of Readiness
In 1997, the Company organized a multi-disciplinary Year 2000 Project Team
that includes outside consultants. The Year 2000 Project Team and the Company's
businesses have developed and are currently executing a comprehensive plan
designed to make the Company's mission critical IT systems and embedded systems
Year 2000 ready. Outside consultants have reviewed the Company's overall
process, plan and progress to date. The Company's plan for IT systems consists
of four phases: (1) inventory-identifying all IT systems and risk rating each
according to its potential business impact; (2) assessment - identifying IT
systems that use date functions and assessing them for Year 2000 functionality;
(3) remediation -reprogramming, or replacing where necessary, inventoried items
to ensure they are Year 2000 ready; and (4) testing and certification - testing
the code modifications and new inventory with other associated systems,
including extensive date testing and performing quality assurance testing to
ensure successful operation in the post-1999 environment.
The Company completed the inventory and assessment phases for substantially all
of its IT systems by year-end 1997. The Company's IT systems are currently in
the remediation and testing and certification phases. The Company plans to
complete the remediation of substantially all of its mission critical IT systems
by year-end 1998, the remediation of its other IT systems by March 30, 1999 and
the testing and certification of all of its IT systems by mid-1999.
The Company has inventoried and risk rated substantially all of its embedded
systems. The results of these processes indicate that embedded systems should
not present a material Year 2000 risk to the Company. The Company's remaining
steps include testing selected embedded systems and remediating and certifying
systems that exhibit Year 2000 issues. The Company is focusing its testing and
remediation efforts on select embedded systems of its mission critical
facilities such as data centers, service centers, communications centers and
select office locations. The Company plans to complete the testing of these
systems by mid-1999, and the remediation and certification of these systems by
year-end 1999.
The Company believes that its Year 2000 project generally is on schedule.
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. The Company is attempting to determine the overall
Year 2000 readiness of its external relationships. In the case of mission
critical suppliers such as banks, financial intermediaries (such as stock
exchanges), telecommunications providers and other utilities, mutual fund
companies, IT vendors, financial market data providers, national pharmacy
chains, electronic claims clearinghouses, major physician groups and major
hospitals, the Company is engaged in discussions with the third parties and is
attempting to obtain detailed information as to those parties' Year 2000 plans
and state of readiness. The Company, however, does not have sufficient
information at the current time to predict whether its external relationships
will be Year 2000 ready.
Page 37
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000 (CONTINUED)
Year 2000 Costs
Total Year 2000 project costs are currently estimated to be $110 million
(after tax) in 1998 and $85 million (after tax) in 1999. A large majority of
these costs are expected to be incremental expenses that will not recur in the
Year 2000 or thereafter. The Company's current estimates primarily reflect
increased remediation and testing efforts (additional lines of code) and
increased use of outside resources as well as the cost of Year 2000 compliance
for NYLCare. Year 2000 costs incurred were $37 million (after tax) for the third
quarter of 1998 and $77 million (after tax) for the first nine months of 1998.
Year 2000 costs were not material in 1997. The Company expenses these costs as
incurred and funds these costs through operating cash flows.
Year 2000 compliance is critical to the Company. The Company has redeployed some
resources from non-critical system enhancements to address Year 2000 issues. Due
to the importance of IT systems to the Company's business, management has not
deferred mission non-critical systems enhancements to become Year 2000 ready.
The Company does not expect these redeployments and deferrals to have a material
impact on the Company's financial condition or results of operations.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process benefits claims, update customers' accounts, process financial
transactions, bill customers, assess exposure to risks, determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others as well as business interruptions or shutdowns, financial
losses, reputational harm, increased scrutiny by regulators and litigation
related to Year 2000 issues. The Company's international affiliates face
additional Year 2000 risk due to the diverse environments in which they operate.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues at the Company or its external
relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
The Company has begun to develop contingency/recovery plans aimed at ensuring
the continuity of critical business functions before and after December 31,
1999. As part of that process, the Company has begun to develop reasonably
likely failure scenarios for its critical IT systems and external relationships
and the embedded systems in its critical facilities. Once these scenarios are
identified, the Company will develop plans that are designed to reduce the
impact on the Company, and provide methods of returning to normal operations, if
one or more of those scenarios occur. The Company expects contingency/recovery
planning to be substantially complete by September 1999.
See "Forward-Looking Information/Risk Factors" for factors that could cause
actual Year 2000 results to differ from the Company's expectations.
Page 38
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
REGULATORY ENVIRONMENT
A variety of legislative and regulatory proposals have been made and enacted at
both the federal and state government levels to address various aspects of the
health care system and health insurance.
Legislation to reform the federal Medicare program was passed by Congress on
July 31, 1997 and was signed into law. Certain provisions of this legislation
began to phase in, beginning on January 1, 1998, changes to the Medicare risk
HMO premium determination methodology that will generally reduce the premiums
payable to the Company as compared with the methodology previously used. The
level and extent of such reductions will vary by geographic market and other
factors. A "user fee" payable by the Company was also imposed. While the
phase-in provisions have provided the Company with an opportunity to offset some
of such premium reductions (including the user fee) by adjusting the
supplemental premiums payable by members and the benefits included in the
Company's products, competition, regulation and other factors may result in such
adjustments not fully offsetting such premium reductions. Due to such
reductions and other factors, the Company has decided to non-renew its Medicare
risk contracts in certain areas effective January 1, 1999. New regulations to
govern the Medicare risk program as part of the Medicare and Choice program were
issued in draft form in mid-1998 and are expected to be issued in final form
with an effective date of January 1, 1999.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), was
enacted to (i) ensure portability of coverage to individuals changing jobs or
moving to individual coverage by limiting preexisting condition exclusions, (ii)
guarantee availability of coverage to employees in the small group market, and
(iii) prevent exclusion of individuals from coverage under group plans based on
health status. This legislation was effective on July 1, 1997. Other federal
legislation, effective January 1, 1998, mandated minimum hospital stays after
childbirth and parity in applying lifetime limits to mental health benefits.
Congress and many states, including states in which the Company has substantial
managed care membership, have enacted or are considering legislation or
regulation related to the operation of health plans. Such legislation or
regulation varies, but includes, among other things, one or more of the
following: (i) mandatory maternity and other lengths of stay, (ii) regulation of
utilization review, (iii) mandated expanded consumer disclosures, (iv) mandatory
direct access to OB/GYNs, chiropractors and other particular specialists, (v)
mandatory direct access to specialists for patients with chronic conditions,
(vi) mandatory point-of-service benefits, (vii) mandatory or expanded coverage
of experimental procedures and drugs, (viii) third party review of denials of
benefits, (ix) liability for negligent denials of benefits, (x) assessments,
surcharges or taxes on premiums or provider payments to fund uncompensated care,
graduate medical education or government programs, (xi) extension of malpractice
and other liability for medical and other decisions from providers to health
plans, (xii) required payment for emergency services, (xiii) mandated internal
and external grievance and appeal procedures, (xiv) hearings or other
limitations on termination of physicians from networks, (xv) prohibition of
so-called "gag" clauses, and (xvi) eliminating or reducing the scope of ERISA
preemption of state laws, (xvii) required payment levels for out of network
care, (xviii) prohibition or limitation of arrangements designed to manage
medical costs and improve quality of care, such as capitated arrangements with
providers or provider financial incentives, (xviv) limitations on utilization
management methods, (xx) regulation of the composition of the Company's provider
networks, such as any willing provider or pharmacy laws, and (xxi) changes to
licensure or certification requirements.
At this time, the Company is unable to predict the impact of the foregoing
federal or state legislation or regulation, or of any future legislation or
regulatory changes that may be enacted, although it can be anticipated that
certain of these measures, if enacted, would adversely affect the Company.
Moreover, there can be no assurance that the Company can recoup, through higher
premiums or other measures, the increased costs of mandated benefits or the
other increased costs caused by such legislation or regulation.
For other important information regarding regulation of the Company's health and
other businesses, see the Company's 1997 Annual Report on Form 10-K.
Page 39
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions.
Certain information contained in this management's discussion and analysis is
forward-looking within the meaning of the 1995 Act or Securities and Exchange
Commission rules including, but not limited to, the information that appears
under the headings "Year 2000" and "Regulatory Environment". Words such as
expects, projects, anticipates, intends, plans, believes, seeks or estimates, or
variations of such words and similar expressions are also intended to identify
forward-looking statements. These forward-looking statements are subject to
significant uncertainties and contingencies, many of which are beyond the
control of the Company.
Set forth below are certain important factors that, in addition to general
economic conditions and other factors, some of which are discussed under the
headings "Forward Looking Information/Risk Factors", "Year 2000", "Regulatory
Environment" and the "Outlook" section of each business segment in the Company's
1997 Annual Report, may affect the forward-looking statements and the Company's
businesses generally.
Other Factors Affecting All of the Company's Businesses - Year 2000
Any critical unresolved Year 2000 issues at the Company or its external
relationships could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. In addition, the Company's
expectations about the future costs and timely and successful completion of its
Year 2000 program are subject to uncertainties that could cause actual results
to differ materially from what has been discussed above under "Year 2000".
Factors that could influence the amount of future costs and the completion dates
and effectiveness of remediation, testing and certification and contingency
planning efforts include the Company's success in identifying IT systems and
embedded systems that contain two-digit year codes, the nature and amount of
required reprogramming, testing and certification, the rate and magnitude of
related labor and consulting costs, the availability of qualified personnel and
the success of the Company's external relationships in addressing their own Year
2000 issues. See "Year 2000".
Page 40
<PAGE> 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General Account Investments".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions have been
transferred to the United States District Court for the Eastern District of
Pennsylvania for consolidated pretrial proceedings with the cases pending there.
The plaintiffs have filed a Consolidated and Amended Complaint (the "Complaint")
seeking, among other remedies, unspecified damages resulting from defendants'
alleged violations of federal securities laws. The Complaint alleges that the
Company and three of its current or former officers or directors, Ronald E.
Compton, Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. The litigation is still in the preliminary stages, and the
Company is defending the actions vigorously.
The Company is also involved in numerous other 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 these other lawsuits cannot be determined at this time,
after consideration of the defenses available to the Company and any related
reserves established, they are not expected to result in liability for amounts
material to the financial condition of the Company, although they may adversely
affect results of operations in future periods.
Page 41
<PAGE> 42
PART II. OTHER INFORMATION (Continued)
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services, Inc.'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>
Year Ended December 31,
Nine Months Ended ------------------------------------------------
Aetna Inc. September 30, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 5.11 5.55 2.45 4.97 4.74 (a)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 4.05 4.28 2.10 4.97 4.74 (a)
</TABLE>
(a) The Company reported a pretax loss from continuing operations in 1993 which
was inadequate to cover fixed charges by $1.0 billion.
<TABLE>
<CAPTION>
Year Ended December 31,
Nine Months Ended -----------------------
Aetna Services, Inc. September 30, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.48 5.75 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 4.48 5.75 2.44
</TABLE>
For purposes of computing both the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
"earnings" represent consolidated earnings from continuing operations before
income taxes, cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of interest (and the
portion of rental expense deemed representative of the interest factor) and
includes the dividends paid to preferred shareholders of a subsidiary. (See Note
15 of Notes to Financial Statements in the Company's 1997 Annual Report.) During
1995, 1994, and 1993 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 42
<PAGE> 43
PART II. OTHER INFORMATION (Continued)
Item 5. Other Information. (continued)
(b) Ratings
The ratings of certain of Aetna Inc.'s subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
---------------------------------------------
Moody's
Duff & Investors Standard
A.M. Best Phelps Service & Poor's
--------- ------ ------- --------
<S> <C> <C> <C> <C>
Aetna Services, Inc.(senior debt)**
August 4, 1998(1) * A A3 A
November 3, 1998 * A A3 A
Aetna Services, Inc.(commercial paper)**
August 4, 1998(1) * D-1 P-2 A-1
November 3, 1998 * D-1 P-2 A-1
Aetna Life Insurance Company(claims paying)
August 4, 1998(1) A AA- A1 A+
November 3, 1998 A AA- A1 A+
Aetna Life Insurance and Annuity Company(claims paying)
August 4, 1998(1) A+ AA+ Aa3 AA-
November 3, 1998 A AA Aa3 AA-
</TABLE>
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
(1) As of August 4, 1998 A.M. Best ratings were on review and Standard & Poor's
and Moody's Investors Service ratings were on credit watch or review for
possible downgrade.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and preferred stock
dividends for the nine months ended September 30, 1998 and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 for the
Company and for the nine months ended September 30, 1998 and for the
years ended December 31, 1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG Peat Marwick LLP acknowledging awareness of the use
of a report on unaudited interim financial information, dated
November 3, 1998.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
Page 43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aetna Inc.
-------------------------
(Registrant)
Date November 4, 1998 By /s/ Alan M. Bennett
---------------------------------------
Alan M. Bennett
Vice President and Corporate Controller
(Chief Accounting Officer)
Page 44
<PAGE> 45
AETNA INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
12 Statement Re Computation of Ratios
Statement re: computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and preferred stock
dividends for the nine months ended September 30, 1998 and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 for the
Company and for the nine months ended September 30, 1998 and for the
years ended December 31, 1997 and 1996 for Aetna Services, Inc.
15 Letters Re Unaudited Interim Financial Information
Letter from KPMG Peat Marwick LLP acknowledging awareness of the use
of a report on unaudited interim financial information, dated
November 3, 1998.
27 Financial Data Schedule
Page 45
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30, December 31,
----------------- -----------------------------------------------------------
(Millions) 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations $ 1,062.1 $ 1,511.2 $ 338.7 $ 726.2 $ 627.5 $(1,014.7)
Add back fixed charges 259.5 321.9 245.1 187.0 170.8 154.7
Minority interest 5.5 14.7 16.4 16.1 11.4 7.0
- ---------------------------------------------------------------------------------------------------------------
Income (loss) as adjusted $ 1,327.1 $ 1,847.8 $ 600.2 $ 929.3 $ 809.7 $ (853.0)
===============================================================================================================
Fixed charges:
Interest on indebtedness (1) $ 180.5 $ 235.8 $ 168.3 $ 115.9 $ 98.6 $ 77.4
Portion of rents representative
of interest factor 79.0 86.1 76.8 71.1 72.2 77.3
- ---------------------------------------------------------------------------------------------------------------
Total fixed charges $ 259.5 $ 321.9 $ 245.1 $ 187.0 $ 170.8 $ 154.7
===============================================================================================================
Preferred stock dividend
requirements 68.3 92.4 41.1 -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 327.8 $ 414.3 $ 286.2 $ 187.0 $ 170.8 $ 154.7
===============================================================================================================
Ratio of earnings to
fixed charges 5.11 5.74 2.45 4.97 4.74 (5.51)
===============================================================================================================
Ratio of earnings to
combined fixed charges and
preferred stock dividends 4.05 4.46 2.10 4.97 4.74 (5.51)
===============================================================================================================
</TABLE>
(1) For the nine months ended September 30, 1998 and years ended December 31,
1997, 1996, 1995 and 1994, interest on indebtedness includes the dividends
paid to preferred shareholders of a subsidiary. (See Note 14 of Notes to
Financial Statements in the Company's 1997 Annual Report.)
<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>
Nine Months Ended Years Ended
September 30, December 31,
----------------- -----------------------
(Millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax income from continuing
operations $ 886.4 $ 1,505.2 $ 335.0
Add back fixed charges 256.2 318.1 243.8
Minority interest 4.8 15.7 16.4
- ----------------------------------------------------------------------------------------
Income as adjusted $ 1,147.4 $ 1,839.0 $ 595.2
========================================================================================
Fixed charges:
Interest on indebtedness (2) $ 180.4 $ 234.0 $ 168.3
Portion of rents representative
of interest factor 75.8 84.1 75.5
- ----------------------------------------------------------------------------------------
Total fixed charges $ 256.2 $ 318.1 $ 243.8
========================================================================================
Preferred stock dividend
requirements -- -- --
- ----------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 256.2 $ 318.1 $ 243.8
========================================================================================
Ratio of earnings to fixed
charges 4.48 5.78 2.44
========================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 4.48 5.78 2.44
========================================================================================
</TABLE>
(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 1997 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 1997 Annual
Report.)
<PAGE> 1
Exhibit 15
Letter Re: Unaudited Interim Financial Information
Aetna Inc.
Hartford, Connecticut
Ladies and Gentlemen:
Re: Registration Statements No. 333-07169, 333-08427,
333-08429, 333-08431, 333-52321, 333-52321-01, 333-52321-02, 333-52321-03,
333-52321-04, and 333-52321-05.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated November 3, 1998 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.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
November 3, 1998
<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 nine months ended
September 30, 1998 for Aetna Inc. and is qualified in its entirety by reference
to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 33,194
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 638
<MORTGAGE> 3,653
<REAL-ESTATE> 276
<TOTAL-INVEST> 40,362
<CASH> 3,482
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,533
<TOTAL-ASSETS> 100,895
<POLICY-LOSSES> 18,430
<UNEARNED-PREMIUMS> 234
<POLICY-OTHER> 4,065
<POLICY-HOLDER-FUNDS> 17,934
<NOTES-PAYABLE> 2,210
862
0
<COMMON> 3,423
<OTHER-SE> 7,035
<TOTAL-LIABILITY-AND-EQUITY> 100,895
10,548
<INVESTMENT-INCOME> 2,424
<INVESTMENT-GAINS> 226
<OTHER-INCOME> 1,703
<BENEFITS> 10,489
<UNDERWRITING-AMORTIZATION> 176
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,062
<INCOME-TAX> 417
<INCOME-CONTINUING> 646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 646
<EPS-PRIMARY> 4.17<F1>
<EPS-DILUTED> 4.10<F2>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>The EPS-Primary tag represents basic EPS under SFAS 128.
<F2>The EPS-Diluted tag represents diluted EPS under SFAS 128.
</FN>
</TABLE>
