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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 1-11913
Aetna Inc.
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(Exact name of registrant as specified in its charter)
Connecticut 02-0488491
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
151 Farmington Avenue,
Hartford, Connecticut 06156
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(Address of principal (ZIP Code)
executive offices)
Registrant's telephone number, including area code: (860) 273-0123
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock $.01 par value New York Stock Exchange
6.25% Class C Voting Mandatorily New York Stock Exchange
Convertible Preferred Stock
$.01 par value
9 1/2% Cumulative Monthly Income New York Stock Exchange
Preferred Securities, Series A
(issued by a subsidiary)
6 3/8% Notes due August 15, 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998 was $11,485,043,678.
As of January 31, 1998, 145,637,336 shares of the registrant's Common Stock $.01
par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 annual report to shareholders (the "Annual
Report"). (Parts I, II and IV)
Portions of the registrant's proxy statement to be filed on or about March 20,
1998 (the "Proxy Statement"). (Parts III and IV)
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.
A. Organization of Business 3
B. Financial Information about Industry Segments 4
C. Description of Industry Segments
1. Aetna U.S. Healthcare 4
2. Aetna Retirement Services 14
3. Aetna International 18
4. Large Case Pensions 20
5. General Account Investments 22
6. Other Matters
a. Regulation 23
b. NAIC IRIS Ratios 26
c. Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock
Dividends 27
d. Trademarks 27
e. Ratings 28
f. Miscellaneous 28
Item 2. Properties. 29
Item 3. Legal Proceedings. 29
Item 4. Submission of Matters to a Vote of Security Holders. 29
Executive Officers of Aetna Inc. 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 32
Item 6. Selected Financial Data. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 32
Item 8. Financial Statements and Supplementary Data. 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 32
PART III
Item 10. Directors and Executive Officers of the Registrant. 33
Item 11. Executive Compensation. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management. 33
Item 13. Certain Relationships and Related Transactions. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 33
Index to Financial Statement Schedules 40
Signatures 58
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PART I
Item 1. Business.
A. Organization of Business
Aetna Inc. and its subsidiaries (collectively, the "Company") constitute one of
the nation's largest health benefits companies, based on membership, and one of
the nation's largest insurance and financial services organizations centered
around three core businesses: health care, retirement services and
international.
Aetna Inc., a Connecticut corporation, became the parent corporation of Aetna
Services, Inc. ("Aetna Services") and Aetna U.S. Healthcare, Inc. (formerly U.S.
Healthcare, Inc.) as a result of a merger transaction on July 19, 1996. The
merger was accounted for as a purchase of U.S. Healthcare. (See Note 2 of Notes
to Financial Statements in the Annual Report.) Aetna sold its property-casualty
operations on April 2, 1996. (See Note 3 of Notes to Financial Statements in the
Annual Report for a discussion of certain indemnifications and other information
related to the property-casualty sale.)
The Company's business operations are conducted in the following segments: Aetna
U.S. Healthcare, Aetna Retirement Services, Aetna International and Large Case
Pensions. The principal products included in these segments are:
Aetna U.S. Healthcare:
Health products (including health maintenance organization,
point-of-service, preferred provider organization and indemnity products)
Group life and disability insurance
Long-term care insurance
Aetna Retirement Services:
Financial services
Individual life insurance
Aetna International:
Primarily life and health insurance and financial services
Large Case Pensions:
Retirement products (including pension and annuity products) primarily for
defined benefit and defined contribution plans
In addition, the Corporate segment includes interest expense and corporate
expenses not directly related to the Company's business segments, such as staff
area expenses, national advertising and contributions.
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B. Financial Information about Industry Segments
Required financial information by industry segment is set forth in Note 17 to
the Financial Statements, which is incorporated herein by reference to the
Annual Report. Revenue and income from continuing operations attributable to
each industry segment are incorporated herein by reference to the Selected
Financial Data in the Annual Report.
Certain reclassifications have been made to 1996 and 1995 financial information
to conform to 1997 presentation.
C. Description of Industry Segments
1. Aetna U.S. Healthcare
Products and Services
Aetna U.S. Healthcare provides a full spectrum of health products (managed care
and indemnity) and group insurance products (life, disability and long-term
care) on both an insured and an employer-funded basis. Under insured plans, the
Company assumes all or a majority of health care cost, utilization, mortality,
morbidity or other risk depending on the product. Under employer-funded plans,
the customer, and not the Company, assumes all or a majority of these risks.
Aetna U.S. Healthcare consists of the Health Risk business and the Group
Insurance and Other Health business.
Health products include health maintenance organization, point-of-service,
preferred provider organization and indemnity products. The Health Risk business
includes health products offered on an insured basis.
The Group Insurance and Other Health business 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 following table summarizes premiums and fees and other income for the Health
Risk and Group Insurance and Other Health businesses:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Health Risk $ 9,735.0 $6,749.5 $4,960.9
Group Insurance and Other Health 2,573.5 2,511.6 2,301.1
--------- -------- --------
Total Aetna U.S. Healthcare $12,308.5 $9,261.1* $7,262.0
========= ======== ========
U.S. Healthcare Pre Merger (historical amounts) N/A*** $ 2,384.7** $3,542.1
========= ========= ========
</TABLE>
* Includes U.S. Healthcare premiums and fees and other income from July 19,
1996 through December 31, 1996.
** Reflects premiums and fees and other income from January 1, 1996 through
July 18, 1996.
*** Not applicable.
Under insured plans, Aetna U.S. Healthcare charges a premium and under
employer-funded plans, Aetna U.S. Healthcare charges a fee for administrative
and claim services.
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The principal Commercial health products offered by Aetna U.S. Healthcare are:
Health Maintenance Organization ("HMO") plans offer comprehensive managed care
benefits generally through participating network physicians, hospitals and other
providers. When an individual enrolls in one of the Company's HMOs, he or she
selects a primary care physician ("PCP") from among the physicians participating
in the Aetna U.S. Healthcare network. PCPs generally are family practitioners,
internists, general practitioners or pediatricians who provide necessary
preventive and primary medical care, and are generally responsible for
coordinating other necessary health care, including making referrals to
participating network specialists. Preventive care and quality improvement are
emphasized in these plans. The Company offers HMO plans with varying levels of
copayments which result in different levels of premium rates. HMO plans are
principally offered on an insured basis. Commercial HMO membership totaled 3.3
million and 3.0 million as of December 31, 1997 and 1996, respectively.
Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity
plans. Members can have comprehensive HMO-style benefits through network
providers with minimum out-of-pocket expense (copayments) and also can go
directly, without a referral, to any provider they choose, subject to, among
other things, certain deductibles and coinsurance, with member cost sharing
limited by out-of-pocket maximums. POS plans are offered on both an insured and
employer-funded basis. Commercial POS membership totaled 3.7 million and 3.5
million as of December 31, 1997 and 1996, respectively.
Preferred Provider Organization ("PPO") plans offer the member the ability to
select any health care provider, with benefits paid at a higher level when care
is received from a network provider. Coverage is subject to deductibles and
coinsurance, with member cost sharing limited by out-of-pocket maximums. PPO
plans are offered on both an insured and employer-funded basis. PPO membership
totaled 3.6 million and 3.7 million as of December 31, 1997 and 1996,
respectively.
Indemnity plans offer the member the ability to select any health care provider
for covered services. Some managed care and medical cost containment features
may be included in these plans, such as inpatient precertification, limiting
payments to reasonable and customary charges and additional benefits for
preventive services (e.g. cancer screening). Coverage is subject to deductibles
and coinsurance, with member cost sharing limited by out-of-pocket maximums.
Indemnity plans are offered on both an insured and employer-funded basis.
Indemnity membership totaled 2.6 million and 3.1 million as of December 31, 1997
and 1996, respectively.
In addition to Commercial health products, the Company also offers coverage for
Medicare beneficiaries and individuals eligible for Medicaid benefits. Such
coverages include the following:
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Through contracts with the Health Care Financing Administration ("HCFA"), Aetna
U.S. Healthcare HMOs offer coverage for Medicare-eligible individuals in certain
geographic areas. Generally, services must be obtained through network
providers, with the exception of emergency and urgent care. Members generally
receive enhanced benefits over standard Medicare fee-for-service coverage,
including vision, hearing and pharmacy coverage. Such Medicare plans are offered
on an insured basis. Medicare membership totaled .4 million and .3 million as of
December 31, 1997 and 1996, respectively.
The Company also served as an administrator of Medicare benefits in certain
states, providing claim services for physicians, hospitals, skilled nursing
facilities and home health agencies in exchange for a fee. The contract with
HCFA to provide these services expired on September 30, 1997.
The Company has contracts with certain state and local agencies to offer
coverage for Medicaid-eligible individuals. Benefits are determined by the
contracting agencies. Medicaid is offered on an insured basis. Medicaid
membership totaled .1 million as of December 31, 1997 and 1996.
Aetna U.S. Healthcare offers a variety of specialty health care coverages
offered as either supplements to health products or as stand-alone products.
Such coverages include indemnity and managed dental plans, prescription drug and
vision programs, and network-based workers' compensation case management
services.
These specialty health coverages and services are included in either Health Risk
or Group Insurance and Other Health business, with the exception of behavioral
health (including employee assistance programs) and network-based workers'
compensation case management services, which are included in Group Insurance and
Other Health.
During 1997, the Company sold certain subsidiaries primarily to more effectively
focus its health business resources. On December 5, 1997, the Company sold Human
Affairs International ("HAI"), a behavioral health management business. Aetna
U.S. Healthcare will continue to market HAI's behavioral health services,
including employee assistance programs, through a long-term strategic
arrangement with the acquiring company. During 1997, the Company also sold
Healthcare Data Interchange Corporation, a provider of health care electronic
data interchange services, and Aetna Professional Management Corporation, a
physician practice management business.
In addition, the Company acquired Virginia Mason Health Plan, Inc., and Frontier
Health Holdings, Inc., both of which are health maintenance organizations,
during 1997. The purchase price of these acquisitions, both individually and in
the aggregate, was not material.
Aetna U.S. Healthcare group insurance products consist primarily of the
following:
Group Life Insurance consists principally of renewable term coverage, the
amounts of which may be fixed or linked to individual employee wage levels.
Basic and supplemental term coverage and spouse and dependent coverages are
available. Group universal life and accidental death benefit coverages are also
available. Group life insurance is offered on an insured basis. Group life
insurance membership totaled 9.9 million and 9.6 million as of December 31, 1997
and 1996, respectively.
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Group Disability Insurance provides coverage for disabled employees' income
replacement benefits for both short-term disability and long-term disability.
The Company also offers a managed disability product with additional case
management features. Group disability insurance coverages are offered on both an
insured and employer-funded basis. Group disability membership totaled 2.6
million and 2.4 million as of December 31, 1997 and 1996, respectively.
Long-Term Care Insurance provides coverage for long-term care expenses in a
nursing home, adult day care or home setting. Long-term care insurance is
offered on an insured basis. Long-term care membership totaled .1 million as of
December 31, 1997 and 1996.
Many group insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.
Provider Networks
General
Aetna U.S. Healthcare provides members of its managed care plans with access to
health care services through networks of independent health care providers. The
Company contracts with providers to participate in its provider networks as it
expands into new geographic areas or as considered necessary in order to serve
members. The providers in the Company's networks are independent contractors and
are neither employees nor agents of the Company.
The HMOs operated by Aetna U.S. Healthcare most closely adhere to the individual
practice model. Under the individual practice model, the HMO contracts with
independent physicians who are broadly dispersed throughout a community and who
care for patients in their own offices. Participating physicians generally also
have patients who are not members of the Company's HMOs. In the Company's HMOs,
the primary care physician plays an important role in practicing preventive
medicine and acts on behalf of the HMO member to coordinate the care provided by
specialist physicians, hospitals, and other health care providers.
Aetna U.S. Healthcare uses a variety of practices to help contain the rate of
increase in the cost of medical services. In addition to contracts with health
care providers, such procedures include the development and implementation of
standards for the appropriate utilization of health care resources and working
with health care providers to review data in order to help them improve
consistency and quality.
At December 31, 1997, Aetna U.S. Healthcare had approximately 330,000 providers
in its networks nationwide.
Contracting
Primary Care Physicians
Compensation by the Company's HMOs to PCPs is principally on a capitated basis,
although fee-for-service contracts also exist. Under a capitation arrangement,
physicians receive a monthly fixed fee for each HMO member, regardless of the
medical services provided to the member. In some instances, the capitation rate
is subject to adjustment based on the attainment of certain criteria including
comprehensiveness of care, quality of care and utilization. This quality-based
incentive program is administered via the Company's Quality Care Compensation
System. In a fee-for-service arrangement, network physicians are paid for health
care services provided to the member based upon a fee schedule.
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Hospitals
The Company enters into contracts that provide for all-inclusive per diem, per
case and capitated hospitalization rates, with fixed rates for ambulatory
surgery and emergency room services. Certain contracted hospitals' final
compensation is based upon attainment of agreed-upon quality and other measures.
Aetna U.S. Healthcare HMOs generally require precertification of elective
admissions and monitoring of the length of hospital stays. Participating
physicians generally admit their HMO patients to hospitals using referral
procedures that direct the hospital to contact the Company's patient management
unit, which confirms the patient's membership status while obtaining pertinent
data. This unit also coordinates related activities, including the subsequent
transition to the home environment and home care, if necessary. Case management
assistance for complex or "catastrophic" cases is provided by a special case
unit.
Specialist and Ancillary Services
Specialist physicians participating in the Company's networks are generally
reimbursed at contracted rates per visit or procedure.
Aetna U.S. Healthcare's HMOs have fixed-fee capitated payment arrangements for
most pharmacy, mental health, substance abuse, and laboratory services. In those
HMO markets where the Company has a significant presence, most radiology,
diagnostic imaging, podiatric and physical therapy services also have fixed-fee
capitated payment arrangements.
Integrated Delivery Systems
Aetna U.S. Healthcare has developed and continues to develop contractual
relationships with national and regional Integrated Delivery Systems ("IDS") to
provide comprehensive medical services. Under these arrangements, the Company's
HMOs contract with an IDS for a fixed, per member fee. This fee covers most or
all of the care required by the member which is generally delivered by the IDS
and its affiliated PCPs, hospitals and specialists.
Quality Assessment
Quality assessment programs begin with the initial selection of providers.
Providers wanting to participate in the Company's HMO networks must satisfy an
extensive set of criteria, including licensing, hospital admission privileges,
demonstrated proficiency, written references, patient access, office standards,
after-hours coverage and many other factors.
Participating physicians are recertified regularly. Recertification covers many
aspects of patient care including an analysis of member grievances filed with
the Company, the transfer and termination rate of members from the practice,
on-site interviews, analysis of utilization patterns, extensive member surveys
and analysis of drug prescription patterns. Committees, each composed of a peer
group of participating private physicians, review participating PCPs being
considered for recertification.
The Company also offers quality and outcome measurement and improvement
programs, and health care data analysis systems for providers and purchasers of
health care.
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With an emphasis on quality improvement, the Company seeks accreditation for
certain of its HMO plans from the National Committee for Quality Assurance
("NCQA"), a national organization established to review the quality and medical
management systems of HMOs and other managed care plans. Accreditation by NCQA
is a nationally recognized standard. As of December 31, 1997, a majority of the
Company's HMO membership is serviced by health plans which have been granted
full, three-year accreditation.
Principal Markets and Sales
Total health membership is widely dispersed throughout the United States. One or
more products offered by the Health Risk business are available in all 50
states. Health Risk membership is concentrated in the Mid-Atlantic and Northeast
regions where the majority of HMO members are located.
Products offered by the Group Insurance and Other Health business are available
in all 50 states. This business consists primarily of large customers (i.e.,
those with at least 3,000 eligible lives).
The following table presents total health membership by region and funding
arrangement, for the years indicated:
<TABLE>
<CAPTION>
(Thousands) 1997(1) 1996(1) 1995(1)(2)
------------------------ ------------------------ ------------------------
Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total
---- ------- ----- ---- ------- ----- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mid-Atlantic 1,863 1,159 3,022 1,911 1,115 3,026 367 736 1,103
Northeast 1,089 735 1,824 1,127 776 1,903 438 698 1,136
Southeast 752 1,717 2,469 594 1,784 2,378 456 1,737 2,193
Mid-West 503 1,915 2,418 459 1,966 2,425 456 1,938 2,394
West Central 405 1,862 2,267 484 1,823 2,307 498 1,740 2,238
West(3) 723 1,011 1,734 730 969 1,699 1,449 978 2,427
----- ----- ------ ----- ----- ------ ----- ----- ------
Total Health
Membership(4) 5,335 8,399 13,734 5,305 8,433 13,738 3,664 7,827 11,491
===== ===== ====== ===== ===== ====== ===== ===== ======
</TABLE>
(1) Health membership as of December 31, 1997 reflects system and plan
conversions. The conversions predominately affect Indemnity and PPO
membership and have an immaterial impact on all other Health products.
December 31, 1996 and 1995 reflects adjustments based on known corrected
data from the conversions, as applied to December 31, 1996 and 1995
membership previously reported.
(2) Excludes U.S. Healthcare membership of 2,433 thousand for 1995. U.S.
Healthcare membership is primarily risk and concentrated in the
Mid-Atlantic and Northeast regions.
(3) Decreased membership as of December 31, 1996 resulted primarily from the
award of a risk contract with the Civilian Health and Medical Program of
the Uniformed Services ("CHAMPUS") to another contractor. The Company
remained the primary provider through March 31, 1996.
(4) Includes the following products: Commercial, Medicare and Medicaid HMO,
POS, PPO and Indemnity.
For membership composition of Aetna U.S. Healthcare's products by funding
arrangement, see Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Aetna U.S. Healthcare in the Annual Report.
For both Health Risk and Group Insurance and Other Health businesses, products
and services are marketed primarily to employers for the benefit of employees
and their dependents. Frequently, employers offer employees a choice of
coverages, from which the employee makes his or her selection during a
designated annual open enrollment period. In some instances, Aetna U.S.
Healthcare is the only health care coverage offered. Employers pay all or a
portion of the monthly premiums, and employees, through payroll deductions, pay
any premium not provided as an employee benefit.
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Within the Health Risk business, Medicare coverage is sold on an individual
basis as well as through employer groups to their retirees. Medicaid is marketed
to individuals rather than employer groups. Because these coverages are sold
primarily on an individual basis, Medicare and Medicaid marketing costs are
typically higher than for other products.
Aetna U.S. Healthcare products are sold primarily through Company sales
personnel who frequently work with independent consultants and brokers who
assist in the production and servicing of business. Sales representatives also
sell to employers on a direct basis.
For large customers, independent consultants and brokers are frequently involved
in employer health plan selection decisions and sales.
Marketing and sales efforts are promoted by an advertising program which
includes television, radio, billboards and print media, supported by market
research and direct marketing efforts.
Health Pricing
For insured Commercial plans, customer contracts are generally established in
advance of the policy period, for a duration of one year. In determining the
premium rates to be charged to the customer, prospective and retrospective
rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the beginning of
the policy period. Unanticipated increases in medical costs cannot be recovered
in the current policy year; however, prior experience for a product in the
aggregate is considered, among other factors, in determining premium rates for
future periods. Federally-qualified HMOs are required to set premiums in this
manner.
Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior to
contract inception, without regard to actual utilization of services incurred by
individual members, using one of three approved community rating methods. These
rates may vary from account to account to reflect projected family size and
contract mix, benefit levels, renewal date, and other factors. Under one of
these methods, "traditional community rating", an HMO establishes premium rates
based on its revenue requirements for its entire enrollment in a given
community. Under "community rating by class", an HMO establishes premium rates
based on its revenue requirements for broad classes of membership distinguished
by factors such as age and sex. Under "group specific community rating", an HMO
establishes premium rates based on the HMO's revenue requirements for providing
services to the group. State laws, in certain of the states in which the Company
operates HMOs, require the filing with and approval by the state of HMO premium
rates, and certain states may prohibit the use of one or more of these rating
methods. In addition to reviewing anticipated medical costs, some states also
review anticipated administrative costs as part of the approval process. Future
results of the Company could be affected if the premium rates requested by the
Company are not approved or are adjusted downward by state regulators.
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Under retrospective rating, a preliminary premium rate is determined at the
beginning of the policy period. Once the policy period has ended, the actual
experience is reviewed. If the experience is positive (i.e., actual claim costs
and other expenses are less than those expected) then a refund is credited to
the policy. If the experience is negative, then the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the
deficit is considered in setting future premium levels. If a customer elects to
terminate coverage, these deficits generally cannot be recovered. Retrospective
rating is generally used for non-HMO health customers which exceed 300 lives.
Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these contracts, which are typically executed annually, HCFA pays the HMO at a
fixed, capitated rate based on membership and adjusted for demographic factors
and a user fee. Inflation, changes in utilization patterns and benefit plans,
demographic factors such as age and sex, and both local county and national fee
for service average per capita Medicare costs are considered in the rate
calculation process. Amounts payable under Medicare risk arrangements are
subject to periodic unilateral revision by HCFA. In addition to premiums
received from HCFA, some of the Medicare products offered by Aetna U.S.
Healthcare require a modest premium to be paid by the member. Under Medicare
risk arrangements, Aetna U.S. Healthcare assumes the risk of higher than
expected medical expenses. Medicare contracts typically generate higher per
member per month revenues, but also higher per member per month medical
expenses, than Commercial plans.
Aetna U.S. Healthcare also has HMO contracts with a variety of federal
government employee groups under the Federal Employees Health Benefit Program.
Premium rates are subject to federal government review and audit. Premium rates
for these contracts are set prospectively but are subject to retrospective
adjustments.
Premiums and fees from the federal government accounted for 19% of Aetna U.S.
Healthcare's revenue in 1997. Contracts with HCFA accounted for 82% of these
premiums and fees, with the balance from federal employee related benefit
programs.
The Company has contracts with state and local agencies to provide fully-insured
health benefits to persons eligible for Medicaid benefits. These contracts are
generally for a period of one to three years. Aetna U.S. Healthcare receives a
fixed monthly payment based on membership in return for the coverage of health
care services. The rates are subject to unilateral revision by the contracting
agencies upon renewal. Aetna U.S. Healthcare assumes the risk of higher than
expected medical expenses.
Contracts with the customer to provide administrative services for
employer-funded plans are generally for a period of one to three years,
frequently with built in inflation factors. Aetna U.S. Healthcare has entered
into certain guarantees with respect to certain functions such as customer
service response time, claim processing accuracy and claim processing turnaround
time, as well as certain guarantees that claim expenses to be incurred by the
customer will fall within a certain range. With any of these guarantees, Aetna
U.S. Healthcare is financially at risk if the conditions of the arrangements are
not met.
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Competition
Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing and pricing, a proliferation of
competing products, including new products developed in an effort to contain
health care costs, and increased quality and price sensitivity. New entrants
into the marketplace as well as significant consolidation within the industry
have also contributed to the more intense competitive environment.
Aetna U.S. Healthcare believes that the most significant factors which
distinguish competing health plans are quality of service and managed care
programs (including NCQA accreditation status), comprehensiveness of coverage,
cost (including both premium and member out-of-pocket costs), product design,
financial stability and the geographic scope of provider networks and the
providers available in such networks. Aetna U.S. Healthcare believes that it is
competitive in each of these areas. The ability to increase the number of
persons covered by Aetna U.S. Healthcare benefits or to increase revenues is
affected by competition in any particular area. In addition, the ability to
increase the number of persons enrolled in Health Risk products is affected by
the desire and ability of employers to self fund their employees' insurance.
Competition may also affect the availability of services from health care
providers, including primary care physicians, specialists and hospitals.
Within the Health Risk business, Aetna U.S. Healthcare competes with local and
regional managed care plans, in addition to managed care plans sponsored by
large health insurance companies and Blue Cross/Blue Shield plans. Additional
competitors include other types of medical and dental provider organizations,
various specialty service providers, integrated health care delivery
organizations, and in certain plans, with programs sponsored by the federal or
state governments.
Within the Other Health component of the Group Insurance and Other Health
business, Aetna U.S. Healthcare competes primarily with other commercial
insurance companies and third party administrators.
For the Group Insurance industry, Aetna U.S. Healthcare believes that the most
significant factors which distinguish competing companies are price, quality of
service, comprehensiveness of coverage, and product array and design. Specialty
carriers have increased market penetration in the disability business. The
deeply-penetrated group life market remains highly competitive, while
competition continues to intensify in the emerging long-term care market.
Reserves
For the Health Risk business, medical claims payable reflects estimates of the
ultimate cost of claims that have been incurred but not yet reported and
reported but not yet paid. Medical claims payable 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.
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For Group Insurance products, reserves are established as premiums become due to
reflect the present value of expected future obligations net of the present
value of expected future premiums. Policy reserves for group paid-up life
insurance generally reflect long-term fixed obligations and are computed on the
basis of assumed or guaranteed yield and benefit payments. Assumptions are based
on the Company's historical claim experience. For long-term disability products,
reserves are established for (i) lives currently in payment status (using both
standard industry, as well as the Company's own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so and (iii) claims that have been incurred but not reported.
Long-term care reserves are a long-term obligation calculated using industry
data for morbidity and mortality assumptions.
Group health and group insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such premiums are recognized as
the related experience emerges.
Reinsurance
Aetna U.S. Healthcare uses reinsurance agreements with nonaffiliated insurers
for Group Insurance businesses to control its exposure to large losses and
certain other risks. The Company maintains catastrophic life reinsurance which
provides protection against accidents involving five or more covered lives. For
disability business, reinsurance arrangements for excess coverage are
established on a case-by-case basis to reflect the circumstances of the specific
disability risks. In addition, the Company carries excess medical malpractice
professional liability insurance.
Group Life Insurance In Force and Other Statistical Data
The following table summarizes changes in group life insurance in force before
deductions for reinsurance ceded to other companies for the years indicated:
<TABLE>
<CAPTION>
(Dollars in Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
In force, end of year $284,978 $278,499 $274,429
======== ======== ========
Terminations (lapses and all other) $ 14,576 $ 18,014 $ 14,119
======== ======== ========
Number of policies and contracts
in force, end of year:
Group Life Contracts (1) 13,849 15,288 19,175
Group Conversion Policies (2) 32,660 33,538 33,358
</TABLE>
(1) Due to the diversity of coverages and size of covered groups, statistics
are not provided for average size of policies in force.
(2) Reflects conversion privileges exercised by insureds under group life
policies to replace those policies with individual life policies.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Aetna U.S. Healthcare's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE> 14
Page 14
2. Aetna Retirement Services
Products and Services
Aetna Retirement Services ("ARS") offers financial services and individual life
insurance products. Primarily all products are offered through Aetna Life
Insurance and Annuity Company ("ALIAC")and Aetna Insurance Company of America
("AICA") indirect, wholly owned subsidiaries of the Company. Investment advisory
services are offered through ALIAC and Aeltus Investment Management Inc.
("Aeltus"), registered investment advisers and indirect, wholly owned
subsidiaries of the Company. Aeltus has also served as subadviser to Aetna
mutual funds. Financial planning services are offered through Financial Network
Investment Corporation ("FNIC"), a broker/dealer acquired in 1997 and Aetna
Financial Services, Inc. ("AFSI"), indirect wholly owned subsidiaries of the
Company.
Financial Services
Financial services products principally include annuity contracts that offer a
variety of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408
and 457 (collectively, "qualified plans") and nonqualified annuity contracts.
These contracts may be deferred or immediate ("payout annuities"). Financial
services also include investment advisory services, financial planning and
pension plan administrative services.
Individual Life Insurance
Individual life insurance products include universal life and variable universal
life, which have both life insurance and investment characteristics, traditional
whole life and term insurance. Universal life and variable universal life
products accounted for approximately 96% of life insurance new business premiums
in 1997.
Investment Options
ARS products provide annuity and certain life insurance customers with variable
and/or fixed investment options. Variable ("nonguaranteed") options provide for
full assumption by the customer of investment risks. Assets supporting variable
options are held in separate accounts that invest in Aetna mutual funds and/or
unaffiliated mutual funds. Aetna mutual funds include funds managed by Aeltus
and beginning in 1997, funds managed by outside investment advisors under
subadvisory arrangements. Separate account investment income and realized
capital gains and losses are not reflected in the Company's consolidated results
of operations. Fixed options can be either "fully guaranteed" or "experience
rated". Fully guaranteed options provide guarantees on investment return,
maturity values, and if applicable, benefit payments. Experience rated options
require the customer to assume investment (including realized capital gains and
losses) and other risks subject, among other things, to certain minimum
guarantees. The effect of such realized gains and losses (as long as minimum
guarantees are not triggered) does not impact the Company's results.
<PAGE> 15
Page 15
Fees and Investment Margins
Insurance charges, investment management or other fees earned by ARS, vary by
product and depend, among other factors, on the funding option selected by the
customer under the product. For variable annuities or life insurance products
where assets are allocated to variable funding options, ARS charges the separate
account an asset-based insurance fee and expense charge. In addition, where the
customer selects an Aetna mutual fund as a variable funding option, ARS receives
an asset-based investment management fee and, in the case of those funds
subadvised by outside managers, ALIAC pays a subadvisory fee to the fund
manager. For unaffiliated mutual funds, ARS receives distribution fees and/or
expense reimbursements. For fixed funding options, ARS derives an investment
margin, which is based on the difference between income earned on the
investments supporting the liability and interest credited to customers. Other
fees or charges, such as administrative fees, may be assessed depending on the
nature of the product.
ARS also provides direct investment advisory services to unaffiliated customers
through Aeltus and FNIC generally for fees based on assets under management.
FNIC and AFSI provide financial planning services generally for fees which may
or may not be asset based.
Assets Under Management
The substantial portion of fees or other charges and investment margins are
based on assets under management. Assets under management are principally
affected by deposits, investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
persistency (i.e., customer retention). Assets under management, excluding net
unrealized capital gains and losses on debt securities other than those held in
separate accounts, were $45.0 billion, $32.1 billion and $25.1 billion at
December 31, 1997, 1996 and 1995, respectively. Approximately 94% and 93% of
assets under management at December 31, 1997 and 1996, respectively, allowed for
contractholder withdrawal, 77% and 75% of which, respectively, are subject to
market value adjustments or deferred surrender charges at December 31, 1997.
To encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception which may be waived at the
Company's discretion. The period of time and level of the charge vary by
product. In addition, an approach incorporated into recent variable annuity
contracts with fixed funding options allows contractholders to receive an
incremental interest rate if withdrawals from the fixed account are spread over
a period of five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing tax penalties
on annuity distributions prior to age 59-1/2 provide further disincentive to
customers for premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.
<PAGE> 16
Page 16
Life Insurance In Force and Other Statistical Data
For individual life insurance products, life insurance in force is a key
determinant of earnings as contract charges for cost of insurance coverage are
typically based on amounts of coverage in force less accumulated policy
reserves. The key drivers of life insurance in force are new sales, surrenders
and mortality. The following table summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies:
(Amounts in millions, except number of policies and average size
of policies in force)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales and additions:
Permanent:
Nonparticipating $ 4,281 $ 4,357 $ 5,212
Participating 13 12 12
Term:
Nonparticipating 1,586 1,382 2,160
Participating 53 133 390
-------- -------- --------
Total $ 5,933 $ 5,884 $ 7,774
======== ======== ========
Terminations:
Surrenders and conversions $ 1,865 $ 1,646 $ 1,620
Lapses 2,126 2,098 1,874
Other 1,130 330 281
-------- -------- --------
Total $ 5,121 $ 4,074 $ 3,775
======== ======== ========
In force, end of year:
Permanent $ 36,614 $ 35,883 $ 34,614
Term 13,181 13,100 12,559
-------- -------- --------
Total $ 49,795 $ 48,983 $ 47,173
======== ======== ========
Number of policies in force,
end of year:
Nonparticipating 597,221 627,233 626,880
Participating 97,533 105,098 113,045
-------- -------- --------
Total 694,754 732,331 739,925
======== ======== ========
Average size of policies in
force, end of year:
Nonparticipating $ 72,654 $ 66,385 $ 62,009
Participating 65,664 69,883 73,433
</TABLE>
See Note 12 of Notes to Financial Statements in the Annual Report for a
discussion of participating life insurance contracts.
The following table summarizes premiums and deposits for ARS:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums $ 158.5 $ 180.7 $ 260.2
Deposits 4,969.0 4,564.8 3,785.1
--------- --------- ---------
$ 5,127.5 $ 4,745.5 $ 4,045.3
========= ========= =========
</TABLE>
Principal Markets and Method of Distribution
ARS products and services are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate markets.
ARS products generally are sold through pension professionals, independent
agents and brokers, third party administrators, banks, dedicated career agents
and financial planners.
<PAGE> 17
Page 17
Competition
ARS competes with other insurance companies, as well as an array of financial
services companies including banks, mutual funds and other investment managers.
Principal competitive factors are reputation for investment performance, product
features, service, cost and the perceived financial strength of the investment
manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of ARS' products and services.
Reserves
Reserves for limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, morbidity and
expenses and include a margin for adverse deviation. The assumptions vary by
plan, year of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life contingent payouts) are
equal to cumulative deposits plus credited interest less withdrawals and charges
thereon. Of those investment contracts which are experience rated, the reserves
also reflect net realized capital gains/losses (which ARS reflects through
credited rates on an amortized basis) and unrealized capital gains/losses
related to Financial Accounting Standard ("FAS") No. 115.
Reserves for universal life products (which are all experience rated) are equal
to cumulative deposits less withdrawals and charges plus credited interest
thereon, plus/less net realized capital gains/losses (which ARS reflects through
credited rates on an amortized basis). These reserves also reflect unrealized
capital gains/losses related to FAS No. 115. Reserves for all other fixed
individual life contracts are computed on a basis consistent with that described
above for limited payment contracts.
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
Reinsurance
ARS retains no more than $10 million of risk per individual life insured.
Amounts in excess of the retention limit are reinsured with unaffiliated
companies.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
ARS' business, see MD&A - Forward-Looking Information/Risk Factors and financial
results discussions in the Annual Report.
<PAGE> 18
Page 18
3. Aetna International
Aetna International, through subsidiaries and joint venture operations, sells
primarily life and health insurance and financial services products in non-U.S.
markets.
The Company continues to increase its investments in emerging international and
financial services markets, primarily in Asia Pacific and Latin America, where
it believes demographic and other characteristics afford the opportunity for
long-term business growth. The Company seeks to enter new emerging markets in
their early stages of development, seeking to be among the first foreign
entrants, and then to build sufficient scale of operations to compete with local
and other foreign companies. The Company also explores opportunities for
additional investments, or divestitures where appropriate, in markets where it
has established operations.
The Company may invest in a new market or increase its position in a market
through a combination of acquisitions, joint ventures or by starting new
independent operations. Over the past 5 years, the Company has invested $882
million in its international operations, of which $473 million was invested in
1997, a majority of which related to the acquisition of 49% of a joint venture
in Brazil with Sul America Seguros, Brazil's largest insurance company.
In October 1997, the Company was granted approval to operate a joint venture
insurance business in Shanghai. The approval was given by The People's Bank of
China, a regulatory body for financial institutions in China. The joint venture,
to be formed with China Pacific Insurance Company, the second largest insurer in
China, will provide life insurance products to individual Chinese citizens and
foreign nationals in the Shanghai region.
The Company classifies its operations in international regions as either
"established" or "start-up", depending on the stage of their business
developments.
Aetna International conducts its business in several geographic regions:
o Asia Pacific - Operations are conducted through majority owned
subsidiaries in Taiwan and Malaysia, as well as through other equity
subsidiaries (where the Company has between a 20% and 50% interest)
in Hong Kong and New Zealand. The products and services sold by
these subsidiaries include individual and group life and health
insurance, deposit administration and related financial products and
services.
<PAGE> 19
Page 19
o Latin America - Operations are conducted through wholly owned and
majority-owned subsidiaries in Chile, and equity subsidiaries in
Mexico, Peru and Brazil. The products and services sold by these
subsidiaries include individual and group life and health insurance,
annuities, personal and commercial property-casualty insurance, and
pension fund administration services.
o Canada - Operations are conducted through wholly owned subsidiaries.
The products and services sold by these subsidiaries include
individual and group life, health and disability insurance and
administration services to group plans.
o Other - Operations include primarily start-up operations
(subsidiaries in the initial years of operation) in Argentina, the
Philippines and Indonesia, as well as corporate overhead expenses.
The products and services sold by these subsidiaries include
individual and group life and health insurance, and health and
pension fund administration services.
Each of the subsidiaries through which Aetna International conducts business
operates within guidelines established by the Company. Methods of distributing
products vary by country and product depending on local laws, customs and the
needs of the particular market. Distribution channels include career agents,
independent agents and brokers, financial institutions and direct sales.
Competition varies by country and includes well established local companies, as
well as companies based in North America, Europe, Australia and Japan that have
a strong international presence.
The following table sets forth Aetna International's revenue (including only its
share of net income for equity subsidiaries and excluding net realized capital
gains or losses), and operating earnings or losses (i.e., net income or loss
excluding net realized capital gains or losses) by region, premiums and life
insurance in force, before deductions for reinsurance ceded to other companies:
<TABLE>
<CAPTION>
Operating
Revenue Earnings
------------------------------ ----------------------------
(Millions) 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Asia Pacific $1,037.2 $ 845.1 $ 698.2 $ 60.1 $ 54.3 $ 46.0
Latin America 443.9 352.0 355.2 76.7 56.0 47.9
Start-ups and other 477.7 427.4 408.8 (8.1) (4.8) (5.2)
-------- -------- -------- -------- ------- -------
$1,958.8 $1,624.5 $1,462.2 $ 128.7 $ 105.5 $ 88.7
======== ======== ======== ======= ======= =======
Premiums (included in
revenue above) $1,434.1 $1,166.1 $1,038.5
======== ======== ========
Life insurance in force,
end of year $ 78,750 $ 76,672 $ 59,384
======== ======== ========
</TABLE>
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Aetna International's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE> 20
Page 20
4. Large Case Pensions
Principal Products
Large Case Pensions manages a variety of retirement products (including pension
and annuity products) offered to IRC Section 401 qualified defined benefit and
defined contribution plans. Contracts provide nonguaranteed, partially
guaranteed (experience rated) and fully guaranteed investment options through
General and Separate Account products. The majority of Large Case Pensions'
products that use Separate Accounts provide contractholders with a vehicle for
investments under which the contractholders assume the investment risks as well
as the benefit of favorable performance. Large Case Pensions earns a management
fee on these Separate Accounts.
In 1993, the Company discontinued its fully guaranteed large case pension
products. (For additional information, see MD&A - Large Case Pensions in the
Annual Report.)
At December 31, assets under management, including Separate Accounts and
excluding net unrealized capital gains and losses on debt securities, were $29.7
billion in 1997, $35.3 billion in 1996 and $45.6 billion in 1995. The decline in
assets under management is primarily attributable to the transfer of assets
under management to the ARS segment, reflecting the consolidation of the
Company's investment advisory services, the continuing runoff of the underlying
liabilities and the sale of Insurance Company Investment Management, a
specialized asset manager, in 1996.
The following table summarizes premiums and deposits:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums $ 155.0 $ 214.1 $ 244.4
Deposits 1,598.6 1,781.8 1,600.2
--------- --------- ---------
Total $ 1,753.6 $ 1,995.9 $ 1,844.6
========= ========= =========
</TABLE>
Reserves
When the Company discontinued the fully guaranteed large case pension products,
it established a reserve for expected future losses on the runoff of the
business. For additional information on this reserve, see Note 9 of Notes to
Financial Statements in the Annual Report.
The Company also maintains reserves for guaranteed investment contracts equal to
amounts deposited plus credited interest thereon. Reserves for single premium
annuity contracts reflect the present value of benefits based on actuarial
assumptions established at the time of contract purchase. Such assumptions are
based on the Company's experience, which is periodically reviewed against
published industry data. These products provide guarantees on investment return,
maturity values, and if applicable, benefit payments. The interest credited on
these contracts during 1997 ranged from 3.5% to 17.7% with an average rate of
8.6% (compared with 8.7% in 1996). For the contracts in force at December 31,
1997, the average credited rate was 8.5%. None of these contracts allow for
contractholder withdrawal, except in extraordinary circumstances.
<PAGE> 21
Page 21
Reserves for experience rated contracts reflect cumulative deposits, less
withdrawals and charges, plus credited interest thereon, plus/less net realized
capital gains/losses (which the Company intends to reflect in credited rates)
and net unrealized capital gains/losses related to FAS No. 115.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Large Case Pension's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE> 22
Page 22
5. General Account Investments
Consistent with the nature of the contract obligations involved in the Company's
health, life, annuity and pension operations, the majority of general account
assets have been invested in intermediate and long-term, fixed-income
obligations such as treasury obligations, mortgage-backed securities, corporate
debt securities and mortgage loans.
For information concerning the valuation of investments, see Notes 1, 4, and 7
of Notes to Financial Statements in the Annual Report.
The following table sets forth the distribution of invested assets, cash and
cash equivalents and accrued investment income of the Company's general account
portfolio (excluding Discontinued Operations) as of the end of the years
indicated: (1) (2)
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Debt securities:
Bonds:
United States Government and
government agencies and
authorities $ 3,928.6 $ 3,773.1 $ 3,720.5
States, municipalities and
political subdivisions 206.6 355.3 81.5
U.S. Corporate securities:
Utilities 2,505.5 2,420.3 2,333.0
Financial 5,216.8 4,546.5 4,704.3
Transportation/capital goods 2,589.4 2,492.8 2,729.9
Health care/consumer products 1,735.3 1,803.7 1,924.8
Natural resources 1,559.9 1,317.9 1,278.8
Other 1,506.2 1,519.8 1,859.2
--------- --------- ---------
Total U.S. Corporate securities 15,113.1 14,101.0 14,830.0
Foreign:
Government, including political
subdivisions 2,629.8 2,505.4 1,968.3
Utilities 689.1 790.2 780.1
Other 3,830.4 3,513.1 2,986.3
--------- --------- ---------
Total foreign securities 7,149.3 6,808.7 5,734.7
Residential mortgage-backed securities:
Pass-throughs 1,812.5 1,848.4 1,864.4
Collateralized mortgage obligations 2,710.4 2,764.7 3,073.9
--------- --------- ---------
Total residential mortgage-backed
securities 4,522.9 4,613.1 4,938.3
Commercial/Multifamily mortgage-
backed securities 1,622.0 1,144.3 774.0
Other asset-backed securities 1,635.1 1,464.6 1,772.5
--------- --------- ---------
Total bonds 34,177.6 32,260.1 31,851.5
Redeemable preferred stocks 67.4 76.2 8.8
--------- --------- ---------
Total debt securities 34,245.0 32,336.3 31,860.3
--------- --------- ---------
Equity securities:
Common stocks 866.4 1,185.3 566.9
Nonredeemable preferred stocks 175.0 147.5 92.8
--------- --------- ---------
Total equity securities 1,041.4 1,332.8 659.7
--------- --------- ---------
Short-term investments 1,003.9 723.2 607.8
Mortgage loans 4,207.8 6,700.9 8,327.2
Real estate 369.5 850.2 1,277.3
Policy loans 746.9 707.3 629.4
Other 947.4 835.5 688.6
--------- --------- ---------
Total investments $42,561.9 $43,486.2 $44,050.3
========= ========= =========
Cash and cash equivalents $ 1,805.8 $ 1,462.6 $ 1,712.7
========= ========= =========
Accrued investment income $ 545.8 $ 598.6 $ 618.3
========= ========= =========
</TABLE>
(1) Excludes Separate Accounts.
(2) Includes $7.9 billion, $8.7 billion and $10.3 billion of investments
supporting discontinued products in 1997, 1996 and 1995, respectively.
<PAGE> 23
Page 23
The following table summarizes the Company's investment results: (1)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Net Earned Net Net Realized Change in Net
Investment Investment Capital Unrealized Capital
Income (2) Income Rate (3) Gains (4) Gains and Losses (5)
---------- --------------- ---------- --------------------
<S> <C> <C> <C> <C>
For the year:
1997 $3,377.5 7.7% $ 334.2 $ (50.7)
1996 3,565.2 8.0 134.4 10.8
1995 3,575.1 7.9 47.2 1,002.8
</TABLE>
(1) Excludes Separate Accounts, investments in affiliates and Discontinued
Operations.
(2) Net investment income excludes net realized capital gains and losses and
is after deduction of investment expenses, but before deduction of income
taxes.
(3) The Earned Net Investment Income Rate for any given year is equal to (a)
net investment income divided by (b) the average of cash, invested assets
excluding unrealized, and investment income due and accrued at the
beginning and end of the year.
(4) Net realized capital gains are before income taxes and exclude gains and
losses allocable to experience rated pension contractholders in all years.
(5) Net unrealized capital gains (losses) are before federal income taxes and
exclude changes in unrealized capital gains (losses) related to experience
rated contractholders and discontinued products.
6. Other Matters
a. Regulation
General
The Company's operations are subject to comprehensive regulation throughout the
United States and the foreign jurisdictions in which it does business. The laws
of these jurisdictions establish supervisory agencies, including state health,
insurance and securities departments, with broad authority to grant licenses to
transact business and regulate many aspects of the products and services offered
by the Company, as well as solvency and reserve adequacy. Many agencies also
regulate investment activities on the basis of quality, diversification, and
other quantitative criteria. The Company's operations and accounts are subject
to examination at regular intervals by certain of these regulators.
Health Care
The federal government and the states in which the Company conducts its HMO and
other health operations have adopted laws and regulations that govern the
business activities of the Company to varying degrees. These laws and
regulations may restrict how the Company conducts its businesses and may result
in additional burdens and costs to the Company. Areas of governmental regulation
include licensure, premium rates, benefits, service areas, quality assurance
procedures, plan design, eligibility requirements, provider rates of payment,
surcharges on provider payments, provider contract forms, underwriting,
financial arrangements, financial condition (including reserves) and corporate
governance. These laws and regulations are subject to amendments and changing
interpretations in each jurisdiction.
<PAGE> 24
Page 24
States generally require HMOs to obtain a certificate of authority prior to
commencing operations. To establish an HMO in any state where it does not
presently operate an HMO, the Company generally has to obtain such a
certificate. The time necessary to obtain such a certificate varies from state
to state. Each HMO must file periodic financial and operating reports with the
states in which it does business. In addition, the HMOs are subject to state
examination and periodic license renewal.
The provision of services to certain employee health benefit plans is subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of
laws and regulations subject to interpretation and enforcement by the Internal
Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain
aspects of the relationships between the Company and employers who maintain
employee benefit plans subject to ERISA. Some of the administrative services and
other activities of the Company may also be subject to regulation under ERISA.
In addition, some states require licensure or registration of companies
providing third party claims administration services for benefit plans.
Certain legislative and regulatory changes related to health products have
recently been enacted or proposed, and a variety of other potential legislative
and regulatory changes are receiving a high level of attention at both the state
and federal level. For a discussion of these matters see MD&A - Regulatory
Environment in the Annual Report. For information regarding regulation of
pricing by the Company's HMOs, see "Aetna U.S.
Healthcare - Health Pricing", on page 10.
Investment and Retirement Products and Services
Operations conducted by ARS and Large Case Pensions are subject to regulation by
various insurance agencies where the Company conducts business, in particular
the insurance departments of Connecticut and New York. Among other matters,
these agencies may regulate premium rates, trade practices, agent licensing,
policy forms, underwriting and claims practices, the maximum interest rates that
can be charged on life insurance policy loans, and the minimum rates that must
be provided for accumulation of surrender value.
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of broker-dealer and
investment advisory subsidiaries of the Company. Regulations of the SEC,
Department of Labor and Internal Revenue Service also impact certain of the
Company's pension, annuity, life insurance and other investment and retirement
products. These products involve Separate Accounts of Aetna Life Insurance and
Annuity Company and Aetna Insurance Company of America and mutual funds
registered under the Investment Company Act of 1940.
<PAGE> 25
Page 25
International
The nature and extent of regulations affecting the Company's international
operations varies by jurisdiction and line of business. Most operations are
subject to local insurance laws. These laws typically regulate the types of
business that can be written, policy forms and terms, currency, permitted
investments, reserves, taxation and other matters affecting the conduct of the
business. International operations are also subject to a variety of additional
investment and other controls that may be imposed by governments. Certain
jurisdictions may require that portions of the business be reinsured through
designated state-affiliated institutions. As a foreign investor, the Company is
also subject to a variety of restrictions regarding permitted levels of equity
ownership, remittance of foreign earnings, repatriation of capital, exchange of
currency, and entry into new lines of business. Regulation of international
operations may also be subject to other political factors not typically
associated with doing business in the United States, such as more rapid change
of regulatory policy, possible nationalization of businesses, hostilities and
unrest.
Federal Employee Benefit Regulation
ARS and Large Case Pensions also provide a variety of products and services to
employee benefit plans that are covered by ERISA.
In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit contract" were
"plan assets" for purposes of ERISA and that the insurance company was an ERISA
fiduciary with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 DOL interpretive bulletin that had suggested that
insurance company general account assets were not plan assets.
Congress recently enacted the Small Business Job Protection Act (the "Act"),
which, among other matters, created a framework for resolving potential issues
raised by the Supreme Court decision. The Act provides that, absent criminal
conduct, insurers generally will not have liability with respect to general
account assets held under contracts that are not guaranteed benefit contracts
based on claims that those assets are plan assets. The relief afforded extends
to conduct that occurred before the date that is eighteen months after the DOL
issues final regulations required by the Act, except as provided in the
anti-avoidance portion of the regulations. The regulations, which were proposed
by the DOL on December 22, 1997, will address ERISA's application to the general
account assets of insurers attributable to contracts issued on or before
December 31, 1998 that are not guaranteed benefit contracts. The conference
report relating to the Act states that contracts issued after December 31, 1998
that are not guaranteed benefit contracts will be subject to ERISA's fiduciary
obligations. The Company is not currently able to predict how these matters may
ultimately affect its businesses.
<PAGE> 26
Page 26
HMO and Insurance Holding Company Laws
A number of states, including Connecticut, regulate affiliated groups of HMOs
and insurers such as the Company under holding company statutes. These laws may
require these companies to maintain certain levels of equity. For information
regarding restrictions on certain payments of dividends or other distributions
by HMO and insurance company subsidiaries of the Company, see MD&A - Liquidity
and Capital Resources in the Annual Report. Some of these laws also regulate
changes in control (as do Connecticut corporate laws), and other matters such as
transactions with affiliates. See also Note 16 of Notes to Financial Statements
in the Annual Report.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants. The
after-tax charges to earnings for guaranty fund obligations for the years ended
December 31, 1997, 1996 and 1995 were $5 million, $4 million and $8 million,
respectively. While the Company has historically recovered more than half of
guaranty fund assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future efforts to recover
such assessments. For information regarding certain other potential regulatory
changes relating to the Company's businesses, see MD&A - Forward-Looking
Information/Risk Factors.
b. NAIC IRIS Ratios
The NAIC IRIS ratios cover 12 categories of financial data with defined usual
ranges for each category. The ratios are intended to provide insurance
regulators "early warnings" as to when a given company might warrant special
attention. An insurance company may fall out of the usual range for one or more
ratios and such variances may result from specific transactions that are in
themselves immaterial or eliminated at the consolidated level. In 1997, none of
Aetna Inc.'s significant insurance subsidiaries had more than two IRIS ratios
that were outside of the NAIC usual ranges.
Management does not expect that any of the Company's significant subsidiaries
will have more than two IRIS ratios outside of the NAIC usual ranges for 1998.
<PAGE> 27
Page 27
See MD&A - Liquidity and Capital Resources in the Annual Report for additional
discussion regarding solvency regulation.
c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratios of
earnings to fixed charges and ratios of earnings to combined fixed charges and
preferred stock dividends for the years indicated:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Aetna Inc.
Ratio of Earnings to Fixed Charges 5.74 2.45 4.97 4.74 (a)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends 4.46 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>
(Millions) 1997 1996
---- ----
<S> <C> <C>
Aetna Services, Inc.
Ratio of Earnings to Fixed Charges 5.78 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends 5.78 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
include the dividends paid to preferred shareholders of a subsidiary. (See Note
14 of Notes to Financial Statements in the Annual Report.) During 1993, 1994 and
1995, there was no preferred stock outstanding. As a result, the ratios of
earnings to combined fixed charges and preferred stock dividends were the same
as the ratios of earnings to fixed charges.
d. Trademarks
The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Trademark
application pending), U.S. Healthcare (Registered Trademark), and Aetna
Retirement Services (Registered Trademark), together with the corresponding
design logos are owned by the Company. The Company considers these trademarks
and its other trademarks and trade names important in the operation of its
business. However, the business of the Company is not dependent on any
individual trademark or trade name.
<PAGE> 28
Page 28
e. 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)**
February 4, 1997 * A A2 A-
February 4, 1998 * A A2 A
Aetna Services, Inc.(commercial paper)**
February 4, 1997 * D-1 P-1 A-2
February 4, 1998 * D-1 P-1 A-1
Aetna Life Insurance Company(claims paying)
February 4, 1997 A AA- Aa3 A
February 4, 1998 A AA- A1 A+
Aetna Life Insurance and Annuity Company(claims paying)
February 4, 1997 A+ AA+ Aa2 AA-
February 4, 1998 A+ AA+ Aa3 AA-
</TABLE>
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
In addition, certain of the Company's HMO subsidiaries are rated on their
claims paying ability by A.M. Best. All such ratings are in the "Excellent" or
"Superior" categories.
f. Miscellaneous
The Company had approximately 27,100 domestic employees at December 31, 1997. In
addition, the Company had approximately 13,200 international employees at
December 31, 1997 in its majority and wholly owned non-U.S. subsidiaries.
Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and its internal auditors
and are modified as considered necessary. See MD&A for information regarding the
Company's efforts to prepare its systems, applications and facilities to
accommodate Year 2000 date-sensitive information.
The federal government is a significant customer of the Aetna U.S. Healthcare
segment and the Company, accounting for approximately 13% of the Company's
consolidated revenue in 1997. No other customer accounted for 10% or more of the
Company's consolidated revenues in 1997. No other segment of the Company's
business is dependent upon a single customer or a few customers, the loss of
which would have a significant effect on the earnings of the segment. See Note
17 of Notes to Financial Statements in the Annual Report regarding segment
information.
The loss of business from any one, or a few, independent brokers or agents would
not have a material adverse effect on the earnings of the Company or any of its
segments.
<PAGE> 29
Page 29
Item 2. Properties.
The home office of the Company is a building complex located at 151 Farmington
Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The
Company and certain of its subsidiaries also own or lease other space in the
greater Hartford area, Blue Bell, Pennsylvania and Fairfield, New Jersey, as
well as various field locations throughout the country. The Company believes its
properties are adequate and suitable for its business as presently conducted.
The foregoing does not include numerous investment properties held by the
Company in its general and separate accounts.
Item 3. 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 2, 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 Complaints seek, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaints allege 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 litigation is still in
the preliminary stages, and the Company is defending the actions vigorously.
The Company also is 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE> 30
Page 30
EXECUTIVE OFFICERS OF AETNA INC.*
The Chairman of the Company is elected and all other executive officers listed
below are appointed by the Board of Directors of the Company at its Annual
Meeting each year to hold office until the next Annual Meeting of the Board or
until their successors are elected or appointed. None of these officers have
family relationships with any other executive officer or Director.
<TABLE>
<CAPTION>
Business Experience
Name of Officer Principal Position Age * During Past Five Years *
- --------------- ------------------ --- ----------------------
<S> <C> <C> <C>
Richard L. Huber Chairman, Chief Executive 61 (1)
Officer and President
Thomas J. Calvocoressi Vice President and
General Counsel 44 (2)
Michael J. Cardillo Executive Vice President,
Aetna U.S. Healthcare** 54 (3)
Frederick C. Copeland, Jr. Executive Vice President,
International** 56 (4)
Timothy A. Holt Vice President,
Aetna Investment Management 44 (5)
Group
Thomas J. McInerney Executive Vice President,**
Aetna Retirement Services 41 (6)
</TABLE>
* As of March 2, 1998.
** Executive Vice Presidents, in conjunction with certain other senior
officers, are responsible for assisting the Chief Executive Officer in
setting policy and overall direction for the Company.
<PAGE> 31
Page 31
(1) Mr. Huber was named Chairman on March 1, 1998 and Chief Executive Officer
and President on July 28, 1997. He had served as Vice Chairman for
Strategy and Finance since February 1995. He served as President and Chief
Operating Officer of Grupo Wasserstein Perella from September 1994 to
February 1995 and as Vice Chairman of Continental Bank from 1990 to
September 1994.
(2) Mr. Calvocoressi assumed his current position on January 1, 1997. From
March 1996 to January 1997, he served as Vice President and Deputy General
Counsel of Aetna. He served as Vice President and Corporate Counsel from
August 1994 to March 1996, as Vice President and Counsel from July 1993 to
August 1994 and as Counsel, Office of General Counsel, from July 1991 to
July 1993.
(3) Mr. Cardillo has served in his current position since July 19, 1996. He
also serves as President of Aetna U.S. Healthcare Inc. a position he
assumed in March 1997 after serving as Co-President since July 19, 1996.
Mr. Cardillo had been Co-President of U.S. Healthcare, Inc. since 1995 and
Principal Marketing Officer since 1989.
(4) Mr. Copeland assumed his current position on July 19, 1996. He also serves
as President and Chief Executive Officer of Aetna International, Inc., a
position he assumed in April 1996, after having served as President of
Aetna International since July 1995. From January 1993 to July 1995, he
served as Chairman, President and Chief Executive Officer of Fleet Bank,
N.A., Connecticut. From September 1987 to January 1993, he served as
President and Chief Executive Officer of Citibank Canada.
(5) Mr. Holt assumed his current position on September 26, 1997, having served
as Vice President and Chief Financial Officer of Aetna Retirement Services
since 1996. He served as Vice President, Portfolio Management Group, from
1992 to 1996.
(6) Mr. McInerney assumed his current position on August 18, 1997, having
served as Vice President, Strategic Planning, since March 1997. He also
currently serves as President, Aetna Retirement Services, Inc. From 1996
to 1997, he served as Vice President, National Accounts, for Aetna Health
Plans and then as Vice President, National Accounts and Sales and
Marketing, for the successor business, Aetna U.S. Healthcare. During 1995
and 1996, he also served as Vice President, Corporate Strategy. From 1992
to 1996, Mr. McInerney served as Vice President, Guaranteed Products.
<PAGE> 32
Page 32
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Aetna Inc.'s common stock is listed on the New York Stock Exchange. Its symbol
is AET. As of January 31, 1998, there were 20,910 record holders of the common
stock.
The dividends declared and the high and low sales prices with respect to the
Company's common stock for each quarterly period for the past two years are
incorporated herein by reference from "Quarterly Data" in the Annual Report.
Information regarding restrictions on the Company's present and future ability
to pay dividends is incorporated herein by reference from Note 16 of Notes to
Financial Statements and MD&A - Liquidity and Capital Resources in the Annual
Report.
Item 6. Selected Financial Data.
The information contained in "Selected Financial Data" in the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report is incorporated herein
by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-General Account Investments" in the Annual
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The 1997 Consolidated Financial Statements and the report of the registrant's
independent auditors and the unaudited information set forth under the caption
"Quarterly Data" are incorporated herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE> 33
Page 33
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I pursuant to
General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with Section 16 (a)
of the Securities Exchange Act of 1934 is incorporated herein by reference to
the Proxy Statement.
Item 11. Executive Compensation.
The information under the captions "Director Compensation in 1997" and
"Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Security Ownership of Certain Beneficial
Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Certain Transactions and Relationships" in
the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements and the report of the registrant's
independent auditors are incorporated herein by reference to the Annual Report.
2. Financial statement schedules:
The supporting schedules of the consolidated entity are included in this Item
14. See Index to Financial Statement Schedules on page 40.
<PAGE> 34
Page 34
3. Exhibits:
(3) Articles of Incorporation and By-Laws.
Aetna Inc. Amended and Restated Certificate of Incorporation, incorporated
herein by reference to the Company's Registration Statement on Form S-4 (File
No. 333-5791) filed on June 12, 1996.
Aetna Inc. Bylaws, as amended, incorporated herein by reference to the Company's
Form 10-K filed on February 28, 1997.
(4) Instruments defining the rights of security holders, including indentures.
Senior Indenture, dated July 1, 1996, between the Company, Aetna Services, Inc.
(formerly Aetna Life and Casualty Company), and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, incorporated herein
reference to the Company's Form 10-Q filed on October 25, 1996.
Form of Subordinated Indenture between Aetna Services, Inc., Aetna Inc. and
State Street Bank and Trust Company of Connecticut, National Association, as
Trustee (including the forms of Subordinated Debt Securities and Subordinated
Debt Guarantees), incorporated herein by reference to the Company's and Aetna
Services, Inc.'s Registration Statement on Form S-3 (File No. 333-07167) filed
on June 28, 1996.
Designations, Rights and Preferences of 6.25% Class C Voting Preferred Stock,
incorporated herein by reference to the Company's 8-K filed on July 26, 1996.
Aetna Inc. Rights Agreement, incorporated herein by reference to the Company's
8-K filed on July 26, 1996.
Indenture, dated as of October 15, 1986, between Aetna Services, Inc. and The
First National Bank of Boston, Trustee, incorporated herein by reference to
Aetna Services, Inc.'s 1992 Form 10-K.
First Indenture Supplement, dated as of August 1, 1996, to Indenture, dated as
of October 15, 1986, between Aetna Services, Inc. and State Street Bank and
Trust Company, as Successor Trustee, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.
Indenture, dated as of August 1, 1993, between Aetna Services, Inc. and State
Street Bank and Trust Company of Connecticut, National Association, as Trustee,
incorporated herein by reference to Aetna Services, Inc.'s Registration
Statement on Form S-3 (File No. 33-50427).
First Indenture Supplement, dated as of August 1, 1996, to the Indenture dated
as of August 1, 1993 between Aetna Services, Inc. and State Street Bank and
Trust Company of Connecticut, National Association, as Trustee, incorporated
herein by reference to the Company's Form 10-Q filed on October 25, 1996.
Written Action, dated as of November 15, 1994, establishing the terms of Series
A Preferred Securities of Aetna Capital L.L.C., incorporated herein by reference
to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
<PAGE> 35
Page 35
3. Exhibits (Continued):
Subordinated Indenture, dated as of November 1, 1994, between Aetna Services,
Inc. and The First National Bank of Chicago, as Trustee, incorporated herein by
reference to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
First Indenture Supplement, dated as of August 1, 1996, to the Indenture, dated
as of November 1, 1994, between Aetna Services, Inc. and The First National Bank
of Chicago, as Trustee, incorporated herein by reference to the Company's Form
10-Q filed on October 25, 1996.
Payment and Guarantee Agreement, dated November 22, 1994, of Aetna Services,
Inc. with respect to Aetna Capital L.L.C., incorporated herein by reference to
Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
Payment and Guarantee Agreement, dated as of August 1, 1996, of Aetna Inc. with
respect to Aetna Capital L.L.C., incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.
Amendment No. 1, dated as of August 1, 1996, to the Fiscal Agency Agreement,
dated as of July 17, 1986, between Aetna Services, Inc. and State Street Bank
and Trust Company, as successor Fiscal Agent, incorporated herein by reference
to the Company's Form 10-Q filed on October 25, 1996.
(10) Material contracts.
Employment Agreement, dated as of March 30, 1996, by and between U.S.
Healthcare, Inc. and Joseph Sebastianelli, incorporated herein by reference to
the Company's Form 10-Q filed on October 25, 1996.**
Employment Agreement, dated as of March 30, 1996, by and between U.S.
Healthcare, Inc. and Michael Cardillo, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.**
Stock Purchase Agreement, dated as of November 28, 1995, between The Travelers
Insurance Group Inc. and Aetna Services, Inc. relating to the purchase and sale
of 100% of the Common Stock of The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company, incorporated herein by reference to Aetna
Services, Inc.'s 1995 Form 10-K.
Letter Agreement, dated as of January 19, 1995, between Aetna Services, Inc. and
Richard L. Huber, incorporated herein by reference to Aetna Services, Inc.'s
1995 Form 10-K.**
Employment Agreement, dated as of January 29, 1996, between Aetna Services, Inc.
and Ronald E. Compton, incorporated herein by reference to Aetna Services,
Inc.'s 1995 Form 10-K.**
Employment Agreement, dated as of December 19, 1995, between Aetna Services,
Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Services,
Inc.'s 1995 Form 10-K.**
The 1984 Stock Option Plan of Aetna Life and Casualty Company and amendments
thereto, incorporated herein by reference to the 1992 Form 10-K. **
Letter Agreement, dated as of January 31, 1996, between Aetna Services, Inc. and
The Travelers Insurance Group Inc., incorporated herein by reference to Aetna
Services, Inc.'s Form 10-Q filed on April 26, 1996.
<PAGE> 36
Page 36
3. Exhibits (Continued):
Amendment, dated as of April 2, 1996, to Stock Purchase Agreement, dated as of
November 28, 1995, between Aetna Services, Inc. and The Travelers Insurance
Group Inc., incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q
filed on April 26, 1996.
Registration Rights Agreement, dated as of March 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to Aetna Services, Inc.'s
Form 10-Q filed on April 26, 1996.
Amendment No. 1, dated as of May 30, 1996, to the Registration Rights Agreement,
dated as of March 30, 1996, between the Company and Leonard Abramson,
incorporated herein by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-5791) filed on June 12, 1996.
Amended and Restated Agreement, dated as of May 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12,
1996.
The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-5791)
filed on June 12, 1996.**
The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed
on June 12, 1996.**
The Aetna Inc. Non-Employee Director Deferred Stock and Deferred Compensation
Plan, as amended, incorporated herein by reference to Company's Form 10-K filed
on February 28, 1997.**
The Supplemental Pension Benefit Plan for Certain Employees of Aetna Services,
Inc., incorporated herein by reference to the Company's Form 10-Q filed on
October 25, 1996.**
Amendment No. 1, dated March 1, 1996 to Letter Agreement, dated January 19,
1995, between Aetna Services, Inc. and Richard L. Huber, incorporated herein by
reference to the Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.**
Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**
Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.**
Split Dollar Insurance Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related
Collateral Assignment Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
<PAGE> 37
Page 37
3. Exhibits (Continued):
Split Dollar Insurance Agreement, dated as of January 21, 1991, among Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the
related Collateral Assignment Agreement, dated as of January 21, 1991, among
Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson,
David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.
Description of Deferred Compensation Plan, incorporated herein by reference to
U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**
Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life
Insurance Company and Aetna Life Insurance and Annuity Company, incorporated
herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services,
Inc., U.S. Healthcare, Inc., the Company, Antelope Sub, Inc. and New Merger
Corporation, incorporated herein by reference to Aetna Services, Inc.'s Form
10-Q filed on April 26, 1996.
Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan of Merger,
dated as of March 30, 1996, among Aetna Services, Inc., U.S. Healthcare, Inc.,
the Company, Antelope Sub. Inc. and New Merger Corporation, incorporated herein
by reference to the Company's Registration Statement on Form S-4 (Registration
No. 333-5791) filed on June 12, 1996.
Aetna Services, Inc. Credit Facility, incorporated herein by reference to Aetna
Services, Inc.'s Report on Form 8-K filed on July 16, 1996.
Notification from Aetna Services, Inc. dated October 22, 1996 electing to reduce
Credit Facility to $1.5 billion, incorporated herein by reference to the
Company's Form 10-K filed on February 28, 1997.
Amendment, dated as of September 4, 1997, to the Amended and Restated Agreement,
dated as of May 30, 1996, between the Company and Leonard Abramson, incorporated
herein by reference to Aetna Inc.'s Form 10-Q filed on November 4, 1997.
Amendment, dated as of September 8, 1997, to Employment Agreement, as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on November 4,
1997.**
Amendment No. 1, dated as of December 31, 1996, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment No. 2, dated as of February 28, 1997, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
<PAGE> 38
Page 38
3. Exhibits (Continued):
Employment Agreement, dated as of March 6, 1997, by and between the Company and
Joseph Sabastianelli, incorporated herein by reference to Aetna Inc.'s Form 10-Q
filed on May 6, 1997.**
Amendment dated as of April 9, 1997, to the Amended and Restated Agreement,
dated as of May 10, 1996, between the Company and Leonard Abramson, incorporated
herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.
Amendment dated as of July 22, 1996, to Letter Agreement, dated as of January
19, 1995, between the Company and Richard L. Huber incorporated herein by
reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
January 19, 1995, between the Company and Ronald E. Compton, incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6,
1997.**
Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Frederick C. Copeland, Jr., as amended.**
Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Thomas McInerney, as amended.**
Description of certain arrangements not embodied in formal documents, as
described under the headings "Director Compensation" and "Executive
Compensation", incorporated herein by reference to the Aetna Services, Inc. 1997
Proxy Statement.
(11) Statement re: computation of per share earnings.
Incorporated herein by reference to Note 1 of Notes to Financial Statements in
the Annual Report.
(12) Statement re: computation of ratios.
Statement re: computation of ratio of earnings to fixed charges for the Company
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and Aetna
Services for the years ended December 31, 1997 and 1996.
Statement re: computation of ratio of earnings to combined fixed charges and
preferred stock dividends for the Company for the years ended December 31, 1997,
1996, 1995, 1994 and 1993 and Aetna Services for the years ended December 31,
1997 and 1996.
(13) Annual Report to security holders.
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial Statements and the
report of the Company's independent auditors, and unaudited Quarterly Data from
the Annual Report.
<PAGE> 39
Page 39
3. Exhibits (Continued):
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel.
Consent of Independent Auditors to Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney.
(27) Financial data schedule.
(b) Reports on Form 8-K
None
* Exhibits other than those listed are omitted because they are not required
or are not applicable. Copies of exhibits are available without charge by
writing to the Office of the Corporate Secretary, Aetna Inc., 151
Farmington Avenue, Hartford, Connecticut 06156.
** Management contract or compensatory plan or arrangement.
<PAGE> 40
Page 40
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC.
Page
----
Independent Auditors' Report 41
I Summary of Investments - Other than Investments in Affiliates as of
December 31, 1997 42
II Condensed Financial Information of
the Registrant:
Aetna Inc. as of and for the years ended
December 31, 1997 and 1996 43
Aetna Services, Inc. (formerly Aetna Life
and Casualty Company) for the year
ended December 31, 1995 49
III Supplementary Insurance Information as of
and for the years ended December 31, 1997,
1996 and 1995 53
IV Reinsurance 56
V Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1997, 1996
and 1995 57
Certain of the required information is shown in the Financial Statements or
Notes thereto in the Annual Report. Certain information has been omitted from
the schedules filed because the information is not applicable.
Certain reclassifications have been made to 1996 and 1995 financial information
to conform to 1997 presentation.
<PAGE> 41
Page 41
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
Under date of February 3, 1998, we reported on the consolidated balance sheets
of Aetna Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, as contained in
the 1997 annual report to shareholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
<PAGE> 42
Page 42
AETNA INC. AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1997
<TABLE>
<CAPTION>
Amount
at which
shown in the
Type of Investment Cost Value* balance sheet
--------- --------- -------------
(Millions)
<S> <C> <C> <C>
Debt securities:
Bonds:
United States Government
and government agencies
and authorities $ 3,762.3 $ 3,928.6 $ 3,928.6
States, municipalities and
political subdivisions 190.7 206.6 206.6
U.S. Corporate securities:
Utilities 2,382.6 2,505.5 2,505.5
Financial 5,049.4 5,216.8 5,216.8
Transportation/capital goods 2,417.7 2,589.4 2,589.4
Health care/consumer products 1,641.5 1,735.3 1,735.3
Natural resources 1,467.1 1,559.9 1,559.9
Other 1,418.9 1,506.2 1,506.2
--------- --------- ---------
Total U.S. Corporate
securities 14,377.2 15,113.1 15,113.1
Foreign:
Government, including political
subdivisions 2,514.7 2,629.8 2,629.8
Utilities 612.4 689.1 689.1
Other 3,714.8 3,830.4 3,830.4
--------- --------- --------
Total foreign securities 6,841.9 7,149.3 7,149.3
Residential mortgage-backed
securities:
Pass-throughs 1,707.5 1,812.5 1,812.5
Collateralized mortgage
obligations 2,549.6 2,710.4 2,710.4
--------- --------- ---------
Total residential
mortgage-backed securities 4,257.1 4,522.9 4,522.9
Commercial/Multifamily
mortgage-backed securities 1,586.2 1,622.0 1,622.0
Other asset-backed securities 1,612.9 1,635.1 1,635.1
--------- --------- ---------
Total bonds 32,628.3 34,177.6 34,177.6
Redeemable preferred stocks 65.7 67.4 67.4
--------- --------- ---------
Total debt securities $32,694.0 $34,245.0 $34,245.0
========= ========= =========
Equity securities:
Common stocks:
Public utilities $ 12.4 $ 17.5 $ 17.5
Banks, trust and insurance
companies 92.8 232.2 232.2
Industrial, miscellaneous
and all other 561.5 616.7 616.7
--------- --------- ---------
Total common stocks 666.7 866.4 866.4
Nonredeemable preferred stocks 157.7 175.0 175.0
--------- --------- ---------
Total equity securities $ 824.4 $ 1,041.4 $ 1,041.4
========= ========= =========
Short-term investments $ 1,003.9 $ 1,003.9
Mortgage loans 4,207.8 4,207.8
Real estate 369.5 369.5
Policy loans 746.9 746.9
Other 574.8(1) 947.4(2)
--------- ---------
Total investments $40,421.3 $42,561.9
========= =========
</TABLE>
- ----------
* See Notes 1 and 4 of Notes to Financial Statements in the Company's 1997
Annual Report.
(1) Excludes investments in affiliates of $372.6 million.
(2) Includes investments in affiliates of $372.6 million.
<PAGE> 43
Page 43
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Income
<TABLE>
<CAPTION>
For the year ended December 31,
(Millions) 1997 1996
---- ----
<S> <C> <C>
Net investment income $ .5 $ 1.2
------- -------
Total revenue .5 1.2
Operating expenses - .2
------- -------
Total expenses - .2
------- -------
Income before income taxes
and equity in earnings of affiliates .5 1.0
Income taxes .1 .5
Equity in earnings of affiliates 900.7 204.6
------- -------
Income from continuing operations 901.1 205.1
Discontinued Operations, net of tax:
Income from operations - 182.2
Gain on sale - 263.7
------- -------
Net income $ 901.1 $ 651.0
======= =======
</TABLE>
- ----------
See Notes to Condensed Financial Statements.
<PAGE> 44
Page 44
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
(Millions, except share data) 1997 1996
---- ----
ASSETS
<S> <C> <C>
Investments:
Short-term investments $ 3.2 $ 8.8
Investments in affiliates 11,049.2 10,842.3
--------- ---------
Total investments 11,052.4 10,851.1
Cash and cash equivalents 22.1 26.9
Due from affiliates 5.4 6.0
Affiliate dividends receivable 200.0 100.0
Deferred income taxes 1.1 4.0
--------- ---------
Total assets $11,281.0 $10,988.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 36.1 $ 36.9
Other liabilities 29.3 40.1
Current income taxes 20.2 21.3
--------- ---------
Total liabilities 85.6 98.3
--------- ---------
Shareholders' Equity:
Class C Voting Mandatorily
Convertible Preferred Stock
($.01 par value; 15,000,000 shares
authorized; 11,655,206 in 1997 and
11,655,546 in 1996 issued and
outstanding) 865.4 865.4
Common stock ($.01 par value; 500,000,000
shares authorized; 145,794,844 and
150,084,799 issued and outstanding in
1997 and 1996) 3,644.4 4,032.8
Accumulated other comprehensive income 307.1 340.0
Retained earnings 6,378.5 5,651.5
--------- ---------
Total shareholders' equity 11,195.4 10,889.7
--------- ---------
Total liabilities and
shareholders' equity $11,281.0 $10,988.0
========= =========
</TABLE>
- ----------
See Notes to Condensed Financial Statements.
<PAGE> 45
Page 45
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Class C
Accumulated Other Voting
Comprehensive Income Mandatorily
For the two years ended Unrealized Convertible
December 31, 1997 Retained Gains(Losses) Foreign Preferred Common
(Millions, except share data) Total Earnings on Securities Currency Stock Stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 7,272.8 $ 5,195.6 $ 797.0 $ (155.9) - $ 1,436.1
- ------------------------------------===================================================================================
Comprehensive income:
Net income 651.0 651.0
Other comprehensive loss,
net of tax:
Unrealized losses on
securities (($527.6) pretax) (342.8) (342.8)
Foreign currency ($64.2 pretax) 41.7 41.7
---------
Other comprehensive loss (301.1)
---------
Total comprehensive income 349.9
=========
Issued for U.S. Healthcare
merger:
Class C Voting mandatorily
convertible preferred stock
(11,655,546 shares) 865.4 865.4
Common shares
(34,988,615 shares) 2,580.1 2,580.1
Stock options 24.8 24.8
Common stock issued for benefit
plans (1,563,491 shares) 75.1 75.1
Repurchase of common shares
(1,194,400 shares) (83.3) (83.3)
Common stock dividends (170.0) (170.0)
Preferred stock dividends (25.1) (25.1)
-----------------------------------------------------------------------------------
Balances at December 31, 1996 $10,889.7 $5,651.5 $ 454.2 $ (114.2) $ 865.4 $ 4,032.8
- ------------------------------------===================================================================================
Comprehensive income:
Net income 901.1 901.1
Other comprehensive loss,
net of tax:
Unrealized gains on securities
($81.8 pretax) 49.9 49.9
Foreign currency (($127.3)
pretax) (82.8) (82.8)
---------
Other comprehensive loss (32.9)
---------
Total comprehensive income 868.2
=========
Common stock issued for benefit
plans (1,883,945 shares) 134.7 134.7
Repurchase of common shares
(6,173,900 shares) (523.1) (523.1)
Common stock dividends (118.6) (118.6)
Preferred stock dividends (55.5) (55.5)
-----------------------------------------------------------------------------------
Balances at December 31, 1997 $11,195.4 $6,378.5 $ 504.1 $ (197.0) $ 865.4 $ 3,644.4
- ------------------------------------===================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 46
Page 46
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions) 1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 901.1 $ 651.0
Adjustments to reconcile net income
to net cash (used for) provided by
operating activities:
Income from Discontinued Operations - (182.2)
Equity in earnings of affiliates (901.4) (204.6)
Gain on sale of Discontinued Operations - (263.7)
Other, net (8.4) 27.7
------- -------
Net cash (used for) provided by
operating activities (8.7) 28.2
------- -------
Cash Flows from Investing Activities:
Proceeds from sales of short-term investments 619.4 184.4
Cost of investments in short-term investments (613.8) (193.2)
Cost of investment in U.S. Healthcare - (5,243.9)
Capital contributions to affiliates (421.0) (500.0)
Dividends received from affiliates 1,007.2 5,938.0
Other, net (24.6) 35.2
------- -------
Net cash provided by investing activities 567.2 220.5
------- -------
Cash Flows from Financing Activities:
Common stock issued under benefit plans 134.7 75.1
Common shares repurchased (523.1) (83.3)
Dividends paid to shareholders (174.9) (237.3)
------- -------
Net cash used for financing activities (563.3) (245.5)
------- -------
Net (decrease) increase in cash and cash
equivalents (4.8) 3.2
Cash and cash equivalents, beginning of year 26.9 23.7
------- -------
Cash and cash equivalents, end of year $ 22.1 $ 26.9
======== =======
Supplemental disclosure of cash flow
information:
Interest paid $ - $ -
======== ========
Income taxes received, net $ 1.0 $ .5
======== ========
</TABLE>
- ----------
See Notes to Condensed Financial Statements.
<PAGE> 47
Page 47
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements
1. Background of Organization
Aetna Inc. was incorporated under the Stock Corporation Act of the state of
Connecticut on March 25, 1996 for the purpose of effecting the combination of
Aetna Services, Inc. ("Aetna Services")(formerly Aetna Life and Casualty
Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare") (formerly
U.S. Healthcare, Inc. ("U.S. Healthcare")) in accordance with the terms of the
Agreement and Plan of Merger dated as of March 30, 1996. Aetna's merger with
Aetna U.S. Healthcare was consummated on July 19, 1996. As a result of the
merger, Aetna Services and Aetna U.S. Healthcare are each direct wholly owned
subsidiaries of Aetna Inc.
The accompanying condensed financial statements include for 1996 the results of
operations of Aetna Services from January 1, 1996 and of U.S. Healthcare from
July 19, 1996 which are reflected as Equity in Earnings of Affiliates on the
Statement of Income. These financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Annual
Report.
2. Guarantee of Debt Securities
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9 1/2% Subordinated Debentures due
2024 (the "Subordinated Debentures") issued to Aetna Capital L.L.C., a wholly
owned subsidiary of Aetna Services. Aetna Capital L.L.C. has issued $275 million
of redeemable preferred stock and the Subordinated Debentures represent
substantially all of the assets of Aetna Capital L.L.C. See Note 13 to the
Consolidated Financial Statements in the Annual Report for a description of
outstanding debt.
3. Dividends
Cash dividends paid to Aetna Inc. by Aetna Services and Aetna U.S. Healthcare
for the year ended December 31, 1997 were $.8 billion and $.3 billion,
respectively, and for the year end December 31, 1996 were $5.3 billion and $.6
billion, respectively. The 1996 dividends included the dividend by Aetna
Services of the net proceeds from the sale of the property-casualty operations.
The 1996 dividends from Aetna Services were used to finance the cash portion of
the U.S. Healthcare merger consideration. See Note 16 to the Consolidated
Financial Statements in the Annual Report for a description of dividend
restrictions.
<PAGE> 48
Page 48
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements (Continued)
4. New Accounting Standards
See Note 1 to the Consolidated Financial Statements in the Annual Report for a
description of new accounting standards.
5. Discontinued Products
See Note 9 to the Consolidated Financial Statements in the Annual Report for a
description of discontinued products.
6. Other Acquisitions and Dispositions
See Note 3 to the Consolidated Financial Statements in the Annual Report for a
description of other acquisitions and dispositions.
7. Severance and Facilities Charges
See Note 8 to the Consolidated Financial Statements in the Annual Report for a
description of the 1996 severance and facilities charges.
8. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual Report for a
description of income taxes.
<PAGE> 49
Page 49
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Income
<TABLE>
<CAPTION>
For the year ended December 31,
(Millions) 1995
----
<S> <C>
Premiums $ 1.2
Net investment income 1.0
Net realized capital losses (.2)
-------
Total revenue 2.0
Current and future benefits .4
Operating expenses 39.2
Interest expense 108.3
-------
Total benefits and expenses 147.9
-------
Losses before income taxes
(benefits) and equity in earnings
of affiliates (145.9)
Income taxes (benefits):
Current (57.2)
Deferred 3.1
Equity in earnings of affiliates 565.7
-------
Income from continuing operations 473.9
Loss from Discontinued Operations,
net of tax (222.2)
-------
Net income $ 251.7
=======
</TABLE>
- ----------
See Notes to Condensed Financial Statements.
<PAGE> 50
Page 50
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
Unrealized
The year ended December 31, 1995 Retained Gains (Losses) Foreign Common
(Millions, except share data) Total Earnings on Securities Currency Stock
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 5,503.0 $ 5,259.6 $ (941.5) $ (130.0) $ 1,314.9
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 251.7 251.7
Other comprehensive income, net of tax:
Unrealized gains on securities
($2,697.9 pretax) 1,738.5 1,738.5
Foreign currency (($39.8) pretax) (25.9) (25.9)
------
Other comprehensive income 1,712.6
-------
Total comprehensive income 1,964.3
=======
Common stock issued for
benefit plans (74,400 shares) 5.2 5.2
Treasury stock issued for
benefit plans (1,994,935 shares) 92.2 92.2
Gain on issuance of
treasury stock 23.8 23.8
Common stock dividends (315.7) (315.7)
--------------------------------------------------------------
Balances at December 31, 1995 $ 7,272.8 $ 5,195.6 $ 797.0 $ (155.9) $ 1,436.1
- ------------------------------------------==============================================================
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE> 51
Page 51
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
For the year ended December 31,
(Millions) 1995
----
<S> <C>
Cash Flows from Operating Activities:
Net income $ 251.7
Adjustments to reconcile net income
to net cash used for operating activities:
Loss from Discontinued Operations 222.2
Decrease in premiums due and other
receivables 116.4
Increase in accrued investment income (1.6)
Depreciation and amortization 0.1
Increase in income taxes 0.5
Net decrease in other assets and other
liabilities (70.3)
Increase in insurance reserve liabilities 45.2
Equity in earnings of affiliates (565.7)
Net realized capital losses 0.2
Amortization of net investment discounts (0.2)
Other, net (36.0)
--------
Net cash used for operating activities (37.5)
--------
Cash Flows from Investing Activities:
Proceeds from sales of:
Short-term investments 1,289.3
Cost of investments in:
Debt securities available for sale (0.1)
Equity securities (0.1)
Short-term investments (1,272.2)
Capital contributions to affiliates (303.0)
Dividends received from affiliates 451.7
Other, net (139.6)
--------
Net cash provided by investing activities 26.0
--------
Cash Flows from Financing Activities:
Issuance of long-term debt .6
Stock issued under benefit plans 121.2
Repayment of long-term debt (100.8)
Net increase in short-term debt 329.9
Dividends paid to shareholders (315.7)
--------
Net cash provided by financing activities 35.2
--------
Net increase in cash and cash equivalents 23.7
Cash and cash equivalents, beginning of year -
--------
Cash and cash equivalents, end of year $ 23.7
========
Supplemental disclosure of cash flow
information:
Interest paid $ 117.8
========
Income taxes received, net $ 70.2
========
</TABLE>
- ----------
See Notes to Condensed Financial Statements.
<PAGE> 52
Page 52
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Annual
Report.
1. Merger with U.S. Healthcare, Inc.
The merger between Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life
and Casualty Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare")
(formerly U.S. Healthcare, Inc. ("U.S. Healthcare")) was consummated on July 19,
1996. As a result of the merger, Aetna Services and Aetna U.S. Healthcare are
each direct, wholly owned subsidiaries of Aetna Inc. (See pages 43 through 48
for condensed financial information of Aetna Inc. for the years ended December
31, 1997 and 1996.)
2. Dividends
The amounts of cash dividends paid to Aetna Services by insurance affiliates for
the year ended December 31, 1995 were $451.7 million. See Note 16 to the
Consolidated Financial Statements in the Annual Report for a description of
dividend restrictions from the consolidated insurance subsidiaries to Aetna
Services.
3. New Accounting Standards
See Note 1 to the Consolidated Financial Statements in the Annual Report for a
description of new accounting standards.
4. Other Acquisitions and Dispositions
See Note 3 to the Consolidated Financial Statements in the Annual Report for a
description of other acquisitions and dispositions.
5. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual Report for a
description of income taxes.
<PAGE> 53
Page 53
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1997
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- ------- ----------- --------- --------- ---------- ----------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 19.5 $ 1,166.5 $ 3,163.5 $ 254.2 $ 556.9 $10,844.6
Aetna Retirement Services 1,645.3 4,111.9 40.4 - 11,339.5 158.5
International 702.5 3,430.7 89.0 105.0 384.1 1,434.1
Large Case Pensions - 9,128.0 1.5 - 6,480.7 155.0
--------- --------- --------- ---------- --------- ---------
Total $ 2,367.3 $17,837.1 $ 3,294.4 $ 359.2 $18,761.2 $12,592.2
========= ========= ========= ========== ========= =========
<CAPTION>
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(3) written(4)
- ------- ----------- ------------- ---------- ------------ --------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 451.2 $ 1,605.6 $ 9,239.2 $ 20.3 $ 2,797.1 $10,001.9
Aetna Retirement Services 1,114.7 629.3 1,034.1 110.6 385.6 -
International 384.4 157.0 1,206.3 86.6 486.1 465.0
Large Case Pensions 1,408.7 58.8 1,199.9(2) - 34.8 -
Corporate 18.5 119.8 - - 428.4 -
--------- ---------- ---------- --------- --------- ---------
Total $ 3,377.5 $ 2,570.5 $12,679.5 $ 217.5 $ 4,132.0 $10,466.9
========= ========= ========= ========== ========= =========
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, interest expense, amortization of goodwill
and other acquired intangible assets and severance and facilities charges
(reserve reductions).
(4) Excludes life insurance business pursuant to Regulation S-X.
<PAGE> 54
Page 54
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1996
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- ------- ----------- --------- --------- --------- ----------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 39.2 $ 1,309.2 $ 2,924.2 $ 252.8 $ 579.9 $ 7,765.2
Aetna Retirement Services 1,488.1 3,935.8 30.1 - 10,868.1 180.7
International 699.6 3,370.1 73.5 80.8 434.0 1,166.1
Large Case Pensions - 9,168.3 1.4 - 8,019.7 214.1
--------- --------- --------- --------- --------- ---------
Total $ 2,226.9 $17,783.4 $ 3,029.2 $ 333.6 $19,901.7 $ 9,326.1
========= ========= ========= ========= ========= =========
<CAPTION>
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(3) written(4)
- ------- ---------- ------------- ---------- ------------ --------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 414.6 $ 1,553.9 $ 6,622.4 $ 11.9 $ 2,973.9 $ 6,982.8
Aetna Retirement Services 1,086.7 494.8 1,035.9 74.3 386.5 -
International 334.2 130.7 996.8 73.9 388.4 292.0
Large Case Pensions 1,649.2 112.3 1,521.3 (2) - 58.6 -
Corporate 80.5 17.5 - - 717.9 -
--------- --------- --------- --------- --------- ---------
Total $ 3,565.2 $ 2,309.2 $10,176.4 $ 160.1 $ 4,525.3 $ 7,274.8
========= ========= ========= ========= ========= =========
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, interest expense, amortization of goodwill
and other acquired intangible assets and severance and facilities charges.
(4) Excludes life insurance business pursuant to Regulation S-X.
<PAGE> 55
Page 55
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1995
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- ------- ----------- --------- --------- --------- ----------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 50.5 $ 1,344.2 $ 2,426.3 $ 86.8 $ 634.4 $ 5,949.7
Aetna Retirement Services 1,320.8 3,917.4 30.2 - 10,704.4 260.2
International 581.8 2,691.9 82.8 55.3 851.7 1,038.5
Large Case Pensions - 9,278.4 1.5 - 10,708.2 244.4
Corporate - - 163.3 .3 - -
--------- --------- --------- --------- --------- ---------
Total $ 1,953.1 $17,231.9 $ 2,704.1 $ 142.4 $22,898.7 $ 7,492.8
========= ========= ========= ========= ========= =========
<CAPTION>
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (1) and losses) benefits costs expenses(2) written(3)
- ------- ---------- ------------- ---------- ------------ --------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 364.0 $ 1,301.7 $ 5,100.4 $ 22.2 $ 2,038.4 $ 5,016.5
Aetna Retirement Services 1,044.1 401.8 1,061.4 46.1 303.8 -
International 308.7 112.6 911.2 70.8 350.5 234.8
Large Case Pensions 1,850.6 153.4 2,015.6 - 100.1 -
Corporate 7.7 2.0 - - 292.7 -
--------- --------- --------- --------- --------- ---------
Total $ 3,575.1 $ 1,971.5 $ 9,088.6 $ 139.1 $ 3,085.5 $ 5,251.3
========= ========= ========= ========= ========= =========
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes operating expenses, interest expense and amortization of goodwill
and other acquired intangible assets.
(3) Excludes life insurance business pursuant to Regulation S-X.
<PAGE> 56
Page 56
AETNA INC. AND SUBSIDIARIES
SCHEDULE IV
Reinsurance*
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1997**
Premiums:
Life insurance $ 2,209.5 $ 88.2 $ 29.5 $ 2,150.8 1.4%
Accident and health insurance 10,441.5 62.6 5.5 10,384.4 .1
Property-casualty insurance 82.5 30.9 5.4 57.0 9.5
--------- --------- --------- ---------
Total premiums $12,733.5 $ 181.7 $ 40.4 $12,592.2 .3%
========= ========= ========= =========
1996**
Premiums:
Life insurance $ 2,285.5 $ 85.6 $ 42.8 $ 2,242.7 1.9%
Accident and health insurance 7,073.2 62.1 23.5 7,034.6 .3
Property-casualty insurance 95.1 50.1 3.8 48.8 7.8
--------- --------- --------- ---------
Total premiums $ 9,453.8 $ 197.8 $ 70.1 $ 9,326.1 .8%
========= ========= ========= =========
1995**
Premiums:
Life insurance $ 2,232.9 $ 72.1 $ 43.9 $ 2,204.7 2.0%
Accident and health insurance 5,286.4 48.3 9.4 5,247.5 .2
Property-casualty insurance 98.2 57.6 - 40.6 -
--------- --------- --------- ---------
Total premiums $ 7,617.5 $ 178.0 $ 53.3 $ 7,492.8 .7%
========= ========= ========= =========
</TABLE>
* Excludes intercompany transactions.
** Net life insurance in force was $387.8 billion, $381.4 billion and $362.8
billion at December 31, 1997, 1996 and 1995, respectively.
<PAGE> 57
Page 57
AETNA INC. AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Additions
Balance -------------------------
at Charged
beginning Charged (credited) Balance
Balance at of period (credited) to other at end
beginning as to costs and accounts- Deductions- of
of period Adjustments adjusted expenses (1) describe (2) describe (3) period
--------- ----------- -------- ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Asset valuation
reserves:
Mortgage loans $ 247.0 $ - $ 247.0 $ (10.6) $ (45.0) $ (76.9) $ 114.5
Real estate 142.1 - 142.1 6.1 14.8 (61.7) 101.3
Other 2.8 - 2.8 - - - 2.8
---------- ---------- -------- --------- --------- ---------- ------
$ 391.9 $ - $ 391.9 $ (4.5) $ (30.2) $ (138.6) $ 218.6
========== ========== ======== ========== ========== ========== =======
1996
Asset valuation
reserves:
Mortgage loans $ 604.9 $ - $ 604.9 $ (33.0) $ (67.6) $ (257.3) $ 247.0
Real estate 130.6 52.9 (4) 183.5 27.1 1.9 (70.4) 142.1
Other 2.8 - 2.8 - - - 2.8
---------- ---------- -------- --------- --------- ---------- ------
$ 738.3 $ 52.9 $ 791.2 $ (5.9) $ (65.7) $ (327.7) $ 391.9
========== ========== ======== ========= ========= ========== =======
1995
Asset valuation
reserves:
Mortgage loans $ 647.5 $ 208.5 (5) $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9
Real estate 111.4 - 111.4 3.3 55.5 (39.6) 130.6
Other 6.0 - 6.0 - - (3.2) 2.8
---------- ---------- -------- --------- --------- ---------- ------
$ 764.9 $ 208.5 $ 973.4 $ 13.7 $ 50.5 $ (299.3) $ 738.3
========== ========== ======== ========= ========= ========== =======
</TABLE>
(1) Charged (credited) to net realized capital (gains) losses in the
Consolidated Statements of Income.
(2) Reflects additions to (reductions of) reserves related to assets
supporting experience rated contracts and discontinued products for which
a corresponding reduction was included in Policyholders' Funds Left with
the Company in the Consolidated Balance Sheets and the reserve for future
losses, respectively.
(3) Reduction in reserves is primarily a result of related asset write-downs
(including foreclosures of real estate) and sales.
(4) As a result of the adoption of FAS No. 121, valuation reserves at January
1, 1996 were increased by $52.9 million in connection with the reversal of
previously recorded accumulated depreciation related to properties held
for sale.
(5) The general reserve at December 31, 1997 excluded reserves of
approximately $208.5 million related to experience rated products.
<PAGE> 58
Page 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 2, 1998
AETNA INC.
(Registrant)
By /s/ Robert J. Price
--------------------------------------
(Signature)
Robert J. Price
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 2, 1998.
* *
- ----------------------------------- --------------------------------------
Richard L. Huber, Gerald Greenwald, Director
Chairman, Chief Executive Officer,
President and Director
(Principal Executive Officer and
Principal Financial Officer)
* *
- ----------------------------------- --------------------------------------
Leonard Abramson, Director Ellen M. Hancock, Director
* *
- ----------------------------------- --------------------------------------
Betsy Z. Cohen, Director Michael H. Jordan, Director
* *
- ----------------------------------- --------------------------------------
William H. Donaldson, Director Jack D. Kuehler, Director
* *
- ----------------------------------- --------------------------------------
Barbara Hackman Franklin, Director Frank R. O'Keefe, Jr., Director
* *
- ----------------------------------- --------------------------------------
Jerome S. Goodman, Director Judith Rodin, Director
*
- -----------------------------------
Earl G. Graves, Director
/s/ Robert J. Price
- -----------------------------------
Robert J. Price, Vice President
and Corporate Controller
(Controller)
* By /s/ Robert J. Price
------------------------------
Robert J. Price
(Attorney-in-Fact)
<PAGE> 59
Page 59
INDEX TO EXHIBITS
Exhibit Filing
Number Description of Exhibit Method
(10) Material contracts.
(10.1) Employment Agreement, dated as of December 21, 1995, Electronic
by and between Aetna Services, Inc. and Frederick
C. Copeland, Jr., as amended.
(10.2) Employment Agreement, dated as of December 19, 1995, by Electronic
and between Aetna Services, Inc. and Thomas McInerney,
as amended.
(12) Statement re computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed
charges for the Company for the years ended December
31, 1997, 1996, 1995, 1994 and 1993 and Aetna Services
for the year ended December 31, 1997 and 1996.
Statement re: computation of ratio of earnings to
combined fixed charges and preferred stock dividends
for the Company for the years ended December 31, 1997,
1996, 1995, 1994, and 1993 and Aetna Services for the
year ended December 31, 1997 and 1996.
(13) Annual Report to security holders. Electronic
Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of
Operations, Consolidated Financial Statements and the
report of the Company's independent auditors, and
unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant. Electronic
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel. Electronic
Consent of Independent Auditors to Incorporation by
Reference in the Registration Statements on Form S-3
and Form S-8.
(24) Powers of attorney. Electronic
(27) Financial data schedule.
(27.1) Financial data schedule for December 31, 1997. Electronic
(27.2) Financial data schedule for March 31, 1997, June 30, Electronic
1997, September 30, 1997 and December 31, 1996.
(27.3) Financial data schedule for March 31, 1996, June 30, Electronic
1996, September 30, 1996 and December 31, 1995.
<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of December 21, 1995, by and
between Aetna Life and Casualty Company, a Connecticut corporation (the
"Company"), and Fredrick C. Copeland, Jr. ("Executive").
W I T N E S S E T H:
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the structure of its
business, including, without limitation, dividing the business of the Company
into two or more separate publicly traded companies or otherwise transferring a
portion of the business to a third party;
WHEREAS, the Company believes that Executive is a key employee and
that it is in the Company's best interests to retain the services of Executive
for the period during which such restructuring alternatives are considered and,
to the extent applicable, implemented;
WHEREAS, the Company therefore desires to retain the services of
Executive and to enter into an agreement embodying the terms of such employment
(the "Agreement"); and
WHEREAS, Executive desires to accept such employment and enter
into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment. Except as provided in Paragraph 6(a), the Company
shall continue to employ Executive and Executive agrees to remain employed by
the Company under the terms of this Agreement for the period commencing on the
date first written above and ending December 8, 1998. The period during which
Executive is employed pursuant to this Agreement shall be referred to as the
"Contract Employment Period". Upon the expiration of the Contract Employment
Period, Executive's employment with the Company shall continue on an at-will
basis.
2. Position and Duties. During the Contract Employment Period,
Executive shall serve in Executive's current position and in such other
comparable or better position or positions with the Company and its subsidiaries
as the Chief Executive Officer or the Board of Directors of the Company (the
"Board") shall specify from time to time. During the Contract Employment Period,
Executive shall have the duties, responsibilities and obligations customarily
assigned to individuals serving in the position or positions in which Executive
serves hereunder and such other duties, responsibilities and obligations as the
Chief Executive Officer or the Board shall from time to time specify. Executive
shall devote his full business time to the
1
<PAGE> 2
services required of him hereunder, except for vacation time and reasonable
periods of absence due to sickness, personal injury or other disability, and
shall use his best efforts, judgment, skill and energy to perform such services
in a manner consistent with the duties of his position and to improve and
advance the business and interests of the Company and its subsidiaries. Nothing
contained herein shall preclude Executive from (i) serving on any corporate or
governmental board of directors on which he currently serves or, if the Board
consents to such service, on any other board of directors, (ii) serving on the
board of, or working for, any charitable, not-for profit or community
organization, (iii) pursuing any other activity to which the Board consents or
(iv) pursuing his personal, financial and legal affairs, so long as such
activities, individually or collectively, do not interfere with the performance
of Executive's duties hereunder.
3. Cash Compensation.
a. Base Salary. During the Contract Employment Period, the Company
shall pay Executive a base salary at the annual rate of $300,000. The Board
shall periodically review Executive's base salary and the Company may, in its
discretion, increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. Executive's annual base salary payable hereunder, as it
may be increased from time to time and without reduction for any amounts
deferred as described above, is referred to herein as "Base Salary". Executive's
Base Salary, as in effect from time to time, may not be reduced by the Company
without Executive's consent, provided that the Base Salary payable under this
paragraph shall be reduced to the extent Executive elects to defer or reduce
such salary under the terms of any deferred compensation or savings plan or
other employee benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of his Base Salary not deferred in
accordance with its customary periodic payroll practices.
b. Incentive Compensation. During the term of the Contract
Employment Period, Executive shall remain eligible for participation in the
Company's existing and future annual and long term incentive compensation
programs at a level consistent with his position at the Company and the
Company's then current policies and practices; provided that following any
assignment of this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph 7(e)), the
calculation of the amount payable as annual incentive compensation and the
conditions upon which such bonus shall be payable shall be no less favorable to
the Executive (taking into account reasonable changes in the Company's goals and
objectives) than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such assignment or
Change in Control. Without limiting the generality of the foregoing, for each
calendar year ending during the term hereof, Executive shall receive the
opportunity to receive an annual bonus of at least 60% of his Base Salary (the
"Minimum Bonus Percentage"), subject to satisfaction of such reasonable
performance criteria as shall be established with respect to such year.
4. Stock Option Grant. Contingent upon the execution of this
Agreement by the Executive, the Company has granted Executive an option, having
a ten-year term, to purchase 35,000 shares of the Company's Common Stock at an
exercise price per share equal to $71.625 a
2
<PAGE> 3
share (the "Option"). Except to the extent specified below, the terms of the
Option shall be determined in accordance with the terms of the 1994 Stock
Incentive Plan (the "1994 Plan") and shall be set forth in the separate
agreement embodying the grant of such Option (the "Option Agreement"), the form
of which is attached hereto as Exhibit A.
5. Benefits, Perquisites and Expenses.
a. Benefits. During the Contract Employment Period, Executive shall
be eligible to participate in (i) each welfare benefit plan sponsored or
maintained by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, and (ii) each pension, profit sharing,
retirement, deferred compensation or savings plan sponsored or maintained by the
Company, in each case, whether now existing or established hereafter, to the
extent that Executive is eligible to participate in any such plan under the
generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or terminate any
particular plan, program or arrangements, provided that, following the
occurrence of a Change in Control (as defined in Paragraph 7(e)) or the
assignment of this Agreement to a New Entity (as defined in Paragraph 6(a))
pursuant to Paragraph 9(b), the benefits made available to the Executive
thereafter shall be at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such Change in
Control or assignment.
With respect to the pension or retirement benefits payable to
Executive, Executive's service credited for purposes of determining Executive's
benefits and vesting shall be determined in accordance with the terms of the
applicable plan or program or, if applicable, pursuant to any written agreement
between Executive and the Company (whether now existing or hereafter adopted)
that provides Executive a more favorable method of crediting service for any
purpose thereunder.
b. Perquisites. During the Contract Employment Period, Executive
shall be entitled to receive such perquisites as are generally provided to other
senior officers of the Company in accordance with the then current policies and
practices of the Company.
c. Business Expenses. During the Contract Employment Period, the
Company shall pay or reimburse Executive for all reasonable expenses incurred or
paid by Executive in the performance of Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may require and in accordance with the generally applicable policies and
procedures of the Company.
3
<PAGE> 4
6. Termination of Employment.
a. Early Termination of the Contract Employment Period.
Notwithstanding Paragraph 1, the Contract Employment Period shall end upon the
earliest to occur of (i) a termination of Executive's employment on account of
Executive's death, (ii) a Termination due to Disability, (iii) a Termination for
Cause, (iv) a Termination Without Cause, (v) a Termination for Good Reason or
(vi) a termination of Executive's employment by Executive other than a
Termination for Good Reason. For purposes of this Agreement, a transfer of
Executive's employment (i)to any other entity controlled by or under common
control with the Company shall not be treated as a termination unless and until
such entity ceases to be controlled by or under common control with the Company
or (ii) as a result of the implementation of any restructuring of the Company
(whether occurring by spin-off or otherwise) shall not be treated as a
termination of employment, provided that, in either case, the successor employer
(the "New Entity") expressly assumes and agrees to perform all of the Company's
obligations under this Agreement.
b. Benefits Payable Upon Termination. Following the end of the
Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the
event of his death, his surviving spouse, if any, or his estate) shall be paid
the type or types of compensation determined to be payable in accordance with
the following table at the times established pursuant to Paragraph 6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance
Salary Benefits Bonus Benefit
------ -------- ------- ---------
<S> <C> <C> <C> <C>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Payable Payable Payable Payable
Without Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other
than for Good
Reason
</TABLE>
4
<PAGE> 5
c. Timing of Payments. Earned Salary and Accrued Bonus shall be paid
in a single lump sum as soon as practicable, but in no event more than 30 days,
following the end of the Contract Employment Period. Vested Benefits shall be
payable in accordance with the terms of the plan, policy, practice, program,
contract or agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was receiving his salary
payments hereunder, for the greater of (i) one year, (ii) the period over which
such benefits would be payable if paid to Executive under the Company's
otherwise applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid to Executive
under the Company's otherwise applicable plans, policies or procedures, as in
effect at the time of Executive's termination of employment. Notwithstanding the
foregoing, Executive may elect, by written notice given to the Company prior to
the first periodic payment and within ten business days after such termination,
that, instead of periodic installments, Severance Benefits shall be paid in
either a single lump sum, payable within ten business days of receipt by the
Company of such election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and the second
payable on the first business day of the following calendar year.
d. Definitions. For purposes of this Paragraph 6, capitalized terms
have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the product of (i)
the annual incentive compensation Executive would have been entitled to receive
under Paragraph 3(b) for the calendar year in which his active service for the
Company terminates pursuant to Paragraph 6(a) had he remained employed for the
entire year and assuming that all targets for such year had been met, multiplied
by (ii) a fraction, the numerator of which is equal to the number of days in
such calendar year occurring on or prior to the termination of Executive's
active service for the Company (including any period of absence due to
disability) and the denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Contract
Employment Period ends (other than Base Salary deferred pursuant to Executive's
election, as provided in Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the greater of:
(i) the sum of
(A) the annual Base Salary payable to Executive immediately prior
to the end of the Contract Employment Period; and
(B) an amount (the "Bonus Severance Amount") equal to the product
of Executive's Base Salary times the greater of (1) the
Minimum Bonus
5
<PAGE> 6
Percentage and (2) the percentage of Base Salary that would
have been payable to Executive for the year of such
termination assuming achievement of target levels of
performance and Executive's continued employment for the
entire year, or
(ii) the amount otherwise payable to Executive under the Company's
otherwise applicable severance plans, policies or programs as in
effect on the date hereof (or, if more favorable to Executive, as
in effect on the date of Executive's termination), assuming for
purposes of determining the amount payable thereunder that
Executive's employment was terminated as a result of the
elimination of his position, but calculated by including the
Bonus Severance Amount as part of Executive's eligible
compensation for purposes of calculating the benefits payable
under such plans, policies or programs;
except that, in the event that Executive becomes entitled to receive Severance
Benefits hereunder following a Change in Control, the Severance Benefit payable
to Executive shall be determined under Paragraph 7(c). Additionally, while
Executive is receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the welfare
benefit plans and programs (excluding the long-term disability plan, the
sick-pay plan and vacation accruals) generally made available to employees of
the Company and in which he participated immediately prior to the termination of
his employment on the same terms and conditions as would have applied had
Executive continued to be employed. Upon an election to receive Severance
Benefits in either a single lump sum payment or in two installments, Executive
will forfeit any right to continue to receive any coverage under the Company's
welfare benefit plans, other than COBRA coverage (determined from the original
date of termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits in two
installments instead of periodic installments, the Company shall pay one-half of
the cost of Executive's COBRA coverage from the date the first installment
payment is made until the date the second installment payment is made.
Notwithstanding the foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be eligible for any
retiree benefit programs for which he is otherwise eligible under the terms of
the Company's employee benefit plans, policies or programs.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) the willful failure by Executive to perform
substantially Executive's duties as an employee of the Company (other than due
to physical or mental illness) after reasonable notice to Executive of such
failure, (ii) Executive's engaging in misconduct that is materially injurious to
the Company or any subsidiary or any affiliate of the Company, (iii) Executive's
having been convicted of, or entered a plea of nolo contendere to, a crime that
constitutes a felony, (iv) the material breach by Executive of any written
covenant or agreement not to compete with the Company or any subsidiary or any
affiliate or (v) the breach by Executive of his duty of loyalty to the Company
which shall include, without limitation, (A) the disclosure by Executive of any
confidential information pertaining to the Company or any subsidiary or any
affiliate of the Company, other than (x) in the ordinary course of the
performance of his duties on behalf of the Company or (y) pursuant to a judicial
or administrative subpoena from a court or
6
<PAGE> 7
governmental authority with jurisdiction over the matter in question, (B) the
harmful interference by Executive in the business or operations of the Company
or any subsidiary or any affiliate of the Company, (C) any attempt by Executive
directly or indirectly to induce any employee, insurance agent, insurance broker
or broker-dealer of the Company or any subsidiary or any affiliate to be
employed or perform services elsewhere, other than actions taken by Executive
that are intended to benefit the Company or any subsidiary or affiliate and do
not benefit Executive financially other than as an employee or stockholder of
the Company, (D) any attempt by Executive directly or indirectly to solicit the
trade of any customer or supplier, or prospective customer or supplier, of the
Company on behalf of any person other than the Company or a subsidiary thereof,
other than actions taken by Executive that are intended to benefit the Company
or any subsidiary or affiliate and do not benefit Executive financially other
than as an employee or stockholder of the Company, provided, however, that this
provision shall only apply to any product or service which is in competition
with a product or service of the Company or any subsidiary or affiliate thereof
or (E) any breach or violation of the Company's Code of Conduct, as amended from
time to time sufficient to warrant a for cause termination consistent with the
Company's past practice. Notwithstanding the foregoing, a breach of Executive's
duty of loyalty to the Company as described in subclause (A) or a breach of the
Company's Code of Conduct as described in subclause (E) of clause (v) of the
preceding sentence shall not be grounds for a Termination for Cause unless such
breach has had or could reasonably be expected to have a significant adverse
effect on the business or reputation of the Company.
"Termination due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable, with or without
reasonable accommodation, of substantially fulfilling the positions, essential
duties, responsibilities and obligations of Executive's positions set forth in
this Agreement because of physical, mental or emotional incapacity resulting
from injury, sickness or disease for a period of (i) at least four consecutive
months or (ii) more than six months in any twelve month period. Any question as
to the existence, extent or potentiality of Executive's disability shall be made
by a qualified, independent physician selected by the chief or assistant chief
(or the equivalent position) of the department which treats the condition giving
rise to Executive's absence at a nationally or regionally recognized teaching
hospital chosen by the Company. The determination of any such physician shall be
final and conclusive for all purposes of this Agreement. Notwithstanding the
foregoing, (i) a Termination for Disability shall not affect Executive's right
to receive any amount that would otherwise have been payable to Executive under
the Company's plans, policies, practices or programs pertaining to short-term or
long-term disability had Executive's employment continued and (ii) if it is
determined, at the time Executive is first eligible to receive long-term
disability benefits under the Company's plans, policies, practices or programs,
that Executive is not entitled to receive such long-term disability benefits
(other than due to Executive's failure to cooperate), Executive shall, for
purposes of this Paragraph 6, be deemed to have been terminated as of the date
of such determination pursuant to a Termination Without Cause and to be entitled
to receive any additional benefits payable hereunder in respect of a Termination
Without Cause.
"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following actual knowledge of (i) a
reduction in Executive's annual
7
<PAGE> 8
Base Salary or incentive compensation opportunity as provided under Paragraph
3(b), (ii) a material reduction in Executive's positions, duties and
responsibilities from those described in Paragraph 2 hereof, (iii) the
relocation of Executive's principal place of employment to a location more than
50 miles from the location at which he performed his principal duties on the
date immediately prior to such relocation, (iv) a breach of the obligation to
provide Executive with the benefits required to be provided in accordance with
Paragraph 5(a), (v) a failure by the Company to pay any amounts due and owing to
Executive within 10 days following written notice from Executive of such failure
to pay, or (vi) any other material breach of the Company's obligations to
Executive hereunder that materially affects the compensation or benefits payable
to Executive or materially impairs Executive's ability to perform the duties and
responsibilities of his position. Notwithstanding the foregoing, a termination
shall not be treated as a Termination for Good Reason (i) if Executive shall
have consented in writing to the occurrence of the event giving rise to the
claim of Termination for Good Reason or (ii) unless Executive shall have
delivered a written notice to the Chief Executive Officer of the Company within
60 days of his having actual knowledge of the occurrence of one of such events
stating that he intends to terminate his employment for Good Reason and
specifying the factual basis for such termination, and such event shall not have
been cured within 30 days of the receipt of such notice.
"Termination Without Cause" means any termination of Executive's
employment by the Company other than (i) a Termination due to Disability or (ii)
a Termination for Cause. Subject to the Company's obligations to make the
payments, if any, required pursuant to this paragraph 6, nothing in this
Agreement shall be construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without reason.
"Vested Benefits" means amounts payable under the terms of or in
accordance with any plan, policy or practice or program of, or any contract or
agreement with, the Company or any of its subsidiaries (including, without
limitation, any supplemental pension plan, supplemental savings plan or other
deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock
Option Plan (the "1984 Plan") with respect to which Executive's rights to such
amounts (i) have become vested and nonforfeitable on or before Executive's
termination of employment or (ii) otherwise have or will become nonforfeitable
at or subsequent to his termination of employment without regard to the
performance by Executive of further services or the resolution of a contingency
that is not satisfied at or after such termination, provided that, at any time
during which Executive is entitled to receive the Severance Benefits hereunder,
Executive shall not also be entitled to receive any benefits under the Company's
generally applicable severance or other termination plans, policies or programs.
e. Full Discharge of Company Obligations. Except to the extent
provided in this Paragraph 6, the amounts payable to Executive pursuant to this
Paragraph 6 shall be in full and complete satisfaction of Executive's rights
under this Agreement and, except to the extent prohibited by law, any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and shall not be subject to any offset or
mitigation. Notwithstanding anything else contained herein to the contrary,
unless the Company shall waive its rights to any such release, the Company's
obligations under this Paragraph 6 are expressly
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conditioned upon Executive's execution simultaneously with or immediately
following such termination of employment, of a release and waiver, substantially
in the form attached hereto as Exhibit B (subject to, in the event any change of
law occurring after the date hereof, to such modifications as shall be necessary
or appropriate to place the Company in a substantially the same position as
though no change in law had occurred), of any claims he may have in connection
with the termination of, or arising out of, his employment with the Company,
provided that such release shall not be construed to waive, release or otherwise
limit any amounts required to be paid hereunder or any benefits due and payable
to Executive under the terms of any employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
any other Vested Benefit or any right of Executive to be indemnified by the
Company pursuant to its applicable policies and practices from and against any
third party claims arising out of or relating to Executive's employment with or
other services on behalf of the Company or any subsidiary of the Company.
f. Outplacement Services. In addition to any other benefits
described in this Paragraph 6, in the event Executive is eligible to receive
Severance Benefits, the Company shall also provide to Executive, at its expense,
individual outplacement services from a qualified outplacement firm selected by
the Company. The outplacement services to be provided to Executive shall be no
less favorable to Executive than those made available to other executives prior
to the date hereof under the Company's generally applicable policies, programs
or arrangements.
7. Change in Control of the Company.
a. Accelerated Vesting and Payment. Unless the Board (or the
appropriate committee thereof) shall otherwise determine in the manner set forth
in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence
of a Change in Control (as defined below) and shall remain exercisable for a
period of one year thereafter regardless of whether Executive continues to be
employed by the Company or, if longer, for the period during which such Option
would otherwise be exercisable in accordance with its terms or the generally
applicable provisions of the 1994 Plan. If no Alternative Option is provided as
set forth in Section 7(b) below, and the Company does not survive as a publicly
traded corporation following a Change in Control, the Company shall pay
Executive, in full settlement of all rights with respect to the Option, an
aggregate amount in cash equal to the product of (i) (A) the Fair Market Value
of a Share of the Company's Common Stock on the date the Change in Control
occurs minus (B) the per share exercise price for the Option times (ii) the
number of shares as to which such Option has not been exercised at the time of
the Change in Control. Any amount payable pursuant to the preceding sentence
shall be paid within 30 days following such Change in Control.
b. Alternative Options. Notwithstanding Paragraph 7(a), no
acceleration of exercisability shall occur with respect to any Option if the
Board (or the appropriate committee thereof) reasonably determines in good
faith, prior to the occurrence of a Change in Control, that such Option shall be
honored or assumed, or new rights substituted therefor (such honored,
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assumed or substituted Option being hereinafter referred to as an "Alternative
Option") by the successor in interest to the Company, provided that any such
Alternative Option must:
(i) provide Executive with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under the Option, including, but not limited to, an
identical or better exercise and vesting schedule and identical or
better timing and methods of payment;
(ii) have substantially equivalent economic value to such Option
(determined at the time of the Change in Control); and
(iii) have terms and conditions which provide that, in the event that
Executive's employment is terminated by the Company for any reason
or is terminated by Executive pursuant to a Termination for Good
Reason within two years following a Change in Control, (A) any
conditions on Executive's rights under, or any restrictions on
exercisability applicable to, each such Alternative Option shall be
waived or shall lapse, as the case may be and (B) the Alternative
Option shall remain exercisable until the second anniversary of the
Change in Control or, if longer, for the period during which such
Alternative Option would otherwise be exercisable in accordance with
its terms or the provisions of the plan under which it is granted
that permit the longest post-termination exercise period for
involuntary terminations (other than due to death, disability or
retirement).
c. Enhanced Severance Payments. If Executive's employment is
terminated following a Change in Control pursuant to a Termination for Good
Reason or a Termination Without Cause, the Severance Benefit payable to
Executive pursuant to Paragraph 6 shall be equal to two times the sum of
Executive's annual Base Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
(i) Application of Paragraph 7(d). In the event that any amount or
benefit paid or distributed to Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise
paid or distributed to Executive by the Company or any affiliated
company (collectively, the "Covered Payments"), would be an
"excess parachute payment" as defined in Section 280G of the Code
and would thereby subject Executive to the tax (the "Excise Tax")
imposed under Section 4999 of the Code (or any similar tax that
may hereafter be imposed), the provisions of this Section 7(d)
shall apply to determine the amounts payable to Executive
pursuant to this Agreement.
(ii) Calculation of Benefits. Immediately following delivery of any
Notice of Termination, the Company shall notify Executive of the
aggregate present value of all termination benefits to which he
would be entitled under this Agreement and any other plan,
program or arrangement as of the projected date of termination,
together with the projected maximum payments, determined as of
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such projected date of termination that could be paid without
Executive being subject to the Excise Tax.
(iii) Imposition of Payment Cap. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by less than
105%, then the amounts payable to Executive under this Agreement
may, in the discretion of the Company, be reduced (but not below
zero) to the maximum amount which may be paid hereunder without
Executive becoming subject to such an Excise Tax (such reduced
payments to be referred to as the "Payment Cap"). In the event that
Executive receives reduced payments and benefits hereunder,
Executive shall have the right to designate which of the payments
and benefits otherwise provided for in this Agreement that he will
receive in connection with the application of the Payment Cap.
(iv) Further Payments by the Company. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by more than
105%, the Company shall pay to Executive immediately following
Executive's termination of employment an additional amount (the "Tax
Reimbursement Payment") such that the net amount retained by
Executive with respect to such Covered Payments, after deduction of
any Excise Tax on the Covered Payments and any Federal, state and
local income tax and Excise Tax on the Tax Reimbursement Payment
provided for by this Paragraph 7(d)(iv), but before deduction for
any Federal, state or local income or employment tax withholding on
such Covered Payments, shall be equal to the amount of the Covered
Payments.
(v) Application of Section 280G. For purposes of determining whether any
of the Covered Payments will be subject to the Excise Tax and the
amount of such Excise Tax,
(A) such Covered Payments will be treated as "parachute
payments" within the meaning of Section 280G of the Code,
and all "parachute payments" in excess of the "base amount"
(as defined under Section 280G(b)(3) of the Code) shall be
treated as subject to the Excise Tax, unless, and except to
the extent that, in the good faith judgment of the
Company's independent certified public accountants
appointed prior to the Effective Date or tax counsel
selected by such Accountants (the "Accountants"), the
Company has a reasonable basis to conclude that such
Covered Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable
compensation for personal services actually rendered
(within the meaning of Section 280G(b)(4)(B) of the Code)
in excess of the "base
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amount," or such "parachute payments" are otherwise not
subject to such Excise Tax, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining whether Executive
would receive a greater net after-tax benefit were the amounts
payable under this Agreement reduced in accordance with Paragraph
7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal rate
of Federal income taxation for the calendar year in which the
first amounts are to be paid hereunder, and
(B) any applicable state and local income taxes at the highest
applicable marginal rate of taxation for such calendar year,
net of the maximum reduction in Federal incomes taxes which
could be obtained from the deduction of such state or local
taxes if paid in such year;
provided, however, that Executive may request that such
determination be made based on his individual tax circumstances,
which shall govern such determination so long as Executive provides
to the Accountants such information and documents as the Accountants
shall reasonably request to determine such individual circumstances.
(vii) Adjustments in Respect of the Payment Cap. If Executive receives
reduced payments and benefits under this Paragraph 7(d) (or this
Paragraph 7(d) is determined not to be applicable to Executive
because the Accountants conclude that Executive is not subject to
any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding
(a "Final Determination") that, notwithstanding the good faith of
Executive and the Company in applying the terms of this Agreement,
the aggregate "parachute payments" within the meaning of Section
280G of the Code paid to Executive or for his benefit are in an
amount that would result in Executive being subject an Excise Tax,
then the amount equal to such excess parachute payments shall be
deemed for all purposes to be a loan to Executive made on the date
of receipt of such excess payments, which Executive shall have an
obligation to repay to the Company on demand, together with interest
on such amount at the applicable Federal rate (as defined in Section
1274(d) of the Code) from the date of the payment hereunder to the
date of repayment by Executive. If this Paragraph 7(d) is not
applied to reduce Executive's entitlements under this Paragraph 7
because the Accountants determine that Executive would not receive a
greater net-after tax benefit by applying this Paragraph 7(d) and it
is established pursuant to a Final
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Determination that, notwithstanding the good faith of Executive and
the Company in applying the terms of this Agreement, Executive would
have received a greater net after tax benefit by subjecting his
payments and benefits hereunder to the Payment Cap, then the
aggregate "parachute payments" paid to Executive or for his benefit
in excess of the Payment Cap shall be deemed for all purposes a loan
to Executive made on the date of receipt of such excess payments,
which Executive shall have an obligation to repay to the Company on
demand, together with interest on such amount at the applicable
Federal rate (as defined in Section 1274(d) of the Code) from the
date of the payment hereunder to the date of repayment by Executive.
If Executive receives reduced payments and benefits by reason of
this Paragraph 7(d) and it is established pursuant to a Final
Determination that Executive could have received a greater amount
without exceeding the Payment Cap, then the Company shall promptly
thereafter pay Executive the aggregate additional amount which could
have been paid without exceeding the Payment Cap, together with
interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code) from the original payment due date
to the date of actual payment by the Company.
(viii) Adjustments in Respect of the Tax Reimbursement Payments. In the
event that the Excise Tax is subsequently determined by the
Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement Payment made,
Executive shall repay to the Company, at the time that the amount of
such reduction in the Excise Tax is finally determined, the portion
of such prior Tax Reimbursement Payment that would not have been
paid if such Excise Tax had been applied in initially calculating
such Tax Reimbursement Payment, plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any portion of the Tax
Reimbursement Payment to be refunded to the Company has been paid to
any Federal, state or local tax authority, repayment thereof shall
not be required until actual refund or credit of such portion has
been made to Executive, and interest payable to the Company shall
not exceed interest received or credited to Executive by such tax
authority for the period it held such portion. Executive and the
Company shall mutually agree upon the course of action to be pursued
(and the method of allocating the expenses thereof) if Executive's
good faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the
Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to exceed the amount taken into account
hereunder at the time the Tax Reimbursement Payment is made
(including, but not limited to, by reason of any payment the
existence or amount of which cannot be determined at the time of the
Tax Reimbursement Payment), the Company shall make an additional Tax
Reimbursement Payment in respect of such excess (plus any interest
or penalty
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payable with respect to such excess) at the time that the amount of
such excess is finally determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or portion
thereof) provided for in Paragraph 7(d)(iv) above shall be paid
to Executive not later than 10 business days following the
payment of the Covered Payments; provided, however, that if the
amount of such Tax Reimbursement Payment (or portion thereof)
cannot be finally determined on or before the date on which
payment is due, the Company shall pay to Executive by such date
an amount estimated in good faith by the Accountants to be the
minimum amount of such Tax Reimbursement Payment and shall pay
the remainder of such Tax Reimbursement Payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined, but in no
event later than 45 calendar days after payment of the related
Covered Payment. In the event that the amount of the estimated
Tax Reimbursement Payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan
by the Company to Executive, payable on the fifth business day
after written demand by the Company for payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the
Code).
e. Definition of "Change in Control". For purposes of this Paragraph
7, a "Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and as
used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary (including any trustee of such plan
acting as trustee), directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months after the
Commencement Date, the individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof, provided that
a director who was not a director at the beginning of such 24-month period
shall be deemed to have satisfied such 24-month requirement (and be an
Incumbent Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period) or
by prior operation of this Paragraph 7(e)(ii); or
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(iii) The occurrence of a transaction requiring stockholder approval
for the acquisition of the Company by an entity other than the Company or
a subsidiary through purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
a. Noncompetition. During the Contract Employment Period and for a
period of one year following Executive's termination of employment during the
Contract Employment Period other than due to a Termination Without Cause or a
Termination for Good Reason, Executive shall not become associated, whether as a
principal, partner, employee, consultant or shareholder (other than as a holder
of not in excess of 1% of the outstanding voting shares of any publicly traded
company), with any entity that is actively engaged in any geographic area in any
business which is in substantial and direct competition with the business or
businesses of the Company for which Executive provides substantial services or
for which Executive has substantial responsibility, provided that nothing in
this Paragraph 8(a) shall preclude Executive from performing services solely and
exclusively for a division or subsidiary of such an entity that is engaged in a
non-competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
(i) Executive shall not (except to the extent required by an order
of a court having competent jurisdiction or under subpoena from an
appropriate government agency) disclose to any third person, whether
during or subsequent to the Executive's employment with the Company, any
trade secrets; customer lists; product development and related
information; marketing plans and related information; sales plans and
related information; operating policies and manuals; business plans;
financial records; or other financial, commercial, business or technical
information related to the Company or any subsidiary or affiliate thereof
unless such information has been previously disclosed to the public by the
Company or has become public knowledge other than by a breach of this
Agreement; provided, however, that this limitation shall not apply to any
such disclosure made while Executive is employed by the Company, or any
subsidiary or affiliate thereof in the ordinary course of the performance
of Executive's duties;
(ii) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to induce any employee or Insurance Agent (as defined below)
of the Company, or any subsidiary or any affiliate thereof to be employed
or perform services elsewhere provided that this covenant shall not
preclude Executive from taking any actions during the Contract Employment
Period that (x) are intended to benefit the Company or any subsidiary or
affiliate and (y) do not benefit Executive financially other than as an
employee or stockholder of the Company;
(iii) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to induce any insurance agent or agency, insurance broker,
broker-dealer or supplier of the
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Company, or any subsidiary or affiliate thereof to cease providing
services to the Company, or any subsidiary or affiliate thereof provided
that this covenant shall not preclude Executive from taking any actions
during the Contract Employment Period that (x) are intended to benefit the
Company or any subsidiary or affiliate and (y) do not benefit Executive
financially other than as an employee or stockholder of the Company;
(iv) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to solicit, on behalf of any person or entity other than the
Company or any of its subsidiaries, the trade of any individual or entity
which, at the time of the solicitation, is a customer of the Company, or
any subsidiary or affiliate thereof, or which the Company, or any
subsidiary or affiliate thereof is undertaking reasonable steps to procure
as a customer at the time of or immediately preceding termination of the
Contract Employment Period; provided, however, that this limitation shall
only apply to (x) any product or service which is in competition with a
product or service of the Company or any subsidiary or affiliate thereof
and (y) with respect to any customer or prospective customer with whom
Executive has or had (by virtue of Executive's position or otherwise) a
personal relationship; and
(v) following the termination of the Contract Employment Period,
Executive shall provide assistance to and shall cooperate with the Company
or any subsidiary or affiliate thereof, upon its reasonable request, with
respect to matters within the scope of Executive's duties and
responsibilities during the Contract Employment Period. (The Company
agrees and acknowledges that it shall, to the maximum extent possible
under the then prevailing circumstances, coordinate (or cause a subsidiary
or affiliate thereof to coordinate) any such request with Executive's
other commitments and responsibilities to minimize the degree to which
such request interferes with such commitments and responsibilities). The
Company agrees that it will reimburse Executive for reasonable travel
expenses (i.e., travel, meals and lodging) that Executive may incur in
providing assistance to the Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent"
shall mean those insurance agents or agencies representing the Company or any
subsidiary or affiliate thereof, that are exclusive or career agents or agencies
of the Company or any subsidiary or affiliate thereof, or any insurance agents
or agencies which derive 50% or more of their business revenue from the Company
or any subsidiary or affiliate thereof (calculated on an aggregate basis for the
12-month period prior to the date of determination or such other similar period
for which such information is more readily available).
c. Company Property. Promptly following Executive's termination of
employment, Executive shall return to the Company all property of the Company,
and all copies thereof in Executive's possession or under his control.
d. Intention of the Parties. If any provision of Paragraph 8 is
determined by an arbitrator (or a court of competent jurisdiction asked to
enforce the decision of the arbitrator)
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not to be enforceable in the manner set forth in this Agreement, the Company and
Executive agree that it is the intention of the parties that such provision
should be enforceable to the maximum extent possible under applicable law and
that such arbitrator (or court) shall reform such provision to make it
enforceable in accordance with the intent of the parties. Executive acknowledges
that a material part of the inducement for the Company to provide the salary and
benefits evidenced hereby is Executive's covenants set forth in Paragraph 8(a),
(b) and (c) and that the covenants and obligations of Executive with respect to
nondisclosure and nonsolicitation relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company irreparable injury for which adequate
remedies are not available at law. Therefore, Executive agrees that, if
Executive shall materially breach any of those covenants following termination
of employment, the Company shall have no further obligation to pay Executive any
benefits otherwise payable hereunder and the Company shall be entitled to an
injunction, restraining order or such other equitable relief (without the
requirement to post a bond) restraining Executive from committing any violation
of the covenants and obligations contained in Paragraph 8(a), (b) and (c). The
remedies in the preceding sentence are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity as an
arbitrator (or court) shall reasonably determine.
e. Waiver. Without limiting the generality of the foregoing, upon
request of Executive prior to engaging in any conduct otherwise prohibited by
this Paragraph 8, the Company may, in its sole discretion, waive in writing, on
such terms and conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
a. Survival. Paragraphs 5(c) (dealing with reimbursement of
expenses), 7 (relating to a Change in Control), 8 (relating to noncompetition,
nonsolicitation and confidentiality) and 9 (relating, among other things, to
survival, assignment and governing law) shall survive the termination hereof,
whether such termination shall be by expiration of the Contract Employment
Period or an early termination pursuant to Paragraph 6 hereof. Paragraph 6
(relating to early termination) shall survive the termination hereof to the
extent that, prior thereto, or at the time of termination, Executive (or his
beneficiary) has become or becomes entitled to receive any of the benefits
payable thereunder. The option referred to in Paragraph 4 survives for the term
specified in Attachment A.
b. Binding Effect. This Agreement shall be binding on, and shall
inure to the benefit of, the Company and any person or entity that succeeds to
the interest of the Company (regardless of whether such succession does or does
not occur by operation of law) by reason of the sale of all or a portion of the
Company's stock, a merger, consolidation or reorganization involving the Company
or, unless in the case of a sale involving less than all or substantially all of
the Company's assets the Company otherwise elects in writing, a sale of the
assets of the business of the Company (or portion thereof) in which Executive
performs a majority of his services. Any successor in interest to the Company
shall acknowledge in writing to Executive that it has assumed this Agreement and
is responsible to Executive for the performance of the
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Company's obligations under this Agreement. Without limiting the generality of
the foregoing, the Company shall have the right, without the consent of
Executive, to assign this Agreement and its obligations hereunder to any New
Entity or any subsidiary of any New Entity by which Executive becomes employed,
at the discretion of the Company, by reason of the implementation of any
restructuring of the Company, and, following any such assignment, such New
Entity or subsidiary shall be treated as the Company for all purposes of this
Agreement. This Agreement shall also enure to the benefit of Executive's heirs,
executors, administrators and legal representatives.
c. Assignment. Except as provided under Paragraph 9(b), neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party. In the event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at any time due
and payable hereunder in the event (and only to the extent) that the assignee
has become a debtor in bankruptcy, is the subject of a receivership or similar
preceding or has become insolvent, provided that Executive shall be required to
assign his rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In consideration of such
guarantee, Executive agrees that following such assignment, the covenants of
Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit
of the Company, as well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in favor of the
Company shall, from and after the date of such assignment, inure solely to the
benefit of the assignee.
d. Entire Agreement. Except as expressly provided below, this
Agreement, the Option Agreement and the portion, if any, of any other agreement
relating to pension service or credits referred to in Paragraph 5(a) shall
constitute the entire agreement between the parties hereto with respect to the
matters referred to herein and any other agreement or any portion of any such
other agreement not expressly preserved hereby shall cease to be effective upon
the execution hereof and shall not become reinstated upon the expiration or
other termination of this Agreement. There are no promises, representations,
inducements or statements between the parties other than those that are
expressly contained herein. Executive acknowledges that he is entering into this
Agreement of his own free will and accord, and with no duress, that he has read
this Agreement and that he understands it and its legal consequences. Other than
the provisions of Paragraph 6 which limit Executive's eligibility to receive
severance benefits under the Company's generally applicable plans, programs or
agreements, nothing in this Agreement shall be construed to limit or otherwise
supersede Executive's rights or entitlements under any compensatory plan,
program or arrangement made available generally to all employees or all officers
of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d)
shall not preclude reference to the documents governing any such plan, program
or arrangement to determine such rights and entitlements.
e. Severability; Reformation. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby. In the event any of
Paragraph 8(a), (b) or (c) is not enforceable in accordance with its
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terms, Executive and the Company agree that such Paragraph shall be reformed to
make such Paragraph enforceable in a manner which provides the Company the
maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement shall not operate as a
waiver of any other breach or default, whether similar to or different from the
breach or default waived. No waiver of any provision of this Agreement shall be
implied from any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights hereunder on any
occasion or series of occasions.
g. Notices. Any notice required or desired to be delivered under
this Agreement shall be in writing and shall be delivered personally, by courier
service, by registered mail, return receipt requested, or by telecopy and shall
be effective upon actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Corporate Secretary
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<PAGE> 20
If to Executive:
Fredrick C. Copeland, Jr.
75 Bloomfield Avenue
West Hartford, Connecticut 06015
h. Arbitration. The Company and Executive agree that any claim,
dispute or controversy arising under or in connection with this Agreement, or
otherwise in connection with Executive's employment by the Company (including,
without limitation, any such claim, dispute or controversy arising under any
federal, state or local statute, regulation or ordinance or any of the Company's
employee benefit plans, policies or programs) shall be resolved solely and
exclusively by binding arbitration. The arbitration shall be held in the city of
Hartford, Connecticut (or at such other location as shall be mutually agreed by
the parties). The arbitration shall be conducted in accordance with the
Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration
Association (the "AAA") in effect at the time of the arbitration, except that
the arbitrator shall be selected by alternatively striking from a list of five
arbitrators supplied by the AAA. All fees and expenses of the arbitration,
including a transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented to the
arbitrator, the entire cost of such proceedings (including, without limitation,
Executive's reasonable attorneys fees) shall be borne by the Company. If
Executive does not prevail as to any material issue, each party will pay for the
fees and expenses of its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party prevails on a
claim for which attorney's fees are recoverable under the Rules). Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or Executive pursues any claim, dispute or controversy against the
other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action.
i. Amendments. This Agreement may not be altered, modified or
amended except by a written instrument signed by each of the parties hereto.
j. Headings. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to affect
the meaning or interpretation hereof.
k. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall be reduced by
any amounts required to be withheld by the Company from time to time under
applicable Federal, State or local income or employment tax laws or
similar statutes or other provisions of law then in effect.
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<PAGE> 21
m. Governing Law. This Agreement shall be governed by the laws of
the State of Connecticut, without reference to principles of conflicts or choice
of law under which the law of any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and Executive has hereunto set his hand
as of the day and year first above written.
Aetna Life and Casualty Company
/s/ Ronald E. Compton
---------------------
Ronald E. Compton
Chairman
/s/ Fredrick C. Copeland, Jr.
-----------------------------
Fredrick C. Copeland, Jr.
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<PAGE> 22
EXHIBIT A TO EMPLOYMENT AGREEMENT
AETNA LIFE AND CASUALTY COMPANY
1994 STOCK INCENTIVE PLAN
PERFORMANCE VESTED NONSTATUTORY STOCK OPTION AGREEMENT
Pursuant to its 1994 Stock Incentive Plan, Aetna Life and Casualty Company
hereby grants to the person named below the right and option to purchase the
stated number of shares of Common Stock on the terms and conditions hereinafter
set forth.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Effective Date Aetna No. Grantee Total Optioned Shares Option Price
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
ARTICLE I
DEFINITIONS
(a) "Board" means the Board of Directors of Aetna Life and Casualty Company.
(b) "Committee" means the Board's Committee on Compensation and Organization
or any successor thereto.
(c) "Common Stock" means shares of the Company's Common Capital Stock, without
par value.
(d) "Company" means Aetna Life and Casualty Company.
(e) "Disability" means long-term disability as defined under the terms of the
Company's applicable long-term disability plans or policies.
(f) "Effective Date" means the date of grant of this Option, as set forth
above.
(g) "Fair Market Value" means the closing price of the Common Stock as
reported by the Consolidated Tape of the New York Stock Exchange Listed
Shares on the date such value is to be determined, or, if no shares were
traded on such day, on the next preceding day on which the Common Stock
was traded.
(h) "For Cause" means a termination of Grantee's employment by the Company due
to (i) the willful failure by Grantee to perform substantially Grantee's
duties as an employee of the Company (other than due to physical or mental
illness) after reasonable notice to Grantee of such failure, (ii)
Grantee's engaging in serious misconduct that is injurious to the Company
or any subsidiary or any affiliate of the Company, (iii) Grantee's having
been convicted of, or entered a plea of nolo
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<PAGE> 23
contendere to, a crime involving an act that is immoral or wrong in and of
itself (e.g., burglary, larceny, murder or arson) or a crime involving
deceit, fraud, perjury or embezzlement, (iv) the breach by Grantee of any
written covenant or agreement not to compete with the Company or any
subsidiary or any affiliate or (v) the breach by Grantee of his duty of
loyalty to the Company which shall include, without limitation, (A) the
disclosure by Grantee of any confidential information pertaining to the
Company or any Subsidiary or any affiliate of the Company, other than (x)
in the ordinary course of the performance of his duties on behalf of the
Company or (y) pursuant to a judicial or administrative subpoena from a
court or governmental authority with jurisdiction over the matter in
question, (B) the harmful interference by Grantee in the business or
operations of the Company or any Subsidiary or any affiliate of the
Company, (C) any attempt by Grantee directly or indirectly to induce any
employee, insurance agent, insurance broker or broker-dealer of the
Company or any Subsidiary or any affiliate to be employed or perform
services elsewhere, (D) any attempt by Grantee directly or indirectly to
solicit the trade of any customer or supplier, or prospective customer or
supplier, of the Company on behalf of any person other than the Company or
a Subsidiary thereof or (E) any breach or violation of the Company's Code
of Conduct, as amended from time to time. Notwithstanding the foregoing, a
breach of Grantee's duty of loyalty to the Company as described in
subclause (A) or (E) of clause (v) of the preceding sentence shall not be
grounds for a termination For Cause unless such breach has had or could
reasonably be expected to have a significant adverse effect on the
business or reputation of the Company.
(i) "Fundamental Corporate Event" shall mean any stock dividend, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
split-up, spin-off, combination, exchange of shares, warrants or rights
offering to purchase Common Stock at a price substantially below fair
market value, or similar event.
(j) "Good Reason" means a termination of Grantee's employment by Grantee
within 90 days following (i) a reduction in Grantee's annual Base Salary
or incentive compensation opportunity as provided under Paragraph 3(b)
of the employment agreement signed by Grantee and the Company dated as
of December 8, 1995 (the "Employment Agreement"), (ii) a material
reduction in Grantee's positions, duties and responsibilities from those
described in Paragraph 2 of the Employment Agreement, (iii) the
relocation of Grantee's principal place of employment to a location more
than 50 miles from the location at which he performed his principal
duties on the date immediately prior to such relocation, (iv) a breach
of the obligation to provide Grantee with the benefits required to be
provided in accordance with Paragraph 5(a) of the Employment Agreement,
(v) a failure by the Company to pay any amounts due and owing to Grantee
within 10 days following written notice from Grantee of such failure to
pay, or (vi) any other material breach of the Company's obligations to
Grantee under the Employment Agreement that significantly affects the
compensation or benefits payable to Grantee or materially impairs
Grantee's ability to perform the duties and responsibilities of his
position. Notwithstanding the foregoing, a termination shall not be
treated as a termination for Good Reason (i) if Grantee shall
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<PAGE> 24
have consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (ii) unless Grantee shall have
delivered a written notice to the Chief Executive Officer of the Company
within 60 days of his having actual knowledge of the occurrence of one or
such events stating that he intends to terminate his employment for Good
Reason and specifying the factual basis for such termination, and such
event shall not have been cured within 30 days of the receipt of such
notice.
(k) "Grantee" means the person named above to whom this Option has been
granted.
(l) "Interim Performance Period" means the period of time beginning on the
Effective Date and ending on April 28, 1997.
(m) "Option" means the option herein granted.
(n) "Option Price" means the amount per share of Common Stock required to be
paid upon the exercise of this Option, as set forth above, or such other
amount per share of Common Stock as may result by operations of Article IV
of this Agreement.
(o) "Optioned Shares" means the number of shares of Common Stock represented
by this Option, as set forth above, or such other amount as may result by
operation of Article IV of this Agreement.
(p) "Performance Target" means the performance objective measured by the price
of the Common Stock as described in Article II.
(q) "Performance Period" means the period of time beginning on the Effective
Date and ending on April 28, 1998.
(r) "Plan" means the Aetna Life and Casualty Company 1994 Stock Incentive
Plan.
(s) "Retirement" means the termination of employment of a Grantee from active
service with the Company or a Subsidiary under circumstances which would
entitle an employee of the Company or a Subsidiary to an immediate pension
under one of the Company's approved retirement plans (such pension may be
actuarially reduced for early commencement of benefits).
(t) "Shares of Stock" or "Stock" means the Common Stock.
(u) "Subsidiary" means any entity of which, at the time such subsidiary status
is to be determined, at least 50% of the total combined voting power of
all classes of stock in such entity is held by the Company and its
Subsidiaries (exclusive of ownership by the entity whose subsidiary status
is being determined).
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<PAGE> 25
(v) "Successor" means the legal representative of the estate of a deceased
Grantee or the person or persons who shall acquire the right to exercise
an Option by bequest or inheritance or by reason of the death of the
Grantee.
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<PAGE> 26
ARTICLE II
TERM OF OPTION AND VESTING
(a) The Term of this Option shall commence on the Effective Date and shall
terminate, unless sooner terminated by the terms of the Plan or this
Agreement, at:
(i) the close of the Company's business on the day preceding the tenth
anniversary of the Effective Date, if the Company is open for
business on such day: or
(ii) the close of the Company's business on the next preceding day that
the Company is open for business.
(b) Except as provided in (c), (d) and (e) below, all or a portion of this
Option will become vested and the Option will be exercisable on April 28,
1998 only to the extent the Fair Market Value of the Common Stock meets or
exceeds the Performance Targets described below. A Performance Target
shall be deemed to have been met only to the extent the Fair Market Value
of the Common Stock meets or exceeds the Performance Target for at least
five consecutive trading business days at any time during the Performance
Period.
<TABLE>
<CAPTION>
---------------------------------------------
Performance Target Amount Vested
---------------------------------------------
<S> <C>
Below $78 Option does not vest
$78 33%
$84 67%
$91 or above 100%
---------------------------------------------
</TABLE>
The portion of the Option which shall vest at performance levels between
$62 and $73 shall be determined by mathematical interpolation between the
respective measuring points. Notwithstanding anything else contained
herein to the contrary, the portion of the Option which shall become
vested under Section (b), if any, shall be reduced by the amount which has
become vested pursuant to (c) below.
(c) If the Performance Targets described above are met or exceeded during the
Interim Performance Period, 50% of the amount which would have become
vested in accordance with the above schedule will become vested on April
28, 1997.
(d) This Option may become vested pursuant to (b) and (c) above only if the
Grantee is an active employee of the Company or a Subsidiary as of the
last day of the Performance Period or the Interim Performance Period, as
the case may be; provided, however, if the Company involuntarily
terminates the employment of the Grantee (other than "For Cause"), the
Grantee dies or terminates employment for reason of Disability, or if the
Grantee voluntarily terminates employment for "Good Reason," the Option
may continue to vest for such Grantee if the Performance Targets are met
during the Performance Period or Interim Performance Period.
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<PAGE> 27
(e) If the Performance Targets are not met as of the end of the Performance
Period, the Options will become vested on April 28, 2002, provided the
Grantee is an active employee of the Company or a Subsidiary on that date.
ARTICLE III
METHOD OF OPTION EXERCISE
An option is exercisable only after it has become vested as provided in Article
II above. In order to exercise this Option, Grantee must comply with procedures
adopted by the Company from time to time. Under current procedures, the Grantee
must deliver or mail to the Committee, Attention: Manager, Grantee Compensation,
Aetna Human Resources, a properly executed exercise notification letter on the
appropriate form along with payment of the Option Price. If Grantee is using the
cashless exercise program offered by the Company, the exercise notice must be
delivered to the participating broker.
In addition, if the Grantee has been notified that he or she must consult with a
member of the Company's Law and Regulatory Affairs Department prior to engaging
in transactions in Aetna stock, Grantee must consult with the Law and Regulatory
Affairs prior to exercising this Option.
ARTICLE IV
CAPITAL CHANGES
Except as otherwise specifically provided in Article VI, in the event that the
Committee shall determine that any Fundamental Corporate Event affects the
Common Stock such that an adjustment is required to preserve, or to prevent
enlargement of, the benefits or potential benefits made available under this
Plan, then the Committee may, in such manner as the Committee may deem
equitable, adjust the (i) the number and kind of shares subject to the Option
(including substitution of shares or Options of another company), (ii) the
Performance Targets, or (iii) the Option Price. Additionally, the Committee may
make provision for a cash payment to a Grantee or the Successor of the Grantee.
However, the number of Shares of Stock subject to the Option shall always be a
whole number.
ARTICLE V
TERMINATION OF OPTION
(a) Except as provided in (d) below, if the Grantee shall cease, for reason of
death, Disability or Retirement, to be employed by the Company or its
Subsidiaries during the Term of the Option, the Grantee or Successor of
the Grantee may exercise a vested Option until the earlier of:
(i) the expiration of the Term of the Option; or
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<PAGE> 28
(ii) a period not to exceed five years following such cessation of
employment.
(b) Except as provided in (a) above or (d) below, if the Grantee voluntarily
ceases to be employed by the Company or its Subsidiaries (other than for
"Good Reason") during the Term of the Option, the Grantee may exercise a
vested Option until the earlier of:
(i) the expiration of the Term of the Option; or
(ii) a period not to exceed ninety days following such cessation of
employment.
(c) Except as provided in (a) above or (d) below, if the Grantee involuntarily
ceases to be employed by the Company or its Subsidiaries other than for
cause, or if Grantee voluntarily terminates employment for "Good Reason"
during the Term of the Option, the Grantee may exercise a vested Option
until the later of the expiration of four years from the Effective Date,
or ninety days following such cessation of employment (but not following
the expiration of the Term of the Option).
(d) An Option that has not become vested as provided in Article II above at
the time of cessation of employment (or after cessation of employment as
provided in Article II(d)) may not be exercised thereafter. No Option may
be exercised after the Company has terminated the employment of the
Grantee For Cause, except that the Committee may, in its sole discretion,
permit exercises for a period of up to ninety days in cases where the
Committee shall determine such period is warranted under the particular
circumstances.
(e) If the Grantee has not entered into a written employment agreement
satisfactory to the Company prior to February 16, 1996, this Option shall
immediately terminate as of that date and shall have no further force or
effect. In addition, if Grantee fails to comply with the term of any
written employment agreement entered into with the Company, said failure
shall cause this Option to immediately terminate, whether or not the
Option has become vested.
(f) Employment for purposes of determining eligibility for vesting
post-employment exercise rights of the Grantee under this Agreement shall
mean continuous full-time salaried employment with the Company or a
Subsidiary and shall include periods during which the Grantee is on
vacation, sick leave, or other approved absence, or in receipt of
severance pay or other form of salary continuation benefit.
(g) Except as otherwise herein provided, exercise of this Option, whether by
the Grantee or the Successor of the Grantee, shall be subject to all terms
and conditions of this Agreement.
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<PAGE> 29
ATICLE VI
CHANGE-OF-CONTROL
(a) For purposes of this Article VI, a "Change of Control" means the happening
of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used in
Sections 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored or
maintained by the Company or any Subsidiary (including any trustee
of such plan acting as trustee), directly or indirectly, becomes the
"beneficial owner", (as defined in Rule 13d-3 under the Exchange
Act, as amended from time to time), of securities of the Company
representing 20 percent or more of the combined voting power of the
Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months after the
Commencement Date, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for
any reason other than death to constitute at least a majority
thereof, provided that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied
such 24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the
approval of, at least two-thirds of the directors who then qualified
as Incumbent Directors either actually (because they were directors
at the beginning of such 24-month period) or by prior operation of
this Article VI(a)(ii); or
(iii) The occurrence of a transaction requiring stockholder approval for
the acquisition of the Company by an entity other than the Company
or a subsidiary through purchase of assets, or by merger, or
otherwise.
(b) Unless the Board (or the Committee) shall otherwise determine in the
manner set forth in Paragraph (c) below and notwithstanding anything in
this Agreement to the contrary, this Option shall become fully exercisable
upon the occurrence of a Change of Control (as defined in Paragraph (a)
above) and shall remain exercisable for a period of at least one year
thereafter regardless of whether Grantee continues to be employed by the
Company or, if longer, for the period during which such Option would
otherwise be exercisable in accordance with its terms.
(c) Notwithstanding paragraph (b) above, no acceleration of exercisability
shall occur with respect to any Option if the Board (or the Committee)
reasonably determines in good faith, prior to the occurrence of a Change
of Control, that such Option shall be honored or assumed, or new rights
substituted therefor (such honored, assumed or substituted Option
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<PAGE> 30
being hereinafter referred to as an "Alternative Option") by the successor
in interest to the Company, provided that any such Alternative Option
must:
(i) provide Grantee with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under the Option, including, but not limited to, an
identical or better exercise and vesting schedule and identical or
better timing and methods of payment;
(ii) have substantially equivalent economic value to such Option
(determined at the time of the Change of Control); and
(iii) have terms and conditions which provide that, in the event that the
Company involuntarily terminates employment of Grantee for any
reason or if the Grantee terminates employment for Good Reason
within two years following a Change of Control, any conditions on
Grantee's rights under, or any restrictions on exercisability
applicable to, each such Alternative Option shall be waived or shall
lapse, as the case may be and the Alternative Option shall remain
exercisable until the second anniversary of the Change of Control
or, if longer, for the period during which such Alternative Option
would otherwise be exercisable in accordance with its terms or the
provisions of the plan under which it is granted that permit the
longest post-termination exercise period for involuntary
terminations (other than due to death, disability or retirement).
ARTICLE VII
OTHER TERMS
(a) Grantee understands that the Grantee shall not have any rights as
stockholder by virtue of the grant of an Option but only with respect to
shares of Common Stock actually issued to the Grantee in accordance with
the terms hereof.
(b) Anything herein to the contrary notwithstanding, the Company may postpone
the exercise of the Option for such time as the Committee in its
discretion may deem necessary, in order to permit the Company with
reasonable diligence (i) to effect or maintain registration under the
Securities Act of 1933, as amended, of the Plan or the shares of Common
Stock issuable upon the exercise of the Option, or (ii) to determine that
the Plan and such shares are exempt from registration; and the Company
shall not be obligated by virtue of this Option Agreement or any provision
of the Plan to recognize the exercise of the Option or to sell or issue
shares of Common Stock in violation of said Act or of the law of any
government having jurisdiction thereof. Any such postponement shall not
extend the Term of the Option; and neither the Company nor its Board shall
have any obligation or liability to the Grantee, or to the Grantee's
Successor, with respect to any shares of Common Stock as to which the
Option shall lapse because of such postponement.
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<PAGE> 31
(c) The Option shall be nontransferable and nonassignable except by will and
by the laws of descent and distribution. During the Grantee's lifetime,
the Option may be exercised only by the Grantee.
(d) This Option is not an incentive stock option as described in the Internal
Revenue Code of 1986, as amended, Section 422A (b).
(e) This Agreement is subject to the 1994 Stock Incentive Plan heretofore
adopted by the Company and approved by its shareholders. The terms and
provisions of the Plan (including any subsequent amendments thereto) are
hereby incorporated herein by reference. In the event of a conflict
between any term or provision contained herein and a term or provision of
the Plan, the applicable terms and provisions of the Plan will govern and
prevail.
IN WITNESS WHEREOF, AETNA LIFE AND CASUALTY COMPANY has caused this Option
Agreement to be executed as of the Effective Date, and Grantee has accepted the
terms and provisions hereof.
AETNA LIFE AND CASUALTY COMPANY
By _____________________________________
Its Chairman
Accepted: __________________________
(Signature)
Name: ______________________________
Title: _____________________________
Social Security Number: ____________
Dated: _____________________________
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<PAGE> 32
EXHIBIT B TO EMPLOYMENT AGREEMENT
RELEASE AGREEMENT
I, ________________ , acknowledge that this document accurately reflects
an agreement entered into between me and Aetna Life and Casualty Company (the
"Company") as of this __ day of ___________, 199__. In consideration for the
benefits and consideration set forth in Paragraph 6 of the attached employment
agreement (the "Agreement"), I hereby agree to the following:
1. DEFINITION. In this agreement the word "Company" means not only the
Company by which I was employed, but also parent and subsidiary corporations,
any affiliated entities whether or not incorporated, the employee, agents,
officers, directors and shareholders of all such entities and any person or
entity which may succeed to the rights and liabilities of such entities by
assignment or otherwise.
2. RELEASE. I hereby release and hold harmless (on behalf of myself and my
family, heirs, executors, successors and assigns) now and forever, the Company
from and waive any claim that I have presently, may have or have had in the
past, known or unknown, against the Company by reason of my employment by the
Company including, without limitation, the termination thereof, other than
claims I may have (i) to the payment of amounts due and payable in accordance
with the terms of the Agreement, including without limitation the Severance
Benefits and the Vested Benefits (as each such term is defined in the Agreement)
and (ii) to be indemnified by the Company pursuant to its applicable policies
and practices from and against any third party claims arising out of or relating
to Executive's employment with or other services on behalf of the Company or any
subsidiary of the Company.
3. EXTENT OF RELEASE. This agreement is valid whether any claim arises
under any federal, state or local statute (including, without limitation, Title
VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act of 1967, the Equal Pay Act, the Americans with
Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974
and all other statutes regulating the terms and conditions of my employment),
regulation or ordinance, under the common law or in equity (including any claims
for wrongful discharge or otherwise), or under any policy, agreement,
understanding or promise, written or oral, formal or informal, between the
Company and myself.
4. CONSIDERATION. The consideration hereby provided to me under the
Agreement is not required under the Company's standard policies and I know of no
circumstances other than my agreeing to the terms of this agreement which would
require the Company to provide such consideration.
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<PAGE> 33
5. RESTRICTIONS. I have not filed, nor will I initiate or cause to be
initiated on my behalf, any complaint, charge, claim or proceeding against the
Company before any local, state or federal agency, court or other body relating
to my employment or the termination thereof (each individually a "Proceeding"),
nor will I participate in any Proceeding. I waive any right I may have to
benefit in any manner from any relief (whether monetary or otherwise) arising
out of any Proceeding, including any EEOC proceeding. I understand that by
entering into this agreement, I will be limiting the availability of certain
remedies that I may have against the Company and limiting also my ability to
pursue certain claims against the Company. The foregoing will not be used to
justify interfering with any right I may have to file a charge or participate in
an investigation or proceeding conducted by the EEOC.
6. PENALTIES. If I initiate or participate in any legal actions, as
described above, the Company shall have the right, but shall not be obligated,
to deem this agreement void without effect and to require me to repay to the
Company any amounts (other than Earned Salary and Vested Benefits) payment of
which was conditioned on the execution of this agreement, plus interest thereon
from the original date of payment at an annual rate, compounded semi-annually,
equal to the prime rate as quoted in the Wall Street Journal on my date of
termination, plus 2 percent and to terminate any benefit or payments (other than
with respect to Vested Benefits) that are otherwise payable under the Agreement.
7. RIGHT TO COUNSEL. The Company advises me that I should consult with an
attorney prior to execution of this agreement and the Agreement. I understand
that it is in my best interest to have this document and the Agreement reviewed
by an attorney of my own choosing and at my own expense, and I hereby
acknowledge that I have been afforded a period of at least twenty-one days
during which to consider this agreement and the Agreement and to have this
agreement and the Agreement reviewed by my attorney.
8. SEVERABILITY CLAUSE. Should any provision or part of this agreement be
found to be invalid or unenforceable, only that particular provision or part so
found and not the entire agreement shall be inoperative.
9. EVIDENCE. This document may be used as evidence in any proceeding
relating to my employment or the termination thereof. I waive all objections as
to its form.
10. FREE WILL. I am entering into this agreement and the Agreement of my
own free will. The Company has not exerted any undue pressure or influence on me
in this regard. I have had reasonable time to determine whether entering into
this agreement and the Agreement is in my best interest. I understand that if I
request additional time to review the provisions of this agreement and the
Agreement, a reasonable extension of time will be granted.
11. REVOCATION. This agreement may be revoked by me within seven days
after the date on which I sign this agreement and I understand that this
agreement and the Agreement are not binding or enforceable until such seven day
period has expired. Any such revocation must be made in a signed letter executed
by me and received by the Company at the following address no later than 5 p.m.
Eastern Standard Time on the seventh day after I have executed this agreement
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and the Agreement: _________________________________. I understand that if I
revoke this agreement, the Agreement will not be effective or enforceable and I
will not be entitled to any benefits thereunder.
12. NON-ADMISSION. Nothing contained in this agreement shall be deemed or
construed as an admission of wrongdoing or liability on the part of the Company.
13. GOVERNING LAW. This agreement and the Agreement shall be construed in
accordance with the laws of the State of Connecticut, applicable to contracts
made and entirely to be performed therein.
Date: ________________________ ______________________________
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[LOGO] Interoffice Communication
Mary Ann Champlin
Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Frederick C. Copeland, Jr.
Date July 22, 1996
Subject EMPLOYMENT AGREEMENT
I am pleased to inform you that effective July 19, 1996, Aetna Inc. has
assumed all of the obligations of Aetna Services, Inc. (formerly Aetna Life
and Casualty Company) under your Employment Agreement with Aetna Services,
Inc. All references to the "Company" in your Employment Agreement will
hereinafter be deemed to mean both Aetna Services, Inc. and Aetna Inc. Among
other things, this means that the Change in Control provisions of your
Employment Agreement would be triggered by a change in control of either
Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within the Aetna
holding company system as a result of the merger with U. S. Healthcare. Your
Employment Agreement was entered into with Aetna Services, Inc., which is now
a direct subsidiary of Aetna Inc. We felt it would be appropriate for the
new ultimate parent, Aetna Inc., to assume these obligations to place you on
an equivalent footing post-merger.
The assumption of your Employment Agreement is self-executing. You do not need
to take any action in response to this letter. If you have any questions or
concerns, please let me know.
/s/ Mary Ann Champlin
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[LOGO] Interoffice Communication
Richard L. Huber
President and Chief Executive
Officer
A801
(860) 273-7851
Fax: (860) 273-6872
To Frederick C. Copeland, Jr.
Date September 26, 1997
Subject Pension Credit
This memorandum is to confirm that paragraph 7 of my letter to you dated June 6,
1995 regarding your pension benefits is amended in its entirety and replaced
with the following:
Your participation in the pension plan will begin after you have
completed one year of service with Aetna. Under the terms of the plan
currently in effect, you will receive credit for your actual years of
service from your date of employment and your benefit will vest after five
years of such service. We also will credit you under a supplemental plan
with an additional eight years of service as follows: the first after two
years of active service; the second after three years of active service; the
third and fourth after four years of active service; the fifth after five
years of active service; the sixth after six years of active service; the
seventh after seven years of active service; and the eighth after eight
years of active service. Under the regular plan, you will accumulate one
year for each year you remain in the employ of the Company (but no more than
35 years of actual and credited service combined will accumulate under both
plans) as long as the plans remain in effect.
Your Employment Agreement with the Company dated as of December 21, 1995 remains
in full force and effect.
Please sign and return one copy of this memorandum to evidence your agreement.
Aetna Inc.
By: /s/ Richard L. Huber Date: 9/30/97
-------------------- -------
Richard L. Huber
Agreed and Accepted:
By: /s/ Frederick C. Copeland, Jr.
------------------------------
Frederick C. Copeland, Jr.
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<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of December 19, 1995, by and between
Aetna Life and Casualty Company, a Connecticut corporation (the "Company"), and
Thomas J. McInerney ("Executive").
W I T N E S S E T H:
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the structure of its
business, including, without limitation, dividing the business of the Company
into two or more separate publicly traded companies or otherwise transferring a
portion of the business to a third party;
WHEREAS, the Company believes that Executive is a key employee and
that it is in the Company's best interests to retain the services of Executive
for the period during which such restructuring alternatives are considered and,
to the extent applicable, implemented;
WHEREAS, the Company therefore desires to retain the services of
Executive and to enter into an agreement embodying the terms of such employment
(the "Agreement"); and
WHEREAS, Executive desires to accept such employment and enter into
such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment. Except as provided in Paragraph 6(a), the Company
shall continue to employ Executive and Executive agrees to remain employed by
the Company under the terms of this Agreement for the period commencing on the
date first written above and ending April 28, 1997. The period during which
Executive is employed pursuant to this Agreement shall be referred to as the
"Contract Employment Period". Upon the expiration of the Contract Employment
Period, Executive's employment with the Company shall continue on an at-will
basis.
2. Position and Duties. During the Contract Employment Period,
Executive shall serve in Executive's current position and in such other
comparable or better position or positions with the Company and its subsidiaries
as the Chief Executive Officer or the Board of Directors of the Company (the
"Board") shall specify from time to time. During the Contract Employment Period,
Executive shall have the duties, responsibilities and obligations customarily
assigned to individuals serving in the position or positions in which
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Executive serves hereunder and such other duties, responsibilities and
obligations as the Chief Executive Officer or the Board shall from time to time
specify. Executive shall devote his full business time to the services required
of him hereunder, except for vacation time and reasonable periods of absence due
to sickness, personal injury or other disability, and shall use his best
efforts, judgment, skill and energy to perform such services in a manner
consistent with the duties of his position and to improve and advance the
business and interests of the Company and its subsidiaries. Nothing contained
herein shall preclude Executive from (i) serving on any corporate or
governmental board of directors on which he currently serves or, if the Board
consents to such service, on any other board of directors, (ii) serving on the
board of, or working for, any charitable, not-for profit or community
organization, (iii) pursuing any other activity to which the Board consents or
(iv) pursuing his personal, financial and legal affairs, so long as such
activities, individually or collectively, do not interfere with the performance
of Executive's duties hereunder.
3. Cash Compensation.
a. Base Salary. During the Contract Employment Period, the Company
shall pay Executive a base salary at the annual rate of $225,000. The Board
shall periodically review Executive's base salary and the Company may, in its
discretion, increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. Executive's annual base salary payable hereunder, as it
may be increased from time to time and without reduction for any amounts
deferred as described above, is referred to herein as "Base Salary". Executive's
Base Salary, as in effect from time to time, may not be reduced by the Company
without Executive's consent, provided that the Base Salary payable under this
paragraph shall be reduced to the extent Executive elects to defer or reduce
such salary under the terms of any deferred compensation or savings plan or
other employee benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of his Base Salary not deferred in
accordance with its customary periodic payroll practices.
b. Incentive Compensation. During the term of the Contract
Employment Period, Executive shall remain eligible for participation in the
Company's existing and future annual and long term incentive compensation
programs at a level consistent with his position at the Company and the
Company's then current policies and practices; provided that following any
assignment of this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph 7(e)), the
calculation of the amount payable as annual incentive compensation and the
conditions upon which such bonus shall be payable shall be no less favorable to
the Executive (taking into account reasonable changes in the Company's goals and
objectives) than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such assignment or
Change in Control. Without limiting the generality of the foregoing, for each
calendar year ending during the term hereof, Executive shall receive the
opportunity to receive an annual bonus of at least 45% of his Base Salary (the
"Minimum Bonus Percentage"), subject to satisfaction of such reasonable
performance criteria as shall be established with respect to such year.
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<PAGE> 3
4. Stock Option Grant. Contingent upon the execution of this
Agreement by the Executive, the Company has granted Executive an option, having
a ten-year term, to purchase 25,000 shares of the Company's Common Stock at an
exercise price per share equal to $57 a share (the "Option"). Except to the
extent specified below, the terms of the Option shall be determined in
accordance with the terms of the 1994 Stock Incentive Plan (the "1994 Plan") and
shall be set forth in the separate agreement embodying the grant of such Option
(the "Option Agreement"), the form of which is attached hereto as Exhibit A.
5. Benefits, Perquisites and Expenses.
a. Benefits. During the Contract Employment Period, Executive shall
be eligible to participate in (i) each welfare benefit plan sponsored or
maintained by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, and (ii) each pension, profit sharing,
retirement, deferred compensation or savings plan sponsored or maintained by the
Company, in each case, whether now existing or established hereafter, to the
extent that Executive is eligible to participate in any such plan under the
generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or terminate any
particular plan, program or arrangements, provided that, following the
occurrence of a Change in Control (as defined in Paragraph 7(e)) or the
assignment of this Agreement to a New Entity (as defined in Paragraph 6(a))
pursuant to Paragraph 9(b), the benefits made available to the Executive
thereafter shall be at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such Change in
Control or assignment.
With respect to the pension or retirement benefits payable to
Executive, Executive's service credited for purposes of determining Executive's
benefits and vesting shall be determined in accordance with the terms of the
applicable plan or program or, if applicable, pursuant to any written agreement
between Executive and the Company (whether now existing or hereafter adopted)
that provides Executive a more favorable method of crediting service for any
purpose thereunder.
b. Perquisites. During the Contract Employment Period, Executive
shall be entitled to receive such perquisites as are generally provided to other
senior officers of the Company in accordance with the then current policies and
practices of the Company.
c. Business Expenses. During the Contract Employment Period, the
Company shall pay or reimburse Executive for all reasonable expenses incurred or
paid by Executive in the performance of Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may require and in accordance with the generally applicable policies and
procedures of the Company.
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6. Termination of Employment.
a. Early Termination of the Contract Employment Period.
Notwithstanding Paragraph 1, the Contract Employment Period shall end upon the
earliest to occur of (i) a termination of Executive's employment on account of
Executive's death, (ii) a Termination due to Disability, (iii) a Termination for
Cause, (iv) a Termination Without Cause, (v) a Termination for Good Reason or
(vi) a termination of Executive's employment by Executive other than a
Termination for Good Reason. For purposes of this Agreement, a transfer of
Executive's employment (i)to any other entity controlled by or under common
control with the Company shall not be treated as a termination unless and until
such entity ceases to be controlled by or under common control with the Company
or (ii) as a result of the implementation of any restructuring of the Company
(whether occurring by spin-off or otherwise) shall not be treated as a
termination of employment, provided that, in either case, the successor employer
(the "New Entity") expressly assumes and agrees to perform all of the Company's
obligations under this Agreement.
b. Benefits Payable Upon Termination. Following the end of the
Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the
event of his death, his surviving spouse, if any, or his estate) shall be paid
the type or types of compensation determined to be payable in accordance with
the following table at the times established pursuant to Paragraph 6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance
Salary Benefits Bonus Benefit
------ -------- ----- -------
<S> <C> <C> <C> <C>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Payable Payable Payable Payable
Without Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other
than for Good
Reason
</TABLE>
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<PAGE> 5
c. Timing of Payments. Earned Salary and Accrued Bonus shall be paid
in a single lump sum as soon as practicable, but in no event more than 30 days,
following the end of the Contract Employment Period. Vested Benefits shall be
payable in accordance with the terms of the plan, policy, practice, program,
contract or agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was receiving his salary
payments hereunder, for the greater of (i) one year, (ii) the period over which
such benefits would be payable if paid to Executive under the Company's
otherwise applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid to Executive
under the Company's otherwise applicable plans, policies or procedures, as in
effect at the time of Executive's termination of employment. Notwithstanding the
foregoing, Executive may elect, by written notice given to the Company prior to
the first periodic payment and within ten business days after such termination,
that, instead of periodic installments, Severance Benefits shall be paid in
either a single lump sum, payable within ten business days of receipt by the
Company of such election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and the second
payable on the first business day of the following calendar year.
d. Definitions. For purposes of this Paragraph 6, capitalized terms
have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the product of (i)
the annual incentive compensation Executive would have been entitled to receive
under Paragraph 3(b) for the calendar year in which his active service for the
Company terminates pursuant to Paragraph 6(a) had he remained employed for the
entire year and assuming that all targets for such year had been met, multiplied
by (ii) a fraction, the numerator of which is equal to the number of days in
such calendar year occurring on or prior to the termination of Executive's
active service for the Company (including any period of absence due to
disability) and the denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Contract
Employment Period ends (other than Base Salary deferred pursuant to Executive's
election, as provided in Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the greater of:
(i) the sum of
(A) the annual Base Salary payable to Executive immediately prior
to the end of the Contract Employment Period; and
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(B) an amount (the "Bonus Severance Amount") equal to the product
of Executive's Base Salary times the greater of (1) the
Minimum Bonus Percentage and (2) the percentage of Base Salary
that would have been payable to Executive for the year of such
termination assuming achievement of target levels of
performance and Executive's continued employment for the
entire year, or
(ii) the amount otherwise payable to Executive under the Company's
otherwise applicable severance plans, policies or programs as in
effect on the date hereof (or, if more favorable to Executive, as in
effect on the date of Executive's termination), assuming for
purposes of determining the amount payable thereunder that
Executive's employment was terminated as a result of the elimination
of his position, but calculated by including the Bonus Severance
Amount as part of Executive's eligible compensation for purposes of
calculating the benefits payable under such plans, policies or
programs;
except that, in the event that Executive becomes entitled to receive Severance
Benefits hereunder following a Change in Control, the Severance Benefit payable
to Executive shall be determined under Paragraph 7(c). Additionally, while
Executive is receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the welfare
benefit plans and programs (excluding the long-term disability plan, the
sick-pay plan and vacation accruals) generally made available to employees of
the Company and in which he participated immediately prior to the termination of
his employment on the same terms and conditions as would have applied had
Executive continued to be employed. Upon an election to receive Severance
Benefits in either a single lump sum payment or in two installments, Executive
will forfeit any right to continue to receive any coverage under the Company's
welfare benefit plans, other than COBRA coverage (determined from the original
date of termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits in two
installments instead of periodic installments, the Company shall pay one-half of
the cost of Executive's COBRA coverage from the date the first installment
payment is made until the date the second installment payment is made.
Notwithstanding the foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be eligible for any
retiree benefit programs for which he is otherwise eligible under the terms of
the Company's employee benefit plans, policies or programs.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) the willful failure by Executive to perform
substantially Executive's duties as an employee of the Company (other than due
to physical or mental illness) after reasonable notice to Executive of such
failure, (ii) Executive's engaging in misconduct that is materially injurious to
the Company or any subsidiary or any affiliate of the Company, (iii) Executive's
having been convicted of, or entered a plea of nolo contendere to, a crime that
constitutes a felony, (iv) the material breach by Executive of any written
covenant or agreement not to compete with the Company or any subsidiary or any
affiliate or (v) the breach by Executive of his duty of loyalty to the Company
which shall include, without
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limitation, (A) the disclosure by Executive of any confidential information
pertaining to the Company or any subsidiary or any affiliate of the Company,
other than (x) in the ordinary course of the performance of his duties on behalf
of the Company or (y) pursuant to a judicial or administrative subpoena from a
court or governmental authority with jurisdiction over the matter in question,
(B) the harmful interference by Executive in the business or operations of the
Company or any subsidiary or any affiliate of the Company, (C) any attempt by
Executive directly or indirectly to induce any employee, insurance agent,
insurance broker or broker-dealer of the Company or any subsidiary or any
affiliate to be employed or perform services elsewhere, other than actions taken
by Executive that are intended to benefit the Company or any subsidiary or
affiliate and do not benefit Executive financially other than as an employee or
stockholder of the Company, (D) any attempt by Executive directly or indirectly
to solicit the trade of any customer or supplier, or prospective customer or
supplier, of the Company on behalf of any person other than the Company or a
subsidiary thereof, other than actions taken by Executive that are intended to
benefit the Company or any subsidiary or affiliate and do not benefit Executive
financially other than as an employee or stockholder of the Company, provided,
however, that this provision shall only apply to any product or service which is
in competition with a product or service of the Company or any subsidiary or
affiliate thereof or (E) any breach or violation of the Company's Code of
Conduct, as amended from time to time sufficient to warrant a for cause
termination consistent with the Company's past practice. Notwithstanding the
foregoing, a breach of Executive's duty of loyalty to the Company as described
in subclause (A) or a breach of the Company's Code of Conduct as described in
subclause (E) of clause (v) of the preceding sentence shall not be grounds for a
Termination for Cause unless such breach has had or could reasonably be expected
to have a significant adverse effect on the business or reputation of the
Company.
"Termination due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable, with or without
reasonable accommodation, of substantially fulfilling the positions, essential
duties, responsibilities and obligations of Executive's positions set forth in
this Agreement because of physical, mental or emotional incapacity resulting
from injury, sickness or disease for a period of (i) at least four consecutive
months or (ii) more than six months in any twelve month period. Any question as
to the existence, extent or potentiality of Executive's disability shall be made
by a qualified, independent physician selected by the chief or assistant chief
(or the equivalent position) of the department which treats the condition giving
rise to Executive's absence at a nationally or regionally recognized teaching
hospital chosen by the Company. The determination of any such physician shall be
final and conclusive for all purposes of this Agreement. Notwithstanding the
foregoing, (i) a Termination for Disability shall not affect Executive's right
to receive any amount that would otherwise have been payable to Executive under
the Company's plans, policies, practices or programs pertaining to short-term or
long-term disability had Executive's employment continued and (ii) if it is
determined, at the time Executive is first eligible to receive long-term
disability benefits under the Company's plans, policies, practices or programs,
that Executive is not entitled to receive such long-term disability benefits
(other than due to Executive's failure to cooperate), Executive shall, for
purposes of this Paragraph 6, be deemed to have been terminated as of the date
of such
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<PAGE> 8
determination pursuant to a Termination Without Cause and to be entitled to
receive any additional benefits payable hereunder in respect of a Termination
Without Cause.
"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following actual knowledge of (i) a
reduction in Executive's annual Base Salary or incentive compensation
opportunity as provided under Paragraph 3(b), (ii) a material reduction in
Executive's positions, duties and responsibilities from those described in
Paragraph 2 hereof, (iii) the relocation of Executive's principal place of
employment to a location more than 50 miles from the location at which he
performed his principal duties on the date immediately prior to such relocation,
(iv) a breach of the obligation to provide Executive with the benefits required
to be provided in accordance with Paragraph 5(a), (v) a failure by the Company
to pay any amounts due and owing to Executive within 10 days following written
notice from Executive of such failure to pay, or (vi) any other material breach
of the Company's obligations to Executive hereunder that materially affects the
compensation or benefits payable to Executive or materially impairs Executive's
ability to perform the duties and responsibilities of his position.
Notwithstanding the foregoing, a termination shall not be treated as a
Termination for Good Reason (i) if Executive shall have consented in writing to
the occurrence of the event giving rise to the claim of Termination for Good
Reason or (ii) unless Executive shall have delivered a written notice to the
Chief Executive Officer of the Company within 60 days of his having actual
knowledge of the occurrence of one of such events stating that he intends to
terminate his employment for Good Reason and specifying the factual basis for
such termination, and such event shall not have been cured within 30 days of the
receipt of such notice.
"Termination Without Cause" means any termination of Executive's
employment by the Company other than (i) a Termination due to Disability or (ii)
a Termination for Cause. Subject to the Company's obligations to make the
payments, if any, required pursuant to this paragraph 6, nothing in this
Agreement shall be construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without reason.
"Vested Benefits" means amounts payable under the terms of or in
accordance with any plan, policy or practice or program of, or any contract or
agreement with, the Company or any of its subsidiaries (including, without
limitation, any supplemental pension plan, supplemental savings plan or other
deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock
Option Plan (the "1984 Plan") with respect to which Executive's rights to such
amounts (i) have become vested and nonforfeitable on or before Executive's
termination of employment or (ii) otherwise have or will become nonforfeitable
at or subsequent to his termination of employment without regard to the
performance by Executive of further services or the resolution of a contingency
that is not satisfied at or after such termination, provided that, at any time
during which Executive is entitled to receive the Severance Benefits hereunder,
Executive shall not also be entitled to receive any benefits under the Company's
generally applicable severance or other termination plans, policies or programs.
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<PAGE> 9
e. Full Discharge of Company Obligations. Except to the extent
provided in this Paragraph 6, the amounts payable to Executive pursuant to this
Paragraph 6 (including, without limitation, under Paragraph 6(f)) following
termination of his employment shall be in full and complete satisfaction of
Executive's rights under this Agreement and, except to the extent prohibited by
law, any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and shall not be subject to any
offset or mitigation. Notwithstanding anything else contained herein to the
contrary, unless the Company shall waive its rights to any such release, the
Company's obligations under this Paragraph 6 are expressly conditioned upon
Executive's execution simultaneously with or immediately following such
termination of employment, of a release and waiver, substantially in the form
attached hereto as Exhibit B (subject to, in the event any change of law
occurring after the date hereof, to such modifications as shall be necessary or
appropriate to place the Company in a substantially the same position as though
no change in law had occurred), of any claims he may have in connection with the
termination of, or arising out of, his employment with the Company, provided
that such release shall not be construed to waive, release or otherwise limit
any amounts required to be paid hereunder or any benefits due and payable to
Executive under the terms of any employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
any other Vested Benefit or any right of Executive to be indemnified by the
Company pursuant to its applicable policies and practices from and against any
third party claims arising out of or relating to Executive's employment with or
other services on behalf of the Company or any subsidiary of the Company.
f. Special Continuation of Certain Protection for the Executive.
Notwithstanding anything contained in this Agreement to the contrary, if, at the
end of the Contract Employment Period, (i) Executive remains an at-will employee
of the Company and (ii) within one year following the end of the Contract
Employment Period, the Company effects a Termination Without Cause or takes
actions which, if they had occurred within the Contract Employment Period, would
have given Executive the right to terminate his employment pursuant to a
Termination for Good Reason and Executive, after giving the Company timely
written notice of the events permitting a Termination for Good Reason and the
opportunity to cure described in the definition of a Termination for Good
Reason, voluntarily terminates his employment within 90 days of the date of such
actions by the Company, then in either case, Executive shall receive payment of
the Severance Benefits that would otherwise have been payable to Executive
hereunder had his termination of employment occurred during the Contract
Employment Period. Notwithstanding the preceding sentence, this Section 6(f)
shall not be applicable unless Executive executes the waiver and release
referred to in Paragraph 6(e) above in connection with his termination of
employment pursuant to this Paragraph 6(f).
g. Outplacement Services. In addition to any other benefits
described in this Paragraph 6, in the event Executive is eligible to receive
Severance Benefits, the Company shall also provide to Executive, at its expense,
individual outplacement services from a qualified outplacement firm selected by
the Company. The outplacement services to
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be provided to Executive shall be no less favorable to Executive than those made
available to other executives prior to the date hereof under the Company's
generally applicable policies, programs or arrangements.
7. Change in Control of the Company.
a. Accelerated Vesting and Payment. Unless the Board (or the
appropriate committee thereof) shall otherwise determine in the manner set forth
in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence
of a Change in Control (as defined below) and shall remain exercisable for a
period of one year thereafter regardless of whether Executive continues to be
employed by the Company or, if longer, for the period during which such Option
would otherwise be exercisable in accordance with its terms or the generally
applicable provisions of the 1994 Plan. If no Alternative Option is provided as
set forth in Section 7(b) below, and the Company does not survive as a publicly
traded corporation following a Change in Control, the Company shall pay
Executive, in full settlement of all rights with respect to the Option, an
aggregate amount in cash equal to the product of (i) (A) the Fair Market Value
of a Share of the Company's Common Stock on the date the Change in Control
occurs minus (B) the per share exercise price for the Option times (ii) the
number of shares as to which such Option has not been exercised at the time of
the Change in Control. Any amount payable pursuant to the preceding sentence
shall be paid within 30 days following such Change in Control.
b. Alternative Options. Notwithstanding Paragraph 7(a), no
acceleration of exercisability shall occur with respect to any Option if the
Board (or the appropriate committee thereof) reasonably determines in good
faith, prior to the occurrence of a Change in Control, that such Option shall be
honored or assumed, or new rights substituted therefor (such honored, assumed or
substituted Option being hereinafter referred to as an "Alternative Option") by
the successor in interest to the Company, provided that any such Alternative
Option must:
(i) provide Executive with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under the Option, including, but not limited to, an
identical or better exercise and vesting schedule and identical or
better timing and methods of payment;
(ii) have substantially equivalent economic value to such Option
(determined at the time of the Change in Control); and
(iii) have terms and conditions which provide that, in the event that
Executive's employment is terminated by the Company for any reason
or is terminated by Executive pursuant to a Termination for Good
Reason within two years following a Change in Control, (A) any
conditions on Executive's rights under, or any restrictions on
exercisability applicable to, each such Alternative Option shall be
waived or shall lapse, as the case may be and (B) the Alternative
Option shall remain exercisable until the second anniversary of the
Change in
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Control or, if longer, for the period during which such Alternative
Option would otherwise be exercisable in accordance with its terms
or the provisions of the plan under which it is granted that permit
the longest post-termination exercise period for involuntary
terminations (other than due to death, disability or retirement).
c. Enhanced Severance Payments. If Executive's employment is terminated
following a Change in Control pursuant to a Termination for Good Reason or a
Termination Without Cause, the Severance Benefit payable to Executive pursuant
to Paragraph 6 shall be equal to two times the sum of Executive's annual Base
Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
(i) Application of Paragraph 7(d). In the event that any amount or
benefit paid or distributed to Executive pursuant to this Agreement,
taken together with any amounts or benefits otherwise paid or
distributed to Executive by the Company or any affiliated company
(collectively, the "Covered Payments"), would be an "excess
parachute payment" as defined in Section 280G of the Code and would
thereby subject Executive to the tax (the "Excise Tax") imposed
under Section 4999 of the Code (or any similar tax that may
hereafter be imposed), the provisions of this Section 7(d) shall
apply to determine the amounts payable to Executive pursuant to this
Agreement.
(ii) Calculation of Benefits. Immediately following delivery of any
Notice of Termination, the Company shall notify Executive of the
aggregate present value of all termination benefits to which he
would be entitled under this Agreement and any other plan, program
or arrangement as of the projected date of termination, together
with the projected maximum payments, determined as of such projected
date of termination that could be paid without Executive being
subject to the Excise Tax.
(iii) Imposition of Payment Cap. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by less than
105%, then the amounts payable to Executive under this Agreement
may, in the discretion of the Company, be reduced (but not below
zero) to the maximum amount which may be paid hereunder without
Executive becoming subject to such an Excise Tax (such reduced
payments to be referred to as the "Payment Cap"). In the event that
Executive receives reduced payments and benefits hereunder,
Executive shall have the right to designate which of the payments
and benefits otherwise provided for in this Agreement that he will
receive in connection with the application of the Payment Cap.
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<PAGE> 12
(iv) Further Payments by the Company. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by more than
105%, the Company shall pay to Executive immediately following
Executive's termination of employment an additional amount (the "Tax
Reimbursement Payment") such that the net amount retained by
Executive with respect to such Covered Payments, after deduction of
any Excise Tax on the Covered Payments and any Federal, state and
local income tax and Excise Tax on the Tax Reimbursement Payment
provided for by this Paragraph 7(d)(iv), but before deduction for
any Federal, state or local income or employment tax withholding on
such Covered Payments, shall be equal to the amount of the Covered
Payments.
(v) Application of Section 280G. For purposes of determining whether any
of the Covered Payments will be subject to the Excise Tax and the
amount of such Excise Tax,
(A) such Covered Payments will be treated as "parachute payments"
within the meaning of Section 280G of the Code, and all
"parachute payments" in excess of the "base amount" (as
defined under Section 280G(b)(3) of the Code) shall be treated
as subject to the Excise Tax, unless, and except to the extent
that, in the good faith judgment of the Company's independent
certified public accountants appointed prior to the Effective
Date or tax counsel selected by such Accountants (the
"Accountants"), the Company has a reasonable basis to conclude
that such Covered Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable
compensation for personal services actually rendered (within
the meaning of Section 280G(b)(4)(B) of the Code) in excess of
the "base amount," or such "parachute payments" are otherwise
not subject to such Excise Tax, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining whether Executive
would receive a greater net after-tax benefit were the amounts
payable under this Agreement reduced in accordance with Paragraph
7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal rate
of Federal income taxation for the calendar year in which the
first amounts are to be paid hereunder, and
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<PAGE> 13
(B) any applicable state and local income taxes at the highest
applicable marginal rate of taxation for such calendar year,
net of the maximum reduction in Federal incomes taxes which
could be obtained from the deduction of such state or local
taxes if paid in such year;
provided, however, that Executive may request that such
determination be made based on his individual tax circumstances,
which shall govern such determination so long as Executive provides
to the Accountants such information and documents as the Accountants
shall reasonably request to determine such individual circumstances.
(vii) Adjustments in Respect of the Payment Cap. If Executive receives
reduced payments and benefits under this Paragraph 7(d) (or this
Paragraph 7(d) is determined not to be applicable to Executive
because the Accountants conclude that Executive is not subject to
any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding
(a "Final Determination") that, notwithstanding the good faith of
Executive and the Company in applying the terms of this Agreement,
the aggregate "parachute payments" within the meaning of Section
280G of the Code paid to Executive or for his benefit are in an
amount that would result in Executive being subject an Excise Tax,
then the amount equal to such excess parachute payments shall be
deemed for all purposes to be a loan to Executive made on the date
of receipt of such excess payments, which Executive shall have an
obligation to repay to the Company on demand, together with interest
on such amount at the applicable Federal rate (as defined in Section
1274(d) of the Code) from the date of the payment hereunder to the
date of repayment by Executive. If this Paragraph 7(d) is not
applied to reduce Executive's entitlements under this Paragraph 7
because the Accountants determine that Executive would not receive a
greater net-after tax benefit by applying this Paragraph 7(d) and it
is established pursuant to a Final Determination that,
notwithstanding the good faith of Executive and the Company in
applying the terms of this Agreement, Executive would have received
a greater net after tax benefit by subjecting his payments and
benefits hereunder to the Payment Cap, then the aggregate "parachute
payments" paid to Executive or for his benefit in excess of the
Payment Cap shall be deemed for all purposes a loan to Executive
made on the date of receipt of such excess payments, which Executive
shall have an obligation to repay to the Company on demand, together
with interest on such amount at the applicable Federal rate (as
defined in Section 1274(d) of the Code) from the date of the payment
hereunder to the date of repayment by Executive. If Executive
receives reduced payments and benefits by reason of this Paragraph
7(d) and it is established pursuant to a Final Determination that
Executive could have received a greater amount without exceeding the
Payment Cap, then the Company shall promptly thereafter pay
Executive the aggregate additional amount which could have been paid
without exceeding the Payment Cap, together with interest on such
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<PAGE> 14
amount at the applicable Federal rate (as defined in Section 1274(d)
of the Code) from the original payment due date to the date of
actual payment by the Company.
(viii) Adjustments in Respect of the Tax Reimbursement Payments. In the
event that the Excise Tax is subsequently determined by the
Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement Payment made,
Executive shall repay to the Company, at the time that the amount of
such reduction in the Excise Tax is finally determined, the portion
of such prior Tax Reimbursement Payment that would not have been
paid if such Excise Tax had been applied in initially calculating
such Tax Reimbursement Payment, plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any portion of the Tax
Reimbursement Payment to be refunded to the Company has been paid to
any Federal, state or local tax authority, repayment thereof shall
not be required until actual refund or credit of such portion has
been made to Executive, and interest payable to the Company shall
not exceed interest received or credited to Executive by such tax
authority for the period it held such portion. Executive and the
Company shall mutually agree upon the course of action to be pursued
(and the method of allocating the expenses thereof) if Executive's
good faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the
Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to exceed the amount taken into account
hereunder at the time the Tax Reimbursement Payment is made
(including, but not limited to, by reason of any payment the
existence or amount of which cannot be determined at the time of the
Tax Reimbursement Payment), the Company shall make an additional Tax
Reimbursement Payment in respect of such excess (plus any interest
or penalty payable with respect to such excess) at the time that the
amount of such excess is finally determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or portion
thereof) provided for in Paragraph 7(d)(iv) above shall be paid to
Executive not later than 10 business days following the payment of
the Covered Payments; provided, however, that if the amount of such
Tax Reimbursement Payment (or portion thereof) cannot be finally
determined on or before the date on which payment is due, the
Company shall pay to Executive by such date an amount estimated in
good faith by the Accountants to be the minimum amount of such Tax
Reimbursement Payment and shall pay the remainder of such Tax
Reimbursement Payment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof
can be determined, but in no event later than 45 calendar days after
payment of the related
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<PAGE> 15
Covered Payment. In the event that the amount of the estimated Tax
Reimbursement Payment exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to
Executive, payable on the fifth business day after written demand by
the Company for payment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code).
e. Definition of "Change in Control". For purposes of this Paragraph
7, a "Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and as
used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary (including any trustee of such plan
acting as trustee), directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months after the
Commencement Date, the individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof, provided that
a director who was not a director at the beginning of such 24-month period
shall be deemed to have satisfied such 24-month requirement (and be an
Incumbent Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period) or
by prior operation of this Paragraph 7(e)(ii); or
(iii) The occurrence of a transaction requiring stockholder approval
for the acquisition of the Company by an entity other than the Company or
a subsidiary through purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
a. Noncompetition. During the Contract Employment Period and for a
period of one year following Executive's termination of employment during the
Contract Employment Period other than due to a Termination Without Cause or a
Termination for Good Reason, Executive shall not become associated, whether as a
principal, partner, employee, consultant or shareholder (other than as a holder
of not in excess of 1% of the outstanding voting shares of any publicly traded
company), with any entity that is actively engaged in any geographic area in any
business which is in substantial and direct competition with the business or
businesses of the Company for which Executive provides substantial
15
<PAGE> 16
services or for which Executive has substantial responsibility, provided that
nothing in this Paragraph 8(a) shall preclude Executive from performing services
solely and exclusively for a division or subsidiary of such an entity that is
engaged in a non-competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
(i) Executive shall not (except to the extent required by an order
of a court having competent jurisdiction or under subpoena from an
appropriate government agency) disclose to any third person, whether
during or subsequent to the Executive's employment with the Company, any
trade secrets; customer lists; product development and related
information; marketing plans and related information; sales plans and
related information; operating policies and manuals; business plans;
financial records; or other financial, commercial, business or technical
information related to the Company or any subsidiary or affiliate thereof
unless such information has been previously disclosed to the public by the
Company or has become public knowledge other than by a breach of this
Agreement; provided, however, that this limitation shall not apply to any
such disclosure made while Executive is employed by the Company, or any
subsidiary or affiliate thereof in the ordinary course of the performance
of Executive's duties;
(ii) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to induce any employee or Insurance Agent (as defined below)
of the Company, or any subsidiary or any affiliate thereof to be employed
or perform services elsewhere provided that this covenant shall not
preclude Executive from taking any actions during the Contract Employment
Period that (x) are intended to benefit the Company or any subsidiary or
affiliate and (y) do not benefit Executive financially other than as an
employee or stockholder of the Company;
(iii) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to induce any insurance agent or agency, insurance broker,
broker-dealer or supplier of the Company, or any subsidiary or affiliate
thereof to cease providing services to the Company, or any subsidiary or
affiliate thereof provided that this covenant shall not preclude Executive
from taking any actions during the Contract Employment Period that (x) are
intended to benefit the Company or any subsidiary or affiliate and (y) do
not benefit Executive financially other than as an employee or stockholder
of the Company;
(iv) during the Contract Employment Period and for two years after
the termination of such Period, Executive shall not attempt, directly or
indirectly, to solicit, on behalf of any person or entity other than the
Company or any of its subsidiaries, the trade of any individual or entity
which, at the time of the solicitation, is a customer of the Company, or
any subsidiary or affiliate thereof, or which the Company, or any
subsidiary or affiliate thereof is undertaking reasonable steps to
16
<PAGE> 17
procure as a customer at the time of or immediately preceding termination
of the Contract Employment Period; provided, however, that this limitation
shall only apply to (x) any product or service which is in competition
with a product or service of the Company or any subsidiary or affiliate
thereof and (y) with respect to any customer or prospective customer with
whom Executive has or had (by virtue of Executive's position or otherwise)
a personal relationship; and
(v) following the termination of the Contract Employment Period,
Executive shall provide assistance to and shall cooperate with the Company
or any subsidiary or affiliate thereof, upon its reasonable request, with
respect to matters within the scope of Executive's duties and
responsibilities during the Contract Employment Period. (The Company
agrees and acknowledges that it shall, to the maximum extent possible
under the then prevailing circumstances, coordinate (or cause a subsidiary
or affiliate thereof to coordinate) any such request with Executive's
other commitments and responsibilities to minimize the degree to which
such request interferes with such commitments and responsibilities). The
Company agrees that it will reimburse Executive for reasonable travel
expenses (i.e., travel, meals and lodging) that Executive may incur in
providing assistance to the Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent"
shall mean those insurance agents or agencies representing the Company or any
subsidiary or affiliate thereof, that are exclusive or career agents or agencies
of the Company or any subsidiary or affiliate thereof, or any insurance agents
or agencies which derive 50% or more of their business revenue from the Company
or any subsidiary or affiliate thereof (calculated on an aggregate basis for the
12-month period prior to the date of determination or such other similar period
for which such information is more readily available).
c. Company Property. Promptly following Executive's termination of
employment, Executive shall return to the Company all property of the Company,
and all copies thereof in Executive's possession or under his control.
d. Intention of the Parties. If any provision of Paragraph 8 is
determined by an arbitrator (or a court of competent jurisdiction asked to
enforce the decision of the arbitrator) not to be enforceable in the manner set
forth in this Agreement, the Company and Executive agree that it is the
intention of the parties that such provision should be enforceable to the
maximum extent possible under applicable law and that such arbitrator (or court)
shall reform such provision to make it enforceable in accordance with the intent
of the parties. Executive acknowledges that a material part of the inducement
for the Company to provide the salary and benefits evidenced hereby is
Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the
covenants and obligations of Executive with respect to nondisclosure and
nonsolicitation relate to special, unique and extraordinary matters and that a
violation of any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that, if Executive shall materially breach any of
those covenants following termination of employment, the Company shall have no
further obligation to pay Executive any benefits
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<PAGE> 18
otherwise payable hereunder and the Company shall be entitled to an injunction,
restraining order or such other equitable relief (without the requirement to
post a bond) restraining Executive from committing any violation of the
covenants and obligations contained in Paragraph 8(a), (b) and (c). The remedies
in the preceding sentence are cumulative and are in addition to any other rights
and remedies the Company may have at law or in equity as an arbitrator (or
court) shall reasonably determine.
e. Waiver. Without limiting the generality of the foregoing, upon
request of Executive prior to engaging in any conduct otherwise prohibited by
this Paragraph 8, the Company may, in its sole discretion, waive in writing, on
such terms and conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
a. Survival. Paragraph 7 (relating to a Change in Control), 8
(relating to noncompetition, nonsolicitation and confidentiality) and 9
(relating, among other things, to survival, assignment and governing law) shall
survive the termination hereof, whether such termination shall be by expiration
of the Contract Employment Period or an early termination pursuant to Paragraph
6 hereof. Paragraph 6((other than Paragraph 6(f)) (relating to early
termination) shall survive the termination hereof to the extent that, prior
thereto, or at the time of termination, Executive (or his beneficiary) has
become or becomes entitled to receive any of the benefits payable thereunder.
Paragraph 6(f) (and to the extent applicable to such Paragraph 6(f), 6(e)) shall
survive for one year following the termination hereof. The option referred to in
Paragraph 4 survives for the term specified in Attachment A.
b. Binding Effect. This Agreement shall be binding on, and shall
inure to the benefit of, the Company and any person or entity that succeeds to
the interest of the Company (regardless of whether such succession does or does
not occur by operation of law) by reason of the sale of all or a portion of the
Company's stock, a merger, consolidation or reorganization involving the Company
or, unless in the case of a sale involving less than all or substantially all of
the Company's assets the Company otherwise elects in writing, a sale of the
assets of the business of the Company (or portion thereof) in which Executive
performs a majority of his services. Any successor in interest to the Company
shall acknowledge in writing to Executive that it has assumed this Agreement and
is responsible to Executive for the performance of the Company's obligations
under this Agreement. Without limiting the generality of the foregoing, the
Company shall have the right, without the consent of Executive, to assign this
Agreement and its obligations hereunder to any New Entity or any subsidiary of
any New Entity by which Executive becomes employed, at the discretion of the
Company, by reason of the implementation of any restructuring of the Company,
and, following any such assignment, such New Entity or subsidiary shall be
treated as the Company for all purposes of this Agreement. This Agreement shall
also enure to the benefit of Executive's heirs, executors, administrators and
legal representatives.
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<PAGE> 19
c. Assignment. Except as provided under Paragraph 9(b), neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party. In the event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at any time due
and payable hereunder in the event (and only to the extent) that the assignee
has become a debtor in bankruptcy, is the subject of a receivership or similar
preceding or has become insolvent, provided that Executive shall be required to
assign his rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In consideration of such
guarantee, Executive agrees that following such assignment, the covenants of
Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit
of the Company, as well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in favor of the
Company shall, from and after the date of such assignment, inure solely to the
benefit of the assignee.
d. Entire Agreement. Except as expressly provided below, this
Agreement, the Option Agreement and the portion, if any, of any other agreement
relating to pension service or credits referred to in Paragraph 5(a) shall
constitute the entire agreement between the parties hereto with respect to the
matters referred to herein and any other agreement or any portion of any such
other agreement not expressly preserved hereby shall cease to be effective upon
the execution hereof and shall not become reinstated upon the expiration or
other termination of this Agreement. There are no promises, representations,
inducements or statements between the parties other than those that are
expressly contained herein. Executive acknowledges that he is entering into this
Agreement of his own free will and accord, and with no duress, that he has read
this Agreement and that he understands it and its legal consequences. Other than
the provisions of Paragraph 6 which limit Executive's eligibility to receive
severance benefits under the Company's generally applicable plans, programs or
agreements, nothing in this Agreement shall be construed to limit or otherwise
supersede Executive's rights or entitlements under any compensatory plan,
program or arrangement made available generally to all employees or all officers
of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d)
shall not preclude reference to the documents governing any such plan, program
or arrangement to determine such rights and entitlements.
e. Severability; Reformation. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby. In the event any of
Paragraph 8(a), (b) or (c) is not enforceable in accordance with its terms,
Executive and the Company agree that such Paragraph shall be reformed to make
such Paragraph enforceable in a manner which provides the Company the maximum
rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement shall not operate as a
waiver of any other breach or default, whether similar to or different from the
breach or default waived. No
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<PAGE> 20
waiver of any provision of this Agreement shall be implied from any course of
dealing between the parties hereto or from any failure by either party hereto to
assert its or his rights hereunder on any occasion or series of occasions.
g. Notices. Any notice required or desired to be delivered under
this Agreement shall be in writing and shall be delivered personally, by courier
service, by registered mail, return receipt requested, or by telecopy and shall
be effective upon actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Corporate Secretary
If to Executive:
Thomas J. McInerney
110 Mountain Terrace Road
West Hartford, Connecticut 06107
h. Arbitration. The Company and Executive agree that any claim,
dispute or controversy arising under or in connection with this Agreement, or
otherwise in connection with Executive's employment by the Company (including,
without limitation, any such claim, dispute or controversy arising under any
federal, state or local statute, regulation or ordinance or any of the Company's
employee benefit plans, policies or programs) shall be resolved solely and
exclusively by binding arbitration. The arbitration shall be held in the city of
Hartford, Connecticut (or at such other location as shall be mutually agreed by
the parties). The arbitration shall be conducted in accordance with the
Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration
Association (the "AAA") in effect at the time of the arbitration, except that
the arbitrator shall be selected by alternatively striking from a list of five
arbitrators supplied by the AAA. All fees and expenses of the arbitration,
including a transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented to the
arbitrator, the entire cost of such proceedings (including, without limitation,
Executive's reasonable attorneys fees) shall be borne by the Company. If
Executive does not prevail as to any material issue, each party will pay for the
fees and expenses of its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party prevails on a
claim for which attorney's fees are recoverable under the Rules). Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or Executive pursues any claim, dispute or controversy against the
other in a proceeding other than the arbitration provided for herein, the
responding party shall
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be entitled to dismissal or injunctive relief regarding such action and recovery
of all costs, losses and attorney's fees related to such action.
i. Amendments. This Agreement may not be altered, modified or
amended except by a written instrument signed by each of the parties hereto.
j. Headings. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to affect
the meaning or interpretation hereof.
k. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall be reduced by
any amounts required to be withheld by the Company from time to time under
applicable Federal, State or local income or employment tax laws or similar
statutes or other provisions of law then in effect.
m. Governing Law. This Agreement shall be governed by the laws of
the State of Connecticut, without reference to principles of conflicts or choice
of law under which the law of any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and Executive has hereunto set his hand
as of the day and year first above written.
Aetna Life and Casualty Company
/s/ Ronald E. Compton
-------------------------------
Ronald E. Compton
Chairman
/s/ Thomas J. McInerney
-------------------------------
Thomas J. McInerney
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EXHIBIT A TO EMPLOYMENT AGREEMENT
AETNA LIFE AND CASUALTY COMPANY
1994 STOCK INCENTIVE PLAN
PERFORMANCE VESTED NONSTATUTORY STOCK OPTION AGREEMENT
Pursuant to its 1994 Stock Incentive Plan, Aetna Life and Casualty Company
hereby grants to the person named below the right and option to purchase the
stated number of shares of Common Stock on the terms and conditions hereinafter
set forth.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Effective Date Aetna No. Grantee Total Optioned Shares Option Price
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
ARTICLE I
DEFINITIONS
(a) "Board" means the Board of Directors of Aetna Life and Casualty Company.
(b) "Committee" means the Board's Committee on Compensation and Organization
or any successor thereto.
(c) "Common Stock" means shares of the Company's Common Capital Stock, without
par value.
(d) "Company" means Aetna Life and Casualty Company.
(e) "Disability" means long-term disability as defined under the terms of the
Company's applicable long-term disability plans or policies.
(f) "Effective Date" means the date of grant of this Option, as set forth
above.
(g) "Fair Market Value" means the closing price of the Common Stock as
reported by the Consolidated Tape of the New York Stock Exchange Listed
Shares on the date such value is to be determined, or, if no shares were
traded on such day, on the next preceding day on which the Common Stock
was traded.
(h) "For Cause" means a termination of Grantee's employment by the Company due
to (i) the willful failure by Grantee to perform substantially Grantee's
duties as an employee of the Company (other than due to physical or mental
illness) after reasonable notice to Grantee of such failure, (ii)
Grantee's engaging in serious misconduct that is injurious to the Company
or any subsidiary or any affiliate of the Company, (iii) Grantee's having
been convicted of, or entered a plea of nolo
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<PAGE> 23
contendere to, a crime involving an act that is immoral or wrong in and of
itself (e.g., burglary, larceny, murder or arson) or a crime involving
deceit, fraud, perjury or embezzlement, (iv) the breach by Grantee of any
written covenant or agreement not to compete with the Company or any
subsidiary or any affiliate or (v) the breach by Grantee of his duty of
loyalty to the Company which shall include, without limitation, (A) the
disclosure by Grantee of any confidential information pertaining to the
Company or any Subsidiary or any affiliate of the Company, other than (x)
in the, ordinary course of the performance of his duties on behalf of the
Company or (y) pursuant to a judicial or administrative subpoena from a
court or governmental authority with jurisdiction over the matter in
question, (B) the harmful interference by Grantee in the business or
operations of the Company or any Subsidiary or any affiliate of the
Company, (C) any attempt by Grantee directly or indirectly to induce any
employee, insurance agent, insurance broker or broker-dealer of the
Company or any Subsidiary or any affiliate to be employed or perform
services elsewhere, (D) any attempt by Grantee directly or indirectly to
solicit the trade of any customer or supplier, or prospective customer or
supplier, of the Company on behalf of any person other than the Company or
a Subsidiary thereof or (E) any breach or violation of the Company's Code
of Conduct, as amended from time to time. Notwithstanding the foregoing, a
breach of Grantee's duty of loyalty to the Company as described in
subclause (A) or (E) of clause (v) of the preceding sentence shall not be
grounds for a termination For Cause unless such breach has had or could
reasonably be expected to have a significant adverse effect on the
business or reputation of the Company.
(i) "Fundamental Corporate Event" shall mean any stock dividend, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
split-up, spin-off, combination, exchange of shares, warrants or rights
offering to purchase Common Stock at a price substantially below fair
market value, or similar event.
(j) "Good Reason" means a termination of Grantee's employment by Grantee
within 90 days following (i) a reduction in Grantee's annual Base Salary
or incentive compensation opportunity as provided under Paragraph 3(b) of
the employment agreement signed by Grantee and the Company dated as of
December 8, 1995 (the "Employment Agreement"), (ii) a material reduction
in Grantee's positions, duties and responsibilities from those described
in Paragraph 2 of the Employment Agreement, (iii) the relocation of
Grantee's principal place of employment to a location more than 50 miles
from the location at which he performed his principal dudes on the date
immediately prior to such relocation, (iv) a breach of the obligation to
provide Grantee with the benefits required to be provided in accordance
with Paragraph 5(a) of the Employment Agreement, (v) a failure by the
Company to pay any amounts due and owing to Grantee within 10 days
following written notice from Grantee of such failure to pay, or (vi) any
other material breach of the Company's obligations to Grantee under the
Employment Agreement that significantly affects the compensation or
benefits payable to Grantee or materially impairs Grantee's ability to
perform the duties and responsibilities of his position. Notwithstanding
the foregoing, a termination shall not be treated as a termination for
Good Reason (i) if Grantee shall
23
<PAGE> 24
have consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (ii) unless Grantee shall have
delivered a written notice to the Chief Executive Officer of the Company
within 60 days of his having actual knowledge of the occurrence of one or
such events stating that he intends to terminate his employment for Good
Reason and specifying the factual basis for such termination, and such
event shall not have been cured within 30 days of the receipt of such
notice.
(k) "Grantee" means the person named above to whom this Option has been
granted.
(l) "Interim Performance Period" means the period of time beginning on the
Effective Date and ending on April 28, 1997.
(m) "Option" means the option herein granted.
(n) "Option Price" means the amount per share of Common Stock required to be
paid upon the exercise of this Option, as set forth above, or such other
amount per share of Common Stock as may result by operations of Article IV
of this Agreement.
(o) "Optioned Shares" means the number of shares of Common Stock represented
by this Option, as set forth above, or such other amount as may result by
operation of Article IV of this Agreement.
(p) "Performance Target" means the performance objective measured by the price
of the Common Stock as described in Article II.
(q) "Performance Period" means the period of time beginning on the Effective
Date and ending on April 28, 1998.
(r) "Plan" means the Aetna Life and Casualty Company 1994 Stock Incentive
Plan.
(s) "Retirement" means the termination of employment of a Grantee from active
service with the Company or a Subsidiary under circumstances which would
entitle an employee of the Company or a Subsidiary to an immediate pension
under one of the Company's approved retirement plans (such pension may be
actuarially reduced for early commencement of benefits).
(t) "Shares of Stock" or "Stock" means the Common Stock.
(u) "Subsidiary" means any entity of which, at the time such subsidiary status
is to be determined, at least 50% of the total combined voting power of
all classes of stock in such entity is held by the Company and its
Subsidiaries (exclusive of ownership by the entity whose subsidiary status
is being determined).
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<PAGE> 25
(v) "Successor" means the legal representative of the estate of a deceased
Grantee or the person or persons who shall acquire the right to exercise
an Option by bequest or inheritance or by reason of the death of the
Grantee.
25
<PAGE> 26
ARTICLE II
TERM OF OPTION AND VESTING
(a) The Term of this Option shall commence on the Effective Date and shall
terminate, unless sooner terminated by the terms of the Plan or this
Agreement, at:
(i) the close of the Company's business on the day preceding the tenth
anniversary of the Effective Date, if the Company is open for
business on such day; or
(ii) the close of the Company's business on the next preceding day that
the Company is open for business.
(b) Except as provided in (c), (d) and (e) below, all or a portion of this
Option will become vested and the Option will be exercisable on April 28,
1998 only to the extent the Fair Market Value of the Common Stock meets or
exceeds the Performance Targets described below. A Performance Target
shall be deemed to have been met only to the extent the Fair Market Value
of the Common Stock meets or exceeds the Performance Target for at least
five consecutive trading business days at any time during the Performance
Period.
<TABLE>
<CAPTION>
-------------------------------------------------
Performance Target Amount Vested
-------------------------------------------------
<S> <C>
Below $62 Option does not vest
$62 33%
$67 67%
$73 or above 100%
-------------------------------------------------
</TABLE>
The portion of the Option which shall vest at performance levels between
$62 and $73 shall be determined by mathematical interpolation between the
respective measuring points. Notwithstanding anything else contained
herein to the contrary, the portion of the Option which has become vested
under Section (b), if any, shall be reduced by the amount which has become
vested pursuant to (c) below.
(c) If the Performance Targets described above are met or exceeded during the
Interim Performance Period, 50% of the amount which would have become
vested in accordance with the above schedule will become vested on April
28, 1997.
(d) This Option may become vested pursuant to (b) and (c) above only if the
Grantee is an active employee of the Company or a Subsidiary as of the
last day of the Performance Period or the Interim Performance Period, as
the case may be; provided, however, if the Company involuntarily
terminates the employment of the Grantee (other than "For Cause"), the
Grantee dies or terminates employment for reason of Disability, or if the
Grantee voluntarily terminates employment for "Good Reason," the Option
may
26
<PAGE> 27
continue to vest for such Grantee if the Performance Targets are met
during the Performance Period or Interim Performance Period.
(e) If the Performance Targets are not met as of the end of the Performance
Period, the Options will become vested on April 28, 2002, provided the
Grantee is an active employee of the Company or a Subsidiary on that date.
ARTICLE III
METHOD OF OPTION EXERCISE
An option is exercisable only after it has become vested as provided in Article
II above. In order to exercise this Option, Grantee must comply with procedures
adopted by the Company from time to time. Under current procedures, the Grantee
must deliver or mail to the Committee, Attention: Manager, Grantee Compensation,
Aetna Human Resources, a properly executed exercise notification letter on the
appropriate form along with payment of the Option Price. If Grantee is using the
cashless exercise program offered by the Company, the exercise notice must be
delivered to the participating broker.
In addition, if the Grantee has been notified that he or she must consult with a
member of the Company's Law and Regulatory Affairs Department prior to engaging
in transactions in Aetna stock, Grantee must consult with the Law and Regulatory
Affairs prior to exercising this Option.
ARTICLE IV
CAPITAL CHANGES
Except as otherwise specifically provided in Article VI, in the event that the
Committee shall determine that any Fundamental Corporate Event affects the
Common Stock such that an adjustment is required to preserve, or to prevent
enlargement of, the benefits or potential benefits made available under this
Plan, then the Committee may, in such manner as the Committee may deem
equitable, adjust the (i) the number and kind of shares subject to the Option
(including substitution of shares or Options of another company), (ii) the
Performance Targets, or (iii) the Option Price. Additionally, the Committee may
make provision for a cash payment to a Grantee or the Successor of the Grantee.
However, the number of Shares of Stock subject to the Option shall always be a
whole number.
ARTICLE V
TERMINATION OF OPTION
(a) Except as provided in (d) below, if the Grantee shall cease, for reason of
death, Disability or Retirement, to be employed by the Company or its
Subsidiaries during
27
<PAGE> 28
the Term of the Option, the Grantee or Successor of the Grantee may
exercise a vested Option until the earlier of:
(i) the expiration of the Term of the Option; or
(ii) a period not to exceed five years following such cessation of
employment.
(b) Except as provided in (a) above or (d) below, if the Grantee voluntarily
ceases to be employed by the Company or its Subsidiaries (other than for
"Good Reason") during the Term of the Option, the Grantee may exercise a
vested Option until the earlier of:
(i) the expiration of the Term of the Option; or
(ii) a period not to exceed ninety days following such cessation of
employment;
(c) Except as provided in (a) above or (d) below, if the Grantee involuntarily
ceases to be employed by the Company or its Subsidiaries other than for
cause, or if Grantee voluntarily terminates employment for "Good Reason"
during the Term of the Option, the Grantee may exercise a vested Option
under the later of the expiration of four years from the Effective Date,
or ninety days following such cessation of employment (but not following
the expiration of the Term of the Option).
(d) An Option that has not become vested as provided in Article II above at
the time of cessation of employment (or after cessation of employment as
provided in Article II(d)) may not be exercised thereafter. No Option may
be exercised after the Company has terminated the employment of the
Grantee For Cause, except that the Committee may, in its sole discretion,
permit exercises for a period of up to ninety days in cases where the
Committee shall determine such period is warranted under the particular
circumstances.
(e) If the Grantee has not entered into a written employment agreement
satisfactory to the Company prior to February 16, 1996, this Option shall
immediately terminate as of that date and shall have no further force or
effect. In addition, if Grantee fails to comply with the terms of any
written employment agreement entered into with the Company, said failure
shall cause this Option to immediately terminate, whether or not the
Option has become vested.
(f) Employment for purposes of determining eligibility for vesting
post-employment exercise rights of the Grantee under this Agreement shall
mean continuous full-time salaried employment with the Company or a
Subsidiary and shall include periods during which the Grantee is on
vacation, sick leave, or other approved absence, or in receipt of
severance pay or other form of salary continuation benefit.
28
<PAGE> 29
(g) Except as otherwise herein provided, exercise of this Option, whether by
the Grantee or the Successor of the Grantee, shall be subject to all terms
and conditions of this Agreement.
29
<PAGE> 30
ARTICLE VI
CHANGE-OF-CONTROL
(a) For purposes of this Article VI, a "Change of Control" means the happening
of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used in
Sections 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored or
maintained by the Company or any Subsidiary (including any trustee
of such plan acting as trustee), directly or indirectly, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act,
as amended from time to time), of securities of the Company
representing 20 percent or more of the combined voting power of the
Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months after the
Commencement Date, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for
any reason other than death to constitute at least a majority
thereof, provided that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied
such 24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the
approval of, at least two-thirds of the directors who then qualified
as Incumbent Directors either actually (because they were directors
at the beginning of such 24-month period) or by prior operation of
this Article VI(a)(ii); or
(iii) The occurrence of a transaction requiring stockholder approval for
the acquisition of the Company by an entity other than the Company
or a subsidiary through purchase of assets, or by merger, or
otherwise.
(b) Unless the Board (or the Committee) shall otherwise determine in the
manner set forth in Paragraph (c) below and notwithstanding anything in
this Agreement to the contrary, this Option shall become fully exercisable
upon the occurrence of a Change of Control (as defined in Paragraph (a)
above) and shall remain exercisable for a period of at least one year
thereafter regardless of whether Grantee continues to be employed by the
Company or, if longer, for the period during which such Option would
otherwise by exercisable in accordance with its terms.
(c) Notwithstanding paragraph (b) above, no acceleration of exercisability
shall occur with respect to any Option if the Board (or the Committee)
reasonably determines in good faith, prior to the occurrence of a Change
of Control, that such Option shall be honored or assumed, or new rights
substituted therefor (such honored, assumed or
30
<PAGE> 31
substituted Option being hereinafter referred to as an "Alternative
Option") by the successor in interest to the Company, provided that any
such Alternative Option must:
(i) provide Grantee with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under the Option, including, but not limited to, an
identical or better exercise and vesting schedule and identical or
better timing and methods of payment;
(ii) have substantially equivalent economic value to such Option
(determined at the time of the Change of Control); and
(iii) have terms and conditions which provide that, in the event that the
Company involuntarily terminates employment of Grantee for any
reason or if the Grantee terminates employment for Good Reason
within two years following a Change of Control, any conditions on
Grantee's rights under, or any restrictions on exercisability
applicable to, each such Alternative Option shall be waived or shall
lapse, as the case may be and the Alternative Option shall remain
exercisable until the second anniversary of the Change of Control
or, if longer, for the period during which such Alternative Option
would otherwise be exercisable in accordance with its terms or the
provisions of the plan under which it is granted that permit the
longest post-termination exercise period for involuntary
terminations (other than due to death, disability or retirement).
ARTICLE VII
OTHER TERMS
(a) Grantee understands that the Grantee shall not have any rights as
stockholder by virtue of the grant of an Option but only with respect to
shares of Common Stock actually issued to the Grantee in accordance with
the terms hereof.
(b) Anything herein to the contrary notwithstanding, the Company may postpone
the exercise of the Option for such time as the Committee in its
discretion may deem necessary, in order to permit the Company with
reasonable diligence (i) to effect or maintain registration under the
Securities Act of 1933, as amended, of the Plan or the shares of Common
Stock issuable upon the exercise of the Option, or (ii) to determine that
the Plan and such shares are exempt from registration; and the Company
shall not be obligated by virtue of this Option Agreement or any provision
of the Plan to recognize the exercise of the Option or to sell or issue
shares of Common Stock in violation of said Act or of the law of any
government having jurisdiction thereof. Any such postponement shall not
extend the Term of the Option; and neither the Company nor its Board shall
have any obligation or liability to the Grantee, or to the Grantee's
Successor, with respect to any shares of Common Stock as to which the
Option shall lapse because of such postponement.
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<PAGE> 32
(c) The Option shall be nontransferable and nonassignable except by will and
by the laws of descent and distribution. During the Grantee's lifetime,
the Option may be exercised only by the Grantee.
(d) This Option is not an incentive stock option as described in the Internal
Revenue Code of 1986, as amended, Section 422A(b).
(e) This Agreement is subject to the 1994 Stock Incentive Plan heretofore
adopted by the Company and approved by its shareholders. The terms and
provisions of the Plan (including any subsequent amendments thereto) are
hereby incorporated herein by reference. In the event of a conflict
between any term or provision contained herein and a term or provision of
the Plan, the applicable terms and provisions of the Plan will govern and
prevail.
IN WITNESS WHEREOF, AETNA LIFE AND CASUALTY COMPANY has caused this Option
Agreement to be executed as of the Effective Date, and Grantee has accepted the
terms and provisions hereof.
AETNA LIFE AND CASUALTY COMPANY
By:_________________________________
Its Chairman
Accepted:________________________
(Signature)
Name: ________________________
Title: ________________________
Social Security Number:__________
Dated: ________________________
32
<PAGE> 33
EXHIBIT B TO EMPLOYMENT AGREEMENT
RELEASE AGREEMENT
I,____________________ acknowledge that this document accurately reflects
an agreement entered into between me and Aetna Life and Casualty Company (the
"Company") as of this ______ day of __________, 199__. In consideration for the
benefits and consideration set forth in Paragraph 6 of the attached employment
agreement (the "Agreement"), I hereby agree to the following:
1. DEFINITION. In this agreement the word "Company" means not only the
Company by which I was employed, but also parent and subsidiary corporations,
any affiliated entities whether or not incorporated, the employee, agents,
officers, directors and shareholders of all such entities and any person or
entity which may succeed to the rights and liabilities of such entities by
assignment or otherwise.
2. RELEASE. I hereby release and hold harmless (on behalf of myself and my
family, heirs, executors, successors and assigns) now and forever, the Company
from and waive any claim that I have presently, may have or have had in the
past, known or unknown, against the Company by reason of my employment by the
Company including, without limitation, the termination thereof, other than
claims I may have (i) to the payment of amounts due and payable in accordance
with the terms of the Agreement, including without limitation the Severance
Benefits and the Vested Benefits (as each such term is defined in the Agreement)
and (ii) to be indemnified by the Company pursuant to its applicable policies
and practices from and against any third party claims arising out of or relating
to Executive's employment with or other services on behalf of the Company or any
subsidiary of the Company.
3. EXTENT OF RELEASE. This agreement is valid whether any claim arises
under any federal, state or local statute (including, without limitation, Title
VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act of 1967, the Equal Pay Act, the Americans with
Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974
and all other statutes regulating the terms and conditions of my employment),
regulation or ordinance, under the common law or in equity (including any claims
for wrongful discharge or otherwise), or under any policy, agreement,
understanding or promise, written or oral, formal or informal, between the
Company and myself.
4. CONSIDERATION. The consideration hereby provided to me under the
Agreement is not required under the Company's standard policies and I know of no
circumstances other than my agreeing to the terms of this agreement which would
require the Company to provide such consideration.
33
<PAGE> 34
5. RESTRICTIONS. I have not filed, nor will I initiate or cause to be
initiated on my behalf, any complaint, charge, claim or proceeding against the
Company before any local, state or federal agency, court or other body relating
to my employment or the termination thereof (each individually a "Proceeding"),
nor will I participate in any Proceeding. I waive any right I may have to
benefit in any manner from any relief (whether monetary or otherwise) arising
out of any Proceeding, including any EEOC proceeding. I understand that by
entering into this agreement, I will be limiting the availability of certain
remedies that I may have against the Company and limiting also my ability to
pursue certain claims against the Company. The foregoing will not be used to
justify interfering with any right I may have to file a charge or participate in
an investigation or proceeding conducted by the EEOC.
6. PENALTIES. If I initiate or participate in any legal actions, as
described above, the Company shall have the right, but shall not be obligated,
to deem this agreement void without effect and to require me to repay to the
Company any amounts (other than Earned Salary and Vested Benefits) payment of
which was conditioned on the execution of this agreement, plus interest thereon
from the original date of payment at an annual rate, compounded semi-annually,
equal to the prime rate as quoted in the Wall Street Journal on my date of
termination, plus 2 percent and to terminate any benefit or payments (other than
with respect to Vested Benefits) that are otherwise payable under the Agreement.
7. RIGHT TO COUNSEL. The Company advises me that I should consult with an
attorney prior to execution of this agreement and the Agreement. I understand
that it is in my best interest to have this document and the Agreement reviewed
by an attorney of my own choosing and at my own expense, and I hereby
acknowledge that I have been afforded a period of at least twenty-one days
during which to consider this agreement and the Agreement and to have this
agreement and the Agreement reviewed by my attorney.
8. SEVERABILITY CLAUSE. Should any provision or part of this agreement be
found to be invalid or unenforceable, only that particular provision or part so
found and not the entire agreement shall be inoperative.
9. EVIDENCE. This document may be used as evidence in any proceeding
relating to my employment or the termination thereof. I waive all objections as
to its form.
10. FREE WILL. I am entering into this agreement and the Agreement of my
own free will. The Company has not exerted any undue pressure or influence on me
in this regard. I have had reasonable time to determine whether entering into
this agreement and the Agreement is in my best interest. I understand that if I
request additional time to review the provisions of this agreement and the
Agreement, a reasonable extension of time will be granted.
11. REVOCATION. This agreement may be revoked by me within seven days
after the date on which I sign this agreement and I understand that this
agreement and the Agreement are not binding or enforceable until such seven day
period has expired. Any such revocation must be made in a signed letter executed
by me and received by the Company at
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<PAGE> 35
the following address no later than 5 p.m. Eastern Standard Time on the seventh
day after I have executed this agreement and the Agreement: _____________. I
understand that if I revoke this agreement, the Agreement will not be effective
or enforceable and I will not be entitled to any benefits thereunder.
12. NON-ADMISSION. Nothing contained in this agreement shall be deemed or
construed as an admission of wrongdoing or liability on the part of the Company.
13. GOVERNING LAW. This agreement and the Agreement shall be construed in
accordance with the laws of the State of Connecticut, applicable to contracts
made and entirely to be performed therein.
Date: ________________________ ____________________________________
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<PAGE> 36
[LOGO] Interoffice Mary Ann Champlin
Communication Senior Vice President
Aetna Human Resources, RC3A
(203) 273-8371
Fax: (203) 560-8721
To... Thomas J. McInerney
Date... May 2, 1996
Subject... Employment Agreement
This memorandum is intended to amend that certain Employment Agreement dated as
of December 19, 1995 by and between Aetna Life and Casualty Company and you.
1. Paragraph 1 shall be amended and restated as follows:
Employment. Except as provided in Paragraph 6(a), the Company shall
continue to employ Executive and Executive agrees to remain employed by
the Company under the terms of this Agreement for the period commencing on
the date first written above and ending December 31, 1998. The period
during which Executive is employed pursuant to this Agreement shall be
referred to as the "Contract Employment Period". The Contract Employment
Period shall automatically be extended for one additional year unless, not
later than 180 days prior to the end of the Contract Employment Period,
the Company or Executive shall have given notice not to extend the
Contract Employment Period. The giving by the Company of a notice not to
extend the Contract Employment Period shall not constitute a Termination
Without Cause or a Termination for Good Reason (as defined below). Upon
the expiration of the Contract Employment Period, Executive's employment
with the Company shall continue on an at-will basis.
2. Paragraph 3 shall be amended and restated as follows:
Compensation
a. Base Salary. During the Contract Employment Period, the Company
shall pay Executive a base salary at the annual rate of $450,000
effective April 29, 1996. The Board shall periodically review
Executive's base salary and the Company may, in its discretion,
increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any other
obligation of the Company hereunder. Executive's annual base salary
payable hereunder, as it may be increased from time to time and
without reduction for any amounts deferred as described above, is
referred to herein as "Base Salary". Executive's Base Salary, as in
effect from time to time, may not be reduced by the Company without
Executive's consent, provided that the Base Salary payable under
this paragraph shall be reduced to the extent Executive elects to
defer or reduce such salary under the terms of any deferred
compensation or savings plan or other employee benefit arrangement
maintained or established by the Company. The Company shall pay
Executive the portion of his Base Salary not deferred in accordance
with its customary periodic payroll practices.
b. Incentive Compensation. During the term of the Contract Employment
Period, Executive shall remain eligible for participation in the
Company's existing and future annual and long term
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<PAGE> 37
incentive compensation programs at a level consistent with his
position at the Company and the Company's then current policies and
practices; provided that following any assignment of this Agreement
in accordance with the provisions of Paragraph 9(c) or a Change in
Control of the Company (as defined in Paragraph 7(e)), the
calculation of the amount payable as annual incentive compensation
and the conditions upon which such bonus shall be payable shall be
no less favorable to the Executive (taking into account reasonable
changes in the Company's goals and objectives) than the annual bonus
opportunity that had been made available to the Executive for the
fiscal year ended immediately prior to such assignment or Change in
Control. Without limiting the generality of the foregoing, beginning
with the performance year 1997, for each performance year ending
during the term hereof, Executive shall receive the opportunity to
receive an annual bonus of at least 80% of his Base Salary (the
"Minimum Bonus Percentage"), subject to satisfaction of such
reasonable performance criteria as shall be established with respect
to such year.
3. Paragraph 4 shall be amended and restated as follows:
Options.
a. Stock Option Grant. Contingent upon the execution of this Agreement
by the Executive, the Company has granted Executive an option,
having a ten-year term, to purchase 25,000 shares of the Company's
Common Stock at an exercise price per share equal to $57 a share
(the "Option"). Except to the extent specified below, the terms of
the Option shall be determined in accordance with the terms of the
1994 Stock Incentive Plan (the "1994 Plan") and shall be set forth
in the separate agreement embodying the grant of such Option (the
"Option Agreement"), the form of which is attached hereto as Exhibit
A.
b. Performance Vested Stock Option Grant. Contingent upon the execution
of this amendment to the Agreement by the Executive, the Company has
granted Executive an option, having a ten-year term, to purchase
44,400 shares of the Company's Common Stock at an exercise price per
share equal to $71 a share (also referred to as the "Option").
Except to the extent specified below, the terms of the Option shall
be determined in accordance with the terms of the 1994 Stock
Incentive Plan (the "1994 Plan") and shall be set forth in the
separate agreement embodying the grant of such Option (also referred
to as the "Option Agreement").
Except as amended herein, the Employment Agreement shall remain in full force
and effect.
Aetna Life and Casualty Company
By: /s/ Mary Ann Champlin /s/ Thomas J. McInerney
--------------------------------- -------------------------------
Thomas J. McInerney
Date: May 2, 1996 Date: May 7, 1996
- ------------------------- -------------------------------
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<PAGE> 38
[LOGO] Interoffice Communication
Mary Ann Champlin
Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Thomas McInerney
Date July 22, 1996
Subject Employment Agreement
I am pleased to inform you that effective July 19, 1996, Aetna Inc. has assumed
all of the obligations of Aetna Services, Inc. (formerly Aetna Life and Casualty
Company) under your Employment Agreement with Aetna Services, Inc. All
references to the "Company" in your Employment Agreement will hereinafter be
deemed to mean both Aetna Services, Inc. and Aetna Inc. Among other things, this
means that the Change in Control provisions of your Employment Agreement would
be triggered by a change in control of either Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within the Aetna
holding company system as a result of the merger with U.S. Healthcare. Your
Employment Agreement was entered into with Aetna Services, Inc., which is now a
direct subsidiary of Aetna Inc. We felt it would be appropriate for the new
ultimate parent, Aetna Inc., to assume these obligations to place you on an
equivalent footing post-merger.
The assumption of your Employment Agreement is self-executing. You do not need
to take any action in response to this letter. If you have any questions or
concerns, please let me know.
/s/ Mary Ann Champlin
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<PAGE> 1
Page 1
EXHIBIT 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations $1,511.2 $338.7 $726.2 $627.5 $(1,014.7)
Add back fixed charges 321.9 245.1 187.0 170.8 154.7
Minority interest 14.7 16.4 16.1 11.4 7.0
-------- ------ ------ ------ ---------
Income (loss) as adjusted $1,847.8 $600.2 $929.3 $809.7 $ (853.0)
======== ====== ====== ====== =========
Fixed charge
Interest on indebtedness $ 235.8(1) $168.3(1) $115.9(1) $ 98.6(1) $ 77.4
Portion of rents representative
of interest factor 86.1 76.8 71.1 72.2 77.3
-------- ------ ------ ------ ---------
Total fixed charges $ 321.9 $245.1 $187.0 $170.8 $ 154.7
======== ====== ====== ====== =========
Preferred stock dividend
requirements 92.4 41.1 -- -- --
-------- ------ ------ ------ ---------
Total combined fixed charges
and preferred stock dividend
requirements $ 414.3 $286.2 $187.0 $170.8 $ 154.7
======== ====== ====== ====== =========
Ratio of earnings to fixed
charges 5.74 2.45 4.97 4.74 (5.51)
======== ====== ====== ====== =========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 4.46 2.10 4.97 4.74 (5.51)
======== ====== ====== ====== =========
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the 1997 Annual Report.)
<PAGE> 2
Page 2
EXHIBIT 12
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(Millions) 1997 1996
---- ----
<S> <C> <C>
Pretax income from
continuing operations $ 1,505.2 $ 335.0
Add back fixed charges 318.1 243.8
Minority interest 15.7 16.4
--------- ---------
Income as adjusted $ 1,839.0 $ 595.2
========= =========
Fixed charges:
Interest on indebtedness $ 234.0(2) $ 168.3(2)
Portion of rents representative
of interest factor 84.1 75.5
--------- ---------
Total fixed charges $ 318.1 $ 243.8
========= =========
Preferred stock dividend
requirements -- --
--------- ---------
Total combined fixed charges
and preferred stock dividend
requirements $ 318.1 $ 243.8
========= =========
Ratio of earnings to fixed
charges 5.78 2.44
========= =========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 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 1997 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 14 of Notes to Financial Statements in the 1997 Annual Report.)
<PAGE> 1
Page 1 EXHIBIT 13
Selected Financial Data
<TABLE>
<CAPTION>
(Millions, except per common share data) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Premiums:
Aetna U.S. Healthcare $ 10,844.6 $ 7,765.2 $ 5,949.7 $ 5,611.5 $ 4,700.6
Aetna Retirement Services 158.5 180.7 260.2 235.7 189.8
International 1,434.1 1,166.1 1,038.5 887.1 909.5
Large Case Pensions 155.0 214.1 244.4 123.5 90.8
----------------------------------------------------------
Total Premiums 12,592.2 9,326.1 7,492.8 6,857.8 5,890.7
- ------------------------------------------------------------------------------------------------------
Net Investment Income, Fees and Other
Income, and Net Realized Capital Gains
(Losses):
Aetna U.S. Healthcare 2,056.8 1,968.5 1,665.7 1,527.6 1,405.4
Aetna Retirement Services 1,744.0 1,581.5 1,445.9 1,269.1 1,269.6
International 541.4 464.9 421.3 409.9 369.8
Large Case Pensions 1,467.5 1,761.5 2,004.0 2,120.8 2,380.1
Corporate: Other 138.3 98.0 9.7 (9.7) (6.9)
----------------------------------------------------------
Total Net Investment Income, Fees
and Other Income, and Net Realized
Capital Gains (Losses) 5,948.0 5,874.4 5,546.6 5,317.7 5,418.0
- ------------------------------------------------------------------------------------------------------
Total Revenue $ 18,540.2 $ 15,200.5 $ 13,039.4 $ 12,175.5 $ 11,308.7
- --------------------------------------------==========================================================
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments:
Aetna U.S. Healthcare $ 453.8 $ 58.7 $ 286.0 $ 341.7 $ 272.2
Aetna Retirement Services 257.1 186.2 198.0 159.1 111.4
International 142.4 109.9 86.6 71.2 55.0
Large Case Pensions 234.2 258.4 89.2 54.4 (822.3)
Corporate: Interest (147.5) (103.9) (70.4) (60.5) (44.7)
Other (38.9) (304.2) (115.5) (156.5) (173.9)
- ------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing
Operations before Extraordinary Item and
Cumulative Effect Adjustments 901.1 205.1 473.9 409.4 (602.3)
- ------------------------------------------------------------------------------------------------------
Net Income (Loss) 901.1 651.0 251.7 467.5 (365.9)
- ------------------------------------------------------------------------------------------------------
Net Realized Capital Gains (Losses),
Net of Tax (included above) 198.4 85.9 29.5 (41.2) (42.0)
- ------------------------------------------------------------------------------------------------------
Total Assets 96,000.6 92,912.9 84,323.7 75,486.7 81,572.8
- ------------------------------------------------------------------------------------------------------
Total Long-Term Debt 2,346.2 2,380.0 989.1 1,079.2 1,112.2
- ------------------------------------------------------------------------------------------------------
Aetna-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Limited Liability Company Holding
Primarily Debentures Guaranteed by Aetna 275.0 275.0 275.0 275.0 -
- ------------------------------------------------------------------------------------------------------
Shareholders' Equity 11,195.4 10,889.7 7,272.8 5,503.0 7,043.1
- ------------------------------------------------------------------------------------------------------
Per Common Share Data:
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments
Basic $ 5.67 $ 1.37 $ 4.18 $ 3.64 $ (5.43)
Diluted 5.60 1.36 4.14 3.62 (5.43)
Net Income (Loss)
Basic 5.67 4.77 2.22 4.15 (3.30)
Diluted 5.60 4.72 2.20 4.14 (3.30)
Dividends Declared .80 1.29 2.76 2.76 2.76
Shareholders' Equity 70.85 66.79 63.39 48.85 62.77
Market Price at Year End 70.56 80.00 69.25 47.13 60.38
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations for significant events affecting
the comparability of current year results with 1996 and 1995 results.
<PAGE> 2
Page 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses the financial condition of Aetna Inc. and its subsidiaries
(collectively, the "Company") as of December 31, 1997 and 1996, and its results
of operations for 1997, 1996 and 1995.
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.
Aetna Inc. became the parent corporation of Aetna Services, Inc. ("Aetna
Services")(formerly Aetna Life and Casualty Company) and Aetna U.S. Healthcare
Inc. (formerly U.S. Healthcare, Inc.) as a result of a merger transaction on
July 19, 1996. The merger was accounted for as a purchase of U.S. Healthcare.
(See Note 2 of Notes to Financial Statements for a discussion of the merger and
related matters, including the issuance of additional common stock and preferred
stock, which affects the year to year comparability of per common share
amounts.) The Company also sold its property-casualty operations on April 2,
1996. (See Note 3 of Notes to Financial Statements for a discussion of certain
indemnifications and other information related to the property-casualty sale.)
Consolidated Results
The Company reported income from continuing operations of $901 million in 1997,
$205 million in 1996 and $474 million in 1995. These results include severance
and facilities actions in 1997 and 1996, reductions of the reserve for loss on
discontinued products for Large Case Pensions in 1997 and 1996 and net realized
capital gains in all three years. Excluding these factors, income from
continuing operations would have been $565 million in 1997, $550 million in 1996
and $444 million in 1995.
Aetna U.S. Healthcare's 1997 results were comparable to 1996, although down from
1996 pro forma levels. Aetna Retirement Services and Aetna International both
increased earnings during 1997. The 1996 results reflect earnings growth in each
of the Company's core businesses. The 1997 and 1996 results include higher
interest expense primarily due to additional debt incurred in 1996 in connection
with the financing of the U.S. Healthcare merger. See "Aetna U.S. Healthcare"
for a comparison of pro forma results as though the merger had occurred on
January 1, 1995.
<PAGE> 3
Page 3
Aetna U.S. Healthcare
<TABLE>
<CAPTION>
Operating Summary (Millions) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $10,844.6 $ 7,765.2 $ 5,949.7
Net investment income 451.2 414.6 364.0
Fees and other income 1,463.9 1,495.9 1,312.3
Net realized capital gains (losses) 141.7 58.0 (10.6)
--------------------------------
Total revenue 12,901.4 9,733.7 7,615.4
--------------------------------
Current and future benefits 9,239.2 6,622.4 5,100.4
Operating expenses 2,479.2 2,351.5 2,023.2
Amortization of goodwill and
other acquired intangible assets 362.9 169.4 15.2
Amortization of deferred policy
acquisition costs 20.3 11.9 22.2
Severance and facilities charges(reserve
reductions) (45.0) 453.0 -
--------------------------------
Income before income taxes 844.8 125.5 454.4
Income taxes 391.0 66.8 168.4
--------------------------------
Net income $ 453.8 $ 58.7 $ 286.0
- -------------------------------------------=================================
Net realized capital gains (losses),
net of tax (included above) $ 69.9 $ 37.9 $ (7.1)
- -------------------------------------------=================================
</TABLE>
Aetna U.S. Healthcare consists of the Health Risk business and the Group
Insurance and Other Health business. Health products include health maintenance
organization (HMO), point-of-service (POS), preferred provider organization
(PPO) and indemnity products. The Health Risk business includes health products
offered on an insured basis. The Group Insurance and Other Health business
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. Under insured plans, the Company assumes
all or a majority of health care cost, utilization, mortality, morbidity or
other risk depending on the product. Under employer-funded plans, the customer,
and not the Company, assumes all or a majority of these risks. HMO results
include POS members who access primary care physicians and referred care through
an HMO network.
Actual Results
Aetna U.S. Healthcare's net income increased $395 million in 1997 following a
decline of $227 million in 1996. These results reflect unusual items including
benefits of $29 million in 1997 and expenses of $321 million in 1996, primarily
related to severance and facilities actions (see "Severance and Facilities
Charges"), and net realized capital gains or losses in all three years.
Excluding these items, 1997 results were comparable to 1996. When compared to
1995, the 1996 results increased $48 million. These results reflect the
inclusion of U.S. Healthcare for a full year in 1997 and approximately five and
one-half months in 1996. For a discussion of underlying results, see the
discussion of Aetna U.S. Healthcare pro forma results below.
During 1997, the Company sold certain subsidiaries primarily to more effectively
focus its health business resources. On December 5, 1997, the Company sold Human
Affairs International ("HAI"), a behavioral health management business, and
recognized a gain of $55 million after tax. On August 3, 1997, the Company sold
Healthcare Data Interchange Corporation ("HDIC"), a provider of health care
electronic data interchange services, and recognized a gain of $21 million after
tax. Net realized capital gains for 1997 also include after-tax losses of $44
million related to the disposition of Aetna Professional Management Corporation
("APMC"), a physician practice management business. Net realized capital gains
for 1996 include a $15 million after-tax gain from the sale of an HMO
subsidiary. The earnings of HAI, HDIC, APMC and the HMO subsidiary were not
material to the results of Aetna U.S. Healthcare.
<PAGE> 4
Page 4
Aetna U.S. Healthcare (Continued)
Aetna U.S. Healthcare's effective tax rates were 46% for 1997, 53% for 1996 and
37% for 1995. The higher effective tax rates for 1997 and 1996 are primarily the
result of merger-related goodwill amortization (which is nondeductible for
income tax purposes) and for 1997, the tax treatment of the dispositions of APMC
and HAI.
Pro Forma Results
The remainder of the discussion related to Aetna U.S. Healthcare compares 1997
actual results to 1996 and 1995 results on a pro forma basis as if the merger
had occurred at the beginning of 1995.
<TABLE>
<CAPTION>
Pro forma (1)
-------------------------
Operating Summary (Millions) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $10,844.6 $10,096.6 $ 9,436.1
Net investment income 451.2 441.3 408.2
Fees and other income 1,463.9 1,549.2 1,368.0
Net realized capital gains 141.7 52.5 4.5
-------------------------------------
Total revenue 12,901.4 12,139.6 11,216.8
-------------------------------------
Current and future benefits 9,239.2 8,387.0 7,627.9
Operating expenses 2,479.2 2,683.3 2,517.6
Amortization of goodwill and other
acquired intangible assets 362.9 364.6 371.2
Amortization of deferred policy
acquisition costs 20.3 11.9 22.2
Severance and facilities charges (reserve
reductions) (45.0) 453.0 -
-------------------------------------
Income before income taxes 844.8 239.8 677.9
Income taxes 391.0 146.7 332.7
-------------------------------------
Net income $ 453.8 $ 93.1 $ 345.2
- --------------------------------------------======================================
Net realized capital gains, net of
tax (included above) $ 69.9 $ 34.4 $ 2.1
- --------------------------------------------======================================
</TABLE>
(1) Represents financial information as though the merger with U.S. Healthcare
occurred on January 1, 1995, reflecting adjustments which include: (a)
amortization of goodwill and other acquired intangible assets; (b)
interest income foregone related to a $500 million dividend paid by U.S.
Healthcare to the Company; and (c) adjustments to conform U.S.
Healthcare's accounting policies with Aetna Services' and to remove the
effect of merger-related costs incurred by U.S. Healthcare prior to the
merger. The 1996 and 1995 pro forma operating summaries and information
derived from the summaries are not necessarily indicative of the results
of operations of the Aetna U.S. Healthcare segment had the merger occurred
at the beginning of 1995, nor is it necessarily indicative of future
results. The 1996 and 1995 pro forma operating summaries do not give
effect to the costs of financing the merger (See "Corporate").
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;
unusual items, primarily severance and facilities actions; and net realized
capital gains.
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Health Risk $ 312.9 $ 461.9 $ 499.1
Group Insurance and Other Health 340.7 218.2 151.6
------ ------ ------
Total Aetna U.S. Healthcare $ 653.6 $ 680.1 $ 650.7
======= ======= =======
Health Risk Medical Loss Ratio 85.1% 81.5% 78.5%
======== ======== ========
Commercial HMO Medical Loss Ratio 84.2% 79.3% 73.5%
======== ======== ========
Medicare HMO Medical Loss Ratio 93.4% 89.7% 86.7%
======== ======== ========
Health Risk SG&A Ratio 12.4% 14.5% 14.9%
======== ======== ========
</TABLE>
<PAGE> 5
Page 5
Aetna U.S. Healthcare (Continued)
Aetna U.S. Healthcare's earnings decreased $27 million in 1997 and increased $29
million in 1996. The segment's results reflect decreased Health Risk earnings
and improved Group Insurance and Other Health earnings in both 1997 and 1996.
Health Risk
Health Risk earnings for 1997 were affected by several factors, primarily
consisting of significantly increased HMO medical costs which more than offset
the benefit of increased HMO membership and HMO premium rate increases.
Commercial and Medicare HMO medical costs per member per month (PMPM) increased
by 8% and 10%, when compared to 1996, primarily because of higher inpatient
facility and physician costs. The increase in Medicare HMO medical costs PMPM
also reflects higher pharmacy costs. Partially offsetting this increase in HMO
medical costs were benefits resulting from increased HMO enrollment and
increased Commercial and Medicare HMO premiums PMPM of 1% and 5%, when compared
to 1996. Commercial HMO premiums PMPM for 1997 increased because of premium rate
increases instituted primarily at the beginning of 1997, the effect of which was
partially offset by customers selecting lower premium plans and a shift in
geographic mix. For 1997, Health Risk results also benefited from improved
operating expenses as a percentage of premiums because of continuing cost
reduction efforts.
For the Health Risk business, medical claims payable reflects estimates of the
ultimate cost of claims that have been incurred but not yet reported and
reported but not yet paid. Medical claims payable 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. The 1997 HMO medical cost increases include a $103
million after-tax charge in the third quarter of 1997 for the reestimation of
HMO medical claims reserves, a majority of which relate to 1997 claims.
Health Risk earnings for 1996 were significantly impacted by 4% lower Commercial
HMO premiums PMPM combined with 4% higher Commercial HMO and 13% higher Medicare
HMO medical costs PMPM. Partially offsetting these negative factors were
material benefits from increased HMO enrollment, favorable adjustments to claim
benefit reserve estimates for indemnity and PPO products, favorable tax reserve
developments, increased net investment income and slower growth in operating
expenses relative to premiums. The decrease in Commercial HMO premiums PMPM
resulted from competitive pricing pressures and customers selecting lower
premium plans. The increase in Commercial HMO medical costs PMPM resulted
primarily from increased outpatient facility and pharmacy costs. The increase in
Medicare HMO medical costs PMPM resulted primarily from increased inpatient
facility and pharmacy costs.
Group Insurance and Other Health
Group Insurance and Other Health results for 1997 reflect higher earnings in
both Group Insurance products and Other Health products. The increase from Group
Insurance products is primarily due to favorable developments in claim benefit
reserve estimates for life and disability products, as well as increased product
sales. The increase in earnings from Other Health products reflects higher
administrative service contract fees resulting from rate increases and changes
in product mix, and lower operating expenses as a percentage of revenue due to
continued cost reduction efforts. Results for 1996 primarily reflect favorable
group life mortality experience, as well as increased Group Insurance sales and
enrollment in nonrisk health products, partially offset by increased costs
resulting from higher disability claim volume.
<PAGE> 6
Page 6
Aetna U.S. Healthcare (Continued)
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
December 31, 1997 (1)(2) December 31, 1996 (1)(2)
-------------------------------- ----------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- -------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (3) 3,642 584 4,226 3,316 531 3,847
Medicare 382 19 401 303 19 322
Medicaid 98 - 98 134 - 134
----- ----- ------ ----- ----- ------
Total HMO 4,122 603 4,725 3,753 550 4,303
POS 310 2,473 2,783 325 2,332 2,657
PPO 609 3,012 3,621 761 2,956 3,717
Indemnity 294 2,311 2,605 466 2,595 3,061
----- ----- ------ ----- ----- ------
Total Health Membership 5,335 8,399 13,734 5,305 8,433 13,738
===== ===== ====== ===== ===== ======
Group Insurance (4):
Group Life 9,890 9,624
====== ======
Disability 2,598 2,357
====== ======
Long-Term Care 97 104
====== ======
</TABLE>
(1) Health membership as of December 31, 1997 reflects system and plan
conversions. The conversions predominantly affect Indemnity and PPO
membership and have an immaterial impact on all other Health products.
December 31, 1996 reflects adjustments based on known corrected data from
the conversions, as applied to December 31, 1996 membership previously
reported.
(2) Group Insurance membership as of December 31, 1997 reflects the conversion
to a new membership reporting system. December 31, 1996 reflects
adjustments as applied to membership previously reported.
(3) Includes 885 thousand POS members who access primary care physicians and
referred care through an HMO network at December 31, 1997 and 806 thousand
at December 31, 1996.
(4) 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 December 31, 1997 decreased by 4 thousand members
when compared to December 31, 1996. Membership increases in Commercial HMO,
Medicare HMO and POS were offset by declines in Indemnity, PPO and Medicaid
enrollment. The decline in Indemnity enrollment reflects, among other factors,
the continued migration of Indemnity members to managed care products. Total HMO
membership as of December 31, 1997 increased by 422 thousand members, or 10%
when compared to December 31, 1996.
Total Revenue and Expense
Aetna U.S. Healthcare's revenues increased by $1.0 billion in 1997 and $1.3
billion in 1996, excluding income in 1996 and 1995 not present in 1997
associated with investments in primary care physician practices, as well as
premiums related to the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS") contract, which was not renewed, and income related to
certain Medicare administrative services no longer provided by the Company, and
excluding net realized capital gains. This revenue growth was primarily due to
membership growth in Commercial and Medicare HMO and POS products, partially
offset by lower Indemnity and PPO membership, as well as, for 1997, premium rate
increases primarily instituted at the beginning of the year.
<PAGE> 7
Page 7
Aetna U.S. Healthcare (Continued)
Aetna U.S. Healthcare's operating expenses decreased by $14 million, or .6%, in
1997 and increased by $179 million, or 8%, in 1996, excluding operating expenses
in 1996 and 1995 not present in 1997 associated with investments in primary care
physician practices, as well as operating expenses related to CHAMPUS and
certain Medicare administrative services no longer provided by the Company. The
decrease in 1997 reflects the impact of continuing cost reduction efforts which
also resulted in a reduction in operating expenses as a percentage of revenue.
The increase in 1996 is due primarily to the continued migration of members from
the Indemnity product to more resource-intensive POS and HMO products, partially
offset by continuing cost reduction efforts. Operating expenses as a percentage
of revenue, however, declined.
Outlook
The Company intends to continue to enter new geographic markets and expand its
presence in the Medicare and Commercial risk business. In doing so, the Company
may seek acquisitions in order to strengthen its market position.
With the market shift from traditional indemnity plans toward managed care
products and the increased importance of managed care to the Company, the
ability to profitably grow the managed care risk business and obtain adequate
pricing in an increasingly competitive environment while effectively managing
medical costs and operating expenses is of increasing importance.
Premiums in the Health Risk business are generally fixed by contract for
one-year periods and, accordingly, costs in excess of those reflected in
pricing, such as those experienced in 1997, cannot be recovered in the year
through higher premiums. Results in 1998 will be affected because a significant
portion of the Company's Commercial risk contracts for 1998 were priced prior to
the Company's receipt of information in the third quarter of 1997 regarding
increased medical cost levels, and these contracts cannot be repriced to factor
in the higher medical costs.
For remaining 1998 Commercial risk contracts and for Medicare products, the
Company has targeted further premium increases in an attempt to improve Health
Risk profitability. The Company also attempts to improve profitability by
addressing cost increases in its contracting with providers and through other
cost management techniques. Also, the premium rate increases set by the federal
government in 1998 for Medicare risk products averaged just under 3%, which the
Company believes will be below the rate of medical cost inflation. In an effort
to help stem any medical loss ratio deterioration, the Company has made plan
benefit changes, added premiums for supplemental benefits and made copayment
modifications. There can be no assurances, however, that any premium increases,
benefit changes, or cost savings achieved through recontracting will be
sufficient to offset the increases in medical costs as well as any increases in
other operating costs, due to potential governmental action (including rate
decreases or reduction of rate increases), business conditions (including
intensification of competition) and other factors.
Results for the Group Insurance and Other Health businesses are not expected to
increase at the same rate they have from 1995 through 1997.
See "Liquidity and Capital Resources - Health Legislation and Regulation" and
"Forward-Looking Information/Risk Factors" for information regarding other
important factors that may materially affect Aetna U.S. Healthcare.
<PAGE> 8
Page 8
Aetna Retirement Services
<TABLE>
<CAPTION>
Operating Summary (Millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums (1) $ 158.5 $ 180.7 $ 260.2
Net investment income 1,114.7 1,086.7 1,044.1
Fees and other income 591.7 467.7 359.1
Net realized capital gains 37.6 27.1 42.7
-----------------------------------
Total revenue 1,902.5 1,762.2 1,706.1
-----------------------------------
Current and future benefits (1) 1,034.1 1,035.9 1,061.4
Operating expenses 385.6 337.5 303.8
Amortization of deferred policy
acquisition costs 110.6 74.3 46.1
Severance and facilities charge - 49.0 -
-----------------------------------
Income before income taxes 372.2 265.5 294.8
Income taxes 115.1 79.3 96.8
-----------------------------------
Net income $ 257.1 $ 186.2 $ 198.0
- --------------------------------------------====================================
Net realized capital gains, net of
tax (included above) $ 24.2 $ 17.8 $ 27.0
- --------------------------------------------====================================
Deposits not included in premiums above:
Annuities - fixed options $ 1,191.4 $ 1,362.3 $ 1,306.8
Annuities - variable options 3,291.2 2,759.3 1,939.2
Individual life insurance 486.4 443.2 539.1
-----------------------------------
Total $ 4,969.0 $ 4,564.8 $ 3,785.1
- --------------------------------------------====================================
Assets under management:(2)
Annuities - fixed options $ 12,056.3 $ 11,692.4 $ 11,076.8
Annuities - variable options (3) 20,076.9 14,468.1 10,489.0
Other investment advisory (4)(5) 9,716.6 3,064.9 968.6
-----------------------------------
Financial services 41,849.8 29,225.4 22,534.4
Individual life insurance 3,102.3 2,837.3 2,599.7
-----------------------------------
Total $ 44,952.1 $ 32,062.7 $ 25,134.1
- --------------------------------------------====================================
Individual life insurance coverage issued $ 5,029.9 $ 5,740.3 $ 6,200.6
- --------------------------------------------====================================
Individual life insurance coverage in force $ 49,794.7 $ 48,983.4 $ 47,173.5
- --------------------------------------------====================================
</TABLE>
(1) Includes $59.1 million for 1997, $71.8 million for 1996 and $81.9 million
for 1995, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) Excludes net unrealized capital gains of $551.6 million, $366.0 million
and $797.1 million at December 31, 1997, 1996 and 1995.
(3) Includes $5,178.6 million, $4,724.8 million and $2,604.2 million at
December 31, 1997, 1996 and 1995, related to assets invested through ARS'
products in unaffiliated mutual funds.
(4) The December 31, 1997 balance includes the transfer of $4,078.5 million of
assets under management that were previously reported in the Large Case
Pensions segment, reflecting the consolidation of the Company's investment
advisory services and migration of certain other pension products which
complement ARS' business strategy.
(5) The December 31, 1996 balance includes $1,957.3 million of assets under
management that were previously reported in the Large Case Pensions
segment, reflecting the consolidation of the Company's investment advisory
services.
ARS offers financial services and individual life insurance products.
Financial services include fixed and variable annuity contracts, investment
advisory services, financial planning services and pension plan administrative
services. Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
ARS' net income increased $71 million in 1997 and decreased $12 million in 1996.
ARS' 1996 net income includes an after-tax severance and facilities charge of
$32 million (see "Severance and Facilities Charges"). Excluding this charge and
net realized capital gains, ARS' results, as shown below, increased $33 million
in 1997 and $29 million in 1996. The 1997 results reflect improved earnings from
financial services offset by a decrease in earnings from individual life
insurance products. The 1996 results reflect improved earnings from both
financial services and individual life products.
<PAGE> 9
Page 9
Aetna Retirement Services (Continued)
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial services $ 157.8 $ 120.7 $ 99.8
Individual life insurance 75.1 79.5 71.2
------ ------ ------
Total $ 232.9 $ 200.2 $ 171.0
======= ======= =======
</TABLE>
The increases in 1997 and 1996 earnings for financial services reflect increased
fee income primarily from increased assets under management in annuity products.
Assets under management (excluding assets under management that were previously
reported in the Large Case Pensions segment) increased by 27% in 1997 and 20% in
1996. Assets under management grew primarily because of appreciation in the
stock market and additional net deposits (i.e., deposits less surrenders) and,
in 1997, the inclusion of assets from the acquisition of Financial Network
Investment Corporation ("FNIC") (discussed below). Partially offsetting 1997
increases in fee income were increased operating expenses as well as the
expenses of FNIC. Both 1997 and 1996 reflect increased expenses due to business
growth and continued strategic investments. However, operating expenses as a
percentage of assets under management declined in both years.
Premiums relate to traditional life insurance and annuity products containing
life contingencies. Premiums decreased by $22 million in 1997 following a
decrease of $80 million in 1996. The decrease in 1997 was due to a shift from
annuity products containing life contingencies to annuity products not involving
life contingencies, and in part, from ceasing to write structured settlement
business. The decrease in 1996 was primarily from ARS ceasing to write
structured settlement annuities in the fourth quarter of 1995.
Deposits relate to annuity contracts not involving life contingencies and to
universal life contracts. Deposits increased 9% in 1997 and 21% in 1996,
reflecting continued business growth.
Of the $12.1 billion, $11.7 billion and $11.1 billion of fixed annuity assets
under management at December 31, 1997, 1996 and 1995, respectively, 25%, 25% and
23%, respectively, were fully guaranteed and 75%, 75% and 77%, respectively,
were experience rated. The average earned rate on investments supporting fully
guaranteed investment contracts was 7.8%, 7.9% and 8.2%, and the average earned
rate on investments supporting experience rated investment contracts was 7.9%,
8.0% and 8.1% for the years ended December 31, 1997, 1996 and 1995,
respectively. The average credited rate on fully guaranteed investment contracts
was 6.6%, 6.7% and 6.9%, and the average credited rate on experience rated
investment contracts was 5.9%, 6.0% and 6.2% for the years ended December 31,
1997, 1996 and 1995, respectively. The resulting interest margins on fully
guaranteed investment contracts were 1.2%, 1.2% and 1.3% and on experience rated
investment contracts were 2.0%, 2.0% and 1.9% for the years ended December 31,
1997, 1996 and 1995, respectively.
<PAGE> 10
Page 10
Aetna Retirement Services (Continued)
The duration of the investment portfolios supporting ARS' liabilities is
regularly monitored and adjusted in order to maintain an aggregate duration that
is within 0.5 years of the estimated duration of the underlying liabilities (see
"General Account Investments").
In 1997, in connection with the Company's efforts to expand its financial
planning business, the Company acquired FNIC. FNIC is a broker/dealer licensed
in all fifty states and includes more than 2,400 registered representatives and
177 branch offices in 35 states. The purchase price was not material to the
Company.
Outlook
ARS' strategy is to increase assets under management and improve profitability
by focusing on strategic markets and products in the financial services
business. In doing so, ARS may take a variety of actions intended to improve its
investment and product management, marketing, distribution and customer service,
including increased sales of proprietary fund options within its variable
products. ARS also may seek divestitures or acquisitions of lines of business or
in selected markets in order to align its businesses with strategic and
financial targets or build scale.
See "Forward-Looking Information/Risk Factors" for information regarding other
important factors that may materially affect ARS.
<PAGE> 11
Page 11
Aetna International
<TABLE>
<CAPTION>
Operating Summary (Millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $1,434.1 $1,166.1 $1,038.5
Net investment income 384.4 334.2 308.7
Fees and other income (1) 140.3 124.2 115.0
Net realized capital gains (losses) 16.7 6.5 (2.4)
-------------------------------
Total revenue 1,975.5 1,631.0 1,459.8
-------------------------------
Current and future benefits 1,206.3 996.8 911.2
Operating expenses 462.0 377.2 340.6
Interest expense 7.8 8.2 7.4
Amortization of goodwill and other
acquired intangible assets 16.3 3.0 2.5
Amortization of deferred policy
acquisition costs 86.6 73.9 70.8
-------------------------------
Income before income taxes 196.5 171.9 127.3
Income taxes 54.1 62.0 40.7
-------------------------------
Net income $ 142.4 $ 109.9 $ 86.6
- --------------------------------------------================================
Net realized capital gains (losses),
net of tax (included above) $ 13.7 $ 4.4 $ (2.1)
- --------------------------------------------=================================
</TABLE>
(1) Includes $51.5 million in 1997, $16.8 million in 1996 and $29.7 million in
1995, of earnings from Aetna International subsidiaries, that are carried
on the equity basis.
Aetna International's business, through subsidiaries and joint venture
operations, sells primarily life insurance, health insurance and financial
services products in non-U.S. markets including Brazil, Taiwan, Mexico, Canada,
Chile, Malaysia, Hong Kong, New Zealand, Peru, Argentina, the Philippines and
Indonesia.
Earnings by major geographic location, excluding net realized capital gains and
losses, are as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Asia Pacific $ 60.1 $ 54.3 $ 46.0
Latin America 76.7 56.0 47.9
Start-ups and other (8.1) (4.8) (5.2)
--------------------------------
Total $ 128.7 $ 105.5 $ 88.7
=================================
</TABLE>
Aetna International's net income increased $33 million in 1997, following a $23
million increase in 1996. Excluding net realized capital gains or losses,
earnings increased $23 million in 1997, following a $17 million increase in
1996. Results in 1997 primarily reflect the Company's operations in Brazil,
which were acquired in April 1997, earnings growth in Taiwan and Canada
(included above in other) and favorable investment performance in certain Asia
Pacific and Latin American operations. This earnings growth was partially offset
by increased losses related to start-up operations, primarily those in the
Philippines and Argentina, and fourth quarter currency devaluations in Asia.
Results in 1996 reflect earnings growth in Chile and decreased earnings in
Mexico due to a decline in interest rates.
Premiums in 1997 were 23% higher than in 1996, following a 12% increase in 1996
premiums as compared with 1995. The increases in premiums were primarily due to
increased insurance product sales in Taiwan and Chile. The lower premium growth
rate in 1996 was primarily due to strategic decisions to exit low margin product
businesses in Canada and Latin America.
<PAGE> 12
Page 12
Aetna International (Continued)
Outlook
Aetna International seeks to invest in new emerging markets outside the U.S.
that have the potential for attractive long-term returns. The Company also
explores opportunities for additional investments, or divestitures where
appropriate, in markets where it currently has a presence. These investments are
generally made through the acquisition of part or all of an existing company or
an investment in a start-up operation. Acquisitions of existing companies
generally require larger initial capital expenditures and may result in
immediate earnings. These earnings may, however, be offset in whole or in part,
by the amortization of goodwill and intangible assets related to the
acquisition. Investments in start-up operations generally require less initial
capital, but generally do not generate earnings for a number of years.
Currency devaluation, such as recently experienced in Southeast Asia, could
adversely affect Aetna International's results when translated into U.S.
dollars. Aetna International has established operations in Brazil, Taiwan,
Mexico, Canada, Chile, Malaysia, Hong Kong and Peru whose results could be
adversely affected by devaluation of those currencies. Smaller, or start-up
operations are also subject to currency devaluations which could reduce start-up
losses when translated into U.S. dollars.
See "Forward-Looking Information/Risk Factors" for information regarding
important factors that may materially affect Aetna International.
<PAGE> 13
Page 13
Large Case Pensions
<TABLE>
<CAPTION>
Operating Summary (Millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 155.0 $ 214.1 $ 244.4
Net investment income 1,408.7 1,649.2 1,850.6
Fees and other income (1) 28.1 81.4 135.3
Net realized capital gains 30.7 30.9 18.1
-----------------------------------
Total revenue 1,622.5 1,975.6 2,248.4
-----------------------------------
Current and future benefits 1,372.4 1,723.6 2,015.6
Operating expenses (1) 34.8 58.6 100.1
Reductions of loss on discontinued
products (172.5) (202.3) -
-----------------------------------
Income before income taxes 387.8 395.7 132.7
Income taxes 153.6 137.3 43.5
-----------------------------------
Net income $ 234.2 $ 258.4 $ 89.2
- -------------------------------------------====================================
Net realized capital gains, net of
tax (included above) $ 20.8 $ 20.8 $ 11.0
- -------------------------------------------====================================
Deposits not included in premiums above:
Fully guaranteed discontinued
products $ 14.0 $ 17.7 $ 31.5
Experience rated 735.4 789.0 719.9
Nonguaranteed 849.2 975.1 848.8
-----------------------------------
Total $ 1,598.6 $ 1,781.8 $ 1,600.2
- -------------------------------------------====================================
Assets under management: (1)(2)
Fully guaranteed discontinued
products $ 7,548.9 $ 8,477.1 $ 9,903.6
Experience rated 11,114.7 16,103.2 17,078.6
Nonguaranteed 11,070.2 10,749.3 18,634.1
-----------------------------------
Total $ 29,733.8 $ 35,329.6 $ 45,616.3
- -------------------------------------------====================================
</TABLE>
(1) 1996 includes $15.7 million of fees and other income and $12.7 million of
operating expenses and, at December 31, 1996, assets of $3,608.0 million
which are currently reported in the ARS segment, reflecting the
consolidation of the Company's investment advisory services and certain
other pension products which complement ARS' business strategy.
(2) Excludes net unrealized capital gains of $645.4 million, $321.4 million
and $788.8 million at December 31, 1997, 1996 and 1995, respectively.
The Large Case Pensions segment manages a variety of retirement products
(including pension and annuity products) for primarily defined benefit and
defined contribution plans. These products provide a variety of funding and
benefit payment distribution options and other services. Certain products
provide investment guarantees.
Large Case Pensions' net income decreased $24 million in 1997, following a $169
million increase in 1996. Large Case Pensions' earnings, excluding the
reductions of the reserve for loss on discontinued products (discussed below)
and net realized capital gains, decreased slightly in 1997, following a $28
million increase in 1996. The 1997 earnings reflect decreased income as a result
of redeploying capital supporting the Large Case Pensions segment, as
obligations mature, to other businesses of the Company, partially offset by
lower expenses. Earnings in 1996 include a $10 million increase in investment
income from distributions from leveraged buyout and venture capital limited
partnership investments supporting Large Case Pensions' capital and an increase
in net interest margins. Results in 1996 were partially offset by the effect of
reduced net investment income on the declining capital in the business.
After-tax net realized capital gains in 1996 include a gain of $25 million
related to the sale of Aetna Realty Investors ("ARI"), which was partially
offset by net realized capital losses on bond sales. The earnings of ARI were
not material to Large Case Pensions' net income.
<PAGE> 14
Page 14
Large Case Pensions (Continued)
Assets under management decreased during 1997 and 1996. The 1997 decrease
primarily resulted from the continuing runoff of the segment's underlying
liabilities as well as the consolidation of investment advisory services and
certain other pension products into the ARS segment. The 1996 decrease resulted
primarily from the sale of Insurance Company Investment Management("ICIM"), a
specialized asset manager. ICIM was not a significant contributor to Large Case
Pensions' earnings.
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. Participant withdrawals are generally
subject to significant tax and plan constraints. Experience rated contractholder
and participant withdrawals and transfers were as follows (excluding
contractholder transfers to other Company products):
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $ 905.0 $1,089.1 $1,012.3
Contractholder withdrawals other than scheduled
contract maturities and benefit payments (2) 358.1 506.2 (3) 381.3
Participant withdrawals (2) 130.0 170.8 182.2
</TABLE>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
(2) At December 31, 1997, approximately $1.7 billion of experience rated
pension contracts allowed for unscheduled contractholder withdrawals,
subject to timing restrictions and formula-based market value adjustments.
Further, approximately $3.2 billion of such contracts supported by general
account assets could be withdrawn or transferred to other plan investment
options at the direction of plan participants without market value
adjustment.
(3) Increase primarily relates to an unscheduled withdrawal by one
contractholder in 1996.
Outlook
Large Case Pensions' earnings are expected to materially decline in 1998 due to
reductions in investment income, as capital supporting Large Case Pensions is
redeployed, as obligations mature, to other businesses and certain products of
Large Case Pensions are consolidated into ARS.
See "Forward-Looking Information/Risk Factors" for information regarding other
important factors that may materially affect Large Case Pensions.
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. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
(a) the expected cash flows from the assets supporting these products and
(b) the cash flows expected to be required to meet the product obligations.
<PAGE> 15
Page 15
Large Case Pensions (Continued)
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve. To the extent that
aggregate future losses on the products are greater than anticipated, the
Company's results of operations would be adversely affected, and positively
affected to the extent future losses are less than anticipated. Management
reviews the adequacy of the discontinued products reserve quarterly. As a result
of continued favorable developments in real estate markets, the Company reduced
$173 million (pretax) in 1997 and $202 million (pretax) in 1996 of the reserve
related to GICs. The current reserve reflects management's best estimate of
anticipated future losses. The discussion below presents information for SPA and
GIC products on a combined basis.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest margin $ 15.1 $ 26.3 $ (58.6)
Net realized capital gains (losses)(1) 175.4 79.2 (8.6)
Interest earned on receivable from
continuing products 21.5 29.7 33.0
Other, net 2.8 16.3 8.0
------- ------ -------
Results of discontinued products, after tax $ 214.8 $ 151.5 $ (26.2)
======== ======= ========
Results of discontinued products, pretax $ 337.4 $ 230.3 $ (38.2)
======== ======= ========
Net realized capital gains
from sales of bonds, after tax,
included above $ 36.6 $ 7.7 $ 39.9
======== ======= ========
</TABLE>
(1) 1997 includes net realized capital gains of $100.4 million related to
continued favorable developments in real estate markets (including gains
of $24.3 million related to the securitization of commercial mortgage
loans) as well as $37.3 million resulting from the sale of investments in
order to meet liquidity needs. 1996 includes $72.7 million related to
favorable developments in real estate markets.
The interest margin is the difference between earnings on invested assets and
interest credited to contractholders. The interest margin for 1996 and 1995
includes losses (pretax) of $4 million and $50 million, respectively, due to the
early retirement of $183 million of contract liabilities in 1996 and $728
million in 1995. These losses improve interest margins in future periods.
Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $515 million (after tax) at December 31,
1997. 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>
(Millions)
- ---------------------------------------------
<S> <C>
Reserve at December 31, 1994 $ 997.0
Results of discontinued products (38.2)
--------
Reserve at December 31, 1995 958.8
Results of discontinued products 230.3
Reserve reduction (202.3)
--------
Reserve at December 31, 1996 986.8
Results of discontinued products 337.4
Reserve reduction (172.5)
--------
Reserve at December 31, 1997 $1,151.7
========
</TABLE>
<PAGE> 16
Page 16
Large Case Pensions (Continued)
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities,
settlements and benefit
payments (1) $1,683.1 $2,609.0 $3,208.5
Participant directed withdrawals 36.4 52.0 92.8
</TABLE>
(1) Includes early retirement of GIC liabilities of $183.3 million in 1996 and
$728.0 million in 1995. There were no such retirements in 1997.
Cash required to fund these distributions was provided by earnings and scheduled
payments on and sales of invested assets and the funding of a portion of the
receivable from continuing products.
At December 31, 1997, contractholder liabilities were $7.1 billion. Scheduled
maturities, future benefit payments, and other expected payments, including
future interest, were as follows:
<TABLE>
<CAPTION>
(Millions)
- ---------
<S> <C>
1998 $1,443.8
1999 1,256.2
2000 896.5
2001 813.6
2002 674.8
2003-2007 2,367.3
2008-2012 2,039.3
2013-2017 1,663.2
2018-2022 1,260.8
Thereafter 2,296.2
</TABLE>
See Note 9 of Notes to Financial Statements and "General Account Investments"
for additional information.
<PAGE> 17
Page 17
Corporate
<TABLE>
<CAPTION>
Operating Summary (Millions, after tax) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 147.5 $ 103.9 $ 70.4
--------------------------------
Other expense:
Severance and facilities charges (1) $ - $ 235.5 $ -
Other operating expenses, net 108.7 110.5 116.2
Interest on property-casualty proceeds - (36.8) -
Net realized capital gains (2) (69.8) (5.0) (.7)
-------------------------------
Total other expense $ 38.9 $ 304.2 $ 115.5
================================
</TABLE>
(1) See Note 8 of Notes to Financial Statements for additional information.
(2) After-tax net realized capital gains in 1997 include gains of $98.1
million related to sales of portions of the Company's investment in
Travelers Property Casualty Corp. offset by an after-tax realized capital
loss of $28.6 million related to the write-down of certain properties that
the Company has classified as held for sale.
The Corporate segment includes interest expense and other expenses which are not
directly related to the Company's business segments. "Other expense" includes
corporate expenses such as staff area expenses, advertising and contributions,
which are partially offset by net investment income.
The 1997 and 1996 increase in interest expense primarily results from additional
debt incurred in connection with the financing of the U.S. Healthcare merger.
Other operating expenses were comparable in 1997 and 1996.
Severance and Facilities Charges
During 1996, the Company established severance and facilities reserves of $865
million (pretax)in the Aetna U.S. Healthcare, ARS and Corporate segments to
reflect the integration of the health businesses and certain other actions taken
or to be taken in order to make its businesses more competitive. During 1997,
the Company charged costs of $275 million ($140 million in 1996)(pretax) against
the reserves. In addition, the Company also reduced the Aetna U.S. Healthcare
severance and facilities reserve by $45 million (pretax) during 1997 due to
higher attrition than was contemplated in the establishment of the reserve. Of
the approximately 9,400 positions originally expected to be eliminated by the
Company in the aggregate, 6,423 had been eliminated through severance actions
and the effects of higher attrition by December 31, 1997 and the related
severance benefits were charged against the reserve.
See Note 8 of Notes to Financial Statements for additional information.
<PAGE> 18
Page 18
General Account Investments
Overview
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience rated products).
<TABLE>
<CAPTION>
December 31,
------------------------
(Millions) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Invested Assets:
Fully Guaranteed $10,588.4 $11,075.5
Experience Rated 18,663.3 18,810.2
Other 13,310.2 13,600.5
-------- --------
Total Invested Assets, net of
impairment reserves $42,561.9 $43,486.2
- ----------------------------------------------------========================
Net investment income $ 3,377.5 $ 3,565.2
- ----------------------------------------------------========================
</TABLE>
The Company's investment objective is to fund policyholder and other liabilities
in a manner that enhances shareholder and contractholder value, subject to
appropriate risk constraints. The Company seeks to meet this investment
objective through a mix of investments that reflect the characteristics of the
liabilities they support, diversify the types of investment risks by interest
rate, liquidity, credit and equity price risk, and achieve asset diversification
by investment type, industry, issuer and geographic location. The Company
regularly projects duration and cash flow characteristics of its liabilities and
makes appropriate adjustments in its investment portfolios.
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. In connection with its investment
and risk management objectives, the Company also uses financial instruments
whose market value is at least partially determined by, among other things,
levels of or changes in domestic and/or foreign interest rate (short-term or
long-term), exchange rates, prepayment rates, equity markets or credit
ratings/spreads.
Using financial modeling and other techniques, the Company regularly evaluates
the appropriateness of investments relative to its management-approved
investment guidelines and the business objective of the portfolios. The Company
operates within these investment guidelines by maintaining a mix of investments
that diversifies its assets and reflects the characteristics of the liabilities
that they support.
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 interest rate,
equity price and foreign exchange risks (collectively, market risk). These
instruments, viewed separately, subject the Company to varying degrees of market
and credit risk. However, when used for hedging, the expectation is that these
instruments would reduce overall market risk. Credit risk arises from the
possibility that counterparties may fail to perform under the terms of the
contracts. (See Note 5 of Notes to Financial Statements for additional
information.)
<PAGE> 19
Page 19
General Account Investments (Continued)
The risks associated with investments supporting experience rated pension,
annuity and life products are assumed by those contractholders, and not by the
Company (subject to, among other things, certain minimum guarantees).
Anticipated future losses associated with investments supporting discontinued
fully guaranteed large case pension products are provided for in the reserve for
anticipated future losses (see "Large Case Pensions - Discontinued Products").
Risks associated with the investments and liabilities related to experience
rated pension, annuity and life products and discontinued fully guaranteed large
case pension products are not included in the analysis presented below.
The following discussion about the Company's risk management activities includes
forward-looking statements that involve risk and uncertainties. Set forth below
are management's projections of hypothetical net losses in fair value of
shareholders' equity of the Company's market sensitive instruments if certain
assumed changes in market rates and prices were to occur (sensitivity analysis).
These instruments are not leveraged and are held for purposes other than
trading. While the Company believes that the assumed market rate changes are
reasonably possible in the near term, actual results may differ, particularly as
a result of any management actions that would be taken to mitigate such
hypothetical losses in fair value of shareholders' equity. Based on the
Company's overall exposure to interest rate risk, equity price risk and foreign
exchange risk, the Company believes that these 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.
Interest Rate Risk
Assuming an immediate increase of 100 basis points in interest rates (decrease
for long-term debt) the net hypothetical loss in fair value of shareholders'
equity related to financial and derivative instruments is estimated to be $323
million (after tax), (2.9% of total shareholders' equity at December 31, 1997).
Included in this hypothetical loss in fair value of shareholders' equity at
December 31, 1997 is $122 million (after tax) related to fixed rate long-term
debt (which is recorded at historical cost), which would not affect the
Company's shareholders' equity or results of operations in a decreasing interest
rate environment. The Company believes that an interest rate shift of this
magnitude represents a moderately adverse scenario, and is approximately equal
to the historical annual volatility of interest rate movements for the Company's
intermediate term available for sale debt securities. The Company has included
corresponding changes in certain insurance liabilities in this sensitivity
analysis.
The effect of interest rate risk on potential near-term net income, cash flow
and fair value was determined based on commonly used models. The models project
the impact of interest rate changes on a wide range of factors, including
duration, prepayment, put options and call options. Fair value was estimated
based on the net present value of cash flows or duration estimates, using a
representative set of likely future interest rate scenarios.
<PAGE> 20
Page 20
General Account Investments (Continued)
Equity Price Risk
The Company's available for sale equity securities are comprised primarily of
domestic stocks, as well as certain foreign holdings. Assuming an immediate
decrease of 10% in equity prices for domestic and foreign equity securities
generally, and 25% for Southeast Asian and Latin American emerging market equity
securities, the hypothetical loss in fair value of shareholders' equity related
to financial and derivative instruments is estimated to be $92 million (after
tax), (.8% of total shareholders' equity at December 31, 1997).
Foreign Exchange Risk
The Company selectively hedges to manage its foreign exchange risk. The Company
generally utilizes short-term foreign exchange forward contracts to hedge its
foreign exchange risk arising from certain nondollar denominated investment
securities and investments in foreign affiliates.
Assuming a foreign exchange rate volatility of 10% generally, and 25% for
certain Southeast Asian and Latin American emerging market currencies, the net
hypothetical loss in fair value of shareholders' equity related to financial and
derivative instruments is estimated to be $168 million (after tax), (1.5% of
total shareholders' equity at December 31, 1997). Approximately 75% of total
foreign exchange risk is comprised of Brazil, Mexico, Taiwan, Chile, Malaysia
and Canada. Included in the calculation of net hypothetical loss above is $77
million (after tax) related to equity investments in foreign affiliates,
primarily Brazil and Mexico. Foreign exchange exposure was calculated by: (1)
translating the local reporting currency into U.S. dollars using foreign
exchange rates at December 31, 1997 and (2) applying the market volatility rate
to the translated amount.
Debt Securities
Available for sale debt securities represented 80% of the Company's total
general account invested assets at December 31, 1997 and 74% at December 31,
1996, and were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 6,471.4 $ 5,189.3
Supporting experience rated products 15,322.8 14,888.9
Supporting remaining products 12,450.8 12,258.1
- ----------------------------------------------------------------------------
Total debt securities $34,245.0 $32,336.3
- ------------------------------------------------============================
</TABLE>
Debt securities reflect net unrealized capital gains of $1.6 billion at December
31, 1997 compared with $895 million at December 31, 1996. Of the net unrealized
capital gains at December 31, 1997, $388 million relate to assets supporting
discontinued products and $678 million relate to experience rated pension
contractholders.
<PAGE> 21
Page 21
General Account Investments (Continued)
The debt securities in the Company's portfolio are generally rated by external
rating agencies, and, if not externally rated, are rated by the Company on a
basis believed to be similar to that used by the rating agencies. As of December
31, 1997 and 1996, the Company's investments in debt securities had average
quality ratings of AA-, (36% were AAA at December 31, 1997 and 38% were AAA at
December 31, 1996). "Below investment grade" debt securities carry a rating of
below BBB-/Baa3 and represent 6% of the portfolio at December 31, 1997 and 5% at
December 31, 1996. (See Note 4 of Notes to Financial Statements for disclosures
related to debt securities by market sector.)
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -------------------------------------------------------------------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 2,710.4 $ 2,549.6 $ 2,764.7 $ 2,665.8
========= ========= ========= =========
Percentage of total:
Supporting discontinued
products 3.9% 8.0%
Supporting experience
rated products 76.0 77.3
Supporting remaining
products 20.1 14.7
----- -----
100.0% 100.0%
====== =====
</TABLE>
(1) Approximately 76% of the Company's residential CMO holdings were backed by
government agencies such as GNMA, FNMA and FHLMC at December 31, 1997 and
66% at December 31, 1996.
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for nonagency-backed CMOs, defaults.
The principal risks inherent in holding CMOs are prepayment and extension risks
related to dramatic decreases and increases in interest rates resulting in the
repayment of principal from the underlying mortgages either earlier or later
than originally anticipated. At December 31, 1997 and 1996, approximately 3% of
the Company's CMO holdings were invested in amounts which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
Mortgage Loans
At December 31, 1997 and 1996, the Company's mortgage loan investments, net of
impairment reserves, supported the following types of business:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 976.9 $ 2,730.7
Supporting experience rated products 1,671.9 2,370.5
Supporting remaining products 1,559.0 1,599.7
- ----------------------------------------------------------------------
Total mortgage loans $ 4,207.8 $ 6,700.9
- -------------------------------------------===========================
</TABLE>
<PAGE> 22
Page 22
General Account Investments (Continued)
During 1997, the Company continued to manage its mortgage loan portfolio to
reduce the balance in absolute terms and relative to invested assets, and to
reduce its overall risk. The $2.5 billion decrease in the total mortgage loan
portfolio primarily reflects the effect of loan prepayments and repayments of
maturing loans. In addition, in December 1997, the Company completed the sale
and securitization of approximately $803 million of commercial mortgage loans
primarily supporting discontinued fully guaranteed large case pension products.
Concurrent with the sale, the Company retained approximately $210 million of
subordinate and residual certificates which were classified as available for
sale debt securities at December 31, 1997. The net proceeds from the sale were
approximately $635 million. Realized capital gains on the sale and
securitization were approximately $42 million (pretax), of which $37 million
(pretax) was recorded as part of the reserve for anticipated future losses on
discontinued products.
Problem, Restructured and Potential Problem Loans
Included in the Company's mortgage loan balances were the following categories
of mortgage loans:
<TABLE>
<CAPTION>
(Millions) December 31,
- -------------------------------------------------------------------
1997 1996
<S> <C> <C>
Problem loans (1) $ 101.6 $ 183.6
Restructured loans (2) 125.6 377.6
Potential problem loans (3) 160.3 239.9
------- -------
Total (4) $ 387.5 $ 801.1
======== ========
Specific impairment reserves on loans (5) $ 51.2 $ 144.1
======== ========
</TABLE>
(1) Represent loans with payments over 60 days past due, properties in the
process of foreclosure, properties involved in bankruptcy proceedings and
properties subject to redemption.
(2) Represent loans where the Company modified the original contract terms to
grant concessions to the borrower and are currently performing pursuant to
the modified terms. Restructured loans yielded cash returns of
approximately 9% during 1997 and 7% during 1996.
(3) Represent loans which are performing pursuant to existing terms, but the
Company considers likely to become classified as problem or restructured
loans.
(4) Total problem, restructured and potential problem loans at December 31,
1997 include 55% supporting discontinued products and 29% supporting
experienced rated products; 48% supporting discontinued products and 32%
supporting experience rated products at December 31, 1996.
(5) See Note 4 of Notes to Financial Statements for additional information.
The Company has a comprehensive process for assessing individual mortgage loans
which includes an ongoing evaluation of key attributes of the mortgage
investment, specifically, debt service coverage, cash flow sustainability,
property condition, loan to value, market/economic trends, deal structure,
borrower strength and ability to refinance. Management establishes action plans
intended to reduce potential risk and maximize return on the investment.
Real Estate
The Company's real estate balances, net of write-downs and reserves, were $370
million at December 31, 1997 and $850 million at December 31, 1996.
<PAGE> 23
Page 23
General Account Investments (Continued)
The Company sold real estate with a carrying value of $540 million during 1997,
$666 million during 1996 and $262 million during 1995, (including real estate
supporting discontinued and experience rated products). These sales generated
after-tax net realized capital gains of $80 million in 1997, $113 million in
1996 (substantially all of which was allocable to discontinued and experience
rated products) and $18 million in 1995. Losses from real estate write-downs and
changes in the valuation reserves were immaterial in 1997, 1996 and 1995.
The Company intends to sell a significant amount of its real estate investment
properties held for sale over the next year, real estate and capital market
conditions permitting.
<PAGE> 24
Page 24
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 and income received on investments. The Company's businesses use cash
primarily for claim and benefit payments, contract withdrawals and operating
expenses.
The Company's current liquidity objectives are to maximize the use of available
cash to fund ongoing operating needs, pay shareholder dividends, strategically
invest in core businesses and repurchase shares of common stock. During 1997,
net cash generated from investing, financing and operating activities was used
to make approximately $500 million of investments in core businesses, repurchase
approximately $523 million of common stock and pay approximately $175 million of
dividends to shareholders. In 1996, net cash used by investing, financing and
operating activities was used to make approximately $250 million of investments
in core businesses, repurchase approximately $83 million of common stock and pay
approximately $237 million of dividends to shareholders. Dividend payments
decreased in 1997, reflecting lower dividends declared per common share,
partially offset by increased common shares outstanding following the U.S.
Healthcare merger. See "Consolidated Statements of Cash Flows" for additional
information.
The Company monitors the duration of its debt securities portfolio (which is
highly marketable) and mortgage loans, and executes its purchases and sales with
the objective of having adequate funds available to satisfy the Company's
maturing liabilities.
At December 31, 1997 scheduled mortgage loan principal repayments were as
follows:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------
<S> <C>
1998 $ 502.2
1999 467.6
2000 669.4
2001 211.2
2002 193.8
Thereafter 2,282.4
</TABLE>
Dividends
The Board of Directors (the "Board") reviews Aetna Inc.'s common stock dividend
each quarter. Among the factors considered by the Board in determining the
dividend are the Company's results of operations, the capital requirements,
growth and other characteristics of its businesses.
Financings, Financing Capacity and Capitalization
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services and are fully and unconditionally guaranteed by Aetna
Inc. (See Note 13 of Notes to Financial Statements for additional information.)
<PAGE> 25
Page 25
Liquidity and Capital Resources (Continued)
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 cash receipts and disbursements. Average short-term debt
outstanding totaled $586.3 million in 1997, $427.4 million in 1996 and $96.0
million in 1995. In 1996, the Company used funds made available from the
issuance of $1.4 billion of commercial paper to fund a portion of the
consideration paid in connection with the U.S. Healthcare merger. Aetna Services
also has a revolving credit facility in an aggregate amount of $1.5 billion with
a worldwide group of banks. The facility terminates in June 2001. (See Note 13
of Notes to Financial Statements for additional information.)
The Company's total debt to capital ratio (total debt divided by total debt and
shareholders' equity, adjusted for unrealized gains or losses on
available-for-sale investment securities and redeemable preferred securities)
was 19.1%, 19.9% and 16.9% at the end of 1997, 1996 and 1995, respectively. The
increase in this ratio from 1995 to 1996 reflects additional long-term debt
incurred to refinance outstanding short term borrowings used to partially fund a
portion of the consideration paid in connection with the U.S. Healthcare merger.
The Company continually monitors existing and alternative financing sources to
support the Company's capital and liquidity needs, including, but not limited
to, debt issuance, preferred or common stock issuance, intercompany borrowings
and pledging or selling of assets.
Common Stock Transactions
The Company issued 34,988,615 shares of common stock on July 19, 1996 in
connection with the U.S. Healthcare merger.
The Company issued 1,883,945 shares in 1997, 1,563,491 shares in 1996 and
2,069,335 shares in 1995 of treasury stock or previously unissued shares for
benefit plans.
In October 1996, the Board authorized Aetna Inc. to repurchase up to 5 million
shares of its common stock from time to time. In September, 1997, the Board
authorized the repurchase of up to an additional 7.5 million shares of its
common stock from time to time. As of December 31, 1997, 7,368,300 shares of
common stock had been repurchased pursuant to this authority at a cost of $606
million, of which 6,173,900 shares at a cost of $523 million were repurchased
during 1997.
Restrictions on Certain Payments by the Company
The Company's business operations are conducted through Aetna Services and Aetna
U.S. Healthcare and their respective subsidiaries (which principally consist of
HMOs and insurance companies). In addition to general state law restrictions on
payments of dividends and other distributions to shareholders applicable to all
corporations, HMOs and insurance companies are subject to further state
regulations that, among other things, may require those companies to maintain
certain levels of equity, and restrict the amount of dividends and other
distributions that may be paid to their parent corporations. These regulations
are not directly applicable to Aetna Services, Aetna U.S. Healthcare, or Aetna
Inc., as none is an HMO or insurance company. The additional regulations
applicable to the Company's indirect HMO and insurance company subsidiaries are
not expected to affect the ability of Aetna Inc. to pay dividends, or the
ability of any of the Company's subsidiaries to service their outstanding debt
or preferred stock obligations.
<PAGE> 26
Page 26
Liquidity and Capital Resources (Continued)
Solvency Regulation
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. The National Association of Insurance Commissioners ("NAIC") adopted
risk-based capital ("RBC") standards for life insurers which are designed to
identify weakly capitalized companies by comparing the adjusted surplus to the
required surplus, which reflects the risk profile of the company ("RBC ratio").
Within certain ratio ranges, regulators have increasing authority to take action
as the RBC ratio decreases. There are four levels of regulatory action ranging
from requiring insurers to submit a comprehensive plan to the state insurance
commissioner to when the state insurance commissioner places the insurer under
regulatory control. The RBC ratio for each of the Company's primary life
insurance subsidiaries as measured at December 31, 1997 was significantly above
the levels which would require regulatory action. Rating agencies use their own
RBC standards as part of determining a company's rating.
The NAIC has developed two model investment laws, one providing for limits on
the types and amounts of investments by insurance companies, and an alternative
version which defines standards for insurance company investing. Management
believes that these model laws, if adopted by states regulating the Company,
will not materially affect the Company. The NAIC also is considering several
other solvency-related laws or regulations, such as RBC standards for health
plans, including HMOs. Because these other initiatives are in a preliminary
stage, management cannot assess the potential impact of their adoption on the
Company.
Year 2000
As a health care and financial services enterprise operating multiproduct
businesses in 15 countries, the Company is dependent on computer systems and
applications to conduct its business. The Company has developed and is currently
executing a comprehensive risk-based plan designed to make its computer systems,
applications and facilities Year 2000 ready. The plan covers four stages
including (i) inventory, (ii) assessment, (iii) remediation, and (iv) testing
and certification. At year end 1997, the Company had substantially completed the
inventory stage for its Company-owned systems and applications. The assessment
and remediation processes are currently underway and the Company is utilizing
both internal and external resources to reprogram, or replace where necessary,
and test the software for Year 2000 modifications. The remediation process is
targeted to be largely completed by December 31, 1998. Testing and certification
of these systems and applications are targeted for completion by mid-1999.
Year 2000 compliance is critical to the Company. However, because of the
importance of computer systems and applications to its business, management has
made a strategic decision to continue other planned systems enhancements and
not redeploy significant internal resources to become Year 2000 ready. As a
result, a large majority of these costs are currently believed to be
incremental expenses that will not recur in the Year 2000 or thereafter.
Total Year 2000 costs for the Company-owned systems and applications are
currently estimated to be approximately $95 million (after tax) in 1998 and
approximately $44 million (after tax) in 1999, which are expected to be funded
through operating cash flows.
<PAGE> 27
Page 27
Year 2000 (Continued)
The Company is initiating communications with its critical external
relationships to determine the extent to which the Company may be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where practicable,
the Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The effect, if any, on the
Company's results of operations from the failure of such parties to be Year 2000
ready, is not reasonably estimable.
Regulatory Environment
A variety of legislative and regulatory proposals have been made at both the
federal and state government levels to address various aspects of the health
care system.
Legislation to reform the federal Medicare program was passed by Congress on
July 31, 1997 and was signed into law. Certain provisions of this legislation
will phase in, beginning in 1998, changes to the Medicare risk HMO premium
determination methodology that will generally reduce the premiums payable to the
Company as compared with the methodology previously used. The level and extent
of any reductions will vary by geographic market and other factors. While the
phase-in provisions have provided the Company with an opportunity to offset some
of such premium reductions by adjusting the supplemental premiums payable by
members and the benefits included in the Company's products, competition and
other factors may result in such adjustments not fully offsetting such premium
reductions.
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, mandates minimum hospital stays after
childbirth and parity applying lifetime limits to mental health benefits.
In New York, the Health Care Reform Act of 1996 ("the Act"), effective January
1, 1997, allowed all private health care payors to negotiate payment rates for
inpatient hospital services; previously only HMOs were permitted to negotiate
such rates. The Act also provides for direct funding by private payors of
hospital bad debt and charity care and graduate medical education by payments to
state funding pools rather than through surcharges on payments for hospital
services. The Company has negotiated arrangements with hospitals in its New York
network to adjust the payments it makes to network hospitals to partially offset
the direct payments from the Company required by the Act.
<PAGE> 28
Page 28
Regulatory Environment (Continued)
Several other 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,(i) mandatory maternity and
other lengths of stay, (ii) regulation of utilization review, (iii) mandated
expanded consumer disclosures, (iv) mandatory direct access to specialists
including OB/GYNs and chiropractors, (v) mandatory point-of-service benefits,
(vi) mandatory or expanded coverage of experimental procedures and drugs, (vii)
third party review of denials of benefits, (viii) liability for negligent
denials of benefits, (ix) assessments, surcharges or taxes on premiums or
provider payments to fund uncompensated care, graduate medical education or
government programs, (x) extension of malpractice and other liability for
medical decisions from providers to health plans, (xi) required payment for
emergency services, (xii) mandated grievance and appeal procedures, (xiii)
hearings on termination of physicians from networks, (xiv) prohibition of
so-called "gag" clauses, and (xv) provisions similar to those in HIPAA.
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.
Other potential legislative and regulatory changes related to health plans that
are receiving a high level of attention at both the state and federal levels
include, but are not limited to, eliminating or reducing the scope of ERISA
preemption of state laws, required payment levels for out of network care,
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, limitations on utilization management methods,
regulation of the composition of the Company's provider networks, such as any
willing provider or pharmacy laws, and 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.
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.
New Accounting Standards
See Note 1 of Notes to Financial Statements for a discussion of recently issued
accounting standards.
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.
<PAGE> 29
Page 29
Forward-Looking Information/Risk Factors (Continued)
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 "Outlook" in the discussion of results of operations of each
of the Company's businesses and "General Account Investments - Risk Management
and Market Sensitive Instruments". 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 elsewhere in
this Annual Report or the Company's 1997 Annual Report on Form 10-K, may affect
these forward-looking statements and the Company's businesses generally.
Certain Factors Particular to Health Operations
Premiums; Medical Cost Increases. Premiums in the Company's Health Risk business
are generally fixed by contract for one-year periods and actual costs in excess
of those estimated and reflected in pricing cannot be recovered in the contract
year through higher premiums from customers. Increased utilization, increases in
provider contract rates, changes in legislation or regulation, changes in health
practices and medical technologies and price increases in pharmaceuticals and
durable medical equipment and other factors may increase medical costs.
Reserves. For the Health risk business, medical claims payable reflect estimates
of the ultimate cost of claims that have been incurred but not yet reported and
reported but not yet paid. Medical claims payable 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. As a result, there can be no assurances that the
unfavorable reserve developments that occurred in 1997 will not recur.
For Group Insurance products, reserves are established as premiums become due to
reflect the present value of expected future obligations net of the present
value of expected future premiums. Policy reserves for group paid-up life
insurance generally reflect long-term fixed obligations and are computed on the
basis of assumed or guaranteed yield and benefit payments. Assumptions are based
on the Company's historical claim experience. For long-term disability products,
reserves are established for (i) lives currently in payment status (using both
standard industry, as well as the Company's own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so, and (iii) claims that have been incurred but not reported.
Long-term care reserves are a long-term obligation calculated using industry
data for morbidity and mortality assumptions. As a result, there can be no
assurances that the favorable reserve developments that occurred in 1997 and
1996 will recur.
<PAGE> 30
Page 30
Forward-Looking Information/Risk Factors (Continued)
Health Business Legislative and Regulatory Environment. As discussed above (see
"Regulatory Environment"), certain legislative and regulatory changes related to
health products have recently been enacted or proposed, and a variety of other
potential legislative and regulatory changes are receiving a high level of
attention at both the state and federal levels. At this time the Company is
unable to predict the impact of these changes, although it can be anticipated
that certain of these measures, if enacted, would adversely affect health
operations through (i) reducing premiums, (ii) reducing the ability to manage
medical costs, (iii) increasing medical costs and operating expenses, (iv)
regulating levels and permitted lines of business, (v) imposing financial
assessments, and (vi) regulating other business practices.
Integration of Health Operations. Growth in the Company's profitability is
dependent, in part, on its ability to successfully integrate its health
operations with other health operations acquired, including those of U.S.
Healthcare. Factors affecting successful integration include, but are not
limited to, timely integration of management and information systems, the
application of managed care expertise throughout the Company's broader
membership base, and the timely elimination of duplicative administrative and
customer service functions.
Business Mix. The selection by employers and individuals of plans with higher
copayments, deductibles, or coinsurance may lower certain medical costs, but
generally results in lower premiums to the Company. In addition, continued
migration of employers to self-funded coverage, or increased membership in
Medicare risk plans (plans which the Company intends to expand), or the
selection by plan participants of other health products with higher medical loss
ratios may make the Company's margins more sensitive to changes in medical costs
and premiums. Adverse publicity regarding managed care may negatively influence
the selection of managed care plans generally, and the Company's health plans,
specifically.
Government Payors. In government-funded health programs such as Medicare and
Medicaid, premium levels are determined by the government payor. Reduction of
premium levels would adversely affect these lines of business. In addition, for
plans covering government employees, the Company may be subject to retroactive
reductions of premium rates by the government payor.
Accreditation. For certain of the Company's health plans, accreditation by
independent quality accrediting agencies such as the National Committee for
Quality Assurance is an important competitive factor. Any loss of or denial of
accreditation may adversely affect customer selection of health products, and,
in some jurisdictions may affect licensure status.
<PAGE> 31
Page 31
Forward-Looking Information/Risk Factors (Continued)
Certain Factors Particular to Financial Services Operations
Significant Changes in Financial Markets. Significant changes in financial
markets could impact the level of assets under management in the Company's Aetna
Retirement Services, Large Case Pensions and Aetna International businesses,
and, in turn, the Company's level of asset-based fees in those businesses. For
example, significant increases in interest rates or decreases in equity markets,
in addition to directly affecting the level of assets under management, may
increase the level of withdrawals and decrease the level of deposits by
customers. Customers under those circumstances may seek to diversify among asset
managers or seek investment alternatives not offered by the Company. Significant
declines in the value of investments may also affect the Company's ability to
pass through investment losses to certain experience rated customers, whether
due to triggering minimum guarantees or other business reasons.
Ratings. Adverse changes in the claims-paying ratings of the Company's financial
services subsidiaries could have the effect of decreasing new sales and deposits
and increasing withdrawals and surrenders in the Company's Aetna Retirement
Services and Large Case Pensions businesses, which would adversely affect the
level of asset-based fees of those businesses.
Product Retention. The Company incurs up-front costs, such as commissions, in
sales of its annuity, life insurance and other financial services products,
including international financial services products. These costs are generally
deferred and recognized by the Company over time, and the retention of assets
under those products is an important component of profitability. The Company
generally seeks to structure its products and sales to encourage retention of
assets under management or recover costs, through surrender charges, more
favorable credited rates to customers on assets the Company retains for longer
periods, renewal commissions, service fees or other terms. However, customer
withdrawal of assets earlier than anticipated by the Company in pricing its
products would adversely affect profitability. To retain asset levels, also the
Company may experience competitive pressure to lower margins.
Certain Factors Particular to International Operations
Currency Devaluation. The Company selectively hedges to manage its foreign
exchange risk, although it generally does not hedge the currency exposure of
investments in its foreign affiliates since it views these investments as long
term. In preparing its consolidated financial statements, the Company translates
its results from the foreign currency in which it operates in a particular
country into U.S. dollars. Devaluation of a country's currency, however, would
adversely affect results of operations when translated into U.S. dollars. Also,
when economies, such as Mexico, are considered highly inflationary (generally,
cumulative inflation levels in excess of 100% over a three-year period), changes
in the value of net monetary assets or liabilities would be recognized currently
in earnings, rather than through shareholders' equity, making reported earnings
potentially more volatile. In addition, although the Company considers foreign
exchange trends when deciding to invest in particular countries, currency
devaluation may also affect the value of international investments when
translated to U.S. dollars.
<PAGE> 32
Page 32
Forward-Looking Information/Risk Factors (Continued)
International Market Factors. The Company's International operations involve
certain other risks not typically associated with doing business in the United
States. These risks include investment and other controls that may be imposed by
governments, such as permitted levels of equity ownership of companies by
foreign persons, remittances of foreign earnings or repatriation of capital,
currency exchange controls, restrictions on entry into new lines of business,
requirements that portions of business be reinsured through state-affiliated
institutions and other requirements affecting the conduct of business.
Additionally, interest rate risk management may be more difficult due to the
relatively short durations of investments available in currencies that match
long-term liabilities for international fixed-rate products. Foreign economies
may also experience increased volatility of equity markets and high rates of
inflation and be subject to other political and economic factors such as more
rapid change of regulatory policy. The Company generally does not insure against
foreign political risks.
Other Factors Affecting All of the Company's Businesses
Retention of Key Senior Executives. The Company's success is dependent, in part,
on its ability to attract and retain key senior executives. The Company has
entered into employment agreements with certain of these executives, although an
employment agreement does not guarantee that an executive's services with the
Company will continue.
Other Adverse Changes in Regulation. In addition to its health business, each of
Aetna's other businesses is subject to comprehensive regulation. These
businesses could be adversely affected by (i) increases in minimum capital and
other financial viability requirements for health and other insurance
operations, (ii) removal of barriers preventing banks from engaging in insurance
and mutual fund businesses, (iii) the taxation of insurance companies, and (iv)
changes in the tax treatment of annuity and other insurance products, such as
those suggested in the President of the United States' recent Federal budget
proposal.
Litigation and Year 2000. Litigation could also adversely affect the Company.
See Note 18 of Notes to Financial Statements and the Company's Annual Report on
Form 10-K for information regarding litigation, including current shareholder
litigation. The Company could also be adversely affected by Year 2000 issues.
See "Year 2000".
<PAGE> 33
Page 33
Consolidated Statements of Income
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions, except per common share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums $ 12,592.2 $ 9,326.1 $ 7,492.8
Net investment income 3,377.5 3,565.2 3,575.1
Fees and other income 2,236.3 2,174.8 1,924.3
Net realized capital gains 334.2 134.4 47.2
----------------------------------------------
Total revenue 18,540.2 15,200.5 13,039.4
- -----------------------------------------------------------------------------------------------------
Benefits and Expenses:
Current and future benefits 12,852.0 10,378.7 9,088.6
Operating expenses 3,561.2 3,319.8 2,951.8
Interest expense 235.8 168.3 115.9
Amortization of goodwill and other acquired
intangible assets 380.0 172.5 17.8
Amortization of deferred policy
acquisition costs 217.5 160.1 139.1
Reductions of loss on discontinued products (172.5) (202.3) -
Severance and facilities charges (reserve reductions) (45.0) 864.7 -
----------------------------------------------
Total benefits and expenses 17,029.0 14,861.8 12,313.2
- -----------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 1,511.2 338.7 726.2
Income taxes 610.1 133.6 252.3
----------------------------------------------
Income from continuing operations 901.1 205.1 473.9
Discontinued Operations, net of tax:
Income (Loss) from operations - 182.2 (222.2)
Gain on sale - 263.7 -
----------------------------------------------
Net income $ 901.1 $ 651.0 $ 251.7
==============================================
Net income applicable to common ownership $ 845.6 $ 625.9 $ 251.7
- -------------------------------------------------------==============================================
Results Per Common Share:
Income from continuing operations:
Basic $ 5.67 $ 1.37 $ 4.18
Diluted 5.60 1.36 4.14
Net income:
Basic $ 5.67 $ 4.77 $ 2.22
Diluted 5.60 4.72 2.20
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 34
Page 34
Consolidated Balance Sheets
As of December 31,
<TABLE>
<CAPTION>
(Millions, except share and per common share data) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value
(amortized cost $32,694.0 and $31,441.4) $ 34,245.0 $ 32,336.3
Equity securities, at fair value (cost $824.4
and $963.4) 1,041.4 1,332.8
Short-term investments 1,003.9 723.2
Mortgage loans 4,207.8 6,700.9
Real estate 369.5 850.2
Policy loans 746.9 707.3
Other 947.4 835.5
----------------------------
Total investments 42,561.9 43,486.2
- ----------------------------------------------------------------------------------
Cash and cash equivalents 1,805.8 1,462.6
Accrued investment income 545.8 598.6
Premiums due and other receivables 1,381.0 1,190.4
Deferred policy acquisition costs 2,367.3 2,226.9
Goodwill and other acquired intangible assets 8,506.3 8,432.6
Other assets 875.1 1,070.1
Separate Accounts assets 37,957.4 34,445.5
----------------------------
Total assets $ 96,000.6 $ 92,912.9
==================================================================================
Liabilities:
Future policy benefits $ 17,837.1 $ 17,783.4
Unpaid claims 3,294.4 3,029.2
Unearned premiums 359.2 333.6
Policyholders' funds left with the Company 18,761.2 19,901.7
----------------------------
Total insurance liabilities 40,251.9 41,047.9
Dividends payable to shareholders 36.1 36.9
Short-term debt 252.1 282.8
Long-term debt 2,346.2 2,380.0
Current income taxes 320.5 164.3
Deferred income taxes 223.3 31.7
Other liabilities 2,931.9 3,202.3
Minority and participating policyholders' interests 237.7 221.7
Separate Accounts liabilities 37,930.5 34,380.6
----------------------------
Total liabilities 84,530.2 81,748.2
- ----------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary limited liability company
holding primarily debentures guaranteed by Aetna 275.0 275.0
- ----------------------------------------------------------------------------------
Commitments and Contingent Liabilities
(Notes 3, 5 and 18)
Shareholders' Equity:
Class C voting mandatorily convertible preferred
stock ($.01 par value; 15,000,000 shares
authorized; 11,655,206 in 1997 and 11,655,546
in 1996 issued and outstanding) 865.4 865.4
Common stock ($.01 par value; 500,000,000 shares
authorized; 145,794,844 in 1997 and 150,084,799
in 1996 issued and outstanding) 3,644.4 4,032.8
Accumulated other comprehensive income 307.1 340.0
Retained earnings 6,378.5 5,651.5
----------------------------
Total shareholders' equity 11,195.4 10,889.7
- ----------------------------------------------------------------------------------
Total liabilities, redeemable preferred securities
and shareholders' equity $ 96,000.6 $ 92,912.9
==================================================================================
Shareholders' equity per common share $ 70.85 $ 66.79
==================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 35
Page 35
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Three years ended December 31, 1997 Accumulated Other
Comprehensive Income
--------------------
Unrealized Class C Voting
Gains Mandatorily
Retained (Losses) on Foreign Convertible Common
(Millions, except share data) Total Earnings Securities Currency Preferred Stock Stock
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 5,503.0 $ 5,259.6 $ (941.5) $ (130.0) $ - $ 1,314.9
- --------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 251.7 251.7
Other comprehensive income, net of tax:
Unrealized gains on securities
($2,697.9 pretax)(1) 1,738.5 1,738.5
Foreign currency (($39.8) pretax) (25.9) (25.9)
---------
Other comprehensive income 1,712.6
---------
Total comprehensive income 1,964.3
=========
Common stock issued for benefit plans
(74,400 shares) 5.2 5.2
Treasury stock issued for benefit plans
(1,994,935 shares) 92.2 92.2
Common stock dividends (315.7) (315.7)
Gain on issuance of treasury stock 23.8 23.8
------------------------------------------------------------------------
Balances at December 31, 1995 7,272.8 5,195.6 797.0 (155.9) - 1,436.1
- --------------------------------------========================================================================
Comprehensive income:
Net income 651.0 651.0
Other comprehensive loss, net of tax:
Unrealized losses on securities
(($527.6) pretax)(1) (342.8) (342.8)
Foreign currency ($64.2 pretax) 41.7 41.7
---------
Other comprehensive loss (301.1)
---------
Total comprehensive income 349.9
=========
Issued for U.S. Healthcare merger:
Class C Voting mandatorily convertible
preferred stock (11,655,546 shares) 865.4 865.4
Common shares (34,988,615 shares) 2,580.1 2,580.1
Stock options 24.8 24.8
Common stock issued for benefit plans
(1,563,491 shares) 75.1 75.1
Repurchase of common shares
(1,194,400 shares) (83.3) (83.3)
Common stock dividends (170.0) (170.0)
Preferred stock dividends (25.1) (25.1)
------------------------------------------------------------------------
Balances at December 31, 1996 10,889.7 5,651.5 454.2 (114.2) 865.4 4,032.8
- --------------------------------------========================================================================
Comprehensive income:
Net income 901.1 901.1
Other comprehensive loss, net of tax:
Unrealized gains on securities
($81.8 pretax)(1) 49.9 49.9
Foreign currency (($127.3) pretax) (82.8) (82.8)
---------
Other comprehensive loss (32.9)
---------
Total comprehensive income 868.2
=========
Common stock issued for benefit plans
(1,883,945 shares) 134.7 134.7
Repurchase of common shares
(6,173,900 Shares) (523.1) (523.1)
Common stock dividends (118.6) (118.6)
Preferred stock dividends (55.5) (55.5)
------------------------------------------------------------------------
Balances at December 31, 1997 $11,195.4 $ 6,378.5 $ 504.1 $ (197.0) $ 865.4 $ 3,644.4
- --------------------------------------========================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Financial Statements.
<PAGE> 36
Page 36
Consolidated Statements of Cash Flows
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 901.1 $ 651.0 $ 251.7
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
(Income) Loss from Discontinued Operations - (182.2) 222.2
Decrease (Increase) in accrued investment income 46.0 24.9 (21.0)
(Increase) Decrease in premiums due and other
receivables (245.8) 12.0 (250.7)
Increase in deferred policy acquisition costs (302.4) (275.1) (267.1)
Depreciation and amortization 523.7 338.9 175.8
Increase(Decrease) in income taxes 323.3 (155.8) 263.0
Net (increase) decrease in other assets and
other liabilities (193.0) 184.0 (55.5)
(Decrease) Increase in other insurance liabilities (288.8) (956.8) 522.4
Net realized capital gains (334.2) (134.4) (47.2)
Gain on sale of Discontinued Operations - (263.7) -
Amortization of net investment discounts (149.5) (131.5) (123.7)
Other, net 4.9 5.5 (22.2)
-------------------------------------------
Net cash provided by (used for) operating activities 285.3 (883.2) 647.7
-------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 16,247.8 13,625.6 13,747.2
Equity securities 961.4 565.6 355.9
Mortgage loans 1,078.8 154.9 668.4
Real estate 626.8 689.5 317.1
Other investments 924.7 838.6 761.4
Short-term investments 19,957.0 34,679.2 48,763.1
Discontinued Operations - 4,134.1 -
Investment maturities and repayments of:
Debt securities available for sale 3,913.9 3,567.0 2,190.9
Mortgage loans 1,726.5 1,569.7 1,404.2
Cost of investments in:
Debt securities available for sale (21,310.1) (16,922.5) (16,842.1)
Equity securities (626.1) (859.5) (353.2)
Mortgage loans (255.3) (360.5) (244.9)
Real estate (66.8) (116.4) (96.9)
Other investments (1,544.6) (1,064.9) (841.1)
Short-term investments (20,291.7) (34,703.0) (49,024.1)
U.S. Healthcare - (5,243.9) -
Increase in property and equipment (92.4) (78.2) (155.3)
Decrease (Increase) in Separate Accounts 38.1 (3.2) 57.3
Other, net 83.0 (46.7) (585.7)
-------------------------------------------
Net cash provided by investing activities 1,371.0 425.4 122.2
-------------------------------------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,872.5 1,968.1 2,017.1
Withdrawals of investment contracts (2,535.9) (3,561.1) (3,442.3)
Issuance of long-term debt 4.7 1,389.3 52.4
Repayment of long-term debt (34.3) - (144.6)
Net (decrease) increase in short-term debt (46.7) (109.4) 375.5
Common stock issued under benefit plans 134.7 75.1 121.2
Common stock acquired (523.1) (83.3) -
Dividends paid to shareholders (174.9) (237.3) (315.7)
-------------------------------------------
Net cash used for financing activities (1,303.0) (558.6) (1,336.4)
- -----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (10.1) (0.3) 2.0
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 343.2 (1,016.7) (564.5)
Cash acquired from U.S. Healthcare - 766.6 -
Cash and cash equivalents, beginning of year 1,462.6 1,712.7 2,277.2
-------------------------------------------
Cash and cash equivalents, end of year $ 1,805.8 $ 1,462.6 $ 1,712.7
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 37
Page 37
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Aetna Inc., through its subsidiaries, provides health care benefits, group
insurance, financial services and individual life insurance. Aetna U.S.
Healthcare provides a full spectrum of managed care, indemnity, other health and
group 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. All
footnote disclosures reflect continuing operations unless otherwise noted.
Principles of Consolidation
The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) and, from July 19, 1996, Aetna U.S.
Healthcare, Inc. (Refer to Note 2.) Less than majority-owned entities in which
the Company has at least a 20% interest are reported on the equity basis. These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have been
made to 1996 and 1995 financial information to conform to the 1997 presentation.
New Accounting Standards
Reporting Comprehensive Income
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS")No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholders' equity (except those arising from
transactions with shareholders) and includes net income, net unrealized capital
gains or losses on available-for-sale securities and foreign currency
translation adjustments. As this new standard only requires additional
information in the financial statements, it does not affect the Company's
financial position or results of operations.
Earnings Per Share
As of December 31, 1997, the Company adopted FAS No. 128, Earnings Per Share.
This statement provides new accounting and reporting standards for earnings per
share. It replaces the previously used primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share represents the potential dilution that could
occur if all stock options and other stock-based awards, as well as convertible
securities, were exercised and converted into common stock if their effect is
dilutive. Prior period earnings per common share data have been restated.
<PAGE> 38
Page 38
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of
As of January 1, 1996, the Company adopted FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires long-lived assets to be held and used to be written down
to fair value when they are considered impaired. Long-lived assets to be
disposed of (e.g., real estate held for sale) are to be carried at the lower of
cost or fair value less estimated selling costs. The adoption of FAS No. 121 did
not materially impact the Company's results of operations.
Future Application of Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides accounting
and reporting standards for transfers of financial assets and extinguishments of
liabilities.
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in 1997
did not have a material effect on the Company's financial position or results of
operations. The Company does not expect adoption of this statement for
provisions effective in 1998 to have a material effect on its financial position
or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
<PAGE> 39
Page 39
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Investments
Debt and equity securities are classified as available for sale and carried at
fair value. These securities are written down (as realized capital losses) for
other than temporary declines in value. Unrealized capital gains and losses
related to available for sale investments, other than amounts allocable to
experience rated contractholders and discontinued products, are reflected in
shareholders' equity, net of related income taxes.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
The Company does not accrue interest on problem debt securities when management
believes the likelihood of collection of interest is doubtful.
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value of
a loaned domestic security and 105% of the market value of a loaned foreign
security. The collateral is deposited by the borrower with a lending agent, and
retained and invested by the lending agent according to the Company's guidelines
to generate additional income. The market value of the loaned securities is
monitored on a daily basis with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates.
Purchases and sales of debt and equity securities are recorded on the trade
date. Sales of mortgage loans and real estate are recorded on the closing date.
<PAGE> 40
Page 40
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Mortgage loans and policy loans are carried at unpaid principal balances, net of
impairment reserves. A mortgage loan is considered impaired when it is probable
that the Company will be unable to collect amounts due according to the
contractual terms of the loan agreement (delays of up to 60 days may not result
in a loan being considered impaired). For impaired loans, a specific impairment
reserve is established for the difference between the recorded investment in the
loan and the estimated fair value of the collateral. The Company applies this
loan impairment policy individually to all loans in the portfolio and does not
aggregate loans for the purpose of applying such provisions. The Company records
full or partial charge-offs of loans at the time an event occurs affecting the
legal status of the loan, typically at the time of foreclosure (actual or
in-substance) or upon a loan modification giving rise to forgiveness of debt. A
general reserve is established for losses management believes are likely to
arise from loans in the portfolio, other than for those losses which have been
specifically reserved. The Company does not accrue interest on impaired loans
when management believes the collection of interest is unlikely.
Investment real estate, which the Company has the intent to hold for the
production of income, is carried at depreciated cost, including capital
additions, net of write-downs for other than temporary declines in fair value.
Properties held for sale (primarily acquired through foreclosure) are carried at
the lower of cost or fair value less estimated selling costs. Adjustments to the
carrying value of properties held for sale are recorded in a valuation reserve
when the fair value less estimated selling costs is below cost. Fair value is
generally estimated using a discounted future cash flow analysis in conjunction
with comparable sales information. Property valuations are reviewed regularly by
investment management.
Short-term investments, consisting primarily of money market instruments and
other debt purchased with a maturity of 91 days to one year, are considered
available for sale and are carried at fair value, which approximates amortized
cost.
Other invested assets consist primarily of partnerships and equity subsidiaries.
Partnerships and equity subsidiaries are carried on an equity basis.
The Company utilizes foreign exchange forward contracts, futures contracts, swap
agreements and warrants for other than trading purposes in order to hedge
interest rate, equity price and foreign exchange risks (collectively, market
risk). (Refer to Note 5.)
<PAGE> 41
Page 41
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Foreign exchange forward contracts which are designated at inception and are
effective as hedges of foreign translation and transaction exposures related to
investments classified as available for sale are accounted for using the
deferral method. Accordingly, realized and unrealized gains and losses from
these foreign exchange forward contracts are deferred on the Consolidated
Balance Sheets, net of tax, in accumulated other comprehensive income. Upon
disposal of the hedged item, deferred gains and losses are recognized in net
realized capital gains or losses. Excess realized or unrealized gain or loss, if
any, from the foreign exchange forward contract compared to the foreign
investment being hedged, is reported as a net realized capital gain or loss.
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net realized
capital gains or losses upon disposal of an asset. Changes in the fair value of
futures contracts that do not qualify as hedges are recorded in net realized
capital gains or losses. Hedge designation requires specific asset or liability
identification, a probability at inception of high correlation with the position
underlying the hedge, and that high correlation be maintained throughout the
hedge period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and excess
gains and losses on the hedging instrument are reflected in net realized capital
gains or losses.
Warrants represent the right to purchase specific securities and are accounted
for as hedges. Upon exercise, the cost of the warrants are added to the basis of
the securities purchased.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such agreements
is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets of changes in the fair value of these agreements.
<PAGE> 42
Page 42
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries, where the local
currency is the functional currency, are translated into U.S. dollars at the
exchange rate in effect at each year end for assets and liabilities and average
exchange rates during the year for results of operations. The related unrealized
gains or losses resulting from translation of the net assets are included in
shareholders' equity. If the economy of the country where a foreign subsidiary
is located is considered highly inflationary (generally, cumulative inflation
levels in excess of 100% over a three-year period), changes in the value of net
monetary assets or liabilities would be recognized currently in earnings.
Goodwill and Other Acquired Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets
acquired, is amortized on a straight-line basis over periods not exceeding 40
years. Other acquired intangible assets, which are primarily customer lists,
health provider networks and computer systems, are amortized on a straight-line
basis over various periods not exceeding 25 years.
The Company regularly evaluates the recoverability of goodwill and other
acquired intangible assets. The carrying value of such assets would be reduced
through a direct write-off if, in management's judgment, it was probable that
projected future operating income (before amortization of goodwill and other
acquired intangible assets) would not be sufficient on an undiscounted basis to
recover the carrying value. Operating earnings considered in such an analysis
are those of the entity acquired, if separately identifiable, or the business
segment that acquired the entity if the entity's earnings are not separately
identifiable.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts, and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods (up to
20 years). For universal life and certain annuity and pension contracts, such
costs are amortized in proportion to estimated gross profits and adjusted to
reflect actual gross profits over the life of the contracts (up to 20 years for
annuity and pension contracts). Deferred policy acquisition costs are written
off to the extent that it is determined that future policy premiums and
investment income or gross profits are not adequate to cover related losses and
expenses.
<PAGE> 43
Page 43
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Separate Accounts
Separate Accounts assets and liabilities generally represent funds maintained to
meet specific investment objectives of contractholders who bear the investment
risk, subject, in some cases, to minimum guaranteed rates. Investment income and
investment gains and losses generally accrue directly to such contractholders.
The assets of each account are legally segregated and are not subject to claims
that arise out of any other business of the Company. The assets and liabilities
are carried at market value. Deposits, net investment income and realized
capital gains and losses on Separate Accounts assets are not reflected in the
Consolidated Statements of Income. Management fees charged to contractholders
are included in fees and other income.
Insurance Liabilities
Future policy benefits include reserves for universal life, limited payment and
traditional life insurance contracts. Reserves for universal life contracts are
equal to cumulative premiums less charges plus credited interest thereon.
Reserves for limited payment and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality, morbidity and
expenses, including a margin for adverse deviation. Such assumptions generally
vary by plan, year of issue and policy duration. Reserve interest rates range
from 2.25% to 13.04% for all years presented. Investment yield is based on the
Company's experience. Mortality, morbidity and withdrawal rate assumptions are
based on the experience of the Company and are periodically reviewed against
both industry standards and experience.
Policyholders' funds left with the Company include reserves for pension and
annuity investment contracts. Reserves on such contracts are equal to cumulative
deposits less charges plus credited interest thereon (rates range from 2.50% to
17.80% for all years presented), net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest. Reserves on
contracts subject to experience rating reflect the rights of contractholders,
plan participants and the Company.
<PAGE> 44
Page 44
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Insurance Liabilities (Continued)
Unpaid claims related to the Company's prepaid health care services (primarily
health maintenance organizations) consist principally of medical claims and
capitation costs. Medical claims include estimates of payments to be made on
claims reported and estimates of health care services rendered but not reported
to the Company as of the balance sheet date. Such estimates include the cost of
services which will continue to be rendered after the balance sheet date if the
Company is obligated to pay for such services in accordance with contract
provisions or regulatory requirements. Medical claims payable are estimated
periodically and any resulting adjustments are included in current operations.
Unpaid claim reserves for other group health products and medical claims payable
reflect estimates, derived from past experience, of the ultimate cost of
incurred claims, including claims that have been incurred but not reported, and
claims that have been reported, but not settled.
Revenue Recognition
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges, actuarial
margin and other fees are recorded as revenue in fees and other income. Other
amounts received for these contracts are reflected as deposits and are not
recorded as revenue. Life insurance premiums, other than premiums for universal
life and certain annuity contracts, are recorded as premium revenue when due.
Related policy benefits are recorded in relation to the associated premiums or
gross profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under contracts
that were initially investment contracts, the accumulated balance in the account
is treated as a single premium for the purchase of an annuity, reflected as an
offsetting amount in both premiums and current and future benefits in the
Consolidated Statements of Income.
Group health and group insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect actual experience. Such premiums are recognized as the
experience emerges.
Fees and other income are derived primarily from contracts for claim processing
or other administrative services and are recorded over the period the service is
provided.
<PAGE> 45
Page 45
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. The Company files a
consolidated federal income tax return. Foreign subsidiaries and U.S.
subsidiaries operating outside of the United States are taxed under applicable
foreign statutes. Deferred income tax expenses/benefits result from changes
during the year in cumulative temporary differences between the tax basis and
book basis of assets and liabilities.
Reinsurance
The Company utilizes reinsurance agreements to reduce exposure to large losses
in certain aspects of its insurance business. Reinsurance permits recovery of a
portion of losses from reinsurers, although it does not discharge the primary
liability of the Company as direct insurer of the risks reinsured. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets.
<PAGE> 46
Page 46
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Earnings Per Common Share
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") is as follows:
<TABLE>
<CAPTION>
Per Common
Income Shares Share
(Millions, except per common share data) (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 901.1
Less: Preferred stock dividends 55.5
---------
Basic EPS
Income applicable to common ownership 845.6 149.2 $ 5.67
=========
Effect of dilutive securities:
Stock options and other(1) 1.5
Convertible preferred stock 55.5 10.2
--------- --------
Diluted EPS
Income applicable to common ownership
and assumed conversions $ 901.1 160.9 $ 5.60
- ----------------------------------------------------=======================================
1996(2)(3)
- -------------------------------------------------------------------------------------------
Income from continuing operations $ 205.1
Less: Preferred stock dividends 25.1
---------
Basic EPS
Income applicable to common ownership $ 180.0 131.3 $ 1.37
========= =========
Effect of dilutive securities:
Stock options and other(1) 1.2
--------
Diluted EPS
Income applicable to common ownership
and assumed conversions $ 180.0 132.5 $ 1.36
- ----------------------------------------------------=======================================
1995(2)(3)
- -------------------------------------------------------------------------------------------
Basic EPS
Income applicable to common ownership $ 473.9 113.5 $ 4.18
========= =========
Effect of dilutive securities:
Stock options and other(1) .8
--------
Diluted EPS
Income applicable to common ownership
and assumed conversions $ 473.9 114.3 $ 4.14
- ----------------------------------------------------=======================================
</TABLE>
(1) Options to purchase shares of common stock in 1997, 1996 and 1995 of .2
million shares, 1.2 million shares and .3 million shares, respectively,
(with exercise prices ranging from $62.63 - $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 common stock issuable related to Class C Voting Mandatorily
Convertible Preferred Stock (5.3 million weighted average shares) was not
included in the computation of diluted earnings per common share in 1996
because to do so would be antidilutive. No preferred securities were
outstanding in 1995.
(3) Basic earnings (losses) per common share related to Discontinued
Operations were $3.40 and $(1.96) for 1996 and 1995, respectively. Diluted
earnings (losses) per common share related to Discontinued Operations were
$3.36 and $(1.94) for 1996 and 1995, respectively.
<PAGE> 47
Page 47
Notes to Financial Statements (Continued)
2. Merger with U.S. Healthcare
The merger with U.S. Healthcare was consummated on July 19, 1996. As a result of
the merger, each outstanding share of Aetna Services common stock became a share
of common stock of Aetna Inc. Each outstanding share of U.S. Healthcare common
stock and Class B Stock became a right to receive $34.20 in cash, 0.2246 shares
of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. Class C Stock. The
Company's consolidated results of operations include U.S. Healthcare from July
19, 1996.
The merger was accounted for as a purchase. Total consideration of approximately
$8.9 billion resulted in $7.9 billion, net of related deferred taxes,
representing the excess of the purchase price over the fair values of the net
assets acquired, being allocated to goodwill and other acquired intangible
assets and is being amortized over a 40-year period for goodwill and over a
range of five to 25 years for other acquired intangible assets.
3. Other Acquisitions and Dispositions
During 1997, the Company's health business sold subsidiaries that were involved
in physician practice management, health electronic data interchange services
and behavioral health management. The sale of these entities resulted in a net
after-tax realized capital gain of $31 million ($82 million pretax). In addition
to the sale of the behavioral health management business, Human Affairs
International ("HAI"), the Company entered into a long-term strategic provider
relationship that will provide its health members continued access to HAI's, as
well as the purchaser's, participating behavioral health professionals. Under
the terms of this long-term strategic relationship, the Company may receive
incentive-related compensation payments of up to $300 million over a period of
up to seven years.
In April 1997, the Company acquired a 49% stake for approximately $300 million
in a Brazilian joint venture which provides health and life insurance, as well
as private pension plan products. The joint venture is being accounted for on
the equity basis. In late 1996, the Company acquired certain interests in two
similar joint ventures with its Mexican partner, in addition to increasing its
existing equity ownership in Mexico. The total amount of these investments was
$171 million. Additional investments in the pension products joint venture
totaled $50 million in 1997.
The Company also acquired the following entities during 1997: Financial Network
Investment Corporation, Virginia Mason Health Plan, Inc., Frontier Health
Holdings, Inc. and Financial Life Assurance Company of Canada. The purchase
price of these acquisitions, both individually and in the aggregate, were not
material.
On April 2, 1996, the Company sold its property-casualty operations to an
affiliate of The Travelers Insurance Group Inc. ("Travelers") for approximately
$4.1 billion in cash. The sale resulted in an after-tax gain of $264 million
($218 million pretax).
<PAGE> 48
Page 48
Notes to Financial Statements (Continued)
3. Other Acquisitions and Dispositions (Continued)
The operating results of the property-casualty operations were presented as
Discontinued Operations through the sale date. Operating results for the period
from January 1 to April 2, 1996 and for the year ended December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Total revenue $ 1,539.3 $ 5,258.2
========= =========
Income (Loss) before income taxes $ 262.7 $ (384.3)
Income taxes (benefits) 80.5 (162.1)
--------- ---------
Income (Loss) $ 182.2 $ (222.2)
- ----------------------------------------------------=====================
</TABLE>
As a result of the sale, the Company retained no property-casualty liabilities
other than those associated with indemnifying Travelers for a portion of certain
potential liability exposures. While there can be no assurances, management
currently does not believe that the aggregate ultimate loss arising from these
indemnifications, if any, will be material to the annual net income, liquidity
or financial condition of the Company, although it is reasonably possible.
<PAGE> 49
Page 49
Notes to Financial Statements (Continued)
4. Investments
Debt securities available for sale at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
(Millions) Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and
authorities $ 3,762.3 $ 168.0 $ 1.7 $ 3,928.6
States, municipalities and political subdivisions 190.7 16.1 .2 206.6
U.S. corporate securities:
Utilities 2,382.6 125.1 2.2 2,505.5
Financial 5,049.4 169.8 2.4 5,216.8
Transportation/capital goods 2,417.7 174.7 3.0 2,589.4
Health care/consumer products 1,641.5 97.7 3.9 1,735.3
Natural resources 1,467.1 93.5 .7 1,559.9
Other corporate securities 1,418.9 88.2 .9 1,506.2
----------------------------------------------------
Total U.S. corporate securities 14,377.2 749.0 13.1 15,113.1
Foreign:
Government, including political subdivisions 2,514.7 161.6 46.5 2,629.8
Utilities 612.4 76.9 .2 689.1
Other 3,714.8 188.5 72.9 3,830.4
----------------------------------------------------
Total foreign securities 6,841.9 427.0 119.6 7,149.3
Residential mortgage-backed securities:
Pass-throughs 1,707.5 107.3 2.3 1,812.5
Collateralized mortgage obligations 2,549.6 162.8 2.0 2,710.4
----------------------------------------------------
Total residential mortgage-backed securities 4,257.1 270.1 4.3 4,522.9
Commercial/Multifamily mortgage-backed securities(1) 1,586.2 42.0 6.2 1,622.0
Other asset-backed securities (2) 1,612.9 23.0 .8 1,635.1
----------------------------------------------------
Total Bonds 32,628.3 1,695.2 145.9 34,177.6
Redeemable Preferred Stocks 65.7 1.7 - 67.4
----------------------------------------------------
Total Debt Securities $ 32,694.0 $ 1,696.9 $ 145.9 $ 34,245.0
- -----------------------------------------------------====================================================
<CAPTION>
Gross Gross
(Millions) Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and
authorities $ 3,723.0 $ 82.9 $ 32.8 $ 3,773.1
States, municipalities and political
subdivisions 348.4 7.3 .4 355.3
U.S. corporate securities:
Utilities 2,355.3 85.8 20.8 2,420.3
Financial 4,486.0 82.5 22.0 4,546.5
Transportation/capital goods 2,373.7 136.6 17.5 2,492.8
Health care/consumer products 1,754.0 64.6 14.9 1,803.7
Natural resources 1,287.7 44.1 13.9 1,317.9
Other corporate securities 1,488.1 46.4 14.7 1,519.8
----------------------------------------------------
Total U.S. corporate securities 13,744.8 460.0 103.8 14,101.0
Foreign:
Government, including political subdivisions 2,407.5 111.2 13.3 2,505.4
Utilities 740.3 55.0 5.1 790.2
Other 3,376.3 148.3 11.5 3,513.1
----------------------------------------------------
Total foreign securities 6,524.1 314.5 29.9 6,808.7
Residential mortgage-backed securities:
Pass-throughs 1,771.5 88.6 11.7 1,848.4
Collateralized mortgage obligations 2,665.8 117.6 18.7 2,764.7
----------------------------------------------------
Total residential mortgage-backed securities 4,437.3 206.2 30.4 4,613.1
Commercial/Multifamily mortgage-backed securities 1,131.5 27.8 15.0 1,144.3
Other asset-backed securities (2) 1,458.0 10.3 3.7 1,464.6
----------------------------------------------------
Total Bonds 31,367.1 1,109.0 216.0 32,260.1
Redeemable Preferred Stocks 74.3 1.9 - 76.2
----------------------------------------------------
Total Debt Securities $ 31,441.4 $ 1,110.9 $ 216.0 $ 32,336.3
- -----------------------------------------------------====================================================
</TABLE>
(1) Includes approximately $209.6 million of subordinate and residual
certificates from a securitization of approximately $802.7 million of
commercial mortgage loans in 1997 (proceeds of approximately $635.1
million) which were retained by the Company.
(2) Includes approximately $97.9 million and $108.0 million of subordinate and
residual certificates at December 31, 1997 and 1996, respectively, from a
1995 mortgage loan securitization which were retained by the Company.
<PAGE> 50
Page 50
Notes to Financial Statements (Continued)
4. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation on available for sale
debt securities included $678 million and $399 million, respectively, related to
experience rated contracts and $388 million and $205 million, respectively,
related to discontinued products (refer to Note 9), which were not reflected in
shareholders' equity.
The carrying and fair value of debt securities are shown below by contractual
maturity. Actual maturities may differ from contractual maturities because
securities may be restructured, called or prepaid.
<TABLE>
<CAPTION>
1997 Amortized Fair
(Millions) Cost Value
- ------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 2,058.9 $ 2,097.8
After one year through five years 6,689.3 6,812.1
After five years through ten years 7,753.5 7,984.1
After ten years 8,736.1 9,571.0
Mortgage-backed securities 5,843.3 6,144.9
Other asset-backed securities 1,612.9 1,635.1
- ------------------------------------------------------------------
Total $32,694.0 $34,245.0
- ------------------------------------------========================
</TABLE>
Investments in equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
- --------------------------------------------------------------------------------
Equity securities $ 824.4 $ 287.6 $ 70.6 $ 1,041.4
- -----------------------------===================================================
1996
- --------------------------------------------------------------------------------
Equity securities $ 963.4 $ 397.9 $ 28.5 $ 1,332.8
- -----------------------------===================================================
</TABLE>
Real estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Properties held for sale $ 328.3 $ 771.7
Investment real estate 142.5 220.6
--------------------
470.8 992.3
Valuation reserve 101.3 142.1
--------------------
Net carrying value of real estate $ 369.5 $ 850.2
- ------------------------------------------====================
</TABLE>
Accumulated depreciation for investment real estate was $12 million and $21
million at December 31, 1997 and 1996, respectively.
<PAGE> 51
Page 51
Notes to Financial Statements (Continued)
4. Investments (Continued)
Total real estate write-downs included in the net carrying value of the
Company's real estate holdings at December 31, 1997 and 1996 were $160 million
and $347 million, respectively, (including $116 million and $224 million,
respectively, attributable to assets of discontinued products).
At December 31, 1997 and 1996, 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 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $ 206.5 $ 25.8 $ 387.3 $ 86.9
Supporting experience rated products 110.8 16.7 258.3 40.0
Supporting remaining products 65.6 8.7 160.1 17.2
---------------------------------------------------
Total Impaired Loans $ 382.9(1) $ 51.2 $ 805.7(1) $ 144.1
- ----------------------------------------------===================================================
</TABLE>
(1) Includes impaired loans of $127.7 million and $227.0 million,
respectively, for which no specific reserves are considered necessary.
The activity in the specific and general mortgage loan impairment reserves as of
December 31 is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 287.5 $ 228.3 $ 89.1 $ 604.9
- -------------------------------=====================================================
Credited to net realized
capital gains - - (33.0) (33.0)
Credited to other accounts (1) (10.0) (57.6) - (67.6)
Principal write-offs (140.8) (96.0) (20.5) (257.3)
-----------------------------------------------------
Balance at
December 31, 1996 (2) 136.7 74.7 35.6 247.0
- -------------------------------=====================================================
Credited to net realized
capital gains - - (10.6) (10.6)
Credited to
other accounts (1) (25.0) (20.0) - (45.0)
Principal write-offs (43.0) (23.1) (10.8) (76.9)
-----------------------------------------------------
Balance at
December 31, 1997 (2) $ 68.7 $ 31.6 $ 14.2 $ 114.5
- -------------------------------=====================================================
</TABLE>
(1) Reflects adjustments to reserves related to assets supporting experience
rated products and discontinued products which do not affect the Company's
results of operations.
(2) Total reserves at December 31, 1997 and 1996 include $51.2 million and
$144.1 million of specific reserves and $63.3 million and $102.9 million
of general reserves, respectively.
<PAGE> 52
Page 52
Notes to Financial Statements (Continued)
4. Investments (Continued)
The Company accrues interest income on impaired loans to the extent it is deemed
collectible and the loan continues to perform under its original or restructured
terms. Interest income on problem loans is generally recognized on a cash basis.
Cash payments on loans in the process of foreclosure are generally treated as a
return of principal.
Income earned (pretax) and cash received on the average recorded investment in
impaired loans for the twelve months ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------
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 $ 343.1 $ 36.9 $ 30.2 $ 675.0 $ 54.6 $ 55.8
Supporting experience rated products 195.3 17.6 14.5 474.7 33.1 33.2
Supporting remaining products 112.2 12.5 10.3 211.6 16.6 16.8
----------------------------------------------------------------
Total $ 650.6 $ 67.0 $ 55.0 $ 1,361.3 $ 104.3 $ 105.8
- --------------------------------------================================================================
</TABLE>
Significant noncash investing and financing activities include acquisition of
real estate through foreclosures (including in-substance foreclosures) of
mortgage loans amounting to $33 million and $139 million for 1997 and 1996,
respectively.
At December 31, 1997 and 1996, the Company's mortgage loan balances, net of
specific impairment reserves, by geographic region and property type were as
follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 (Millions) 1997 1996
- ------------------------------------------ ----------------------------------------
<S> <C> <C> <S> <C> <C>
South Atlantic $ 790.0 $ 1,311.6 Office $ 2,009.2 $ 3,056.4
Middle Atlantic 948.4 1,592.9 Retail 901.9 1,369.3
New England 417.9 745.1 Apartment 140.0 428.8
South Central 116.0 334.5 Hotel/Motel 239.6 572.0
North Central 522.8 749.4 Industrial 325.1 584.7
Pacific and Mountain 886.6 1,412.4 Mixed Use 263.8 430.0
Other 589.4 657.9 Other 391.5 362.6
-------------------- --------------------
Total 4,271.1 6,803.8 Total 4,271.1 6,803.8
Less general Less general
impairment reserve 63.3 102.9 impairment reserve 63.3 102.9
-------------------- --------------------
Net mortgage Net mortgage
loan balance $ 4,207.8 $ 6,700.9 loan balance $ 4,207.8 $ 6,700.9
- ----------------------==================== --------------------====================
</TABLE>
<PAGE> 53
Page 53
Notes to Financial Statements (Continued)
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 4,207.8 $ 4,327.0 $ 6,700.9 $ 6,705.0
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 5,897.1 $ 6,022.6 $ 7,167.2 $ 7,175.0
Without a fixed maturity 11,932.0 11,438.8 11,633.5 11,538.9
Long-term debt 2,346.2 2,390.6 2,380.0 2,374.6
- ---------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized capital gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Company's management
of interest rate, equity price, liquidity, and foreign exchange risks, the fair
values of all assets and liabilities should be taken into consideration, not
only those presented above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimates
of mortgage loans of lower credit quality, including problem and restructured
loans, are based on the estimated fair value of the underlying collateral.
Investment contract liabilities (included in policyholders' funds left with the
Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.
<PAGE> 54
Page 54
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Estimated Fair Value (Continued)
Long-term debt: Fair value is based on quoted market prices for the same or
similar issued debt or, if no quoted market prices are available, on the current
rates estimated to be available to the Company for debt of similar terms and
remaining maturities.
Off-Balance-Sheet and Other Financial Instruments
The notional amounts, carrying values and estimated fair values of the Company's
off-balance-sheet and other financial instruments at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Carrying Carrying
Value Value
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange forward
contracts - sell:
Related to net investments in
foreign affiliates $ 157.8 $ .8 $ 1.0 $ 178.9 $ 3.1 $ 3.5
Related to investments in
nondollar denominated assets 42.7 .6 .6 63.9 (.7) (.7)
Foreign exchange forward
contracts - buy:
Related to net investments in
foreign affiliates 11.9 - - 25.3 - -
Related to investments in
nondollar denominated assets 25.0 1.5 1.5 23.5 .5 .5
Futures contracts to purchase
securities 8.5 .1 .1 100.0 (1.2) (1.2)
Futures contracts to sell
securities 10.0 .2 .2 - - -
Interest rate swaps 43.0 - 7.2 43.0 - 6.4
Warrants to purchase securities 19.6 6.7 6.7 19.0 3.9 3.9
- ------------------------------------------------------------------------------------------------
</TABLE>
The notional amounts of these instruments do not represent the Company's risk of
loss. The fair value of these instruments was estimated based on quoted market
prices, dealer quotations or internal price estimates believed to be comparable
to dealer quotations. These fair value amounts reflect the estimated amounts
that the Company would have to pay or would receive if the contracts were
terminated.
<PAGE> 55
Page 55
Notes to Financial Statements (Continued)
5. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Continued)
The Company engages in hedging activities to manage interest rate, equity price
and foreign exchange risks. Such hedging activities have principally consisted
of using off-balance-sheet instruments which involve, to varying degrees,
elements of market risk and credit risk in excess of the amounts recognized in
the Consolidated Balance Sheets. The Company evaluates the risks associated with
these instruments in a manner similar to that used to evaluate the risks
associated with on-balance-sheet financial instruments. Unlike on-balance-sheet
financial instruments, where credit risk is generally represented by the
notional or principal amount, the off-balance-sheet financial instruments' risk
of credit loss generally is significantly less than the notional value of the
instrument and is represented by the positive fair value of the instrument. The
Company generally does not require collateral or other security to support the
financial instruments discussed below. However, the Company controls its credit
risk exposure through credit approvals, credit limits and regular monitoring
procedures. There were no material concentrations of off-balance-sheet financial
instruments at December 31, 1997.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts of
two different currencies at a specified future date and at a specified price.
The Company selectively hedges to manage its foreign exchange risk. The Company
generally utilizes short-term foreign exchange forward contracts to hedge its
foreign exchange exposure arising from certain investments in foreign affiliates
and nondollar denominated investment securities.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell securities at
a specified future date and at a specified price or yield. Futures contracts
trade on organized exchanges and, therefore, have minimal credit risk.
Interest Rate Swaps:
The Company utilizes interest rate swaps to manage certain exposures related to
changes in interest rates primarily by exchanging variable rate returns for
fixed rate returns.
Warrants:
Warrants are instruments giving the Company the right, but not the obligation to
buy a security at a given price during a specified period.
<PAGE> 56
Page 56
Notes to Financial Statements (Continued)
6. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 2,364.9 $ 2,312.1 $ 2,275.9
Equity securities 42.1 34.0 22.0
Short-term investments 25.2 29.0 25.1
Mortgage loans 610.1 761.8 962.6
Real estate 182.6 300.2 306.4
Policy loans 39.9 37.2 30.6
Other 175.5 155.2 133.2
Cash equivalents 141.9 168.6 151.8
-----------------------------------
Gross investment
income 3,582.2 3,798.1 3,907.6
Less: investment
expenses 204.7 232.9 332.5
-----------------------------------
Net investment
income (1)(2) $ 3,377.5 $ 3,565.2 $ 3,575.1
- ----------------------------===================================
</TABLE>
(1) Includes $15.6 million, $67.1 million and $76.2 million from real estate
held for sale during 1997, 1996 and 1995, respectively.
(2) Includes amounts allocable to experience rated contractholders of $1.3
billion, $1.4 billion and $1.5 billion during 1997, 1996 and 1995,
respectively. Interest credited to contractholders is included in current
and future benefits.
7. Capital Gains and Losses on Investment Operations and Other
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold. Provisions for impairments and
changes in the fair value of real estate held for sale are also included in net
realized capital gains or losses.
Net realized capital gains (losses), excluding amounts allocable to experience
rated contractholders and discontinued products, on investments were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 49.8 $ (11.8) $ 34.4
Equity securities (1) 231.2 46.3 18.2
Mortgage loans 19.2 33.9 (9.4)
Real estate 13.5 4.7 3.5
Sales of subsidiaries (2) 82.3 60.1 -
Other (3) (61.8) 1.2 .5
--------------------------------
Pretax realized
capital gains $ 334.2 $ 134.4 $ 47.2
- ----------------------------================================
After-tax realized
capital gains $ 198.4 $ 85.9 $ 29.5
- ----------------------------================================
</TABLE>
(1) Includes pretax realized capital gains of $151.0 million in 1997 related
to the sale of the Company's investment in Travelers Property Casualty
Corp.
(2) Realized capital gains in 1997 include net pretax gains associated with
the sale of certain health subsidiaries. (Refer to Note 3.) Realized
capital gains in 1996 include pretax gains of $39.3 million from the sale
of Aetna Realty Investors and $20.8 million from the sale of Aetna Health
Plans of Western Pennsylvania.
(3) Includes a pretax realized capital loss of $44.0 million in 1997 related
to the write-down of certain properties that the Company has classified as
held for sale.
<PAGE> 57
Page 57
Notes to Financial Statements (Continued)
7. Capital Gains and Losses on Investment Operations and Other
(Continued)
Net realized capital gains of $221 million, $199 million and $97 million for
1997, 1996 and 1995, respectively, allocable to experience rated contractholders
were deducted from net realized capital gains and an offsetting amount was
reflected in policyholders' funds left with the Company.
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $16,247.8 $13,625.6 $13,747.2
Gross gains 90.2 77.6 124.0
Gross losses 40.4 89.4 89.6
- -------------------------------------------------------------
</TABLE>
Changes in shareholders' equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities and
foreign currency) (excluding those related to experience rated contractholders
and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing Operations:
Debt securities $ 194.5 $ (225.8) $ 984.8
Equity securities (152.4) 307.5 41.3
Foreign exchange and other, net (92.8) (70.9) (23.3)
Discontinued Operations - (474.0) 900.9
----------------------------------------
Subtotal (50.7) (463.2) 1,903.7
(Decrease) Increase in deferred
income taxes (17.8) (162.1) 191.1
----------------------------------------
Net changes in accumulated other
comprehensive income $ (32.9) $ (301.1) $ 1,712.6
- ----------------------------------------------========================================
</TABLE>
Shareholders' equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated contractholders
and discontinued products, at December 31:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale:
Gross unrealized capital gains $ 563.0 $ 378.5
Gross unrealized capital losses (77.6) (87.6)
----------------------
485.4 290.9
Equity securities:
Gross unrealized capital gains 287.6 397.9
Gross unrealized capital losses (70.6) (28.5)
----------------------
217.0 369.4
Foreign exchange and other, net (230.0) (137.2)
Deferred income taxes 165.3 183.1
----------------------
Net accumulated other
comprehensive income $ 307.1 $ 340.0
- ----------------------------------------------======================
</TABLE>
<PAGE> 58
Page 58
Notes to Financial Statements (Continued)
7. Capital Gains and Losses on Investment Operations and Other
(Continued)
Additional Information - Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to experience
rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the period (1) $ 385.3 $ (189.0) $ 1,911.5
Less: reclassification adjustment for gains
and other items included in net income (2) 335.4 153.8 173.0
---------------------------------------
Net unrealized gains (losses) on securities $ 49.9 $ (342.8) $ 1,738.5
- ----------------------------------------------=======================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$592.8 million, $(290.8) million and $2,940.8 million for 1997, 1996 and
1995, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $511.0 million, $236.8 million and $242.9 million for
1997, 1996 and 1995, respectively.
8. Severance and Facilities Charges
In 1996, the Company recorded severance and facilities reserves in connection
with the integration of the health businesses and certain other actions taken or
to be taken in order to make its businesses more competitive.
The 1996 severance and facilities charges included the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased
(Millions) Severance Write-Off Property Other Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 277.9 $ 84.9 $ 64.5 $ 25.7 $ 453.0
Aetna Retirement Services 42.8 1.5 1.9 2.8 49.0
Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7
-------------------------------------------------------
Total Company $ 349.2 $ 104.4 $ 379.6 $ 31.5 $ 864.7
- -------------------------------=======================================================
</TABLE>
(1) Includes $292.2 million related to the CityPlace lease.
Activity for 1997 and 1996 within the severance and facilities reserves (pretax)
and positions eliminated related to such actions were as follows:
<TABLE>
<CAPTION>
(Millions) Reserve Positions
- ---------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 $ - -
Severance and facilities charges 864.7 9,373
Actions taken (1) (139.5) (2,421)
-------------------
Balance at December 31, 1996 725.2 6,952
Actions taken (1) (274.8) (2,802)
Adjustments (2) (45.0) (1,200)
-------------------
Balance at December 31, 1997 $ 405.4 2,950
- --------------------------------------------===================
</TABLE>
(1) Includes $120.8 million and $84.6 million in 1997 and 1996, respectively,
of severance-related actions. Other actions include asset write-offs,
vacated leased property payments and other exit costs.
(2) Reflects reductions in anticipated severance actions resulting from higher
attrition than was contemplated in the establishment of the reserve in the
Aetna U.S. Healthcare segment recorded as severance and facilities reserve
reductions in the Consolidated Statements of Income.
<PAGE> 59
Page 59
Notes to Financial Statements (Continued)
8. Severance and Facilities Charges (Continued)
The 2,802 positions eliminated during 1997 related to the following segments:
89.3% - Aetna U.S. Healthcare, 5.8% - Aetna Retirement Services and 4.9% -
Corporate. The Aetna U.S. Healthcare severance actions are expected to be
substantially completed by the end of 1998. The Aetna Retirement Services
severance actions are expected to be substantially completed by September 30,
1998. The Corporate severance actions and vacating of certain leased office
space were substantially completed in 1997. In connection with the sale of the
Company's property-casualty operations, the Company vacated, and the purchaser
subleased, at market rates for a period of eight years, the space that the
Company occupied in the CityPlace office facility in Hartford. The remaining
lease payments (net of expected subrentals) on the facilities (other than the
CityPlace office facility) are payable over approximately the next two years.
9. 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 continued
favorable developments in real estate markets, the Company released $173 million
(pretax) in 1997, and $202 million (pretax) in 1996, respectively, of the
reserve related to GICs. The current reserve reflects management's best estimate
of anticipated future losses. To the extent that aggregate future losses on GICs
and SPAs are greater or less than anticipated, the Company's results of
operations would be adversely or positively affected, respectively. The
discussion below presents information for the discontinued SPAs and GICs on a
combined basis.
<PAGE> 60
Page 60
Notes to Financial Statements (Continued)
9. 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
December 31, 1997, the receivable from continuing products, net of related
deferred taxes payable of $43 million on the accrued interest income, was $515
million. During 1996, $315 million of the receivable, net of the related
deferred taxes payable on the accrued interest income of $19 million, was funded
from continuing products to meet liquidity needs from maturing GICs. As of
December 31, 1997, no additional funding of the receivable had taken place. This
amount is eliminated in consolidation.
<PAGE> 61
Page 61
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax):
<TABLE>
<CAPTION>
Charged
(Credited)
to Reserve for
(Millions) Results Future Losses Net(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Net investment income $ 675.5 $ - $ 675.5
Net realized capital gains(2) 269.9 (269.9) -
Interest earned on receivable from
continuing products 33.1 - 33.1
Other income 25.3 - 25.3
----------------------------------------
Total revenue 1,003.8 (269.9) 733.9
----------------------------------------
Current and future benefits (3) 652.3 67.5 719.8
Operating expenses 14.1 - 14.1
----------------------------------------
Total benefits and expenses 666.4 67.5 733.9
----------------------------------------
Results of discontinued products $ 337.4 $ (337.4) $ -
========================================================================================
1996
Net investment income $ 818.3 $ - $ 818.3
Net realized capital gains 121.8 (121.8) -
Interest earned on receivable from
continuing products 45.7 - 45.7
Change in Accounting Policy -FAS No. 121 (4) 8.3 - 8.3
Other income 31.5 - 31.5
----------------------------------------
Total revenue 1,025.6 (121.8) 903.8
----------------------------------------
Current and future benefits (3) 777.8 108.5 886.3
Operating expenses 17.5 - 17.5
----------------------------------------
Total benefits and expenses 795.3 108.5 903.8
----------------------------------------
Results of discontinued products $ 230.3 $ (230.3) $ -
========================================================================================
1995
Net investment income $ 962.9 $ - $ 962.9
Net realized capital losses (7.1) 7.1 -
Interest earned on receivable from
continuing products 50.8 - 50.8
Other income 20.7 - 20.7
----------------------------------------
Total revenue 1,027.3 7.1 1,034.4
----------------------------------------
Current and future benefits (3) 1,053.1 (31.1) 1,022.0
Operating expenses 12.4 - 12.4
----------------------------------------
Total benefits and expenses 1,065.5 (31.1) 1,034.4
----------------------------------------
Results of discontinued products $ (38.2) $ 38.2 $ -
========================================================================================
</TABLE>
(1) Amounts are reflected in the 1997, 1996 and 1995 Consolidated Statements
of Income, except for interest earned on the receivable from continuing
products which is eliminated in consolidation.
(2) Includes net realized capital gains of $154.4 million (pretax) related to
continued favorable developments in real estate markets (including gains
of $37.4 million (pretax) related to the securitization of commercial
mortgage loans) as well as $57.4 million (pretax) resulting from the sale
of investments in order to meet liquidity needs.
(3) 1995 current and future benefits include losses of $49.5 million (pretax)
due to early retirement of GICs. There were no such losses in 1997 and
such losses were immaterial in 1996.
(4) Refer to Note 1 for a discussion of FAS No. 121.
Deposits of $14 million, $18 million and $32 million were received during 1997,
1996 and 1995, respectively, under preexisting GICs.
<PAGE> 62
Page 62
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
Net realized capital gains from the sale of bonds supporting discontinued
products were $56 million, $12 million and $61 million (pretax) for 1997, 1996
and 1995, respectively.
Assets and liabilities of discontinued products at December 31 were as
follows:(1)
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale $ 6,471.4 $ 5,189.3
Mortgage loans 976.9 2,730.7
Real estate 116.9 367.7
Short-term and other investments 371.3 394.5
------------------------
Total investments 7,936.5 8,682.2
Current and deferred income taxes 165.6 166.0
Receivable from continuing products (2) 557.8 524.7
- -------------------------------------------------------------------------
Total assets $ 8,659.9 $ 9,372.9
=========================================================================
Future policy benefits $ 4,763.0 $ 4,793.7
Policyholders' funds left with the Company 2,321.4 3,288.7
Reserve for anticipated future losses
on discontinued products 1,151.7 986.8
Other 423.8 303.7
- -------------------------------------------------------------------------
Total liabilities $ 8,659.9 $ 9,372.9
=========================================================================
</TABLE>
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products is eliminated in consolidation.
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.
<PAGE> 63
Page 63
Notes to Financial Statements (Continued)
9. Discontinued Products (Continued)
The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between (a)
the expected cash flows from the assets supporting discontinued products, and
(b) the cash flows expected to be required to meet the obligations of the
outstanding contracts. Calculation of the reserve for anticipated future losses
requires projection of both the amount and the timing of cash flows over
approximately the next 30 years, including consideration of, among other things,
future investment results, participant withdrawal and mortality rates, and cost
of asset management and customer service. Projections of future investment
results consider both industry and Company data and are based on performance of
mortgage loan and real estate assets, projections regarding levels of future
defaults and prepayments, and assumptions regarding future real estate market
conditions, which assumptions management believes are reasonable. Management
believes that the reserve for anticipated future losses is adequate to provide
for the future losses associated with the runoff of the liabilities.
At December 31, 1997 and 1996, estimated future net realized capital losses
attributable to mortgage loans and real estate expected to be charged to the
reserve for anticipated future losses were $68.7 million and $180.8 million
(pretax), respectively.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ------------------------------------------------
<S> <C>
Reserve at December 31, 1994 $ 997.0
Results of discontinued products (38.2)
--------
Reserve at December 31, 1995 958.8
Results of discontinued products 230.3
Reserve reduction (202.3)
--------
Reserve at December 31, 1996 986.8
Results of discontinued products 337.4
Reserve reduction (172.5)
--------
Reserve at December 31, 1997 $1,151.7
================================================
</TABLE>
<PAGE> 64
Page 64
Notes to Financial Statements (Continued)
10. Income Taxes
Income taxes (benefits) for continuing operations consist of the following:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $ 407.1 $ 231.9 $ 260.1
State (1) 34.6 15.6 -
Foreign 25.1 10.4 8.0
------------------------------------
466.8 257.9 268.1
------------------------------------
Deferred taxes (benefits):
Federal 141.2 (139.9) (25.7)
State (1) 4.4 2.4 -
Foreign (2.3) 13.2 9.9
------------------------------------
143.3 (124.3) (15.8)
------------------------------------
Total $ 610.1 $ 133.6 $ 252.3
- -------------------------------------------====================================
</TABLE>
(1) Prior to the merger with U.S. Healthcare, state income taxes were
immaterial and were included in operating expenses.
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes, as
follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income from U.S. operations $ 1,271.9 $ 162.5 $ 544.8
Income from non-U.S. operations 239.3 176.2 181.4
------------------------------------
Income before income taxes 1,511.2 338.7 726.2
Tax rate 35% 35% 35%
------------------------------------
Application of the tax rate 528.9 118.5 254.2
Tax effect of:
Tax-exempt interest (2.6) (4.4) (4.3)
Foreign operations (18.3) (4.9) 10.1
Excludable dividends (10.1) (10.5) (9.8)
Goodwill amortization 66.5 30.7 5.5
State income taxes (1) 25.4 11.7 -
Other, net 20.3 (7.5) (3.4)
------------------------------------
Income taxes $ 610.1 $ 133.6 $ 252.3
- -------------------------------------------====================================
</TABLE>
(1) Prior to the merger with U.S. Healthcare, state income taxes were
immaterial and were included in operating expenses.
<PAGE> 65
Page 65
Notes to Financial Statements (Continued)
10. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 325.4 $ 391.5
Reserve for anticipated future
losses on discontinued products 392.3 335.6
Reserve for severance and
facilities charges 167.4 308.9
Impairment reserves 38.0 42.4
Other postretirement benefits 191.3 224.1
Net operating loss carry forward 27.7 59.1
Deferred compensation and other 64.3 86.9
Other 24.1 14.8
----------------------
Total gross assets 1,230.5 1,463.3
Less valuation allowance 20.2 23.0
----------------------
Assets, net of valuation allowance 1,210.3 1,440.3
Deferred tax liabilities:
Deferred policy acquisition costs 651.5 645.5
Acquired intangibles other than
goodwill 432.8 496.1
Accumulated other comprehensive income 132.2 175.8
Market discount 56.3 57.3
Other 160.8 97.3
----------------------
Total gross liabilities 1,433.6 1,472.0
----------------------
Net deferred tax liability $ 223.3 $ 31.7
- -------------------------------------------======================
</TABLE>
Valuation allowances are provided when it is considered unlikely that deferred
tax assets will be realized. The valuation allowance relates to future tax
benefits on certain purchased domestic and foreign net operating losses.
The Company has not recognized U.S. deferred taxes related to the estimated
cumulative amount of undistributed earnings of approximately $385 million on its
foreign corporations because the Company does not expect to repatriate these
earnings. A U.S. deferred tax liability will be recognized when the Company
expects that it will recover these undistributed earnings in a taxable manner,
such as through a receipt of dividends or a sale of the investment.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was $935
million at December 31, 1997 adjusted for Internal Revenue Service (the
"Service") audits finalized to date. This amount would be taxed only under
certain conditions. No income taxes have been provided on this amount since
management believes the conditions under which such taxes would become payable
are remote.
<PAGE> 66
Page 66
Notes to Financial Statements (Continued)
10. Income Taxes (Continued)
The Service has completed its examination of the consolidated federal income tax
returns of Aetna Services and affiliated companies through 1990 and U.S.
Healthcare through 1994. Discussions are being held with the Service with
respect to proposed adjustments. Management believes there are adequate defenses
against, or sufficient reserves to provide for, any such adjustments. The
Service is continuing its examination for the years 1991 through 1994 for Aetna
Services.
The Company paid net income taxes of $378 million, $249 million and $135 million
in 1997, 1996 and 1995, respectively.
11. Benefit Plans
Pension Plans - The Company has noncontributory defined benefit pension plans
covering substantially all Aetna Services employees and certain agents. The
plans provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a
120-month period). Contributions are determined by using the Projected Unit
Credit Method and, for qualified plans subject to ERISA requirements, are
limited to amounts that are tax deductible.
Components of the net periodic pension cost in continuing operations were as
follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on plan assets $ 731.4 $ 373.1 $ 427.5
Service cost - benefits earned
during the period (74.9) (77.7) (86.7)
Interest cost on projected
benefit obligation (231.4) (217.0) (192.9)
Net amortization and deferral (476.1) (128.8) (222.0)
- ---------------------------------------------------------------------------------
Net periodic cost (1) $ (51.0) $ (50.4) $ (74.1)
- ----------------------------------------------===================================
</TABLE>
(1) A curtailment loss of $95.6 million (pretax) is included in the gain on
the sale of Discontinued Operations in 1996.
<PAGE> 67
Page 67
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
As of the measurement date (September 30), the funded status of plans for which
assets exceeded accumulated benefits was as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of vested
benefit obligation $ 2,985.6 $ 2,820.8
- --------------------------------------------------------------------
Actuarial present value of
accumulated benefit obligation $ 3,008.6 $ 2,840.2
- --------------------------------------------------------------------
Plan assets at fair value $ 3,587.5 $ 2,932.3
Actuarial present value of
projected benefit obligation 3,097.3 3,006.9
----------------------
Plan assets greater (less) than
projected benefit obligation 490.2 (74.6)
Unrecognized net (gain) loss (447.4) 86.7
Unrecognized prior service cost 2.4 3.4
Unrecognized net asset at date of
adoption of FAS No. 87 (1.5) (2.0)
----------------------
Prepaid pension cost $ 43.7 $ 13.5
- ----------------------------------------------======================
</TABLE>
Nonfunded plans had projected benefit obligations of $176 million and $143
million for 1997 and 1996, respectively. The 1997 and 1996 accumulated benefit
obligations for these plans were $148 million and $126 million, respectively,
and the related accrued pension cost was $138 million and $132 million,
respectively.
The weighted average discount rate was 7.5% for 1997, 1996 and 1995. The
expected long-term rate of return on plan assets was 9.0% for 1997 and 8.5% for
1996 and 1995. The rate of increase in future compensation was 4.5% for 1997,
1996 and 1995. The future annual cost-of-living adjustment was 2.8% for 1997 and
1996 and 3.0% for 1995.
Plan assets, primarily investments in domestic equities and fixed-income
instruments, are held in trust, and benefit payments are administered by Aetna
Life Insurance Company and affiliates. Approximately 10% of the plan assets at
December 31, 1997 are held in the general account of Aetna Life Insurance
Company.
The Company also has a defined contribution pension plan which covers
substantially all of its former U.S. Healthcare employees, subject to certain
age and service requirements. The Company's contribution for each eligible
employee is a percentage of the employee's compensation, as defined. Pretax
charges for this defined contribution pension plan were $16 million in 1997 and
$7 million for the period from July 19, 1996 through December 31, 1996.
<PAGE> 68
Page 68
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
Postretirement Benefits - In addition to providing pension benefits, the Company
currently provides certain health care and life insurance benefits for retired
employees of Aetna Services. A comprehensive medical and dental plan is offered
to all full-time employees retiring at age 50 with 15 years of service or at age
65 with 10 years of service. There is a cap on the portion of the cost paid by
the Company relating to medical and dental benefits. Retirees are generally
required to contribute to the plans based on their years of service with the
Company.
Components of the net periodic postretirement benefit cost in continuing
operations were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ (5.9) $ (7.3) $ (8.3)
Interest cost (30.2) (34.7) (34.7)
Net amortization 24.9 26.4 28.3
Return on plan assets 2.4 1.4 2.0
-----------------------------------
Net periodic cost (1) $ (8.8) $ (14.2) $ (12.7)
- ----------------------------------------------===================================
</TABLE>
(1) A curtailment gain of $77.4 million (pretax) is included in the gain on
the sale of Discontinued Operations in 1996.
As of the measurement date (September 30), the funded status of the
postretirement benefit plans (other than pensions) was as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 342.5 $ 329.1
Fully eligible active employees 17.0 17.9
Active employees not eligible to retire 67.0 70.2
----------------------
Total 426.5 417.2
Plan assets at fair value 55.7 54.0
----------------------
Accumulated postretirement benefit
obligation in excess of plan assets 370.8 363.2
Unrecognized net gain 78.8 84.0
Prior service cost 78.5 100.0
- --------------------------------------------------------------------
Accrued postretirement benefit cost $ 528.1 $ 547.2
- ----------------------------------------------======================
</TABLE>
<PAGE> 69
Page 69
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
The weighted average discount rate was 7.5% for 1997, 1996 and 1995. The health
care cost trend rate for the 1997 valuation decreased gradually from 9.0% for
1998 to 5.5% by the year 2005. For the 1996 valuation, the rates decreased
gradually from 10.5% for 1997 to 5.5% by the year 2005. Increasing the health
care cost trend rate by one percentage point would increase the accumulated
postretirement benefit obligation at December 31, 1997 by $24 million and would
increase the net periodic cost for 1997 by $2 million (pretax).
It is the Company's practice to fund amounts for postretirement life insurance
benefits to the extent the contribution is deductible for federal income taxes.
The plan assets are held in trust and administered by Aetna Life Insurance
Company. The assets are in the general account of Aetna Life Insurance Company,
and the expected rate of return on the plan assets was 7% for 1997, 1996 and
1995.
The Company's retiree health benefit plan for former U.S. Healthcare employees
is a defined contribution plan which covers substantially all such employees,
subject to certain age and service requirements. Contributions are at the
Company's sole discretion. Accumulated contributions and interest thereon are
used to fund all or a portion of the premiums for health care benefit coverage
for eligible retired employees and their eligible spouses. When funds are
exhausted, the Company has no obligation to make any further contributions or
payments. No contributions have been made to this retiree health benefit plan
since July 19, 1996.
Incentive Savings Plans - Substantially all Aetna Services employees are
eligible to participate in a savings plan under which designated contributions,
which may be invested in common stock of Aetna Inc. or certain other
investments, are matched, up to 5% of compensation, by the Company. The former
U.S. Healthcare savings plan, which has not been merged into the Company's
incentive savings plan, provides for a match of up to 2% of compensation in
common stock of Aetna Inc. Pretax charges to operations (including continuing
and Discontinued Operations in 1996 and 1995) for the incentive savings plans
were $42 million, $50 million and $60 million for 1997, 1996 and 1995,
respectively. Plan trustees held 4,177,786 shares, 4,514,258 shares and
5,015,075 shares of the Company's common stock for plan participants at the end
of 1997, 1996 and 1995, respectively.
<PAGE> 70
Page 70
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
1996 Stock Incentive Plan - The Company's 1996 Stock Incentive Plan (the "1996
Plan") replaced the Company's and U.S. Healthcare's previous stock incentive
plans. Effective with the merger, stock options of Aetna Inc. were substituted
for options outstanding under the previous Aetna Services plans and for that
portion of options outstanding under the previous U.S. Healthcare plans that
were not satisfied for cash in the merger. The 1996 Plan provides for stock
options (see "Stock Options" below), deferred contingent common stock or
equivalent cash awards (see "Incentive Units" below) or restricted stock to
certain key employees. The maximum number of shares of common stock initially
issuable under the 1996 Plan (including shares issuable in respect of options
and units granted under predecessor plans that were outstanding prior to the
merger) is 13,270,000. At December 31, 1997, 6,753,386 shares were available for
grant under the 1996 Plan.
The compensation expense charged to operations related to the Incentive Units
was $22 million, $27 million and $36 million, pretax, for 1997, 1996 and 1995,
respectively. The Company does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. FAS No. 123, Accounting for Stock-Based Compensation,
requires disclosure of pro forma net income as if the fair value method of
valuing stock option grants were applied to such grants (disclosure
alternative). The Company's net income and earnings per common share, on a pro
forma basis, which may not be indicative of pro forma effects in future years,
would have been as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 901.1 $ 651.0 $ 251.7
Pro forma $ 886.3 $ 643.1 $ 249.1
Basic earnings per common share:
As reported $ 5.67 $ 4.77 $ 2.22
Pro forma $ 5.57 $ 4.71 $ 2.20
Diluted earnings per common share:
As reported $ 5.60 $ 4.72 $ 2.20
Pro forma $ 5.51 $ 4.67 $ 2.18
- ---------------------------------------------------------------------------------
</TABLE>
The fair value of the stock options included in the pro forma amounts shown
above was estimated as of the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1% 2% 5%
Expected volatility 30% 26% 22%
Risk-free interest rate 7% 6% 7%
Expected life 4 years 4 years 4 years
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 71
Page 71
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
The weighted-average grant date fair values for options granted in 1997, 1996
and 1995 were $29.17, $17.00, and $9.22, respectively.
Stock Options - Executive and middle management employees may be granted options
to purchase common stock of the Company at or above the market price on the date
of grant. Options generally become 100% vested three years after the grant is
made, with one-third of the options vesting each year. From time to time, the
Company has issued options with different vesting provisions. Vested options may
be exercised at any time during the 10 years after grant, except in certain
circumstances generally related to employment termination or retirement. At the
end of the 10-year period, any unexercised options expire.
Stock option transactions for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 7,228,550 $ 58.99 4,883,661 $ 53.72 5,072,958 $ 52.44
Granted 385,025 $ 94.22 3,185,180 $ 70.78 2,131,100 $ 55.61
Exchanged for
U.S. Healthcare options (1) - $ - 800,610 $ 32.72 - $ -
Exercised (1,821,113) $ 51.94 (1,438,730) $ 51.94 (2,198,219) $ 52.46
Expired or forfeited (525,168) $ 68.55 (202,171) $ 62.02 (122,178) $ 56.19
---------- ---------- ----------
Outstanding, end of year 5,267,294 $ 63.12 7,228,550 $ 58.99 4,883,661 $ 53.72
- ----------------------------------======================================================================
Options exercisable at year end 2,614,399 $ 54.90 2,749,017 $ 47.47 2,110,474 $ 51.43
- ----------------------------------======================================================================
</TABLE>
(1) Effective with the merger, stock options of Aetna Inc. were substituted
for that portion of options outstanding under the previous U.S. Healthcare
plans that were not satisfied in cash in the merger.
The following is a summary of information regarding options outstanding and
options exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14.87 - $ 38.72 469,476 8 $ 34.18 469,476 $ 34.18
$41.50 - $ 46.75 292,221 5 $ 44.88 292,221 $ 44.88
$50.50 - $ 57.00 1,450,495 7 $ 54.72 1,000,608 $ 54.78
$61.63 - $ 75.50 2,687,277 9 $ 70.37 852,094 $ 69.90
$80.25 - $112.63 367,825 10 $ 94.70 - $ -
----------- -----------
5,267,294 2,614,399
- --------------------===========-----------------------------===========--------------
</TABLE>
<PAGE> 72
Page 72
Notes to Financial Statements (Continued)
11. Benefit Plans (Continued)
Incentive Units - Executives may be granted incentive units which are rights to
receive common stock or an equivalent value in cash. Of the two cycles of
incentive unit grants outstanding, each vests at the end of a four-year vesting
period (currently 1998 and 2000) conditioned upon the employee's continued
employment during that period and achievement of specified Company performance
goals related to the Company's total return to shareholders over the four-year
measurement period. The incentive units may vest within a range from 0% to 175%
at the end of the four-year period based on the attainment of these performance
goals. The incentive unit holders are not entitled to dividends during the
vesting period.
Incentive unit transactions related to the 1996 Plan under which holders may be
entitled to receive common stock, are as follows:
<TABLE>
<CAPTION>
Number of Incentive Units
- -----------------------------------------------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Outstanding, beginning of year 368,217 564,920 345,800
Granted 433,500 3,425 243,440
Vested (202,852) (191,928) (24,320)
Expired or forfeited (23,720) (8,200) -
--------- -------- -------
Outstanding, end of year 575,145 368,217 564,920
- --------------------------------------=================================
</TABLE>
The weighted-average grant date fair values for incentive units granted in 1997,
1996 and 1995 were $85.17, $71.88 and $54.33, respectively.
12. Participating Policyholders' Interests
Under participating life insurance contracts issued by the Company, the
policyholder is entitled to share in the earnings of such contracts. This
business is accounted for in the Company's consolidated financial statements on
a statutory basis since any adjustments to policy acquisition costs and reserves
on this business would have no effect on the Company's net income or
shareholders' equity. Statutory premiums, assets and liabilities allocable to
the participating policyholders were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 63.8 $ 48.4 $ 50.1
- ------------------------------------------------------------------------------
Assets $ 733.5 $ 702.1 $ 688.3
- ------------------------------------------------------------------------------
Liabilities $ 640.3 $ 613.3 $ 614.9
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 73
Page 73
Notes to Financial Statements (Continued)
13. Debt and Guarantee of Debt Securities
<TABLE>
<CAPTION>
(Millions) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Long-term debt:
Domestic:
Notes, 8.625% due 1998 $ 99.9 $ 99.9
Notes, 6.75% due 2001 299.7 299.6
Notes, 6.375% due 2003 199.2 199.1
Notes, 7.125% due 2006 347.8 347.5
Debentures, 6.75% due 2013 199.8 199.8
Eurodollar Notes, 7.75% due 2016 63.6 63.6
Debentures, 8% due 2017 (1) 170.0 200.0
Mortgage Notes and Other Notes, 3%
due in varying amounts to 2009 5.6 6.0
Debentures, 7.25% due 2023 200.0 200.0
Debentures, 7.625% due 2026 446.0 445.9
Debentures, 6.97% due 2036 (putable at
par in 2004) 300.0 300.0
International:
Mortgage Notes, 6.5%-11.875% due in
varying amounts to 2006 14.6 18.6
----------------------
Total $ 2,346.2 $ 2,380.0
- ------------------------------------------------------======================
</TABLE>
(1) Subject to various redemption options which began on January 15, 1997.
On August 19, 1996, Aetna Services issued the following debt: $300 million 6.75%
Notes due 2001; $350 million 7.125% Notes due 2006; $450 million 7.625%
Debentures due 2026; and $300 million 6.97% Debentures due 2036 (putable at par
in 2004).
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C., a wholly owned
subsidiary of Aetna Services (refer to Note 14) (collectively the "Aetna
Services Debt").
At December 31, 1997, $252.1 million of short-term borrowings were outstanding.
In addition, Aetna Services has a revolving credit facility in an aggregate
amount of $1.5 billion with a worldwide group of banks that terminates in June
2001. Various interest rate options are available under the facility and any
borrowings mature on the expiration date of the applicable credit commitment.
Aetna Services pays facility fees ranging from .065% to .20% per annum,
depending upon its long-term senior unsecured debt rating. The facility fee at
December 31, 1997 is at an annual rate of .08%. The facility also supports Aetna
Services' commercial paper borrowing program.
As a guarantor to the credit facility, Aetna Inc. is required to maintain
shareholders' equity, excluding net unrealized capital gains and losses, of at
least $7.5 billion.
<PAGE> 74
Page 74
Notes to Financial Statements (Continued)
13. Debt and Guarantee of Debt Securities (Continued)
Aggregate maturities of long-term debt and sinking fund requirements for 1998
through 2001 are $106 million, $2 million, $4 million, $305 million,
respectively, no maturities in 2002 and $1,929 million thereafter.
Total interest paid by the Company was $239 million, $130 million and $122
million in 1997, 1996 and 1995, respectively.
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services at December 31 and for the
year then ended, is as follows (in millions):
<TABLE>
<CAPTION>
Balance Sheets Information:
1997 1996
---------- ----------
<S> <C> <C>
Total investments (excluding
Separate Accounts) $ 41,020.9 $ 42,555.0
---------- ----------
Total assets $ 85,138.9 $ 83,171.6
---------- ----------
Total insurance liabilities $ 38,620.0 $ 40,357.4
---------- ----------
Total liabilities $ 82,160.2 $ 80,352.8
---------- ----------
Total redeemable preferred stock $ 275.0 $ 275.0
---------- ----------
Total shareholder's equity $ 2,703.7 $ 2,543.8
---------- ----------
Statements of Income Information:
Total revenue $ 10,390.7 $ 13,048.7
---------- ----------
Total benefits and expenses $ 8,885.5 $ 12,713.7
---------- ----------
Income from continuing operations
before income taxes $ 1,505.2 $ 335.0
---------- ----------
Income from continuing operations $ 975.9 $ 233.9
---------- ----------
Net income $ 975.9 $ 679.8
---------- ----------
</TABLE>
<PAGE> 75
Page 75
Notes to Financial Statements (Continued)
14. Aetna-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Limited Liability Company
Holding Primarily Debentures Guaranteed by Aetna
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly owned subsidiary
of Aetna Services, issued $275 million (11,000,000 shares) of 9.5% Cumulative
Monthly Income Preferred Securities, Series A. The securities are redeemable, at
the option of ACLLC with Aetna Services' consent, in whole or in part, from time
to time, on or after November 30, 1999, or at any time under certain limited
circumstances related to tax events, at a redemption price of $25 per security
plus accumulated and unpaid dividends to the redemption date. The securities are
scheduled to become due and payable in 2024. The maturity date may be changed
under certain circumstances.
ACLLC loaned the proceeds from the preferred stock issuance and the common
capital contributions to Aetna Services. In return, Aetna Services issued to
ACLLC approximately $348 million principal amount of 9.5% Subordinated
Debentures due in 2024 which are fully and unconditionally guaranteed by Aetna
Inc. on a subordinated basis. (Refer to Note 13.) These Subordinated Debentures
represent substantially all of the assets of ACLLC. Interest on these debentures
is payable monthly, and under certain circumstances, principal may be due prior
to or later than the original maturity date. This loan is eliminated in the
Consolidated Balance Sheets. The interest and other payment dates on the
debentures correspond to the distribution and other payment dates on the
preferred and common securities of ACLLC. Aetna Inc.'s obligations under the
debentures and related agreements, taken together, constitute a full and
unconditional guarantee of payments due on the preferred securities of ACLLC.
15. Capital Stock
In addition to the capital stock disclosed on the Consolidated Balance Sheets,
Aetna Inc. has the following authorized capital stock: 15,000,000 shares of
Class A Voting Preferred Stock, $.01 par value per share; 15,000,000 shares of
Class B Voting Preferred Stock, $.01 par value per share; and 15,000,000 shares
of Class D Non-Voting Preferred Stock, par value $.01 per share.
<PAGE> 76
Page 76
Notes to Financial Statements (Continued)
15. Capital Stock (Continued)
Each share of Class C Stock is mandatorily convertible into one share of common
stock on July 19, 2000. Dividends accrue on a daily basis at an annual rate of
$4.7578 per share and are payable upon declaration by Aetna Inc.'s Board of
Directors (the "Board"). Aetna Inc. may, at its option, redeem the Class C Stock
during the period July 19, 1999 to July 18, 2000 for shares of Aetna Inc. common
stock based on specified formulas. The number of shares of common stock to be
issued for each share of Class C Stock pursuant to an optional redemption will
be based on a ratio, calculated as the greater of: (a) $76.125 (plus any accrued
but unpaid dividends) divided by the then current market price of the common
stock determined two trading days prior to the notice date of the intent to
redeem; or (b) .8197 of a share of common stock. Each share of Class C Stock is
also convertible, prior to the mandatory redemption date in whole or part, at
the option of the holder, into .8197 of a share of common stock.
At December 31, 1997 and 1996, 12,585,929 and 13,204,381 common shares,
respectively, were reserved for Aetna Inc.'s stock option plans.
Pursuant to Aetna Inc.'s Rights Agreement, one share purchase right (a "Right")
is attached to each share of outstanding common stock and common stock
subsequently issued, prior to the time at which the Rights become exercisable,
expire or are redeemed.
The Rights trade with the common stock until they become exercisable. The Rights
become exercisable 10 days after: (i) a public announcement that a person or
group ("person") has acquired 15% or more of the outstanding shares of common
stock or, 10% or more of the outstanding shares of common stock if such person
is declared by the Board to be an "adverse person" ("triggering acquisition");
or (ii) a person commences a tender offer or exchange offer, the consummation of
which could result in such person owning 15% or more of the common stock; or
(iii), in either event, such later date as the Board may determine.
Upon becoming exercisable, each Right will entitle the holder thereof (the
"Holder") to purchase one one-hundredth of a share of Aetna Inc.'s Class B
Voting Preferred Stock, Series A (a "Fractional Preferred Share") at a price of
$200 (the "Exercise Price"). Each Fractional Preferred Share has dividend,
voting and liquidation rights designed to make it approximately equal in value
to one share of common stock. Under certain circumstances, including a
triggering acquisition, each Right (other than Rights that were or are owned by
the acquirer, which are void) thereafter will entitle the Holder to purchase
common stock (or economically equivalent securities, under certain
circumstances) worth twice the Exercise Price. Under certain circumstances,
including certain acquisitions of Aetna Inc. in a merger or sale of its assets,
each Right thereafter will entitle the Holder to purchase equity securities of
the acquirer at a 50% discount.
<PAGE> 77
Page 77
Notes to Financial Statements (Continued)
15. Capital Stock (Continued)
Under certain circumstances, Aetna Inc. may redeem all of the Rights at a price
of $.01 per Right. The Rights will expire on November 7, 1999, unless earlier
redeemed. The Rights have no dilutive effect on earnings per share until
exercised.
16. Dividend Restrictions and Shareholders' Equity
The Company's business operations are conducted through Aetna Services and Aetna
U.S. Healthcare and their respective subsidiaries (which principally consist of
HMOs and insurance companies). In addition to general state law restrictions on
payments of dividends and other distributions to shareholders applicable to all
corporations, HMOs and insurance companies are subject to further state
regulations that, among other things, may require such companies to maintain
certain levels of equity, and restrict the amount of dividends and other
distributions that may be paid to their parent corporations. These regulations
are not directly applicable to Aetna Services, Aetna U.S. Healthcare, or Aetna
Inc., as none are an HMO or insurance company. The additional regulations
applicable to the Company's indirect HMO and insurance company subsidiaries are
not expected to affect the ability of Aetna Inc. to pay dividends, or the
ability of any of the Company's subsidiaries to service their outstanding debt
or preferred stock obligations.
The amount of dividends that may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at December 31, 1997
without prior approval by state regulatory authorities is limited to
approximately $634 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.
The combined statutory net income for the years ended and statutory surplus as
of December 31 for the domestic insurance and HMO subsidiaries of the Company,
reflecting intercompany eliminations, were as follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Statutory net income (1) $ 759.5 $ 418.5
Statutory surplus $ 3,361.3 $ 3,512.7
- --------------------------------------------------------
</TABLE>
(1) Statutory net income includes results for Aetna U.S. Healthcare from July
19, 1996.
As of December 31, 1997, the Company does not utilize any statutory accounting
practices which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory surplus.
<PAGE> 78
Page 78
Notes to Financial Statements (Continued)
17. Segment Information (1)(2)
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Aetna U.S. Healthcare (3) $ 12,901.4 $ 9,733.7 $ 7,615.4
Aetna Retirement Services 1,902.5 1,762.2 1,706.1
International 1,975.5 1,631.0 1,459.8
Large Case Pensions 1,622.5 1,975.6 2,248.4
Corporate: Other 138.3 98.0 9.7
----------------------------------
Total revenue $ 18,540.2 $ 15,200.5 $13,039.4
- -------------------------------------------------==================================
Income from continuing operations
before income taxes:
Aetna U.S. Healthcare $ 844.8 $ 125.5 $ 454.4
Aetna Retirement Services 372.2 265.5 294.8
International 196.5 171.9 127.3
Large Case Pensions 387.8 395.7 132.7
Corporate: Interest (226.9) (159.9) (108.3)
Other (63.2) (460.0) (174.7)
----------------------------------
Total income from continuing
operations before income taxes $ 1,511.2 $ 338.7 $ 726.2
- -------------------------------------------------==================================
Net income:
Aetna U.S. Healthcare $ 453.8 $ 58.7 $ 286.0
Aetna Retirement Services 257.1 186.2 198.0
International 142.4 109.9 86.6
Large Case Pensions 234.2 258.4 89.2
Corporate: Interest (147.5) (103.9) (70.4)
Other (38.9) (304.2) (115.5)
----------------------------------
Income from continuing operations 901.1 205.1 473.9
Discontinued Operations, net of tax - 445.9 (222.2)
----------------------------------
Net income $ 901.1 $ 651.0 $ 251.7
- -------------------------------------------------==================================
</TABLE>
<TABLE>
<CAPTION>
(Millions) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Assets:
Aetna U.S. Healthcare $ 15,938.5 $ 15,831.0
Aetna Retirement Services 40,916.6 32,402.1
International 6,521.5 5,999.6
Large Case Pensions (4) 32,325.2 38,146.1
Corporate 298.8 534.1
----------------------
Total assets $ 96,000.6 $ 92,912.9
- -------------------------------------------------======================
</TABLE>
(1) The 1997 and 1996 results include benefits of $108.4 million and $131.5
million, after tax, respectively, from reductions of the loss on
discontinued products in Large Case Pensions.
(2) The 1996 results include severance and facilities charges of $561.8
million, after tax. Of this charge $294.5 million related to Aetna U.S.
Healthcare, $31.8 million related to Aetna Retirement Services and $235.5
million related to Corporate.
(3) Premiums and fees from the federal government accounted for 19.1% and
13.4% of Aetna U.S. Healthcare's and the Company's consolidated revenue,
respectively in 1997. For 1996, such amounts were 18.0% of Aetna U.S.
Healthcare's revenue, as determined on a pro forma basis for the U.S.
Healthcare acquisitions and less than 10.0% of the Company's consolidated
revenue. Contracts with the Health Care Financing Administration accounted
for 82.4% and 70.0% of these premiums and fees, with the balance from
other federal employee benefit programs in 1997 and 1996, respectively.
(4) Assets at December 31, 1997 and 1996 include $7.9 billion and $8.7
billion, respectively, of assets attributable to discontinued products.
<PAGE> 79
Page 79
Notes to Financial Statements (Continued)
18. Commitments and Contingent Liabilities
Commitments
The Company has agreed with its Mexican partner to invest up to an additional
$63 million in a joint venture that offers insurance products through the
partner's bank subsidiary based on the performance of the new company over the
first five years of operations. In addition, the Company has agreed with its
Brazilian partner to invest up to an additional $90 million in a joint venture
that provides health and life insurance, as well as private pension products,
based on future performance of the new company. The Company also agreed to
invest approximately $75 million in a number of other international joint
ventures, expected to be funded in 1998.
Leases
The Company has entered into operating leases for office space and certain
computer and other equipment. Rental expenses for these items were $192 million,
$179 million and $203 million for 1997, 1996 and 1995, respectively. The future
net minimum payments under noncancelable leases for 1998 through 2002 are
estimated to be $172 million, $137 million, $96 million, $71 million and $62
million, respectively, and $270 million thereafter.
In connection with the property-casualty sale 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. In 1996, the
Company recorded a charge of $292 million pretax ($190 million after tax) which
represents the present value of the difference between rent required to be paid
by the Company under the lease and future rentals expected to be received by the
Company. Future payments under the lease, net of expected subrentals (which are
to be applied against the reserve and are not included in the future net minimum
payments above), are $160 million and $235 million, attributable to the next
five and subsequent six years, respectively.
<PAGE> 80
Page 80
Notes to Financial Statements (Continued)
18. Commitments and Contingent Liabilities (Continued)
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 2, 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 Complaints seek, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaints allege that the Company and three of its
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 litigation is still in the preliminary
stages, and the Company is defending the actions vigorously.
The Company also is 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> 81
Page 81
Management's Responsibility for Financial Statements
Management is responsible for the financial statements of Aetna Inc., which have
been prepared in accordance with generally accepted accounting principles. The
financial statements are the product of a number of processes that include the
gathering of financial data developed from the records of the Company's
day-to-day business transactions. Informed judgments and estimates are used for
those transactions not yet complete or for which the ultimate effects cannot be
measured precisely. The Company emphasizes the selection and training of
personnel who are qualified to perform these functions. In addition, Company
personnel are subject to rigorous standards of ethical conduct that are widely
communicated throughout the organization.
The Company's internal controls are designed to reasonably assure that Company
assets are safeguarded from unauthorized use or disposition and that Company
transactions are authorized, executed and recorded properly. Company personnel
maintain and monitor these internal controls on an ongoing basis. In addition,
the Company's internal auditors review and report upon the functioning of these
controls with the right of full access to all Company personnel.
The Company engages KPMG Peat Marwick LLP as independent auditors to audit its
financial statements and express their opinion thereon. Their audits include
reviews and tests of the Company's internal controls to the extent they believe
necessary to determine and conduct the audit procedures that support their
opinion. Members of that firm also have the right of full access to each member
of management in conducting their audits. The report of KPMG Peat Marwick LLP
appears below.
Aetna's Board of Directors has an Audit Committee composed solely of independent
directors. The Committee meets periodically with management, the internal
auditors and KPMG Peat Marwick LLP to oversee and monitor the work of each and
to inquire of each as to their assessment of the performance of the others in
their work relating to the Company's financial statements. Both the independent
and internal auditors have, at all times, the right of full access to the Audit
Committee, without management present, to discuss any matter they believe should
be brought to the attention of the Committee.
<PAGE> 82
Page 82
Independent Auditors' Report
The Shareholders and Board of Directors
Aetna Inc.:
We have audited the accompanying consolidated balance sheets of Aetna Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Aetna Inc. and
Subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
<PAGE> 83
Page 83
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
(Millions, except per common share data)
- ------------------------------------------------------------------------------------------------
1997 (1)(2)(3) First Second Third Fourth
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 4,486.7 $ 4,628.3 $ 4,632.3 $ 4,792.9
- ------------------------------------------------------------------------------------------------
Income before income taxes $ 487.9 $ 370.1 $ 211.2 $ 442.0
Income taxes 208.6 140.0 93.4 168.1
------------------------------------------------------
Net income $ 279.3 $ 230.1 $ 117.8 $ 273.9
- ------------------------------------------======================================================
Net income applicable to common
shareholders $ 265.4 $ 216.2 $ 104.0 $ 260.0
- ------------------------------------------======================================================
Per Common Share Results: (4)
Net income
Basic $ 1.77 $ 1.44 $ .70 $ 1.76
Diluted 1.72 1.43 .69 1.71
- ------------------------------------------------------------------------------------------------
Common Stock Data:
Dividends declared $ .20 $ .20 $ .20 $ .20
Common stock prices, high 92.88 112.75 117.00 80.38
Common stock prices, low 74.00 83.63 81.00 67.00
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) First quarter includes a benefit of $108.4 million after tax ($172.5
million pretax) from a reduction of the loss on discontinued products.
(2) First and second quarters include after-tax reductions of the severance
and facilities reserves of $9.1 million and $20.2 million, respectively.
(3) The third quarter includes an increase in the reserve for HMO medical
claims of $103.0 million after tax ($161.0 million pretax), the majority
of which relates to the first two quarters of 1997.
(4) Calculation of the earnings per share is based on weighted average shares
outstanding during each quarter and, accordingly, the sum may not equal
the total for the year.
<PAGE> 84
Page 84
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
(Millions, except per common share data)
- --------------------------------------------------------------------------------------------------
1996 (1)(2) First Second Third Fourth
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 3,344.9 $ 3,173.9 $ 4,185.9 $ 4,495.8
- --------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations
before income taxes (benefits) $ 246.3 $ 35.9 $ 205.4 $ (148.9)
Income taxes (benefits) 80.8 11.6 83.0 (41.8)
---------------------------------------------------------
Income (Loss) from continuing
operations 165.5 24.3 122.4 (107.1)
Income from Discontinued
Operations, net of tax 182.2 - - -
Gain on sale of Discontinued Operations,
net of tax - 263.7 - -
--------------------------------------------------------
Net income (loss) $ 347.7 $ 288.0 $ 122.4 $ (107.1)
- ------------------------------------------========================================================
Net income (loss) applicable to common
shareholders $ 347.7 $ 288.0 $ 111.2 $ (121.0)
- ------------------------------------------========================================================
Per Common Share Results: (3)
Income (Loss) from continuing operations
Basic $ 1.44 $ .21 $ .77 $ (.80)
Diluted 1.43 .21 .77 (.80)
Net income (loss)
Basic 3.03 2.49 .77 (.80)
Diluted 2.99 2.47 .77 (.80)
- --------------------------------------------------------------------------------------------------
Common Stock Data: (4)
Dividends declared $ .69 $ - $ .40 $ .20
Common stock prices, high 78.50 75.13 73.63 81.63
Common stock prices, low 67.13 67.13 58.00 60.13
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Second, third and fourth quarters include after-tax severance and
facilities charges of $255.0 million, $31.8 million and $275.0 million,
respectively.
(2) Second and fourth quarters include benefits of $110.5 million and $21.0
million, respectively, after tax, from reductions of the loss on
discontinued products.
(3) Calculation of the earnings per common share is based on weighted average
shares outstanding during each quarter and, accordingly, the sum may not
equal the total for the year.
(4) Aetna Life and Casualty Company common shares through the date of the
merger with U.S. Healthcare, Aetna Inc. common shares thereafter.
<PAGE> 1
Page 1
EXHIBIT 21
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership(1)
- --------------------------------------- -------------- ----------------------------------------------
<S> <C> <C>
Aetna Inc. CT -
Aetna Services, Inc. CT 100% owned by Aetna Inc.
Aetna U.S. Healthcare Inc. PA 100% owned by Aetna Inc.
Aetna Risk Indemnity Company Limited Bermuda 100% owned by Aetna Inc.
Aetna Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Retirement Services, Inc. CT 100% owned by Aetna Services, Inc.
Aetna Health and Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Capital L.L.C. DE 95% owned by Aetna Services, Inc.(2)
Imperial Fire & Marine Re-Insurance
Company Limited United Kingdom 10% owned by Aetna Services, Inc.
Aetna International, Inc. CT 100% owned by Aetna Services, Inc.
AUSHC Holdings, Inc. CT 100% owned by Aetna Services, Inc.
U.S. Healthcare Dental Plan, Inc. PA 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Dental Plan, Inc. NJ 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Dental Plan, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
U.S. Health Insurance Company NY 100% owned by Aetna U.S. Healthcare Inc.
Primary Holdings, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
Corporate Health Insurance Company PA 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. NJ 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare, Inc. NY 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. CT 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. MA 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. NH 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Financial Services,
Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
Aetna Health Management, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
CMBS Holdings, Inc. TX 100% owned by Aetna Life Insurance Company
CDI Equity, Inc. DE 100% owned by Aetna Life Insurance Company
AHP Holdings, Inc. CT 100% owned by Aetna Life Insurance Company
CMBS Holdings, Inc. - II CT 100% owned by Aetna Life Insurance Company
CMBS Holdings, L.L.C. CT 99% owned by Aetna Life Insurance Company(3)
Southeast Second Avenue, Inc. DE 100% owned by Aetna Life Insurance Company
Bay Area Mall, Inc. DE 100% owned by Aetna Life Insurance Company
Aetna Affordable Housing, Inc. CT 100% owned by Aetna Life Insurance Company
PHPSNE Parent Corporation DE 55% owned by AUSHC Holdings Inc.
Aetna Retirement Holdings, Inc. CT 100% owned by Aetna Retirement Services, Inc.
Aetna Canada Holdings Limited Canada 100% owned by Aetna International, Inc.
Aetna Life Insurance Company of
America CT 100% owned by Aetna International, Inc.
Aetna Capital Holdings, Inc. CT 100% owned by Aetna International, Inc.
Aetna Life & Casualty (Bermuda) Ltd. Bermuda 100% owned by Aetna International, Inc.
Primary Investments, Inc. DE 100% owned by Primary Holdings, Inc.
Aetna U.S. Healthcare Inc. OH 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. VA 74% owned by Aetna Health Management, Inc.(4)
Aetna U.S. Healthcare Inc. FL 100% owned by Aetna Health Management, Inc.
Aetna Health Plans of the
Carolinas, Inc. NC 100% owned by Aetna Health Management, Inc.
Aetna Dental Care of Kentucky, Inc. KY 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare of California,
Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna Health Plans of Central and
Eastern Pennsylvania, Inc. DE 100% owned by Aetna Health Management, Inc.
AUSHC Holdings, Inc. DE 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. LA 100% owned by Aetna Health Management, Inc.
Aetna Government Health Plans, Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. AZ 100% owned by Aetna Health Management, Inc.
Med Southwest, Inc. TX 55% owned by Aetna Health Management, Inc.
Informed Health, Inc. DE 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare of Georgia, Inc. GA 37% owned by Aetna Health Management, Inc.(5)
Aetna U.S. Healthcare Dental Care of
California Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare of Illinois, Inc. IL 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. TX 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. TN 100% owned by Aetna Health Management, Inc.
Aetna Dental Care of Texas, Inc. TX 100% owned by Aetna Health Management, Inc.
Aetna Life Insurance and Annuity
Company CT 100% owned by Aetna Retirement Holdings, Inc.
Aeltus Investment Management, Inc. CT 100% owned by Aetna Retirement Holdings, Inc.
</TABLE>
<PAGE> 2
PAGE 2
EXHIBIT 21 (Continued)
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership(1)
- --------------------------------------- -------------- ----------------------------------------------
<S> <C> <C>
Aetna Life Insurance Company of
Canada Canada 100% owned by Aetna Canada Holdings Limited
Aetna Health Plans of Southern
New England, Inc. CT 100% owned by PHPSNE Parent Corporation
United States Health Care Systems of
Pennsylvania, Inc. PA 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare, Inc. VA 26% owned by Primary Investments, Inc.(4)
U.S. Healthcare, Inc. OH 100% owned by Primary Investments, Inc.
U.S. Healthcare of the Carolinas, Inc. NC 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare of Georgia, Inc. GA 63% owned by Primary Investments, Inc.(5)
U.S. Health Insurance Company CT 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare Holdings, Inc. DE 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare Inc. WA 100% owned by Primary Investments, Inc.
Aetna Insurance Company of Connecticut CT 100% owned by AHP Holdings, Inc.
Aetna Health Plans of New York, Inc. NY 100% owned by AUSHC Holdings, Inc.
Aetna Health Plans of New Jersey, Inc. NJ 100% owned by AUSHC Holdings, Inc.
Southwest Physicians Life Insurance
Company TX 100% owned by Med Southwest, Inc.
Aetna U.S. Healthcare of North Texas
Inc. TX 100% owned by Med Southwest, Inc.
Aetna Get Fund MA 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Encore Fund MA 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Fund MA 98% owned by Aetna Life Insurance
and Annuity Company
Aetna Income Shares MA 99% owned by Aetna Life Insurance
and Annuity Company
Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Series Fund, Inc. MD 13% owned by Aetna Life Insurance
and Annuity Company
Aetna Investment Advisers Fund, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Portfolios, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Generation Portfolios, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Portfolio Partners, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Financial Life Assurance Company of
Canada Canada 100% owned by Aetna Life Insurance
Company of Canada
Aetna U.S. Healthcare of Colorado, Inc. CO 100% owned by Aetna U.S. Healthcare Holdings, Inc.
Aeltus Capital, Inc. CT 100% owned by Aeltus Investment Management,
Inc.
Aeltus Trust Company CT 100% owned by Aeltus Investment Management,
Inc.
</TABLE>
(1) Percentages are rounded to the nearest whole percent and are based on
ownership of voting rights.
(2) Aetna Capital Holdings, Inc. owns 5% of Aetna Capital L.L.C.
(3) CMBS Holdings, Inc. - II owns 1% of CMBS Holdings, L.L.C.
(4) Aetna Health Management, Inc. owns 74% and Primary Investments, Inc. owns
26% of Aetna U. S. Healthcare Inc. (VA)
(5) Primary Investments, Inc. owns 63% and Aetna Health Management, Inc. owns
37% of Aetna U.S. Healthcare of Georgia, Inc.
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Aetna Inc.:
We consent to incorporation by reference in the Registration Statements (No.
33-52819 on Form S-3, No. 33-52819-01 on Form S-3, No. 333-07167 on Form S-3,
No. 333-07169 on Form S-3, No. 333-08427 on Form S-8, No. 333-08429 on Form S-8
and No. 333-08431 on Form S-8) of Aetna Inc. of our reports dated February 3,
1998, relating to the consolidated balance sheets of Aetna Inc. and Subsidiaries
as of December 31, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity, and cash flows and related schedules for each of
the years in the three-year period ended December 31, 1997, which reports appear
in or are incorporated by reference in the December 31, 1997 annual report on
Form 10-K of Aetna Inc.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
March 2, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Inc. (the "Company"), hereby
severally constitute and appoint Thomas J. Calvocoressi and Robert J. Price, and
each of them individually, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1997 Form 10-K and any and all amendments thereto
to be filed with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys to the Form 10-K and to any and all amendments
thereto.
Dated as of March 2, 1998.
/s/ Richard L. Huber /s/ Gerald Greenwald
- ------------------------------------- -------------------------------------
Richard L. Huber Gerald Greenwald
Chairman, Chief Executive Officer, Director
President and Director
(Principal Executive Officer and
Principal Financial Officer)
/s/ Leonard Abramson /s/ Ellen M. Hancock
- ------------------------------------- -------------------------------------
Leonard Abramson Ellen M. Hancock
Director Director
/s/ Betsy Z. Cohen /s/ Michael H. Jordan
- ------------------------------------- -------------------------------------
Betsy Z. Cohen Michael H. Jordan
Director Director
/s/ William H. Donaldson /s/ Jack D. Kuehler
- ------------------------------------- -------------------------------------
William H. Donaldson Jack D. Kuehler
Director Director
/s/ Barbara Hackman Franklin /s/ Frank R. O'Keefe, Jr.
- ------------------------------------- -------------------------------------
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
/s/ Jerome S. Goodman /s/ Judith Rodin
- ------------------------------------- -------------------------------------
Jerome S. Goodman Judith Rodin
Director Director
/s/ Earl G. Graves
- -------------------------------------
Earl G. Graves
Director
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 1997 for Aetna Inc. and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 34,245
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,041
<MORTGAGE> 4,208
<REAL-ESTATE> 370
<TOTAL-INVEST> 42,562
<CASH> 1,806
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,367
<TOTAL-ASSETS> 96,001
<POLICY-LOSSES> 17,837
<UNEARNED-PREMIUMS> 359
<POLICY-OTHER> 3,294
<POLICY-HOLDER-FUNDS> 18,761
<NOTES-PAYABLE> 2,346
865
0
<COMMON> 3,644
<OTHER-SE> 6,686
<TOTAL-LIABILITY-AND-EQUITY> 96,001
12,592
<INVESTMENT-INCOME> 3,378
<INVESTMENT-GAINS> 334
<OTHER-INCOME> 2,236
<BENEFITS> 12,852
<UNDERWRITING-AMORTIZATION> 218
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,511
<INCOME-TAX> 610
<INCOME-CONTINUING> 901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 901
<EPS-PRIMARY> 5.67<F1>
<EPS-DILUTED> 5.60<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>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 1997 for Aetna Inc. and is qualified in its entiresty by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 32,612 31,634 31,111 32,336
<DEBT-CARRYING-VALUE> 0 0 0 0
<DEBT-MARKET-VALUE> 0 0 0 0
<EQUITIES> 1,402 1,393 1,327 1,333
<MORTGAGE> 6,014 6,322 6,468 6,701
<REAL-ESTATE> 533 637 679 850
<TOTAL-INVEST> 43,314 42,553 41,991 43,486
<CASH> 1,333 1,617 1,606 1,463
<RECOVER-REINSURE> 0 0 0 0
<DEFERRED-ACQUISITION> 2,373 2,373 2,305 2,227
<TOTAL-ASSETS> 99,147 95,700 91,813 92,913
<POLICY-LOSSES> 18,115 18,041 17,865 17,783
<UNEARNED-PREMIUMS> 199 188 191 334
<POLICY-OTHER> 3,263 3,100 3,055 3,029
<POLICY-HOLDER-FUNDS> 18,939 19,033 19,064 19,902
<NOTES-PAYABLE> 2,374 2,376 2,376 2,380
865 865 865 865
0 0 0 0
<COMMON> 3,862 3,997 4,012 4,033
<OTHER-SE> 6,636 6,426 6,031 5,992
<TOTAL-LIABILITY-AND-EQUITY> 99,147 95,700 91,813 92,913
9,418 6,266 3,087 9,326
<INVESTMENT-INCOME> 2,506 1,687 840 3,565
<INVESTMENT-GAINS> 130 36 2 134
<OTHER-INCOME> 1,694 1,126 558 2,175
<BENEFITS> 9,684 6,366 3,157 10,379
<UNDERWRITING-AMORTIZATION> 159 101 45 160
<UNDERWRITING-OTHER> 0 0 0 0
<INCOME-PRETAX> 1,069 858 488 339
<INCOME-TAX> 442 349 209 134
<INCOME-CONTINUING> 627 509 279 205
<DISCONTINUED> 0 0 0 446
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 627 509 279 651
<EPS-PRIMARY> 3.91 3.21 1.77 4.77
<F1>
<EPS-DILUTED> 3.86 3.15 1.72 4.72
<F2>
<RESERVE-OPEN> 0 0 0 0
<PROVISION-CURRENT> 0 0 0 0
<PROVISION-PRIOR> 0 0 0 0
<PAYMENTS-CURRENT> 0 0 0 0
<PAYMENTS-PRIOR> 0 0 0 0
<RESERVE-CLOSE> 0 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0 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>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 1997 for Aetna Inc. and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 30,956 29,828 30,345 31,860
<DEBT-CARRYING-VALUE> 0 0 0 0
<DEBT-MARKET-VALUE> 0 0 0 0
<EQUITIES> 1,235 1,225 929 660
<MORTGAGE> 7,172 7,493 7,948 8,327
<REAL-ESTATE> 1,101 1,211 1,302 1,277
<TOTAL-INVEST> 42,435 42,845 42,490 44,050
<CASH> 2,159 4,254 1,559 1,713
<RECOVER-REINSURE> 0 0 0 0
<DEFERRED-ACQUISITION> 2,141 2,078 2,007 1,953
<TOTAL-ASSETS> 91,540 84,717 84,102 84,324
<POLICY-LOSSES> 17,150 17,152 17,293 17,232
<UNEARNED-PREMIUMS> 217 245 159 142
<POLICY-OTHER> 3,136 2,583 2,646 2,704
<POLICY-HOLDER-FUNDS> 20,483 20,711 21,703 22,899
<NOTES-PAYABLE> 2,382 987 986 989
865 0 0 0
0 0 0 0
<COMMON> 4,104 1,500 1,474 1,448
<OTHER-SE> 5,943 5,842 5,554 5,825
<TOTAL-LIABILITY-AND-EQUITY> 91,540 84,717 84,102 84,324
6,328 3,606 1,878 7,493
<INVESTMENT-INCOME> 2,678 1,780 886 3,575
<INVESTMENT-GAINS> 74 66 62 47
<OTHER-INCOME> 1,625 1,066 518 1,924
<BENEFITS> 7,242 4,348 2,271 9,089
<UNDERWRITING-AMORTIZATION> 124 75 37 139
<UNDERWRITING-OTHER> 0 0 0 0
<INCOME-PRETAX> 487 282 246 726
<INCOME-TAX> 175 92 81 252
<INCOME-CONTINUING> 312 190 166 474
<DISCONTINUED> 446 446 182 (222)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 758 636 348 252
<EPS-PRIMARY> 5.98 5.52 3.03 2.22
<F1>
<EPS-DILUTED> 5.91 5.47 2.99 2.20
<F2>
<RESERVE-OPEN> 0 0 0 11,144
<PROVISION-CURRENT> 0 0 0 3,099
<PROVISION-PRIOR> 0 0 0 1,134
<PAYMENTS-CURRENT> 0 0 0 1,092
<PAYMENTS-PRIOR> 0 0 0 2,540
<RESERVE-CLOSE> 0 0 0 11,745
<CUMULATIVE-DEFICIENCY> 0 0 0 (1,134)
<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>
