<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarter ended June 30, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11913
Aetna Inc.
(Exact name of registrant as specified in its charter)
Connecticut 02-0488491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue 06156
Hartford, Connecticut (ZIP Code)
(Address of principal executive offices)
(860) 273-0123
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Common Capital Stock (par value $.01) 140,963,577
<S> <C>
(Class) Shares Outstanding at June 30, 1999
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Condensed Notes to Consolidated Financial Statements 7
Independent Auditors' Review Report 19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 40
Item 4. Submission of Matters to a Vote of Security Holders. 41
Item 5. Other Information. 42
Item 6. Exhibits and Reports on Form 8-K. 43
Signatures 44
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Millions, except per common share data) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums $4,580.5 $3,279.1 $ 8,961.9 $6,517.7
Net investment income 725.0 822.8 1,465.7 1,635.5
Fees and other income 634.1 553.6 1,191.0 1,104.1
Net realized capital gains 9.8 172.6 26.9 204.3
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue 5,949.4 4,828.1 11,645.5 9,461.6
- ----------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Current and future benefits 4,352.9 3,270.7 8,487.9 6,541.3
Operating expenses 1,080.6 908.4 2,119.4 1,786.6
Interest expense 64.1 56.5 128.7 113.4
Amortization of goodwill and other acquired
intangible assets 105.7 96.9 213.4 193.1
Amortization of deferred policy acquisition costs 51.7 62.8 101.7 115.2
Reduction of reserve for loss on discontinued products (77.2) -- (77.2) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 5,577.8 4,395.3 10,973.9 8,749.6
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 371.6 432.8 671.6 712.0
Income taxes (benefits):
Current 52.6 174.5 163.1 306.0
Deferred 91.8 (7.4) 101.9 (27.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total income taxes 144.4 167.1 265.0 278.8
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 227.2 $ 265.7 $ 406.6 $ 433.2
==================================================================================================================================
Net income applicable to common ownership $ 213.4 $ 251.8 $ 379.0 $ 405.4
==================================================================================================================================
Results per common share:
Basic $ 1.51 $ 1.74 $ 2.69 $ 2.79
Diluted 1.50 1.69 2.66 2.75
Dividends declared $ .20 $ .20 $ .40 $ .40
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 3
<PAGE> 4
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value (amortized cost $29,830.0 and
$30,730.1) $ 29,826.8 $ 32,180.8
Equity securities, at fair value (cost $824.4 and $762.6) 879.6 800.5
Short-term investments 803.8 942.2
Mortgage loans 3,440.1 3,553.0
Real estate 311.1 270.3
Policy loans 498.7 458.7
Other 1,373.5 1,264.5
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 37,133.6 39,470.0
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,086.1 1,951.5
Short-term investments under securities loan agreement 1,139.4 753.6
Accrued investment income 476.9 537.1
Premiums due and other receivables 1,724.3 1,478.1
Reinsurance recoverables 4,006.2 3,897.2
Deferred income taxes 337.4 53.0
Deferred policy acquisition costs 1,975.5 1,768.6
Goodwill and other acquired intangible assets 9,189.7 9,155.3
Other assets 946.0 1,111.9
Separate Accounts assets 48,690.2 44,971.8
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 107,705.3 $ 105,148.1
============================================================================================================================
Liabilities:
Future policy benefits $ 18,716.5 $ 18,541.1
Unpaid claims 3,888.5 3,953.9
Unearned premiums 217.9 428.9
Policyholders' funds left with the Company 16,609.6 17,632.5
- ----------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 39,432.5 40,556.4
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 35.1 35.2
Short-term debt 867.5 1,063.4
Long-term debt 2,487.7 2,521.2
Payables under securities loan agreement 1,139.4 753.6
Current income taxes 234.0 444.8
Other liabilities 3,119.6 3,025.2
Minority and participating policyholders' interests 162.9 148.4
Separate Accounts liabilities 48,675.5 44,936.0
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 96,154.2 93,484.2
- ----------------------------------------------------------------------------------------------------------------------------
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 and 11)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock ($.01 par value;
15,000,000 shares authorized; 11,613,040 in 1999 and 11,614,816 in 1998
issued and outstanding) 862.0 862.1
Common stock ($.01 par value; 500,000,000 shares authorized; 140,963,577 in
1999 and 141,272,628 in 1998 issued and outstanding) 3,263.0 3,292.4
Accumulated other comprehensive income (loss) (228.2) 177.8
Retained earnings 7,379.3 7,056.6
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,276.1 11,388.9
============================================================================================================================
Total liabilities, redeemable preferred securities and shareholders' equity $ 107,705.3 $ 105,148.1
============================================================================================================================
Shareholders' equity per common share $ 73.88 $ 74.51
============================================================================================================================
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 4
<PAGE> 5
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income (Loss)
Class C Voting ------------------------------
Mandatorily Unrealized
(Millions, except share data) Convertible Common Gains (Losses) Foreign Retained
Six Months Ended June 30, 1999 Total Preferred Stock Stock on Securities Currency Earnings
- ------------------------------------------------------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $11,388.9 $862.1 $3,292.4 $387.2 $(209.4) $7,056.6
Comprehensive income:
Net income 406.6 406.6
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(503.4) pretax) (1) (327.2) (327.2)
Foreign currency ($(121.0) pretax) (78.8) (78.8)
----------
Other comprehensive loss (406.0)
----------
Total comprehensive income .6
==========
Common stock issued for benefit
plans (569,495 shares) 42.5 42.5
Repurchase of common shares
(880,000 shares) (72.0) (72.0)
Conversion of preferred securities (1,776
preferred shares converted to
1,454 common shares) - (.1) .1
Common stock dividends (56.3) (56.3)
Preferred stock dividends (27.6) (27.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 $11,276.1 $862.0 $3,263.0 $ 60.0 $(288.2) $7,379.3
=================================================================================================================================
Six Months Ended June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $11,195.4 $865.4 $3,644.4 $504.1 $(197.0 $6,378.5
Comprehensive income:
Net income 433.2 433.2
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(52.6) pretax) (1) (34.2) (34.2)
Foreign currency ($(37.0) pretax) (24.1) (24.1)
----------
Other comprehensive loss (58.3)
----------
Total comprehensive income 374.9
==========
Common stock issued for benefit
plans (432,469 shares) 26.2 26.2
Repurchase of common shares
(1,891,700 shares) (150.5) (150.5)
Conversion of preferred securities
(40,211 preferred shares converted to
32,952 common shares) - (3.3) 3.3
Common stock dividends (57.7) (57.7)
Preferred stock dividends (27.8) (27.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 $11,360.5 $862.1 $3,523.4 $469.9 $(221.1) $6,726.2
=================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
Page 5
<PAGE> 6
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 406.6 $ 433.2
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization (including investment discounts and premiums) 217.7 245.1
--------- ---------
Cash flows provided by operating activities before net realized capital gains
and changes in assets and liabilities 624.3 678.3
Net realized capital gains (26.9) (204.3)
--------- ---------
Cash flows provided by operating activities before changes in assets and liabilities 597.4 474.0
Changes in assets and liabilities:
Decrease in accrued investment income 61.1 9.9
Increase in premiums due and other receivables (98.2) (162.6)
Increase in deferred policy acquisition costs (202.8) (135.0)
Decrease in income taxes (274.1) (162.7)
Net decrease (increase) in other assets and other liabilities 119.7 (90.8)
Increase (decrease) in insurance liabilities (including run-off liabilities funded by
investing activities below) 73.6 (6.7)
Other, net 28.4 (17.4)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 305.1 (91.3)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale 8,324.2 10,093.3
Equity securities 213.9 480.2
Mortgage loans 36.6 59.5
Real estate 40.9 125.0
Other investments 260.0 220.4
Short-term investments 8,231.9 10,886.8
Investment maturities and repayments of:
Debt securities available for sale 1,525.5 2,202.1
Mortgage loans 191.8 569.0
Cost of investments in:
Debt securities available for sale (9,095.6) (11,457.4)
Equity securities (216.6) (291.7)
Mortgage loans (134.7) (110.9)
Real estate (41.7) (20.2)
Other investments (663.0) (470.6)
Short-term investments (8,060.7) (10,705.8)
Increase in property and equipment (11.3) (82.7)
Net decrease in Separate Accounts 17.8 2.8
Other, net (28.1) 84.0
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 590.9 1,583.8
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits and interest credited for investment contracts 1,386.9 869.6
Withdrawals of investment contracts (1,744.8) (1,758.2)
Repayment of long-term debt (30.0) (140.8)
Net decrease in short-term debt (194.6) (21.3)
Common stock issued under benefit plans 42.5 26.2
Common stock acquired (72.0) (150.5)
Dividends paid to shareholders (84.1) (85.8)
Other, net (64.5) --
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (760.6) (1,260.8)
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (.8) (6.1)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 134.6 225.6
Cash and cash equivalents, beginning of period 1,951.5 1,805.8
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,086.1 $ 2,031.4
===============================================================================================================================
Supplemental cash flow information:
Interest paid $ 117.7 $ 99.6
Income taxes paid 374.5 392.6
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 6
<PAGE> 7
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare").
Less than majority-owned entities, in which the Company has at least a 20%
interest, are reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and are unaudited. Certain reclassifications have been made to the
1998 financial information to conform to the 1999 presentation. These interim
statements necessarily rely heavily on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all adjustments necessary
for a fair statement of results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes as presented in Aetna Inc.'s
1998 Annual Report on Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles, but that is not required for interim reporting
purposes, has been condensed or omitted.
New Accounting Standard
On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). This
statement 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. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations, as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
Future Accounting Standards
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
does not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This standard requires companies to record all derivatives
on the balance sheet as either assets or liabilities and measure those
instruments at fair value. The manner in which companies are to record gains or
losses resulting from changes in the values of those derivatives depends on the
use of the derivative and whether it qualifies for hedge accounting. As amended
by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, this standard is
effective for the Company's financial statements beginning January 1, 2001, with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this standard and the potential effect on its financial position and
results of operations.
Page 7
<PAGE> 8
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three and six months ended June 30,
was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
1999
Net income $ 227.2
Less: preferred stock dividends 13.8
--------
Basic EPS
Income applicable to common ownership 213.4 140.9 $ 1.51
--------
Effect of dilutive securities:
Stock options and other (1) 1.3
Convertible preferred stock 13.8 9.5
-------- --------
Diluted EPS
Income applicable to common ownership and assumed conversions $227.2 151.7 $ 1.50
- -----------------------------------------------------------------------------------------------------------------------
1998
Net income $ 265.7
Less: preferred stock dividends 13.9
--------
Basic EPS
Income applicable to common ownership 251.8 145.1 $ 1.74
--------
Effect of dilutive securities:
Stock options and other (1) 1.2
Convertible preferred stock 13.9 11.1
-------- --------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 265.7 157.4 $ 1.69
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 (2)
Net income $ 406.6
Less: preferred stock dividends 27.6
------
Basic EPS
Income applicable to common ownership $ 379.0 141.1 $ 2.69
-------- --------
Effect of dilutive securities:
Stock options and other (3) 1.2
-----
Diluted EPS
Income applicable to common ownership and assumed conversions $ 379.0 142.3 $ 2.66
- -----------------------------------------------------------------------------------------------------------------------
1998
Net income $433.2
Less: preferred stock dividends 27.8
------
Basic EPS
Income applicable to common ownership 405.4 145.3 $ 2.79
--------
Effect of dilutive securities:
Stock options and other (3) 1.2
Convertible preferred stock 27.8 11.2
------ -----
Diluted EPS
Income applicable to common ownership and assumed conversions $ 433.2 157.7 $ 2.75
=======================================================================================================================
</TABLE>
(1) Options to purchase shares of common stock for the three months ended
June 30, 1999 and 1998 of 2.2 million and 3.6 million, respectively (with
exercise prices ranging from $80.25 - $112.63), were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common
shares.
(2) The issuable common stock related to Class C voting mandatorily
convertible preferred stock (9.5 million weighted average shares) was not
included in the computation of diluted earnings per common share for the
six months ended June 30, 1999 because to do so would be antidilutive.
(3) Options to purchase shares of common stock for the six months ended June
30, 1999 and 1998 of 5.4 million and 2.6 million, respectively (with
exercise prices ranging from $80.25 - $112.63), were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common
shares.
Page 8
<PAGE> 9
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) ACQUISITIONS AND DISPOSITIONS
Aetna U.S. Healthcare
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America ("Prudential") to acquire the Prudential
health care business ("PHC") for approximately $1 billion. The Company expects
to secure remaining regulatory approval and close the transaction during the
third quarter. The Company expects to finance the transaction by issuing $500
million of three-year senior notes to Prudential and by using funds made
available from the issuance of commercial paper. The Company may ultimately
replace this commercial paper with medium- or long-term fixed income securities.
As part of the transaction, the Company has agreed to service Prudential's
administrative services only contracts following the closing.
In connection with the transaction, the Company reached an agreement with the
U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related business acquired by
Aetna as part of the 1998 acquisition of New York Life Insurance Company's
("NYL") health care business ("NYLCare"). The agreement primarily affects
approximately 260,000 NYLCare commercial HMO/POS members in the Houston market
and approximately 167,000 NYLCare commercial HMO/POS members in the Dallas/Ft.
Worth market, as well as related management, operating systems and other
assets. The Company has begun this divestiture process. The financial impact
of the divestiture will depend on the ultimate sales price relative to the book
value of the businesses to be sold and will be assessed as the process is
completed.
As part of the transaction, the Company and Prudential have entered into a
reinsurance agreement for which the Company will pay a premium. Under the
agreement, Prudential will indemnify the Company from insurance risk which may
arise following the closing and reimburse the Company for a large portion of
medical costs of PHC in excess of certain threshold medical loss ratio levels
through the year 2000. Prudential will also pay the Company certain supplemental
fees related to the administrative service contracts to be serviced by the
Company following the closing. These fees are fixed in amount and decline over a
period ending 18 months following the closing.
On July 15, 1998, the Company acquired NYLCare for a purchase price of $1.05
billion in cash, subject to adjustment as provided in the transaction
agreements. The acquisition was accounted for as a purchase. Originally, in
addition to the cash purchase price, payments totaling up to $300 million (up to
$150 million in each of two years) were potentially payable to the extent that
predetermined earnings and membership targets in future periods were achieved
(the "Earnout"). On January 29, 1999, the Company and NYL agreed to resolve all
purchase price adjustments and obligations under the Earnout. Under this
agreement, the Company paid NYL an additional $50 million to resolve such
matters. As a result, the total purchase price is approximately $1.1 billion.
The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $1.15 billion, net of related deferred taxes, being
allocated to goodwill and other acquired intangible assets, which is being
amortized over a 40-year period for goodwill and over a range of three to 20
years for other acquired intangible assets. The Company's consolidated results
of operations include the NYLCare health business from July 15, 1998.
Aetna Retirement Services
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided by the related agreements. The transaction was
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance receivable from
Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $152 million, of which $88 million was deferred and is being
recognized over approximately 15 years. Premiums ceded and reinsurance
recoveries made during 1999 totaled $284.7 million and $216.0 million,
respectively.
Page 9
<PAGE> 10
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale will result in a capital loss which is not expected to be
material. The revenue and earnings of its Canadian operations are not material
to the Company. Completion of the sale, which is anticipated to occur in the
fall of 1999, is subject to the Canadian federal and other regulatory approvals
and other customary conditions.
On February 16, 1999, the Company entered into a joint venture with Poland's
sixth-largest bank for a 40% ownership interest in a company that sells pension
products throughout Poland following the reform and privatization of Poland's
pension sector, effective March 1, 1999.
On January 13, 1999, the Company acquired Asistencia Medica Social Argentina,
Argentina's largest HMO, for approximately $100 million.
(4) REDEMPTION OF CONVERTIBLE PREFERRED STOCK
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of
the Preferred Stock received .8197 shares of Aetna common stock for each share
of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna
common stock were issued as part of the redemption. Also, on May 25, 1999, the
Company's Board of Directors declared a cash dividend of $.84583 per share of
6.25% Class C Voting Mandatorily Convertible Preferred Stock to shareholders of
record at the close of business on July 8, 1999, payable July 19, 1999.
(5) INVESTMENTS
Net investment income includes amounts allocable to experience-rated
contractholders of $257 million and $306 million for the three months ended June
30, 1999 and 1998, respectively, and $513 million and $621 million for the six
months ended June 30, 1999 and 1998, respectively. Interest credited to
contractholders is included in current and future benefits.
Net realized capital gains allocable to experience-rated contractholders of $3
million and $64 million for the three months ended June 30, 1999 and 1998,
respectively, and $9 million and $72 million for the six months ended June 30,
1999 and 1998, respectively, were deducted from net realized capital gains as
reflected on the Consolidated Statements of Income, and an offsetting amount is
reflected on the Consolidated Balance Sheets in policyholders' funds left with
the Company.
The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------------------- ----------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $157.8 $22.3 $161.9 $22.9
Supporting experience-rated products 93.4 19.1 95.7 21.7
Supporting remaining products 42.1 2.4 43.6 3.2
- -------------------------------------------------------------------------------------------------------------------------
Total impaired loans $293.3(1) $43.8 $301.2(1) $47.8
=========================================================================================================================
</TABLE>
(1) Includes impaired loans of $100.0 million and $96.0 million at June 30,
1999 and December 31, 1998, respectively, for which no specific
reserves are considered necessary.
Page 10
<PAGE> 11
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) INVESTMENTS (CONTINUED)
The activity in the specific and general reserves for the six months ended June
30, 1999 and 1998 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, 1998 $29.5 $29.6 $ 7.8 $ 66.9
Charged to other accounts - - 1.4 1.4
Principal write-offs (.6) (4.4) (.2) (5.2)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $28.9 $25.2 $ 9.0 $ 63.1(1)
=========================================================================================================================
Balance at December 31, 1997 $68.7 $31.6 $14.2 $114.5
Credited to net realized capital losses - - (2.0) (2.0)
Charged (credited) to other accounts (30.0) (2.0) 5.3 (26.7)
Principal write-offs (.4) (2.0) (.6) (3.0)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $38.3 $27.6 $16.9 $ 82.8(1)
=========================================================================================================================
</TABLE>
(1) Total reserves at June 30, 1999 and 1998 include $43.8 million and $47.5
million of specific reserves, respectively, and $19.3 million and $35.3
million of general reserves, respectively.
Income earned (pretax) and cash received on the average recorded investment in
impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
--------------------------------- -----------------------------------
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 $158.2 $3.3 $3.3 $159.4 $ 6.0 $ 6.0
Supporting experience-rated products 95.5 2.4 2.4 93.9 4.3 4.2
Supporting remaining products 28.6 2.4 2.3 34.8 3.1 2.8
- ----------------------------------------------------------------------------------------------------------------------
Total $282.3 $8.1 $8.0 $288.1 $13.4 $13.0
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998
--------------------------------- -----------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $167.0 $3.3 $3.3 $180.2 $ 6.5 $ 6.8
Supporting experience-rated products 107.7 1.6 1.7 108.7 4.1 4.1
Supporting remaining products 51.4 .8 .6 56.6 1.7 1.6
- ----------------------------------------------------------------------------------------------------------------------
Total $326.1 $5.7 $5.6 $345.5 $ 12.3 $ 12.5
======================================================================================================================
</TABLE>
Page 11
<PAGE> 12
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SUPPLEMENTAL CASH FLOW INFORMATION
Significant noncash investing and financing activities included acquisition of
real estate through foreclosures of mortgage loans amounting to $8 million and
$4 million for the six months ended June 30, 1999 and 1998, respectively.
(7) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $(270.1) $167.4
Less: reclassification adjustment for gains and other items included in net
income (2) 57.1 201.6
- ---------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities $(327.2) $(34.2)
===============================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$(415.6) million and $257.6 million for 1999 and 1998, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $87.8 million and $310.2 million for 1999 and 1998,
respectively.
(8) DISCONTINUED PRODUCTS
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and the reserve is reviewed by management quarterly. As long as the
reserve continues to represent management's then best estimate of expected
future losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. As a result of management's
review in the second quarter of 1999, $77 million (pretax) of the reserve was
released primarily due to favorable investment performance. The current reserve
reflects management's best estimate of anticipated future losses. The Company's
results of operations would be adversely affected to the extent that future
losses on the products are greater than anticipated and positively affected to
the extent that future losses are less than anticipated. (Refer to Aetna Inc.'s
1998 Annual Report on Form 10-K for a more complete discussion of the reserve
for anticipated future losses on discontinued products.)
At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate which was used to calculate the loss
on discontinuance. The offsetting payable, on which interest is similarly
accrued, is reflected in continuing products. Interest on the payable generally
offsets the investment income on the assets available to fund the shortfall. At
June 30, 1999, the receivable from continuing products, net of related deferred
taxes payable of $61 million on the accrued interest income, was $454 million.
The receivable is eliminated in consolidation.
Page 12
<PAGE> 13
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(8) DISCONTINUED PRODUCTS (CONTINUED)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three months ended June 30, 1999 Results Future Losses Net (1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $121.7 $ -- $121.7
Net realized capital gains 8.1 (8.1) --
Interest earned on receivable from continuing products 8.5 -- 8.5
Other income 4.9 -- 4.9
- ------------------------------------------------------------------------------------------------------------
Total revenue 143.2 (8.1) 135.1
- ------------------------------------------------------------------------------------------------------------
Current and future benefits 126.9 5.1 132.0
Operating expenses 3.1 -- 3.1
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses 130.0 5.1 135.1
- ------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 13.2 $(13.2) $ --
============================================================================================================
Three months ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------
Net investment income $134.9 $ -- $134.9
Net realized capital gains 9.9 (9.9) --
Interest earned on receivable from continuing products 8.7 -- 8.7
Other income 10.5 -- 10.5
- ------------------------------------------------------------------------------------------------------------
Total revenue 164.0 (9.9) 154.1
- ------------------------------------------------------------------------------------------------------------
Current and future benefits 143.0 6.9 149.9
Operating expenses 4.2 -- 4.2
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses 147.2 6.9 154.1
- ------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 16.8 $(16.8) $ --
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Six months ended June 30, 1999 Results Future Losses Net (1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $243.8 $ -- $243.8
Net realized capital gains 18.3 (18.3) --
Interest earned on receivable from continuing products 16.9 -- 16.9
Other income 15.3 -- 15.3
- ------------------------------------------------------------------------------------------------------------
Total revenue 294.3 (18.3) 276.0
- ------------------------------------------------------------------------------------------------------------
Current and future benefits 257.1 12.4 269.5
Operating expenses 6.5 -- 6.5
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses 263.6 12.4 276.0
- ------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 30.7 $(30.7) $ --
============================================================================================================
Six months ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------
Net investment income $272.6 $ -- $272.6
Net realized capital gains 75.0 (75.0) --
Interest earned on receivable from continuing products 17.3 -- 17.3
Other income 16.4 -- 16.4
- ------------------------------------------------------------------------------------------------------------
Total revenue 381.3 (75.0) 306.3
- ------------------------------------------------------------------------------------------------------------
Current and future benefits 290.5 8.5 299.0
Operating expenses 7.3 -- 7.3
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses 297.8 8.5 306.3
- ------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 83.5 $(83.5) $ --
============================================================================================================
</TABLE>
(1) Amounts are reflected in the June 30, 1999 and 1998 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products, which is eliminated in consolidation.
Page 13
<PAGE> 14
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(8) DISCONTINUED PRODUCTS (CONTINUED)
Assets and liabilities of discontinued products at June 30, 1999 were as follows
(1):
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------------------------------
<S> <C>
Debt securities available for sale $5,104.2
Mortgage loans 756.7
Real estate 103.6
Short-term and other investments 561.5
- ---------------------------------------------------------------------------
Total investments 6,526.0
Current and deferred income taxes 167.0
Receivable from continuing products (2) 514.7
- ---------------------------------------------------------------------------
Total assets $7,207.7
===========================================================================
Future policy benefits $4,605.9
Policyholders' funds left with the Company 1,186.7
Reserve for anticipated future losses on discontinued
products 1,167.6
Other 247.5
- ---------------------------------------------------------------------------
Total liabilities $7,207.7
===========================================================================
</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.
The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- -----------------------------------------------------------------------
<S> <C>
Reserve at December 31, 1998 $1,214.1
Results of discontinued products 30.7
Reserve reduction (77.2)
- -----------------------------------------------------------------------
Reserve at June 30, 1999 $1,167.6
=======================================================================
</TABLE>
(9) DEBT AND GUARANTEE OF DEBT SECURITIES
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services (collectively the "Aetna Services
Debt"). ACLLC has issued $275 million of redeemable preferred stock, and the
Subordinated Debentures represent substantially all of the assets of ACLLC.
Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks. This credit facility 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 .2% per annum, depending
upon its long-term senior unsecured debt rating. The facility fee at June 30,
1999 is at an annual rate of .08%. The facility also supports Aetna Services'
commercial paper borrowing program. As a guarantor of any amounts outstanding
under the credit facility, Aetna Inc. is required to maintain shareholders'
equity, excluding net unrealized capital gains and losses (accumulated other
comprehensive income), of at least $7.5 billion.
Page 14
<PAGE> 15
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED)
On April 1, 1999 Aetna Services entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of banks.
This credit facility terminates on March 26, 2000. 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 .25% per annum, depending upon its long-term senior
unsecured debt rating. The facility fee at June 30, 1999 is at an annual rate of
.08%. The facility also supports Aetna Services' commercial paper borrowing
program. As a guarantor of any amounts outstanding under this credit facility,
Aetna Inc. is required to maintain shareholders' equity, excluding net
unrealized capital gains and losses (accumulated other comprehensive income), of
at least $7.5 billion.
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services is as follows (in
millions):
Balance Sheets Information:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments (excluding Separate Accounts) $35,371.7 $38,313.9
Total assets 95,445.9 93,190.9
Total insurance liabilities 37,670.1 38,566.9
Total liabilities 93,176.5 90,770.3
Total redeemable preferred stock 275.0 275.0
Total shareholder's equity 1,994.4 2,145.6
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Information:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $2,797.1 $5,450.3
Total benefits and expenses 2,512.1 4,977.3
Income before income taxes 285.1 473.0
Net income 187.7 316.2
- ----------------------------------------------------------------------------------------------------
</TABLE>
The amount of dividends which may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at June 30, 1999
without prior approval by state regulatory authorities is limited to
approximately $332 million in the aggregate. There are no such restrictions on
distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.
Page 15
<PAGE> 16
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for the
three and six months ended June 30, was as follows:
<TABLE>
<CAPTION>
Aetna
Three months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other(1) Company
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from external customers $4,344.0 $163.0 $674.2 $ 33.3 $ .1 $5,214.6
Net investment income 138.5 213.8 97.1 258.3 1.3 709.0
Equity in subsidiaries -- -- 16.0 -- -- 16.0
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $4,482.5 $376.8 $787.3 $291.6 $ 1.4 $5,939.6
===============================================================================================================================
Operating earnings (2) $ 134.5 $ 56.3 $ 50.0 $ 21.7 $ (60.2) $ 202.3
Unusual items (3) (20.7) (5.4) (4.6) 50.1 (.9) 18.5
Realized capital gains (losses), net (8.4) .6 3.5 13.2 (2.5) 6.4
of tax
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 105.4 $ 51.5 $ 48.9 $ 85.0 $ (63.6) $ 227.2
===============================================================================================================================
998
Revenues from external customers $3,199.1 $204.8 $394.3 $ 34.1 $ .4 $3,832.7
Net investment income 131.6 268.8 94.9 301.7 1.4 798.4
Equity in subsidiaries -- -- 24.4 -- -- 24.4
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $3,330.7 $473.6 $513.6 $335.8 $ 1.8 $4,655.5
===============================================================================================================================
Operating earnings (losses) (2) $ 104.6 $ 72.0 $ 40.7 $ 22.2 $ (62.0) $ 177.5
Unusual item (3) (15.6) (5.1) (1.1) (.3) (2.4) (24.5)
Realized capital gains, net of tax 21.5 6.5 5.4 9.1 70.2 112.7
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 110.5 $ 73.4 $ 45.0 $ 31.0 $ 5.8 $ 265.7
===============================================================================================================================
</TABLE>
(1) Corporate and Other includes interest, staff area expenses,
advertising, contributions, net investment income and other general
expenses, as well as consolidating adjustments.
(2) Operating earnings are comprised of net income (loss) excluding net
realized capital gains and losses and unusual items.
(3) Unusual items include Year 2000 costs for all segments in 1998 and 1999
and an after-tax benefit of $50.2 million from reductions of the
reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 1999.
Page 16
<PAGE> 17
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Aetna
Six months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other(1) Company
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from external customers $8,648.4 $318.3 $1,119.4 $ 66.4 $ .4 $10,152.9
Net investment income 279.2 429.2 191.6 514.9 4.3 1,419.2
Equity in subsidiaries -- -- 46.5 -- -- 46.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $8,927.6 $747.5 $1,357.5 $ 581.3 $ 4.7 $11,618.6
=================================================================================================================================
Operating earnings (2) $ 268.0 $109.3 $ 95.6 $ 44.2 $ (119.7) $ 397.4
Unusual items (3) (38.2) (11.1) (7.2) 49.9 (1.8) (8.4)
Realized capital gains (losses), net
of tax (3.7) 2.5 2.1 19.2 (2.5) 17.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 226.1 $100.7 $ 90.5 $113.3 $ (124.0) $ 406.6
=================================================================================================================================
1998
Revenues from external customers $6,389.1 $407.8 $ 745.5 $ 78.7 $ .7 $ 7,621.8
Net investment income 253.3 536.4 182.7 605.4 2.8 1,580.6
Equity in subsidiaries -- -- 54.9 -- -- 54.9
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $6,642.4 $944.2 $ 983.1 $684.1 $ 3.5 $ 9,257.3
=================================================================================================================================
Operating earnings (losses) (2) $ 205.1 $135.8 $ 78.2 $ 44.8 $ (123.5) $ 340.4
Unusual item (3) (24.4) (9.2) (2.8) (.4) (4.0) (40.8)
Realized capital gains (losses), net
of tax 28.6 5.1 (2.4) 33.8 68.5 133.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 209.3 $131.7 $ 73.0 $ 78.2 $ (59.0) $ 433.2
=================================================================================================================================
</TABLE>
(1) Corporate and Other includes interest, staff area expenses,
advertising, contributions, net investment income and other general
expenses, as well as consolidating adjustments.
(2) Operating earnings are comprised of net income (loss) excluding net
realized capital gains and losses and unusual items.
(3) Unusual items include Year 2000 costs for all segments in 1998 and 1999
and an after-tax benefit of $50.2 million from reductions of the
reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 1999.
(11) COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In connection with the sale of its property-casualty operations in 1996, the
Company vacated, and the purchaser subleased, at market rates for a period of
eight years, the space that the Company occupied in the CityPlace office
facility in Hartford. In 1996, the Company recorded a charge of $292 million
pretax ($190 million after tax) which represented 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. At June 30, 1999 and
December 31, 1998, the balance in this facilities reserve was $279 million and
$288 million, respectively.
Page 17
<PAGE> 18
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(11) 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 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to
the United States District Court for the Eastern District of Pennsylvania (the
"Court") for consolidated pretrial proceedings with the cases pending there. The
plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking,
among other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint, and the Court
denied that motion in March, 1999. Discovery proceedings have commenced and
trial currently is scheduled to begin in early 2000. The Company is defending
the actions vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medical bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph are
not expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.
Page 18
<PAGE> 19
Item 1. Financial Statements.
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of June 30, 1999, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1999 and 1998, and the related condensed consolidated statements
of shareholders' equity and cash flows for the six-month periods ended June 30,
1999 and 1998. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Inc. and Subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 3, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
July 29, 1999
Page 19
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three and six months ended
June 30, 1999 and 1998. This review should be read in conjunction with the
consolidated financial statements and other data presented herein as well as the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Aetna Inc.'s 1998 Annual Report on Form 10-K.
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 products including annuity contracts, investment advisory
services, financial planning and pension plan administration services. Aetna
International, through subsidiaries and joint venture operations, sells
primarily life insurance, health insurance and financial services products in
markets outside the United States. The Company also has a Large Case Pensions
business that manages a variety of retirement products for defined benefit and
defined contribution plans.
Consolidated Results
The Company reported net income of $227 million for the three months ended June
30, 1999 compared to $266 million for the same period in 1998. Net income per
diluted common share for the three months ended June 30, 1999 was $1.50,
compared with $1.69 a year ago.
Net income reflects Year 2000 costs of $32 million for the three months ended
June 30, 1999 and $25 million for the same period in 1998. Results for the three
months ended June 30, 1999 include a reduction of the reserve for loss on
discontinued products for Large Case Pensions of $50 million. Net realized
capital gains were $6 million for the three months ended June 30, 1999 and $113
million for the same period in 1998. Excluding these items, earnings were $202
million for the three months ended June 30, 1999 compared to $178 million for
the same period in 1998.
The Company reported net income of $407 million for the six months ended June
30, 1999 compared to $433 million for the same period in 1998. Net income per
diluted common share for the six months ended June 30, 1999 was $2.66, compared
with $2.75 a year ago.
Net income reflects Year 2000 costs of $59 million for the six months ended June
30, 1999 and $41 million for the same period in 1998. Results for the six months
ended June 30, 1999 include a reduction of the reserve for loss on discontinued
products for Large Case Pensions of $50 million. Net realized capital gains were
$18 million for the six months ended June 30, 1999 and $134 million for the same
period in 1998. Excluding these items, earnings were $397 million for the six
months ended June 30, 1999 compared to $340 million for the same period in 1998.
Page 20
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (CONTINUED)
Acquisitions and Dispositions
Aetna U.S. Healthcare
Prudential Health Care Business
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America ("Prudential") to acquire the Prudential
health care business ("PHC") for approximately $1 billion. The Company expects
to secure remaining regulatory approval and close the transaction during the
third quarter. The Company expects to finance the transaction by issuing $500
million of three-year senior notes to Prudential and by using funds made
available from issuing commercial paper. The Company may ultimately replace this
commercial paper with medium- or long-term fixed income securities. As part of
the transaction, the Company also agreed to service Prudential's administrative
services only contracts following the acquisition.
In connection with the transaction, the Company reached an agreement with the
U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related businesses acquired by
Aetna as part of the 1998 NYLCare acquisition ("NYLCare Texas"). The agreement
primarily affects approximately 260,000 NYLCare commercial HMO/POS members in
the Houston market and approximately 167,000 NYLCare commercial HMO/POS members
in the Dallas/Ft. Worth market, as well as related management, operating systems
and other assets. The Company has begun this divestiture process. The financial
impact of the divestiture will depend on the ultimate sales price relative to
the book value of the businesses to be sold and will be assessed as the process
is completed.
Following the closing, the Company's results will be affected by, among other
things, the operating results of PHC, the costs of financing the transaction and
the amortization of intangible assets (primarily goodwill) to be created as a
result of the transaction and by the loss of the operating results of the
NYLCare Texas operations to be sold. Refer to "Aetna U.S. Healthcare",
"Corporate" and "Liquidity and Capital Resources" as well as Note 3 of Condensed
Notes to Consolidated Financial Statements, for further discussion.
NYLCare Health Business
In July 1998, the Company acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, the Company's results have been
affected by, among other things, the operating results of NYLCare, the costs of
financing the transaction and the amortization of intangible assets (primarily
goodwill) created by the transaction. The operations, and related amortization
of intangible assets, of NYLCare are reflected in the Aetna U.S. Healthcare
segment while the financing costs of the acquisition are reflected in the
Corporate segment. Refer to "Aetna U.S. Healthcare", "Corporate" and "Liquidity
and Capital Resources" as well as Note 3 of Condensed Notes to Consolidated
Financial Statements, for further discussion.
Aetna Retirement Services
In October 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation for approximately $1 billion. The
principal agreement to sell this business was generally in the form of an
indemnity reinsurance arrangement. For more details about the transaction and
the indemnity reinsurance arrangement, refer to "Aetna Retirement Services" and
Note 3 of Condensed Notes to Consolidated Financial Statements.
Page 21
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (CONTINUED)
Acquisitions and Dispositions (Continued)
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale will result in a capital loss which is not expected to be
material. The revenue and earnings of the Canadian operations are not material
to the Company. Completion of the sale, which is anticipated to occur in the
fall of 1999, is subject to Canadian federal and other regulatory approvals and
other customary conditions. Proceeds from the sale are expected to be used for
general corporate purposes, including repayment of debt, internal growth,
acquisitions and share repurchases.
Other
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of
the Preferred Stock received .8197 shares of Aetna common stock for each share
of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna
common stock were issued to effect the redemption. Refer to "Liquidity and
Capital Resources" and Note 4 of the Condensed Notes to Consolidated Financial
Statements for further discussion.
Page 22
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
(Millions) 1999(1) 1998 % Change 1999(1) 1998 % Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $3,949.1 $2,847.0 38.7% $7,861.7 $5,686.0 38.3%
Net investment income 138.5 131.6 5.2 279.2 253.3 10.2
Fees and other income 394.9 352.1 12.2 786.7 703.1 11.9
Net realized capital gains
(losses) (12.9) 33.2 - (5.5) 44.2 -
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 4,469.6 3,363.9 32.9 8,922.1 6,686.6 33.4
- -----------------------------------------------------------------------------------------------------------------------------
Current and future benefits 3,375.9 2,436.2 38.6 6,734.2 4,872.8 38.2
Operating expenses 799.1 633.5 26.1 1,570.0 1,244.2 26.2
Amortization of goodwill and
other acquired intangible assets 101.9 90.7 12.3 203.8 181.4 12.3
- -----------------------------------------------------------------------------------------------------------------------------
Total benefits and
expenses 4,276.9 3,160.4 35.3 8,508.0 6,298.4 35.1
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192.7 203.5 (5.3) 414.1 388.2 6.7
Income taxes 87.3 93.0 (6.1) 188.0 178.9 5.1
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 105.4 $ 110.5 (4.6)% $ 226.1 $ 209.3 8.0%
=============================================================================================================================
Net realized capital gains
(losses), net of tax
(included above) $ (8.4) $ 21.5 - % $ (3.7) $ 28.6 -%
=============================================================================================================================
</TABLE>
(1) Results include the acquired NYLCare health business, including the
portion that the Company must divest.
Aetna U.S. Healthcare's net income for the three months ended June 30, 1999
decreased $5 million compared to the same period in 1998, driven by net realized
capital losses. Net income includes Year 2000 costs of $21 million for the three
months ended June 30, 1999 and $16 million for the same period in 1998.
Excluding Year 2000 costs and net realized capital gains or losses, results for
the three months ended June 30, 1999 increased $30 million, or 29%, compared to
the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $17 million
compared to the same period in 1998. Net income includes Year 2000 costs of $38
million for the six months ended June 30, 1999 and $24 million for the same
period in 1998. Excluding Year 2000 costs and net realized capital gains or
losses, results for the six months ended June 30, 1999 increased $63 million, or
31%, compared to the same period in 1998.
Business Results
In order to provide a comparison that management believes better reflects the
underlying performance of Aetna U.S. Healthcare, the operating earnings
discussion that follows excludes the amortization of goodwill and other acquired
intangible assets (including the goodwill associated with the U.S. Healthcare
and NYLCare acquisitions), Year 2000 costs and net realized capital gains or
losses in both periods.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999(1) 1998 1999(1) 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating earnings:
Health Risk $ 137.7 $ 95.0 $ 273.6 $ 188.7
Group Insurance and Other Health 79.4 84.3 159.5 165.9
- -----------------------------------------------------------------------------------------------------------
Total Aetna U.S. Healthcare $ 217.1 $ 179.3 $ 433.1 $ 354.6
===========================================================================================================
Commercial HMO Premium PMPM $139.68 $134.98 $139.19 $135.02
- -----------------------------------------------------------------------------------------------------------
Commercial HMO Medical Cost PMPM $114.80 $109.60 $114.27 $110.58
- -----------------------------------------------------------------------------------------------------------
Commercial HMO Medical Loss Ratio 82.2% 81.2% 82.1% 81.9%
- -----------------------------------------------------------------------------------------------------------
Medicare HMO Premium PMPM $488.93 $472.19 $487.16 $470.66
- -----------------------------------------------------------------------------------------------------------
Medicare HMO Medical Cost PMPM $442.01 $450.95 $439.69 $443.36
- -----------------------------------------------------------------------------------------------------------
Medicare HMO Medical Loss Ratio 90.4% 95.5% 90.3% 94.2%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the acquired NYLCare health business, including the portion
that the Company must divest.
Page 23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Health Risk
Health Risk (which includes all health products for which Aetna U.S. Healthcare
assumes all or a majority of health care cost and utilization risk) earnings
increased $43 million for the three months ended June 30, 1999 and $85 million
for the six months ended June 30, 1999 compared to the corresponding periods of
1998. The increase in 1999 earnings reflects membership increases from
enrollment growth and the acquisition of NYLCare as well as improved Medicare
HMO results due to the exiting of several Medicare markets as of January 1,
1999.
For the Health Risk business, the liability for medical claims payable reflects
estimates of the ultimate cost of claims that have been incurred but not yet
reported or 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 operating results within current and future benefits.
Commercial HMO
Commercial HMO premium per member per month ("PMPM") increased 3% for the three
and six months ended June 30, 1999 compared to the corresponding periods of
1998. This increase was primarily due to premium rate increases, partially
offset by customers selecting lower premium plans, a shift in the geographic mix
of membership and the addition of NYLCare members.
Commercial HMO medical cost PMPM increased by 5% for the three months ended June
30, 1999 and 3% for the six months ended June 30, 1999 compared to the
corresponding periods of 1998. The 1999 increase reflects medical trend,
particularly pharmacy benefits (both higher cost and utilization), as well as
the addition of NYLCare members. These increases were partially offset by
medical cost initiatives.
The Commercial HMO medical loss ratio increased 1.0 percentage points for the
three months ended June 30, 1999 and .2 percentage points for the six months
ended June 30, 1999 compared to the corresponding periods of 1998. The higher
medical loss ratio reflects medical trend, particularly pharmacy benefits, as
well as the addition of NYLCare members.
Medicare HMO
Medicare HMO premiums PMPM increased 4% for the three and six months ended June
30, 1999 compared to the corresponding periods of 1998. This increase was
primarily due to Health Care Financing Administration rate increases and
increases in supplemental premiums, partially offset by a shift in the
geographic mix of membership.
Medicare HMO medical costs PMPM decreased by 2% for the three months ended June
30, 1999 and .8% for the six months ended June 30, 1999 compared to the
corresponding periods of 1998. The lower medical costs in 1999 reflect the
favorable impact of exiting several markets as of January 1, 1999, partially
offset by medical trend, particularly pharmacy benefits.
The Medicare HMO medical loss ratio decreased 5.1 percentage points for the
three months ended June 30, 1999 and 3.9 percentage points for the six months
ended June 30, 1999 compared to the corresponding periods of 1998. This
improvement primarily reflects the favorable impact of exiting several markets.
Page 24
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Group Insurance and Other Health
Group Insurance and Other Health includes group life and disability insurance
and long-term care insurance, offered on both an insured and employer-funded
basis, and all health products offered on an employer-funded basis. Group
Insurance and Other Health results decreased $5 million for the three months
ended June 30, 1999 and $6 million for the six months ended June 30, 1999
compared to the corresponding periods of 1998. This decrease reflects less
favorable developments in claim benefit reserve estimates, partially offset by
higher investment income. Results for the Group Insurance and Other Health
businesses are expected to be level or to decrease slightly in 1999.
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
June 30, 1999 (1) June 30, 1998
-------------------------------- --------------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2) 5,434 716 6,150 3,905 399 4,304
Medicare 566 - 566 405 - 405
Medicaid 141 39 180 69 - 69
- ---------------------------------------------------------------------------------------------------------------------------
Total HMO 6,141 755 6,896 4,379 399 4,778
POS 212 2,451 2,663 266 2,515 2,781
PPO 884 2,945 3,829 572 2,771 3,343
Indemnity 162 2,058 2,220 253 2,301 2,554
- ---------------------------------------------------------------------------------------------------------------------------
Total Health Membership 7,399 8,209 15,608 5,470 7,986 13,456
===========================================================================================================================
Group Insurance:
Group Life 9,732 9,507
Disability 2,522 2,737
Long-Term Care 107 92
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Health membership for NYLCare at the date of acquisition (July 15,
1998) in thousands was 2,117 members, including 1,186 Commercial HMO
risk, 111 Medicare HMO risk, 56 Medicaid HMO risk, 135 HMO nonrisk, 452
PPO risk and 177 PPO nonrisk. Group Insurance NYLCare membership at the
date of acquisition was 791 thousand members.
(2) Includes 1,507 thousand POS members who access primary care physicians
and referred care through an HMO network at June 30, 1999 and 1,007
thousand at June 30, 1998.
Total Health membership as of June 30, 1999 increased by 2 million members, or
16%, when compared to June 30, 1998 primarily due to the acquisition of NYLCare.
Excluding the impact of the NYLCare members at the date of acquisition, HMO
membership increases were substantially offset by declines in point-of-service
("POS"), preferred provider organization ("PPO") and Indemnity enrollment.
Total Revenue and Expense
Revenue for Aetna U.S. Healthcare, excluding net realized capital gains,
increased by $1.2 billion, or 35%, for the three months ended June 30, 1999 and
$2.3 billion, or 34%, for the six months ended June 30, 1999 when compared to
the same periods in 1998. This growth was primarily due to the acquisition of
NYLCare, as well as to premium rate increases and Commercial HMO membership
growth.
Operating expenses for Aetna U.S. Healthcare increased by $166 million, or 26%,
for the three months ended June 30, 1999 and $326 million, or 26%, for the six
months ended June 30, 1999 when compared to the same periods in 1998. The
increase in 1999 reflects the acquisition of NYLCare, as well as costs to
support HMO membership increases. However, operating expenses as a percentage of
revenue decreased to 18% for the three and six months ended June 30, 1999 from
19% for the corresponding periods of 1998.
Page 25
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Acquisition of the NYLCare Health Business
On July 15, 1998, the Company acquired NYLCare for a purchase price of
approximately $1.1 billion. Refer to "Overview" and Note 3 of the Condensed
Notes to Consolidated Financial Statements for a further discussion of the
acquisition.
Agreement to Acquire Prudential Health Care Business
On December 9, 1998, the Company entered into definitive agreements to acquire
PHC. As part of the transaction, the Company also agreed to service Prudential's
administrative services only ("ASO") contracts following the acquisition.
Included in the acquisition are PHC's HMO, POS, PPO and Indemnity health lines,
as well as its dental business. At June 30, 1999, PHC had approximately 5.5
million health members and 8 million dental members. Following the acquisition,
Aetna U.S. Healthcare's results will be affected by, among other things, the
operating results of PHC and the amortization of intangible assets (primarily
goodwill) created as a result of the transaction.
As part of the transaction, the Company and Prudential have entered into a
reinsurance agreement for which the Company will pay a premium. Under the
agreement, Prudential will indemnify the Company from insurance risk which may
arise following the closing by reimbursing the Company for a large portion of
medical costs of PHC in excess of certain threshold medical loss ratio levels
through the year 2000. Prudential will also pay the Company certain supplemental
fees related to the administrative service contracts to be serviced by the
Company following the closing. These fees are fixed in amount and decline over a
period ending 18 months following the closing. PHC and Prudential's ASO business
have incurred significant operating losses in recent periods. Following the
closing, the Company will seek to improve profitability of PHC by reducing
administrative costs, improving underwriting and pricing discipline and
otherwise improving its operations. Refer to "Overview" and Note 3 of the
Condensed Notes to Consolidated Financial Statements for a further discussion of
the acquisition and agreement to divest NYLCare Texas.
Page 26
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA RETIREMENT SERVICES
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -------------------------------------
(Millions) 1999 1998(1) % Change 1999 1998(1) % Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums (2) $ 18.8 $ 34.9 (46.1)% $ 42.4 $ 75.2 (43.6)%
Net investment income 213.8 268.8 (20.5) 429.2 536.4 (20.0)
Fees and other income 144.2 169.9 (15.1) 275.9 332.6 (17.0)
Net realized capital gains 1.0 10.1 (90.1) 3.9 7.9 (50.6)
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue 377.8 483.7 (21.9) 751.4 952.1 (21.1)
- --------------------------------------------------------------------------------------------------------------------------------
Current and future benefits (2) 180.1 235.3 (23.5) 363.1 485.6 (25.2)
Operating expenses 94.6 104.0 (9.0) 187.1 205.7 (9.0)
Amortization of deferred policy
acquisition costs 26.8 36.5 (26.6) 51.7 70.5 (26.7)
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 301.5 375.8 (19.8) 601.9 761.8 (21.0)
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 76.3 107.9 (29.3) 149.5 190.3 (21.4)
Income taxes 24.8 34.5 (28.1) 48.8 58.6 (16.7)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 51.5 $ 73.4 (29.8)% $ 100.7 $ 131.7 (23.5)%
================================================================================================================================
Net realized capital gains,
net of tax (included above) $ .6 $ 6.5 (90.8)% $ 2.5 $ 5.1 (51.0)%
================================================================================================================================
Deposits not included in premiums above:
Annuities -- fixed options $ 449.1 $ 275.6 63.0% $ 994.3 $ 608.7 63.3%
Annuities -- variable options 1,061.0 947.5 12.0 2,545.1 1,854.6 37.2
Individual life insurance - 129.6 (100.0) - 260.7 (100.0)
- --------------------------------------------------------------------------------------------------------------------------------
Total $1,510.1 $1,352.7 11.6% $3,539.4 $ 2,724.0 30.0%
================================================================================================================================
Assets under management: (3)
Annuities -- fixed options $12,550.8 $11,947.1 5.1%
Annuities -- variable options (4) 29,499.5 23,932.5 23.3
Other investment advisory 16,737.6 11,780.2 42.1
- --------------------------------------------------------------------------------------------------------------------------------
Financial services 58,787.9 47,659.8 23.3
Assets under administration (5) 3,729.4 2,810.9 32.7
- --------------------------------------------------------------------------------------------------------------------------------
Total financial services' assets under
management and administration 62,517.3 50,470.7 23.9
- --------------------------------------------------------------------------------------------------------------------------------
Individual life insurance assets under
management - 2,798.8 (100.0)
- --------------------------------------------------------------------------------------------------------------------------------
Total assets under management and
administration $62,517.3 $53,269.5 17.4%
================================================================================================================================
</TABLE>
(1) 1998 operating results reflect the operations of the individual life
business which was sold on October 1, 1998.
(2) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $12.4 million for
the three months ended June 30, 1999, $13.7 million for the three
months ended June 30, 1998, $30.1 million for the six months ended June
30, 1999 and $28.0 million for the six months ended June 30, 1998.
(3) Excludes net unrealized capital gains of approximately $2.6 million at
June 30, 1999 and $599.9 million at June 30, 1998.
(4) Includes $9,699.8 million at June 30, 1999 and $6,603.3 million at June
30, 1998 of assets held and managed by unaffiliated mutual funds.
(5) Represents assets for which ARS provides administrative services only.
Aetna Retirement Services' ("ARS") net income for the three months ended June
30, 1999 decreased $22 million compared to the same period in 1998 due to the
sale of the individual life business on October 1, 1998. Net income includes
Year 2000 costs of $5 million for the three months ended June 30, 1999 and 1998.
Net income for the three months ended June 30, 1998 also included $24 million
related to the individual life insurance business. Excluding Year 2000 costs and
net realized capital gains, as well as the 1998 individual life earnings,
results for the three months ended June 30, 1999 increased $9 million, or 18%,
compared to the second quarter of 1998.
Page 27
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA RETIREMENT SERVICES (CONTINUED)
Net income for the six months ended June 30, 1999 decreased $31 million compared
to the same period in 1998. Net income includes Year 2000 costs of $11 million
for the six months ended June 30, 1999 and $9 million for the same period in
1998. Net income for the six months ended June 30, 1998 also included $47
million related to the individual life insurance business. Excluding Year 2000
costs and net realized capital gains, as well as the 1998 individual life
earnings, results for the six months ended June 30, 1999 increased $21 million,
or 23%, compared to the first six months of 1998.
ARS' earnings, excluding Year 2000 costs and net realized capital gains or
losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial services $56.3 $ 47.8 $109.3 $ 88.6
Individual life insurance (1) - 24.2 - 47.2
- ---------------------------------------------------------------------------------------------------------------
Total $56.3 $ 72.0 $109.3 $135.8
===============================================================================================================
</TABLE>
(1) The individual life business was sold on October 1, 1998.
The increase in earnings for financial services products primarily reflects
increased fee income from increased assets under management. Assets under
management and administration increased primarily due to appreciation in the
stock market, as well as additional net deposits (deposits less surrenders).
Partially offsetting the increases in fee income were increased operating
expenses. However, operating expenses as a percentage of assets under management
declined in both periods.
Of the $12.6 billion and $11.9 billion of fixed-annuity assets under management
at June 30, 1999 and 1998, respectively, 26% were fully guaranteed and 74% were
experience-rated in each period. The average annualized earned rates on
investments supporting fully guaranteed investment contracts were 7.4% and 7.5%
and the average annualized earned rates on investments supporting
experience-rated investment contracts were 7.6% and 7.9% for the six months
ended June 30, 1999 and 1998, respectively. The average annualized credited
rates on fully guaranteed investment contracts were 6.4% and 6.6% and the
average annualized credited rates on experience-rated investment contracts were
5.6% and 5.8% for the six months ended June 30, 1999 and 1998, respectively. The
resulting annualized interest margins on fully guaranteed investment contracts
were 1.0% and .9% and on experience-rated investment contracts were 2.0% and
2.1% for the six months ended June 30, 1999 and 1998, respectively.
Sale of Individual Life Insurance Business
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The sale resulted in an after-tax
gain of approximately $152 million. Since the principal agreement to sell this
business was generally in the form of an indemnity reinsurance arrangement, the
Company deferred approximately $88 million of the gain and is recognizing it
over approximately 15 years. Approximately $2 million of the gain was recognized
during the three months ended June 30, 1999 and approximately $4 million was
recognized during the first six months of 1999. Revenues from the business sold
were $129 million for the three months ended June 30, 1998 and were $264 million
for the first six months of 1998. For more details about the transaction and the
indemnity reinsurance arrangement, refer to Note 3 of Condensed Notes to
Consolidated Financial Statements.
Page 28
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ----------------------------------------
(Millions) 1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 583.8 $ 367.8 58.7% $1,000.4 $ 687.1 45.6%
Net investment income 113.1 119.3 (5.2) 238.1 237.6 .2
Fees and other income 90.4 26.5 - 119.0 58.4 103.8
Net realized capital gains (losses) 5.4 7.2 (25.0) 2.9 (5.1) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 792.7 520.8 52.2 1,360.4 978.0 39.1
- ---------------------------------------------------------------------------------------------------------------------------------
Current and future benefits 542.9 304.8 78.1 885.1 582.5 51.9
Operating expenses 150.8 121.8 23.8 291.0 236.4 23.1
Interest expenses 2.2 3.1 (29.0) 4.5 5.8 (22.4)
Amortization of goodwill and other
acquired intangible assets 3.0 5.2 (42.3) 8.1 10.3 (21.4)
Amortization of deferred policy
acquisition costs 24.8 26.1 (5.0) 49.8 44.4 12.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 723.7 461.0 57.0 1,238.5 879.4 40.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 69.0 59.8 15.4 121.9 98.6 23.6
Income taxes 20.1 14.8 35.8 31.4 25.6 22.7
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 48.9 $ 45.0 8.7% $ 90.5 $ 73.0 24.0%
=================================================================================================================================
Net realized capital gains (losses), net
of tax (included above) $ 3.5 $ 5.4 (35.2)% $ 2.1 $ (2.4) -%
=================================================================================================================================
</TABLE>
Aetna International's net income for the three months ended June 30, 1999
increased by $4 million compared to the same period in 1998. Net income includes
Year 2000 costs of $5 million for the three months ended June 30, 1999 and $1
million for the same period in 1998. Excluding Year 2000 costs and net realized
capital gains or losses, results for the three months ended June 30, 1999
increased $9 million, or 23%, compared to the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $18 million
compared to the same period in 1998. Net income includes Year 2000 costs of $7
million for the six months ended June 30, 1999 and $3 million for the same
period in 1998. Excluding Year 2000 costs and net realized capital gains or
losses, results for the six months ended June 30, 1999 increased $17 million, or
22%, compared to the same period in 1998.
The increase in 1999 in both periods primarily reflects earnings growth in
Canada, Chile, Malaysia, Taiwan, and the Company's Mexican insurance businesses
partially offset by lower earnings in Brazil. Fluctuations in foreign currencies
did not significantly impact earnings for the second quarter of 1999. The
weakening of foreign currencies, however, did significantly offset growth in
local currency earnings in Brazil and partially offset local currency earnings
in Mexico and Chile during the six months ended June 30, 1999. Refer to
"Overview" for a discussion related to the pending sale of Aetna International's
Canadian operations.
The Company continues to monitor Latin American economies, which are in
recession, and the potential near-term impact on our businesses. Further
currency devaluations in Latin America, or in other regions where the Company
has established operations, could adversely affect future operating earnings
when translated into U.S. dollars. Refer to "Aetna International" and
"Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual Report on
Form 10-K for additional information.
Page 29
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA INTERNATIONAL (CONTINUED)
Earnings by major geographic location, excluding Year 2000 costs and net
realized capital gains or losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asia Pacific (1) $21.3 $15.6 $30.2 $27.9
Americas (2) 32.4 28.6 76.6 57.2
Other (3) (3.7) (3.5) (11.2) (6.9)
- --------------------------------------------------------------------------------------------------------------
Total $50.0 $40.7 $95.6 $78.2
==============================================================================================================
</TABLE>
(1) Includes China, Hong Kong, Indonesia, Malaysia, New Zealand,
Philippines, Taiwan and Thailand.
(2) Includes Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru,
Poland and Venezuela.
(3) Includes general and other miscellaneous expenses.
Page 30
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
(Millions) 1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 28.8 $ 29.4 (2.0)% $ 57.4 $ 69.4 (17.3)%
Net investment income 258.3 301.7 (14.4) 514.9 605.4 (14.9)
Fees and other income 4.5 4.7 (4.3) 9.0 9.3 (3.2)
Net realized capital gains 20.3 14.1 44.0 29.5 52.0 (43.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 311.9 349.9 (10.9) 610.8 736.1 (17.0)
- ---------------------------------------------------------------------------------------------------------------------------
Current and future benefits 254.0 294.4 (13.7) 505.5 600.4 (15.8)
Operating expenses 3.3 5.9 (44.1) 6.4 11.9 (46.2)
Reduction of reserve for loss on
discontinued products (77.2) - - (77.2) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 180.1 300.3 (40.0) 434.7 612.3 (29.0)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 131.8 49.6 165.7 176.1 123.8 42.2
Income taxes 46.8 18.6 151.6 62.8 45.6 37.7
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 85.0 $ 31.0 174.2% $ 113.3 $ 78.2 44.9%
===========================================================================================================================
Net realized capital gains, net of
tax (included above) $ 13.2 $ 9.1 45.1% $ 19.2 $ 33.8 (43.2)%
===========================================================================================================================
Deposits not included in
premiums above $195.9 $216.6 (9.6)% $ 461.3 $ 484.0 (4.7)%
===========================================================================================================================
Assets under management (1) (2) $27,365.7 $29,707.6 (7.9)%
===========================================================================================================================
</TABLE>
(1) Excludes net unrealized capital losses of approximately $35.5 million
at June 30, 1999 and net unrealized capital gains of approximately
$690.6 million at June 30, 1998.
(2) Includes assets under management of $6,390.1 million at June 30, 1999
and $6,974.1 million at June 30, 1998 related to discontinued products.
Large Case Pensions' net income for the three months ended June 30, 1999
increased by $54 million compared to the same period in 1998. During the three
months ended June 30, 1999, the Company released $50 million of the reserve
related to discontinued products primarily as a result of favorable investment
performance. Net income also includes Year 2000 costs of $.1 million for the
three months ended June 30, 1999 and $.3 million for the same period in 1998.
Excluding the reserve release in 1999, Year 2000 costs and net realized capital
gains in both periods, results for the three months ended June 30, 1999
decreased slightly compared to the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $35 million
compared to the same period in 1998. Excluding the discontinued products reserve
release in 1999, Year 2000 costs of $.3 million for the six months ended June
30, 1999 and $.4 million for the same period in 1998 and net realized capital
gains in both periods, results for the six months ended June 30, 1999 decreased
slightly compared to the same period in 1998.
The decrease in results for the three and six months ended June 30, 1999
continues to reflect the redeployment of capital supporting this business,
partially offset by lower expenses. Assets under management at June 30, 1999
were 8% lower than a year earlier. This decrease primarily resulted from the
continuing runoff of underlying liabilities.
Page 31
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows
(excluding contractholder transfers to other Company products):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $237.3 $235.9 $478.5 $473.0
Contractholder withdrawals other than
scheduled contract maturities and benefit
payments 125.7 99.8 201.0 172.5
Participant directed withdrawals 21.5 24.8 43.9 52.6
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
Discontinued Products
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that aggregate future losses on the products are greater than anticipated and
positively affected to the extent future losses are less than anticipated.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest margin (1) $ (3.3) $(5.2) $(8.6) $(11.6)
Net realized capital gains (2) 5.3 6.5 11.9 48.8
Interest earned on receivable from continuing
products 5.5 5.6 11.0 11.2
Other, net 1.3 1.9 5.9 1.6
- --------------------------------------------------------------------------------------------------------------
Results of discontinued products, after tax $ 8.8 $ 8.8 $20.2 $ 50.0
==============================================================================================================
Results of discontinued products, pretax $ 13.2 $16.8 $30.7 $ 83.5
==============================================================================================================
Net realized capital gains from sales of bonds,
after tax (included above) $ 2.3 $ 6.0 $ 7.8 $ 29.1
==============================================================================================================
</TABLE>
(1) The interest margin is the difference between earnings on invested
assets and interest credited to contractholders.
(2) Includes realized capital gains of $1.5 million for the three months
ended June 30, 1998 and $22.7 million for the six months ended June 30,
1998 related to continued favorable developments in real estate
markets.
Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $454 million, net of related deferred
taxes payable, at June 30, 1999. Interest income accrues on this receivable at
the discount rate used to calculate the reserve.
Page 32
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ------------------------------------------------------------
<S> <C>
Reserve at December 31, 1998 $1,214.1
Results of discontinued products 30.7
Reserve reduction (77.2)
- ------------------------------------------------------------
Reserve at June 30, 1999 $1,167.6
============================================================
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $50 million ($77 million pretax) of the reserve was released
in the second quarter of 1999 primarily due to favorable investment performance.
The current reserve reflects management's best estimate of anticipated future
losses.
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scheduled contract maturities, settlements
and benefit payments $356.2 $392.6 $ 666.7 $860.1
Participant directed withdrawals 4.3 6.5 8.6 12.9
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to Note 8 of Condensed Notes to Consolidated Financial Statements for
additional information.
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -----------------------------------
(Millions, after tax) 1999 1998 % Change 1999 1998 % Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense $40.1 $ 34.7 15.6% $80.7 $ 69.9 15.5%
===========================================================================================================================
Other operating expenses, net $21.0 $ 29.7 (29.3)% $40.8 $ 57.6 (29.2)%
Net realized capital losses (gains) (1) 2.5 (70.2) - 2.5 (68.5) -
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense (income) $23.5 $(40.5) -% $43.3 $(10.9) -%
===========================================================================================================================
</TABLE>
(1) After-tax net realized capital gains in 1998 include gains of $74.4
million during the three and six months ended June 30, 1998 related to
the sale of the Company's remaining investment in Travelers Property
Casualty Corporation.
The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other Operating Expenses"
include corporate expenses such as staff area expenses, advertising and
contributions, which are partially offset by net investment income.
The 1999 increase in interest expense primarily results from additional debt
incurred in connection with the NYLCare acquisition. Following the acquisition
of PHC, interest expense will increase due to the issuance of debt to fund the
acquisition.
Included in other operating expenses are Year 2000 costs of $1 million for the
three months ended June 30, 1999, $2 million for the same period in 1998, $2
million for the six months ended June 30, 1999 and $4 million for the same
period in 1998. Excluding Year 2000 costs, other operating expenses decreased
due to continued cost reduction initiatives, as well as system implementation
costs during the first six months of 1998 not present in 1999.
Page 33
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).
Total Investments
<TABLE>
<CAPTION>
(Millions) June 30, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities $ 29,826.8 $32,180.8
Equity securities 879.6 800.5
Short-term investments 803.8 942.2
Mortgage loans 3,440.1 3,553.0
Real estate 311.1 270.3
Policy loans 498.7 458.7
Other 1,373.5 1,264.5
- --------------------------------------------------------------------------------------------
Total investments $ 37,133.6 $39,470.0
============================================================================================
</TABLE>
Debt Securities
Debt securities represented 80% of the Company's total general account invested
assets at June 30, 1999 and 82% at December 31, 1998. Debt securities were as
follows:
<TABLE>
<CAPTION>
(Millions) June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 5,104.2 $ 5,890.5
Supporting experience-rated products 12,050.8 13,197.3
Supporting remaining products 12,671.8 13,093.0
- -----------------------------------------------------------------------------------------------------------------
Total debt securities (1) $29,826.8 $32,180.8
=================================================================================================================
</TABLE>
(1) Total debt securities include "Below Investment Grade" securities of
$2.1 billion at June 30, 1999 and $2.0 billion at December 31, 1998 of
which 43.6% at June 30, 1999 and 50.8% at December 31, 1998 supported
discontinued and experience-rated products. Refer to Aetna Inc.'s 1998
Annual Report on Form 10-K for a discussion of "Below Investment Grade"
securities.
Debt securities reflected net unrealized capital losses of $3.2 million at June
30, 1999 compared to net unrealized capital gains of $1.5 billion at December
31, 1998. Included in net unrealized capital losses at June 30, 1999 were
unrealized capital gains of $6.4 million related to assets supporting
discontinued products and unrealized capital losses of $34.8 million related to
assets supporting experience-rated contracts.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.8 billion at June 30, 1999 and $2.0 billion
at December 31, 1998. There are various categories of CMOs that are subject to
different degrees of risk from changes in interest rates and, for CMOs that are
not agency backed, 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 June 30, 1999
and December 31, 1998, approximately 2% of the Company's CMO holdings were
invested in CMOs that are subject to more prepayment and extension risk than
traditional CMOs (such as interest- or principal-only strips).
Page 34
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Mortgage Loans
At June 30, 1999 and December 31, 1998, the Company's mortgage loan investments,
net of impairment reserves, were as follows:
<TABLE>
<CAPTION>
(Millions) June 30, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 756.7 $ 754.2
Supporting experience-rated products 1,111.8 1,183.3
Supporting remaining products 1,571.6 1,615.5
- ---------------------------------------------------------------------------------------------------------------------
Total mortgage loan investments $3,440.1 $3,553.0
=====================================================================================================================
</TABLE>
During the first six months of 1999, the Company managed its mortgage loan
portfolio to maintain balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. At June 30, 1999 and December 31,
1998, the mortgage loan portfolio balance represented 9% of the Company's total
general account invested assets.
Problem, restructured, and potential problem loans included in mortgage loans
were $293 million at June 30, 1999 and $301 million at December 31, 1998 of
which 86% at June 30, 1999 and December 31, 1998 supported discontinued and
experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K
for a discussion of problem, restructured and potential problem loans. Specific
impairment reserves on these loans were $44 million at June 30, 1999 and $48
million at December 31, 1998. (Refer to Note 5 of Condensed Notes to
Consolidated Financial Statements).
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. The Company's use of derivatives
is generally limited to hedging purposes and has principally consisted of using
interest rate swap agreements, futures contracts, warrants, foreign exchange
forward contracts, currency swap agreements and written options to hedge certain
market risks such as interest rate, equity price and foreign exchange risk.
The Company regularly evaluates market risk sensitive instruments by examining,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term), duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.
Management also reviews, on a quarterly basis, hypothetical net losses in the
Company's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes.
Based on the Company's overall exposure to interest rate, equity price and
foreign exchange risks, the Company believes that these hypothetical changes in
market rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company as of
June 30, 1999. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a more
complete discussion of "Risk Management and Market Sensitive Instruments".
Page 35
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses. In addition, the Company uses cash to invest
in core businesses, make acquisitions, repurchase common stock and pay
shareholder dividends.
During the first six months of 1999, the Company used net cash generated from
investing, financing and operating activities to make approximately $192 million
of investments in core businesses and acquisitions, pay approximately $72
million for common stock repurchases and pay approximately $84 million of
dividends to shareholders.
During the corresponding period of 1998, the Company used net cash generated
from investing, financing and operating activities to make approximately $8
million of investments in core businesses and acquisitions, pay approximately
$151 million for common stock repurchases and pay approximately $86 million of
dividends to shareholders. Refer to the "Consolidated Statements of Cash Flows"
for additional information.
Dividends
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Holders of the Preferred Stock
received .8197 shares of Aetna common stock for each share of Preferred Stock
that was redeemed. Approximately 9.5 million shares of Aetna common stock were
issued to effect the redemption. The Company expects the redemption of the
Preferred Stock to result in approximately $48 million of annual cash dividend
savings. Refer to Note 4 of Condensed Notes to Consolidated Financial Statements
for further information.
On May 25, 1999, the Company's Board of Directors also declared a cash dividend
of $.84583 per share of 6.25% Class C Voting Mandatorily Convertible Preferred
Stock to shareholders of record at the close of business on July 8, 1999,
payable July 19, 1999. On June 24, 1999, the Company's Board of Directors
declared a quarterly dividend of $.20 per share of common stock to shareholders
of record at the close of business on July 30, 1999, payable August 15, 1999.
Financings and Financing Capacity
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services and are fully and unconditionally guaranteed by Aetna
Inc. Refer to Note 9 of Condensed Notes to Consolidated Financial Statements for
additional information.
The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between receipts and disbursements. The maximum amount of domestic
short-term borrowings outstanding was $1.1 billion during the first six months
of 1999 and $.7 billion during the first six months of 1998.
The Company funded the acquisition of NYLCare with funds made available from
issuing commercial paper. The Company issued $300 million of debt in
the fourth quarter of 1998 and expects to issue additional medium- or long-term
fixed income securities in 1999, subject to market conditions, to replace some
of this commercial paper.
Page 36
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Financings and Financing Capacity (Continued)
The acquisition of PHC, which is anticipated to be completed in the third
quarter of 1999, is currently expected to be financed by issuing $500 million of
three-year senior notes to Prudential and issuing additional commercial paper
for the remainder of the purchase price (approximately $500 million). The
Company expects to issue medium- or long-term fixed income securities in 1999,
subject to market conditions, to replace some of this commercial paper.
Common Stock Transactions
In January 1999, the Board authorized the repurchase of 5.0 million shares of
common stock. As of June 30, 1999, 880,000 shares of common stock had been
repurchased under this authorization at a cost of $72 million.
NEW ACCOUNTING STANDARDS
Refer to Note 1 of Condensed Notes to Consolidated Financial Statements for a
discussion of recently issued accounting standards.
YEAR 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors, as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.
State of Readiness
In 1997, the Company organized a multidisciplinary Year 2000 Project Team
including outside consultants. The Year 2000 Project Team and the Company's
businesses have developed and are currently executing a comprehensive plan
designed to make the Company's mission-critical IT systems and embedded systems
Year 2000 ready. Outside consultants have reviewed the Company's overall
process, plan and progress to date. The Company's plan for IT systems consists
of several phases: (i) inventory -- identifying all IT systems and risk rating
each according to its potential business impact; (ii) assessment -- identifying
IT systems that use date functions and assessing them for Year 2000
functionality; (iii) remediation -- reprogramming, or replacing where necessary,
inventoried items to make them Year 2000 ready; and (iv) testing and
certification -- testing the code modifications and new inventory with other
associated systems, including extensive date testing, and performing quality
assurance testing to determine if they will successfully operate in the
post-1999 environment.
The Company completed the inventory and assessment phases for substantially all
of its IT systems by year-end 1997. The Company completed the remediation,
testing and certification of substantially all of its IT systems by June 30,
1999. The Company expects to complete the remainder of its remediation, testing
and certification by September 30, 1999.
Page 37
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000 (CONTINUED)
State of Readiness (Continued)
The Company has inventoried and risk rated substantially all of its embedded
systems. The results of these processes indicate that embedded systems should
not present a material Year 2000 risk to the Company. The Company's remaining
steps include testing selected embedded systems and remediating and certifying
systems that exhibit Year 2000 issues. The Company is focusing its testing and
remediation efforts on select embedded systems of its mission-critical
facilities, such as data centers, service centers, communications centers and
select office locations. The Company plans to complete the testing of these
systems by September 30, 1999, and the remediation and certification of these
systems by year-end 1999.
The Company believes that its Year 2000 project is on schedule.
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. In the case of mission-critical suppliers, such as
banks, financial intermediaries, telecommunications providers and other
utilities, mutual fund companies, IT vendors, financial market data providers,
national pharmacy chains, electronic claims clearinghouses, major physician
groups and major hospitals, the Company is engaged in discussions with the third
parties and is attempting to obtain detailed information as to those parties'
Year 2000 plans and state of readiness. A significant portion of the Company's
critical external relationships have informed the Company that they are not
aware of any Year 2000 related reason that they will not be able to perform
their obligations to the Company in all material respects.
Year 2000 Costs
Total Year 2000 project costs are currently estimated to be at least $85 million
(after tax) in 1999. A large majority of these costs are expected to be
incremental expenses that will not recur in 2000 or thereafter. Year 2000 costs
were $32 million (after tax) for the three months ended June 30, 1999 and $25
million (after tax) for the corresponding period in 1998. Year 2000 costs were
$59 million for the six months ended June 30, 1999 and $41 million for the
corresponding period in 1998. The Company expects that Year 2000 costs in 2000
will be immaterial. The Company expenses these costs as incurred and funds these
costs through operating cash flows.
Year 2000 readiness is critical to the Company. The Company has redeployed some
resources from noncritical system enhancements to address Year 2000 issues. Due
to the importance of IT systems to the Company's business, management has not
deferred mission-critical systems enhancements to become Year 2000 ready. The
Company does not expect these redeployments to have a material impact on the
Company's financial condition or results of operations.
Page 38
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000 (CONTINUED)
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process benefits claims; update customers' accounts; process financial
transactions; bill customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others; as well as business interruptions or shutdowns; financial
losses; reputational harm; increased scrutiny by regulators; and litigation
related to Year 2000 issues. The Company's international affiliates face
additional Year 2000 risk due to the diverse environments in which they operate.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues at the Company or its external
relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
The Company is developing contingency/recovery plans aimed at sustaining the
continuity of critical business functions before and after December 31, 1999.
As part of its contingency planning process, the Company has identified
reasonably possible Year 2000 failure scenarios and is developing contingency
plans for those failure scenarios it believes could have a significant impact
on the Company's operations. These scenarios include, but are not limited to,
limitations on providers', suppliers' and customers' ability to interact
electronically with the Company, Year 2000 related failures at key external
relationships, limitations on the Company's suppliers' or customers' ability
to move funds electronically, failures in pricing securities and increased call
volumes. The Company's planned responses to these scenarios include, but are
not limited to, use of alternative suppliers, use of outside providers to
supplement internal capabilities and reallocation of existing resources.
The Company has completed its high level contingency plans and is continuing to
review and refine the detailed plans it has developed. The Company expects
contingency/recovery planning to be substantially complete by September 1999.
FORWARD-LOOKING INFORMATION/RISK FACTORS
Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual
Report on Form 10-K for factors that could cause actual Year 2000 results to
differ from the Company's expectations. The "Forward-Looking Information/Risk
Factors" and "Regulatory Environment" portions of that Annual Report also
contain a general discussion of other important risks related to the Company's
businesses.
As described in the Annual Report, additional legislation or regulation related
to managed care has been enacted or is being considered by the federal
government and many states and this could adversely impact our business.
Recently, these matters have included legislation exempting physicians from the
antitrust laws that prohibit price fixing, group boycotts, and other horizontal
restraints on competition. It is uncertain whether we can recoup, through
higher premiums or other measures, any increased costs caused by this type of
legislation.
Page 39
<PAGE> 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Refer to the information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - General Account Investments".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to
the United States District Court for the Eastern District of Pennsylvania (the
"Court") for consolidated pretrial proceedings with the cases pending there. The
plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking,
among other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint, and the Court
denied that motion in March, 1999. Discovery proceedings have commenced and
trial currently is scheduled to begin in early 2000. The Company is defending
the actions vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medical bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph 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 40
<PAGE> 41
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders, held April 30, 1999, five matters were
submitted to a vote: the election of directors for the coming year; the
ratification of the appointment of KPMG LLP as independent public accountants
for the current calendar year; a proposal to implement cumulative voting in the
election of directors; a proposal to link executive compensation to health care
quality; and a proposal relating to the endorsement of the Coalition for
Environmentally Responsible Economies "CERES" principles. The results of the
voting on these matters follow:
Election of Directors:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
--- --------
<S> <C> <C>
Leonard Abramson 125,698,277 1,691,910
Betzy Z. Cohen 125,950,932 1,439,255
William H. Donaldson 125,989,009 1,401,178
Barbara Hackman Franklin 126,010,826 1,379,361
Jerome S. Goodman 125,957,029 1,433,158
Earl G. Graves 125,979,819 1,410,368
Gerald Greenwald 126,044,330 1,345,857
Ellen M. Hancock 126,061,871 1,328,316
Richard L. Huber 125,931,935 1,458,252
Michael H. Jordan 126,045,347 1,344,840
Jack D. Kuehler 126,043,415 1,346,772
Frank R. O'Keefe, Jr. 126,017,167 1,373,020
Judith Rodin 125,986,690 1,403,497
</TABLE>
Other matters voted upon:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
<S> <C> <C> <C> <C>
Ratification of Independent
Public Accountants 126,685,487 326,796 377,904 -
Proposal to Implement Cumulative Voting
in Election of Directors 33,959,421 76,601,452 3,053,406 13,775,908
Proposal to Link Executive Compensation
to Health Care Quality 4,929,406 104,354,449 4,330,424 13,775,908
Proposal Relating to Endorsement of the
CERES Principles 9,437,578 97,645,955 6,530,746 13,775,908
</TABLE>
Page 41
<PAGE> 42
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratio of
earnings to fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
------------------ -------------------------------------------------------
Aetna Inc. 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.60 4.96 5.74 2.45 4.97 4.74
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.71 3.94 4.46 2.10 4.97 4.74
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
------------------- -------------------------------
Aetna Services, Inc. 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 3.57 4.31 5.78 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.57 4.31 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. (Refer to
Note 15 of Notes to Consolidated Financial Statements in Aetna Inc.'s 1998
Annual Report on Form 10-K.) During 1995 and 1994 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined fixed charges
and preferred stock dividends were the same as the ratios of earnings to fixed
charges.
(b) Ratings
The ratings of certain Aetna Inc. 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)**
April 27, 1999 * A A3 A
July 28, 1999 (1) * A A3 A
Aetna Services, Inc. (commercial paper)**
April 27, 1999 * D-1 P-2 A-1
July 28, 1999 (1) * D-1 P-2 A-1
Aetna Life Insurance Company (claims paying/financial strength)
April 27, 1999 A AA- A1 A+
July 28, 1999 (1) A AA- A1 A+
Aetna Life Insurance and Annuity Company
(claims paying/financial strength)
April 27, 1999 A AA Aa3 AA-
July 28, 1999 (1) A AA Aa3 AA-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
(1) Moody's Investors Service and Standard & Poor's have the debt and
financial strength ratings on outlook negative.
Page 42
<PAGE> 43
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
(10) Material Contracts.
10.1 The Aetna Services, Inc. Supplemental Pension Benefit Plan
Amended and Restated as of January 1, 1999.*
10.2 The Aetna Services, Inc. Supplemental Incentive Savings
Plan Amended and Restated as of January 1, 1999.*
10.3 Pension Credit Agreement, dated as of September 26, 1997,
by and between the Company and Frederick C. Copeland, Jr.*
10.4 Employment Agreement, dated as of April 6, 1999, by and
between the Company and Thomas J. McInerney.*
10.5 Employment Agreement, dated as of May 4, 1999, by and
between the Company and Frederick C. Copeland, Jr.*
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30,
1999 and for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 for Aetna Inc. and for the six months ended
June 30, 1999 and for the years ended December 31, 1998,
1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of
a report on unaudited interim financial information, dated
July 28, 1999.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
</TABLE>
(b) Reports on Form 8-K.
None.
Page 43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aetna Inc.
------------------------------
Registrant
Date July 29, 1999 By /s/ ALAN M. BENNETT
------------------------------
Alan M. Bennett
Vice President
and Corporate Controller
(Chief Accounting Officer)
Page 44
<PAGE> 45
AETNA INC.
EXHIBIT INDEX
=========================================
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(10) Material Contracts.
10.1 The Aetna Services, Inc. Supplemental Pension Benefit Plan
Amended and Restated as of January 1, 1999.*
10.2 The Aetna Services, Inc. Supplemental Incentive Savings
Plan Amended and Restated as of January 1, 1999.*
10.3 Pension Credit Agreement, dated as of September 26, 1997,
by and between the Company and Frederick C. Copeland, Jr.*
10.4 Employment Agreement, dated as of April 6, 1999, by and
between the Company and Thomas J. McInerney.*
10.5 Employment Agreement, dated as of May 4, 1999, by and
between the Company and Frederick C. Copeland, Jr.*
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30,
1999 and for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 for Aetna Inc. and for the six months ended
June 30, 1999 and for the years ended December 31, 1998,
1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of
a report on unaudited interim financial information, dated
July 28, 1999.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
</TABLE>
Page 45
<PAGE> 1
THE AETNA SERVICES, INC.
SUPPLEMENTAL PENSION BENEFIT PLAN
AMENDED AND RESTATED
AS OF JANUARY 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C>
1. DEFINITIONS AND CONSTRUCTION........................................................ 3
2. BENEFITS ........................................................................... 6
3. MANAGEMENT OF THE PLAN ............................................................. 14
4. AMENDMENT AND TERMINATION .......................................................... 15
5. ADOPTION BY AFFILIATE .............................................................. 16
6. MISCELLANEOUS ...................................................................... 17
Appendix
A. LIST OF PARTICIPATING COMPANIES .................................................... 19
</TABLE>
<PAGE> 3
Aetna Inc. (the "Company") hereby amends and restates, effective
January 1, 1999, The Aetna Services, Inc. Supplemental Pension Benefit Plan (the
"Plan"). The benefits payable to any Participant (or a Beneficiary on behalf of
the Participant) who retired, otherwise terminated employment, or died prior to
January 1, 1999 shall be calculated and paid under the terms and provisions of
the Plan as in effect on the date the Participant retired, otherwise terminated
employment or died; and no such Participant shall have a Supplemental Account
Balance, the right to any form of benefit provided in this Plan, or any other
rights or features in this Plan.
This Plan is intended to provide benefits which supplement the benefits
provided under The Retirement Plan for Employees of Aetna Services, Inc. (the
"Retirement Plan"): (1) benefits in excess of those permitted to be provided
after application of one or more limits applicable to the Retirement Plan under
the Internal Revenue Code of 1986, as amended (the "Code"); (2) benefits
attributable to certain elements of the employee's compensation not taken into
account in determining the employee's pension under the Retirement Plan; and (3)
benefits provided at the direction of the Board of Directors of the Company, the
Board of Directors of the Employer, or other authorized officers of the Company
or the Employer, but which are not provided under the Retirement Plan. That
portion of the Plan that provides benefits that are attributable solely to the
benefits that would be provided under the Retirement Plan but for the
application of the limitations of Section 415 of the Code shall be treated as a
separate plan which is an excess benefit plan within the meaning of Section
3(36) of the Employee Retirement Income Security Act of 1974, as amended.
2
<PAGE> 4
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1 "AFFILIATE" means any entity which, with the Company, constitutes a
group of trades or businesses under common control, a controlled group of
corporations, an affiliated service group, or a group of corporations otherwise
required to be aggregated, as provided in Sections 414(b), (c), (m), and (o) of
the Code, respectively.
1.2 "CODE" means the Internal Revenue Code of 1986, as amended.
1.3 "COMPANY" means Aetna Inc. or any successor by merger,
consolidation, purchase or otherwise.
1.4 "EARNINGS" shall be as defined in the Retirement Plan, except
without regard to the cap imposed therein pursuant to Section 401(a)(17) of the
Code, and provided further that:
(a) With respect to any awards made to a Participant under the
Company's Management Incentive Plan, the following shall apply:
(1) an award paid in cash and not deferred by the
Participant shall be included in Earnings when paid;
(2) an award deferred by the Participant shall never
be included in Earnings (either when earned or when paid),
unless the Participant's Earnings for the year in which the
award would have been paid if not deferred, without regard to
such award, exceed the limit established by Section 401(a)(17)
of the Code, in which case: for performance years 1998 and
earlier, the award shall be allocated to the Participant's
Earnings over the twelve month performance year prior to the
earliest date on which the award would have been payable if
the Participant had so elected; and for performance years 1999
and later, the
3
<PAGE> 5
award shall be allocated to the Participant's Earnings in a lump sum within a
reasonable time after the date on which the award would have been paid if not
deferred; and
(3) an award paid in the form of a grant of a Company
stock option pursuant to the Company's Executive Bonus
Exchange for Stock Options Program shall be excluded from
Earnings; provided, however, that if the Participant's
Earnings for the year in which the award would have been paid
if not deferred, without regard to such award, exceed the
limit established by Section 401(a)(17) of the Code: (i) the
dollar amount of such bonus exchanged for Company stock under
the 1998 program shall be included in Earnings; and (ii) if
such grant of a Company stock option under the 1999 and
subsequent programs is subsequently converted into a deferred
bonus pursuant to an opt-out election permitted by the
Company, the dollar amount of such bonus exchanged for Company
stock shall be included in Earnings; in each such case in a
lump sum within a reasonable time after the date on which the
award would have been paid if cash had been elected.
(b) With respect to Highly Leveraged Employees, for 1999 and
subsequent Plan Years, the Earnings of any Participant taken into
account under the Plan shall not exceed $500,000. For prior years,
certain other limits apply as set forth in the plan document in effect
prior to January 1, 1999.
(c) Consistent with the Retirement Plan, Earnings shall be
determined as if no elective salary reduction had been made pursuant to
Sections 125 and 401(k) of the Code, or pursuant to the Supplemental
Incentive Savings Plan.
4
<PAGE> 6
(d) Earnings shall not include certain cash Merger Awards made to
recognize individual employee efforts in connection with the U.S. Healthcare
Merger and related integration efforts and certain other payments which are
determined by the Company, from time to time, to be excluded from Earnings.
1.5 "Effective Date" means, unless otherwise stated, the effective
date of this amended and restated Plan, January 1, 1999.
1.6 "Eligible Employee" means, for any Plan Year commencing on or
after the Effective Date, an individual who is actively employed by the Employer
or a Participating Company and an Eligible Employee under the Retirement Plan,
and: (1) whose benefit under the Retirement Plan is limited by the application
of Section 401(a)(17) or 415 of the Code, (2) who earns or has earned awards
under the Employer's Management Incentive Plan or plans of similar nature
providing for performance bonuses to employees at mid-level management and above
which are not taken into account in determining the Employee's benefit under the
Retirement Plan and which are included in the definition of Earnings in this
Plan, or (3) who has entered into an agreement with the Employer or a
Participating Company that is ratified by the Employer prior to July 19, 1996 or
by the Company thereafter and that provides for an award to the Employee of
additional years of service, compensation or other amounts for the purpose of
determining a pension benefit but which is not taken into account in determining
that benefit under the Retirement Plan. With respect to (1) and (2) above, an
individual shall become an Eligible Employee on the date the individual receives
written notice thereof.
1.7 "EMPLOYER" means Aetna Services, Inc.
5
<PAGE> 7
1.8 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
1.9 "EXCESS BENEFIT PLAN" means an excess benefit plan within the
meaning of Section 3(36) of ERISA.
1.10 "HIGHLY LEVERAGED EMPLOYEE" means an employee who is so designated
by the Employer or a Participating Company, in the sole discretion of such
Employer or Participating Company, by virtue of the material emphasis by the
Employer or a Participating Company, as the case may be, on variable or
incentive pay.
1.11 "PARTICIPANT" means an Eligible Employee or former Eligible
Employee.
1.12 "PARTICIPATING COMPANY" means any Affiliate which either (a) is
listed in Appendix A on the Effective Date, or (b) after the Effective Date,
adopts the Plan in accordance with the provisions of Article 5 hereof. A
Participating Company may adopt this Plan with respect to less than all of its
otherwise eligible employees. On the date that a Participating Company ceases to
be an Affiliate, it shall also cease to be a Participating Company, pursuant to
Section 5.2 hereof.
1.13 "PLAN" means The Aetna Services, Inc. Supplemental Pension
Benefit Plan, as set forth herein and as amended from time to time. To the
extent that Supplemental Benefits are provided to Participants solely as a
result of the application of the limitations of Section 415 of the Code in the
determination of such Participants' benefits under the Retirement Plan, the Plan
shall be an Excess Benefit Plan which shall be a separate plan hereunder but
shall be included in the definition of "Plan."
1.14 "PLAN YEAR" means the calendar year.
6
<PAGE> 8
1.15 "RETIREMENT PLAN" means The Retirement Plan for Employees of Aetna
Services, Inc., as amended and restated effective January 1, 1999, and as
amended thereafter from time to time.
1.16 "SUPPLEMENTAL ACCOUNT BALANCE" means the amount calculated in
accordance with Section 2.1.
1.17 "SUPPLEMENTAL BENEFIT" means the benefit provided under this Plan.
1.18 CONSTRUCTION. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. Where appropriate, words used in the singular include
the plural and words used in the plural include the singular. The words
"hereof," "herein," "hereunder" and other similar compounds of the word "here"
shall mean and refer to this entire Plan, not to any particular provision or
Section. Capitalized terms used herein and not defined above shall have the
meanings set forth in the Retirement Plan.
ARTICLE 2
BENEFITS
2.1 AMOUNT OF BENEFITS.
(a) CALCULATION OF BENEFITS. Commencing January 1, 1999, the
amount of a Participant's Supplemental Account Balance shall equal the
difference between:
(1) the amount that would have constituted the Participant's
Account Balance in the Retirement Plan calculated as of the Participant's
Termination from Service Date if:
7
<PAGE> 9
(A) Sections 401(a)(17) and 415 of the Code did not apply
to the calculation,
(B) Earnings as defined herein were used in the
calculation, and
(C) any awards of additional years of service,
compensation or other amounts that were made to the
Participant for the purpose of determining a pension
benefit were taken into account, provided, however,
that any such award must be made in a written
contract or plan between the Participant and the
Participant's employer and ratified by the Employer
prior to July 19, 1996 or by the Company thereafter;
and
(2) the Participant's actual Account Balance in the Retirement
Plan calculated as of the Participant's Termination from
Service Date.
After the Termination from Service Date, any changes in the Supplemental Account
Balance shall be calculated independently of the Account Balance under the
Retirement Plan, applying the annual Interest Credit rules set forth in the
Retirement Plan.
(b) SPECIAL RULE FOR PARTICIPANTS ON LONG-TERM SEVERANCE. Notwithstanding
Section 2.1(a) above, the benefit hereunder for Participants who were on
specially negotiated long-term severance or departure arrangements as of January
1, 1999, shall be calculated without giving credit for an "Opening Balance"
under the Retirement Plan for purposes of Section 2.1(a)(1) above.
8
<PAGE> 10
(c) SPECIAL RULE FOR REHIRED PARTICIPANTS. Notwithstanding Section
2.1(a) above, in the case of a rehired Participant, the calculation of a
Supplemental Account Balance shall take into consideration the balances that
existed in this Plan and in the Retirement Plan as of the Participant's previous
Termination from Service Date and any distributions made therefrom. In addition,
notwithstanding a Participant's subsequent reemployment, benefits in pay status
shall not thereafter be suspended.
(d) EXCESS BENEFIT PLAN AMOUNT. The amount of any Supplemental Benefit
payable to a Participant under the portion of the Plan that is an Excess Benefit
Plan shall be determined taking into account any actuarial adjustments to the
limits applicable under Section 415 of the Code and the terms of the Retirement
Plan on the basis of the form and time of payment of the Participant's benefit
under the Retirement Plan.
(e) OCCURRENCE OF DISTRIBUTION. The Supplemental Account Balance shall
be reduced as follows to reflect distributions:
(1) In the case of a lump sum distribution, on the first
day of the month in which the distribution is
actually made;
(2) In the case of an annuity, on the first day of the
month in which the Annuity Starting Date occurs, at
which time the Supplemental Account Balance shall be
reduced to zero.
(f) PRESERVATION OF TRANSITION PARTICIPANT'S ACCRUED FINAL AVERAGE PAY
BENEFIT. In addition to the foregoing, if a benefit in excess of the Cash
Balance Account Balance is payable in accordance with Section 6.4 or 7.4 of the
Retirement Plan pursuant to Code Section 411(d)(6), a
9
<PAGE> 11
coordinated benefit in excess of the Supplemental Account Balance shall be
payable under this Plan.
2.2 OPTIONAL FORMS. The Participant may elect to receive his or her
vested Supplemental Benefit in one of the following forms:
(a) Lump Sum. A lump sum payment to the Participant, with the
remaining Supplemental Account Balance, if any, used to provide
an annuity form of benefit, either immediately or with a
deferred commencement date. The lump sum shall be 50% of the
Supplemental Account Balance; provided, however, that if a
Participant's Supplemental Account Balance is $25,000 or less,
the Participant shall receive a lump sum of 100% of the
Supplemental Account Balance;
(b) Life Annuity. A single life annuity providing a monthly annuity
to the Participant during the Participant's life with all
payments stopping on the Participant's death;
(c) Full Cash Refund Annuity. A single life annuity providing a
monthly annuity to the Participant during the Participant's life
and a final payment after the Participant's death to the
Beneficiary equal to the difference, if any, between the
Participant's Supplemental Account Balance on the Annuity
Starting Date with respect to such annuity less the sum of all
annuity payments made prior to the Participant's death;
(d) Ten Year Certain and Life Annuity. A single life annuity
providing a monthly annuity to the Participant during the
Participant's life, and, if the Participant dies prior to the
end of the 10 year period commencing on the Annuity Starting
Date
10
<PAGE> 12
with respect to such annuity, payments to the Participant's
Beneficiary for the remainder of such 10 year period;
(e) 50% Joint and Survivor Annuity. A joint and survivor annuity
providing a monthly annuity to the Participant during the
Participant's life, with a continuing annuity for the life of
the joint annuitant, whom the Participant designates prior to
the commencement of annuity payments, which shall be 50% of
the annuity payable to the Participant during the
Participant's life; and
(f) 100% Joint and Survivor Annuity. A joint and survivor annuity
providing a monthly annuity to the Participant during the
Participant's life, with a continuing annuity for the life of
the joint annuitant, whom the Participant designates prior to
the commencement of annuity payments, which shall be 100% of
the annuity payable to the Participant during the
Participant's life.
None of the annuity options shall include the Social Security supplement until
age 62 or cost of living adjustments (collectively "COLA Features"); provided,
however, a Participant (i) whose benefit under the Retirement Plan is limited by
Section 415 of the Code and (ii) who elects solely an annuity, commencing at the
same time under both the Retirement Plan and this Plan, may elect under this
Plan the same annuity option with COLA Features which is elected under the
Retirement Plan. Once an annuity is in payment status no further election as to
type of annuity may be made.
2.3 ELECTION AS TO TIME, FORM OF PAYMENT AND BENEFICIARY. Each
Participant shall make an election, on a form and in the manner
11
<PAGE> 13
prescribed by the Company for this purpose, specifying the time at which and the
form (lump sum and annuity or annuity only) in which his or her vested
Supplemental Account Balance is to be paid and the Participant's designated
Beneficiary. Such election shall be made by the later of: December 31, 1998 or
not more than 90 days after the date on which the individual becomes a
Participant. Any election which does not comply with these time limits will be
deemed an election pursuant to Section 2.4 and will be effective only if it
complies with the rules set forth therein.
Except as otherwise provided in Section 2.4 and Section 2.5, payment of
a Participant's vested Supplemental Account Balance shall be made to the
Participant at the time and in the form (lump sum and annuity or annuity only)
specified for payment in the election made by the Participant described above.
In the absence of an election which complies with either this Section
2.3 or Section 2.4, a Participant's vested Supplemental Account Balance shall be
paid in accordance with Section 2.2 (a) above, with the annuity portion, if any,
being paid as a full cash refund single life annuity as set forth in Section 2.2
(c), and with the lump sum to be paid, and annuity payments to commence,
immediately upon the Participant's Termination from Service.
2.4 ABILITY TO CHANGE ELECTION. Notwithstanding any election that may
have been made by a Participant pursuant to Section 2.3, a Participant who has
not yet had a Termination from Service may elect to receive payment of the
vested Supplemental Account Balance at a time and in a form (lump sum and
annuity or annuity only) other than that specified by the Participant in the
election made pursuant to Section 2.3; provided however that:
12
<PAGE> 14
(a) an election made under this Section 2.4 shall apply to
Participant's entire vested Supplemental Account Balance notwithstanding any
prior elections; and
(b) if the Participant's Termination from Service Date occurs within
one year and a day after the date on which the election to change is made, the
election (other than a change in Beneficiary) shall not be honored and the
Participant's vested Supplemental Account Balance shall be distributed in
accordance with Section 2.3.
2.5 PAYMENT IN THE EVENT OF PARTICIPANT'S DEATH. Notwithstanding any
election that may have been made by a Participant pursuant to Section 2.3 or
2.4, any vested Supplemental Account Balance remaining pursuant to Section
2.1(d) above as of the date of the Participant's death shall be paid to the
Participant's Beneficiary in a lump sum as soon as practicable after the Company
receives notification of the Participant's death.
2.6 ACCELERATION OF PAYMENT. Notwithstanding any other provision of
this Plan to the contrary, the Company in its sole discretion may accelerate the
payment of vested Supplemental Account Balances to all or any group of similarly
situated Participants, whether before or after the Participants' Termination
from Service, in response to changes in the tax laws or accounting principles.
2.7 SMALL PAYMENTS; LUMP SUM CASH-OUT. Notwithstanding any other
provision of this Plan, if upon a Participant's Termination from Service Date
the Supplemental Account Balance is not in excess of ten thousand dollars
($10,000), or such higher amount as may be determined by the Company from time
to time, the Plan shall make a single lump sum payment of the entire vested
Supplemental Account Balance to the
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<PAGE> 15
Participant or Beneficiary entitled to such benefit. Such lump sum payment shall
be paid as soon as practicable after the Participant's Termination from Service
Date. If the Participant has no vested interest in a benefit, the Participant
shall be deemed to have a distribution of zero dollars on the Participant's
Termination from Service Date. In the event the Supplemental Account Balance is
not in excess of the dollar limitation at the time the Plan Administrator
initially determines to pay the benefit, but the benefit is not immediately paid
because the Participant (or Beneficiary) cannot be located or there is an
administrative delay in making payment, distribution of the entire vested
Supplemental Account Balance shall be made to the Participant (or Beneficiary)
in a lump sum at such time as the Plan Administrator locates the Participant (or
Beneficiary) or the issue causing the administrative delay is resolved.
2.8 VESTING. An amount will only be payable pursuant to this Article 2
if the Participant is vested. A Participant will be vested in his or her
Supplemental Account Balance if (i) he or she is vested in the benefit under the
Retirement Plan, or (ii) in accordance with an agreement with the Employer or a
Participating Company that is ratified by the Employer prior to July 19, 1996 or
by the Company thereafter and that provides for an alternative vesting rule;
subject however to Sections 2.11 and 2.12.
2.9 PAYMENT OF FICA AND OTHER TAXES.
(a) If, under applicable law and regulations, FICA and other taxes are
required to be withheld by the Employer or the applicable Participating Company
with respect to a Supplemental Benefit earned by a Participant during any period
that Supplemental Benefits are not currently being paid to the Participant, then
the compensation otherwise currently payable to a Participant from the Employer
or the applicable Participating Company
14
<PAGE> 16
during such period shall be reduced by an amount equal to such FICA and other
taxes. To the extent that the compensation currently payable to a Participant
during any such period is insufficient to permit an amount equal to the FICA and
other taxes required to be withheld by the Employer or the applicable
Participating Company during that period to be withheld from such current
compensation, the amount shall be taken by distribution from the Supplemental
Account Balance.
(b) If, under applicable law and regulations, FICA and other taxes are
required to be withheld by the Employer for any period with respect to a
Supplemental Benefit earned by the Participant during any period that
Supplemental Benefits are currently being paid to the Participant, then, in the
Employer's discretion, either the Supplemental Benefit or any other compensation
otherwise currently payable to a Participant during such period shall be reduced
by an amount equal to such FICA and other taxes, or such taxes shall be paid by
distribution from the Supplemental Account Balance, if any.
2.10 EXCESS BENEFIT PLAN. All Supplemental Benefits payable solely by
reason of the application of the limitations of Section 415 of the Code to a
Participant's benefit under the Retirement Plan shall be provided from the
separate plan created herein that is an Excess Benefit Plan.
2.11 UNFUNDED NATURE OF BENEFIT. No assets shall be segregated or
earmarked with respect to any Participant and no Participant or Beneficiary
shall have any right to assign, transfer, pledge or hypothecate an interest or
any portion thereof in any benefit payable hereunder. The Plan shall not
constitute a trust or a funded arrangement of any sort and shall be merely for
the purpose of recording an unsecured contractual
15
<PAGE> 17
obligation of each obligated party; provided, however, that the Employer and the
Company reserve the right to meet the obligations created under the Plan through
one or more trusts or other agreements.
2.12 REDUCTION OF BENEFIT. If a Participant breaches an obligation to
the Company, the Employer or a Participating Company with respect to the payment
of a specific sum of money, the Company, the Employer or the applicable
Participating Company may reduce any benefits payable to such Participant under
this Plan, in the manner of setoff or otherwise, to the extent of such
obligation and any costs incurred with respect thereto.
In addition, the Company, the Employer and the Participating Companies
do not waive any rights to reduce benefits, including but not limited to setoff
rights, which such entities may have under applicable law or a prior written
agreement between all or any of them and an Employee, all of which rights are
enforceable independent of the terms of this Plan.
ARTICLE 3
MANAGEMENT OF THE PLAN
3.1 ADMINISTRATOR. The Employer shall be the Administrator with the
sole responsibility for the administration of the Plan. The Administrator may
delegate to any person or entity any powers or duties of the Administrator under
the Plan. To the extent of any such delegation, the delegatee shall become
responsible for administration of the Plan, and references to the Administrator
shall apply instead to the delegatee. Any action by the Employer assigning any
of its responsibilities as Administrator to specific persons who are all
directors, officers, or employees of the Employer, the Company, or the
Participating Companies shall not constitute delegation of the Administrator's
responsibilities but
16
<PAGE> 18
rather shall be treated as the manner in which the Employer has determined
internally to discharge such responsibility. The Administrator shall not be a
fiduciary (within the meaning of Section 3(21) of ERISA) with respect to the
portion of the Plan that is an Excess Benefit Plan.
3.2 POWERS AND DUTIES OF THE ADMINISTRATOR. The Administrator shall
have such duties and powers as may be necessary to discharge its duties
hereunder, including, but not by way of limitation, the following:
(a) to construe and interpret the Plan, decide all questions
of eligibility, determine the status and rights of Participants, and determine
the amount, manner and time of payment of any benefits hereunder;
(b) to receive from the Participating Companies and from
Participants such information as shall be necessary for the proper
administration of the Plan;
(c) to furnish the Participating Companies, upon request, such
annual reports with respect to the administration of the Plan as are reasonable
and appropriate;
(d) to appoint or employ individuals to assist in the
administration of the Plan and any other agents it deems advisable, including
legal and actuarial counsel;
(e) to defend and initiate any lawsuit on behalf of the Plan
or the Eligible Employees if the Administrator deems it reasonably necessary to
protect the Plan or the Participants.
If there shall arise any misunderstanding or ambiguity concerning the
meaning of any of the provisions of the Plan arising out of the administration
thereof, the Administrator shall have the sole right to construe such
provisions. Subject to the limitations of the Plan and
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<PAGE> 19
applicable law, the Administrator may make such rules and regulations as it
deems necessary or proper for the administration of the Plan and the transaction
of business thereunder.
The decisions of the Administrator with respect to any matter it is
empowered to act on shall be made by it in its sole discretion based on the Plan
documents and shall be final, conclusive and binding on all persons.
ARTICLE 4
AMENDMENT AND TERMINATION
4.1 AMENDMENT. The Company reserves the right to amend this Plan from
time to time in any respect, including without limitation a prospective
reduction in accrual of benefits. See Section 4.4 regarding prohibition of
retroactive reduction of benefits accrued under this Plan.
4.2 ACTION BY COMPANY. Any amendments to this Plan by the Company shall
be made in writing and executed by the Senior Vice President, Corporate Human
Resources or other Company officer holding such position, or by the President or
Chief Executive Officer of the Company. Neither the consent of any Employee nor
that of any payee is required for any amendment to the Plan.
4.3 TERMINATION BY COMPANY. The Plan may be terminated in whole or in
part by the Company at any time. The Plan as a whole shall be terminated only
pursuant to a resolution of the Board of Directors of the Company. The Plan may
be terminated in part in the same manner as is prescribed for the adoption of
amendments. Neither the consent of any Employee nor that of any payee is
required for any termination of the Plan.
4.4 EFFECT OF AMENDMENT OR TERMINATION BY COMPANY. Any amendment or
termination of this Plan by the Company shall be effective
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<PAGE> 20
prospectively and shall not serve to retroactively reduce any right to a benefit
accrued under this Plan up to the date of such amendment or termination;
provided, however, that in the event of any termination or partial termination
of the Plan (including a Participating Company's ceasing to be a Participating
Company pursuant to Section 5.2), the Company shall have the right to
immediately cash out each affected Participant's benefit, notwithstanding any
elections that have been made.
ARTICLE 5
ADOPTION BY AFFILIATE
5.1 ADOPTION BY AFFILIATE. Any Affiliate may, with the consent of the
Company, become a Participating Company under the Plan by a resolution of the
Board of Directors of the Affiliate under which:
(a) The Affiliate shall agree to be bound by all the provisions of the
Plan in the manner set forth herein and any amendments hereto; and
(b) The Affiliate shall agree to pay its share of expenses of the Plan
as they may be determined by the Company from time to time.
5.2 TERMINATION BY A PARTICIPATING COMPANY. Any Participating Company
may at any time elect to terminate its participation under the Plan with respect
to all or any group of the Participating Company's Employees. A Participating
Company shall terminate its participation under the Plan by resolution of the
Board of Directors of the Participating Company. Notwithstanding the above, a
Participating Company shall cease to be a Participating Company, without any
further action, upon ceasing to be an Affiliate of the Company. The termination
of participation by a Participating Company shall not relieve the
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<PAGE> 21
Participating Company of its liabilities under this Plan, including but not
limited to those liabilities imposed under Section 6.2 hereof.
ARTICLE 6
MISCELLANEOUS
6.1 EXCLUSIVE BENEFIT. The Plan is maintained for the exclusive benefit
of Participants.
6.2 SOURCE OF PAYMENT. All benefits under the Plan shall be paid
exclusively by the Employer or the applicable Participating Company from its
general assets, provided that the Company shall be liable for all benefits under
the Plan.
6.3 RIGHTS OF EMPLOYEES. Nothing contained herein shall be deemed to
give any Employee the right to be retained in the service of the Employer or the
applicable Participating Company or to interfere with the right of the Employer
or the applicable Participating Company to discharge such Employee at any time,
nor shall it be deemed to give the Employer or the applicable Participating
Company the right to require the Employee to remain in its service, nor shall it
interfere with the right of the Employer or the applicable Participating Company
to terminate service at any time.
6.4 HEADINGS. The headings of the Plan are inserted for convenience of
reference only and shall have no effect upon the meaning of the provisions
hereof.
6.5 SEVERABILITY. If any provision of this Plan is held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision, and this Plan shall be construed and enforced as if such provision
were omitted.
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<PAGE> 22
6.6 ALIENATION OF BENEFITS. Except as provided in Section 2.12, and
except as otherwise provided by law, and consistent with Section 2.11 hereof, no
benefit under this Plan may be voluntarily or involuntarily assigned or
alienated.
6.7 LOST DISTRIBUTEES. Any benefit payable hereunder shall be deemed
forfeited if the distributee to whom payment is due cannot be located, provided
that such benefit shall be reinstated if a claim is made by the distributee for
the forfeited benefit within two years of the date the forfeited benefit was
originally payable pursuant to the provisions of Article 2.
6.8 GOVERNING LAW. This Plan shall be construed according to the laws
of the State of Connecticut to the extent not pre-empted by Federal law.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer this 1st day of June, 1999.
AETNA INC.
By:/s/ Elease E. Wright
-----------------------
Its: Senior Vice President, Corporate
Human Resources
Attest:
- -----------------------
21
<PAGE> 23
APPENDIX A
LIST OF PARTICIPATING COMPANIES
<TABLE>
<CAPTION>
A. B. C. D.
PARTICIPATING COMPANIES ORIGINAL DATE TAX IDENTIFICATION END OF
OF INCLUSION NUMBER OF EMPLOYER FISCAL YEAR
----------------------- ------------- ------------------ -----------
<S> <C> <C> <C>
Aetna Services, Inc. 9/1/72 06-0843808 12/31
Aetna Life Insurance Company 1/1/55 06-6033492 12/31
Aeltus Investment Management Inc. 1/26/73 06-0888148 12/31
Aetna Life Insurance and Annuity Company 9/1/72 71-0294708
12/31
Aetna U.S. Healthcare Dental Plan of California, Inc. 1/1/98 06-1160812 12/31
Aetna Healthcare of California, Inc. 1/1/98 95-3402799 12/31
Aetna International, Inc. 1/1/98 06-1028458 12/31
</TABLE>
22
<PAGE> 1
THE AETNA SERVICES, INC.
SUPPLEMENTAL INCENTIVE SAVINGS PLAN
Amended and Restated
as of January 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C>
I. DEFINITIONS AND CONSTRUCTION........................................................ 3
II. DEFERRAL OF PAY AND INCENTIVE CONTRIBUTIONS......................................... 5
III. PAYMENT OF DEFERRED AMOUNTS......................................................... 9
IV. MANAGEMENT OF THE PLAN ............................................................. 10
V. AMENDMENT AND TERMINATION .......................................................... 12
VI. ADOPTION BY AFFILIATE .............................................................. 13
VII. MISCELLANEOUS ...................................................................... 13
</TABLE>
Appendix
A. LIST OF PARTICIPATING COMPANIES
<PAGE> 3
Aetna Inc. (the "Company") hereby amends and restates, effective
January 1, 1999, The Aetna Services, Inc. Supplemental Incentive Savings Plan.
This Plan is intended to provide benefits to certain Employees which
supplement the benefits provided under The Aetna Services, Inc. Incentive
Savings Plan (the "ISP"): (1) benefits in excess of those permitted to be
provided after application of one or more limits applicable to the ISP under the
Internal Revenue Code of 1986, as amended (the "Code"); and (2) benefits
provided at the direction of the Board of Directors of the Company, the Board of
Directors of the Employer, or other authorized officers of the Company or the
Employer, but which are not provided under the ISP.
This document constitutes two separate plans, one of which (the "Mirror
Plan") provides certain benefits, as more specifically set forth in Section
2.1(a) hereof, to certain Employees, that are attributable solely to the
benefits, during the period of eligibility to participate under the ISP, that
would be provided to such employees under the ISP but for the application of
sections 401(a)(17) or 402(g) of the Code, and one of which (the "Supplemental
Plan") provides benefits, as more specifically set forth in Sections 2.1(b) and
(c) hereof, for the following purposes: to take into account certain bonuses not
considered as compensation under the ISP; and to provide such additional
benefits as are provided at the direction of the Board of Directors of the
Company, the Board of Directors of the Employer, or other authorized officers of
the Company or the Employer, but which are not provided under the ISP. The
Mirror Plan and Supplemental Plan shall constitute separate plans for (without
limitation) the purposes of Public Law 104-95, 4 U.S.C. Section 114, governing
state taxation of deferred
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<PAGE> 4
compensation. The two plans shall be referred to herein in the aggregate as the
Plan.
This instrument sets forth provisions which constitute the Plan as
amended and restated effective January 1, 1999.
ARTICLE I
DEFINITIONS AND CONSTRUCTION
1.1 "ACCOUNT" means, for any Participant, the account established
for the Participant under Section 2.3. Each Account will consist of two
sub-accounts, the Mirror Sub-Account and the Supplemental Sub-Account.
1.2 "ACCOUNT BALANCE" means, for any Participant as of any date,
the aggregate amount reflected in the Participant's Mirror Sub-Account and the
Participant's Supplemental Sub-Account.
1.3 "AFFILIATE" means any entity which, with the Company,
constitutes a group of trades or businesses under common control, a controlled
group of corporations, an affiliated service group, or a group of corporations
otherwise required to be aggregated, as provided in sections 414(b), (c), (m),
and (o) of the Code, respectively.
1.4 "BOARD" means the Board of Directors of the Company.
1.5 "CODE" means the Internal Revenue Code of 1986, as amended.
1.6 "COMPANY" means Aetna Inc. or any successor by merger,
consolidation, purchase or otherwise.
1.7 "EFFECTIVE DATE" means the effective date of this amended and
restated Plan, January 1, 1999.
1.8 "ELIGIBLE EMPLOYEE" means, for any Plan Year, an Employee whose
total compensation (as reflected on Form W-2) for the prior Plan Year, when
added to all elective deferrals of compensation which would
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<PAGE> 5
otherwise have been reflected on Form W-2, aggregated more than $160,000 or such
other amount announced by the Company prior to the beginning of the applicable
Plan Year, and whose benefit under the ISP for the Plan Year is limited by the
application of section 401(a)(17) or 402(g) of the Code as set forth in Section
2.1(a) hereof. For the first Plan Year in which an Employee is an Eligible
Employee, such Employee shall not be an Eligible Employee until the time as of
which the benefit limitation under ISP for the Plan Year, as set forth in the
previous sentence, has been reached.
1.9 "EMPLOYEE" means any person who is actively employed by the
Employer or a Participating Company, other than as a general agent, a broker, an
independent contractor, or a leased employee (within the meaning of Section
414(n)(2) of the Code).
1.10 "EMPLOYER" means Aetna Services, Inc.
1.11 "HIGHLY LEVERAGED EMPLOYEE" means an employee who is so designated
by the Employer or a Participating Company, in the sole discretion of the
Employer or Participating Company, by virtue of the material emphasis by the
Employer or a Participating Company, as the case may be, on variable or
incentive pay.
1.12 "ISP" means The Aetna Services, Inc. Incentive Savings Plan, as
amended and restated effective January 1, 1999 and as it may be amended from
time to time thereafter.
1.13 "MIRROR SUB-ACCOUNT" means that portion of a Participant's Account
that is credited with benefits provided by Section 2.1(a) hereof.
1.14 "PARTICIPANT" means an Eligible Employee or former Eligible
Employee who has an Account Balance.
1.15 "PARTICIPATING COMPANY" means any Affiliate which either (a)
is listed in Appendix A on the Effective Date, or (b) after the Effective Date,
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<PAGE> 6
adopts the Plan in accordance with the provisions of Article VI hereof. A
Participating Company may adopt this Plan with respect to less than all of its
otherwise eligible employees. On the date that a Participating Company ceases to
be an Affiliate, it shall also cease to be a Participating Company, pursuant to
section 6.2 hereof.
1.16 "PAY" means, for any Eligible Employee for any Plan Year, the
amount determined using the definition of "Pay" set forth in the ISP, with the
following changes:
(a) the limit set forth in Section 401(a)(17) of the Code shall not
apply; and
(b) with respect to Highly Leveraged Employees, Pay taken into account
under the Plan shall not exceed $500,000.
1.17 "PLAN" means The Aetna Services, Inc. Supplemental Incentive
Savings Plan, as set forth herein and as amended from time to time.
1.18 "PLAN YEAR" means the calendar year.
1.19 "SUPPLEMENTAL SUB-ACCOUNT" means that portion of a
Participant's Account that is credited with benefits provided by Sections
2.1(b), (c) and (d) hereof.
1.20 "TERMINATION FROM SERVICE" means a Termination from Service as
defined in the ISP.
1.21 "VALUATION DATE" means the last business day of each calendar
month.
1.22 CONSTRUCTION. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. Where appropriate, words used in the singular include
the plural and words used in the plural include the singular. The words
"hereof," "herein," "hereunder" and other similar
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<PAGE> 7
compounds of the word "here" shall mean and refer to this entire Plan, not to
any particular provision or section. Capitalized terms used herein and not
defined above shall have the meanings set forth in the ISP.
ARTICLE II
DEFERRAL OF PAY
2.1 DEFERRAL OF PAY AND INCENTIVE CONTRIBUTIONS.
(a) For each Plan Year, each individual who is an Eligible Employee for
the Plan Year and who does not make an election pursuant to Subsection (e) below
shall have credited to the Mirror Sub-Account of the Eligible Employee's Account
the difference between: (1) the amount that would have been credited to the
Eligible Employee's Deferral Account and Incentive Contribution Account pursuant
to the Eligible Employee's Compensation Deferral Agreement if (i) the definition
of Pay set forth in this Plan had been used instead of the ISP definition, and
(ii) the cap on contributions to the Eligible Employee's Deferral Account, set
forth in Section 402(g) of the Code, did not apply; and (2) the amount that
actually was credited to the Eligible Employee's Deferral Account and Incentive
Contribution Account during the Plan Year. The Eligible Employee's Compensation
Deferral Agreement shall be a compensation deferral agreement with respect to
this Plan, and the Eligible Employee's compensation shall be reduced in the same
manner and to the same extent that it would have been reduced pursuant to the
ISP.
(b) For each Plan Year, each individual who (i) is an Eligible Employee
for the Plan Year, (ii) made Deferral Contributions to the ISP for such Plan
Year, and (iii) elected to defer an award under the Company's Management
Incentive Plan, shall have credited to the Supplemental Sub-Account of the
Eligible Employee's Account the amount that would have
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<PAGE> 8
been credited as an Incentive Contribution under 2.1(a) above with respect to
such deferred award if (i) such deferred award had been included in the Eligible
Employee's Pay for the Plan Year in which it would otherwise have been paid
(subject to the limit on Pay set forth in Section 1.16(b), if applicable); and
(ii) Deferral Contributions had been made with respect to such award. A
Participant shall not be treated as having elected to defer an award pursuant to
clause (ii) of the preceding sentence if such Participant has elected to use the
award to take part in the Company's Executive Bonus Exchange for Stock Options
Program, unless the Participant subsequently opts out of the Executive Bonus
Exchange for Stock Options Program and instead defers receipt of the award.
(c) In addition to the amounts determined in accordance with
Subsections 2.1(a) and (b) to be contributed to a Participant's Mirror
Sub-Account and Supplemental Sub-Account, there shall be credited to a
Participant's Supplemental Sub-Account for any Plan Year such other amount as
may be determined by the Board of Directors of the Company, the Board of
Directors of the Employer, or other authorized officers of the Company or the
Employer, to be contributed to the Participant's Supplemental Sub-Account for
such Plan Year. Any corresponding reductions to or deductions from the
compensation otherwise payable to the Participant shall be made as specified by
such Board or officer(s) and as agreed to by the Participant.
(d) Prior to the first day of any Plan Year, or, for the Plan Year in
which an Employee first becomes an Eligible Employee, no later than 30 days
after the Employee becomes an Eligible Employee, an Eligible Employee may elect,
on the form and in the manner established by the Employer for such purpose, not
to participate in this Plan for such Plan
-7-
<PAGE> 9
Year. In such event, no amounts shall be deferred from the Eligible Employee's
Pay or credited to the Eligible Employee's Account pursuant to Section 2.1(a) or
(b) for such Plan year.
2.2 PAYMENT OF FICA AND OTHER TAXES. The compensation currently payable
to an Eligible Employee during any period shall be reduced by an amount equal to
the FICA and other taxes required to be withheld by the Employer or the
applicable Participating Company during that period with respect to the amount
deferred pursuant to Section 2.1.
2.3 ACCOUNT; CREDITS AND DEBITS; EARNINGS. The Company shall establish
on its books an Account for each Participant. Each Account shall consist of a
Mirror Sub-Account and a Supplemental Sub-Account. Within each Sub-Account,
those credited amounts that would have been Incentive Contributions, and the
earnings thereon, shall be accounted for separately (all such amounts to be
hereinafter referred to as the "Incentive Portion.") Amounts deferred on behalf
of a Participant, or allocated to a Participant, pursuant to Section 2.1 shall
be credited to the Participant's appropriate sub-account on the date on which
such amounts would have been credited to the Participant's Deferral Account and
Incentive Contribution Account under the ISP had such amounts been payable under
the ISP. In addition, as of each Valuation Date, each Participant's Account
shall be credited with an incremental amount equal to the amount that would have
been earned had the amounts credited to the Participant's Account been invested
in an investment option offered by the Company. The sole investment option
offered by the Company for this Plan is the Stable Value Option. The Company
reserves the right to amend the investment options in the future. Any payments
made to or on behalf of the Participant and/or a Beneficiary shall be debited
from the Participant's Account.
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<PAGE> 10
2.4 VESTING. Each Participant shall have a nonforfeitable right to the
Account other than the Incentive Portion, subject however to Sections 2.5 and
2.6. A Participant shall have a nonforfeitable right to the Incentive Portion
only if the Participant is vested in the Incentive Contribution Account under
the ISP.
2.5 UNFUNDED NATURE OF ACCOUNT. No assets shall be segregated or
earmarked with respect to any Account, and no Participant or Beneficiary shall
have any right to assign, transfer, pledge or hypothecate an interest or any
portion thereof in the Participant's Account. The Plan and the crediting of
Accounts hereunder shall not constitute a trust or a funded arrangement of any
sort and shall be merely for the purpose of recording an unsecured contractual
obligation of each obligated party; provided, however, that the Employer and the
Company reserve the right to meet the obligations created under the Plan through
one or more trusts or other agreements.
2.6 REDUCTION OF BENEFIT. If a Participant breaches an obligation to
the Company, the Employer or a Participating Company with respect to the payment
of a specific sum of money, the Company, the Employer or the applicable
Participating Company may reduce any benefits payable to such Participant under
this Plan, in the manner of setoff or otherwise, to the extent of such
obligation and any costs incurred with respect thereto. In addition, the
Company, the Employer and the Participating Companies do not waive any rights to
reduce benefits, including but not limited to setoff rights, which such entities
may have under applicable law or a prior written agreement between all or any of
them and an Employee, all of which rights are enforceable independent of the
terms of this Plan.
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<PAGE> 11
ARTICLE III
PAYMENT OF DEFERRED AMOUNTS
3.1 ELECTION AS TO TIME OF PAYMENT. Each Eligible Employee shall make
an election, on a form and in the manner prescribed by the Company for this
purpose, specifying the time at which his or her vested Account Balance is to be
paid. Such election shall be made not more than 90 days after the date on which
the individual becomes an Eligible Employee. Any election which does not comply
with these time limits will be deemed an election pursuant to Section 3.2 and
will be effective only if it complies with the rules set forth therein.
Except as otherwise provided in Section 3.2 and Section 3.3, payment of
a Participant's vested Account Balance shall be made to the Participant or the
Participant's Beneficiary in a lump sum as soon as practicable after the
Valuation Date on or next following the time specified for payment in the
election made by the Participant under this Section 3.1.
In the absence of an election which complies with either Section 3.1 or
Section 3.2, a Participant's vested Account Balance shall be paid in a lump sum
as soon as practicable after the Valuation Date on or next following the
Participant's Termination from Service.
3.2 ABILITY TO CHANGE ELECTION. Notwithstanding any election that may
have been made by a Participant pursuant to Section 3.1, a Participant who has
not yet had a Termination from Service may elect to receive payment of the
vested Account Balance at a date other than that specified by the Participant in
the election made pursuant to Section 3.1; provided however that:
(a) an election made under this Section 3.2 shall apply to
Participant's entire vested Account Balance notwithstanding any prior elections;
and
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<PAGE> 12
(b) if the Participant's Termination from Service occurs within one
year and a day after the date on which the election to change the time of
payment is made, the election shall not be honored and the Participant's vested
Account Balance shall be distributed in accordance with Section 3.1.
3.3 PAYMENT IN THE EVENT OF PARTICIPANT'S DEATH. Notwithstanding
any election that may have been made by a Participant pursuant to Section 3.1 or
3.2, any vested Account Balance that has not been paid to the Participant as of
the date of the Participant's death shall be paid to the Participant's
Beneficiary in a lump sum as soon as practicable after the Valuation Date on or
next following the date on which the Company receives notification of the
Participant's death.
3.4 ACCELERATION OF PAYMENT. Notwithstanding any other provision
of this Plan to the contrary, the Company in its sole discretion may accelerate
the payment of vested Account Balances: (a) to all or any group of similarly
situated Participants, whether before or after the Participants' Termination
from Service, in response to changes in the tax laws or accounting principles;
(b) to any Participant in the event of an extreme hardship of such Participant
that cannot be relieved from any other financial resources of such Participant;
or (c) to any Participant in the event of other compelling circumstances.
ARTICLE IV
MANAGEMENT OF THE PLAN
4.1 ADMINISTRATOR. The Employer shall be the Administrator with
the sole responsibility for the administration of the Plan. The Administrator
may delegate to any person or entity any powers or duties of the Administrator
under the Plan. To the extent of any such delegation, the delegatee shall become
responsible for administration of the Plan, and
-11-
<PAGE> 13
references to the Administrator shall apply instead to the delegatee. Any action
by the Employer assigning any of its responsibilities as Administrator to
specific persons who are directors, officers, or employees of the Employer, the
Company, or the Participating Companies shall not constitute delegation of the
Administrator's responsibilities but rather shall be treated as the manner in
which the Employer has determined internally to discharge such responsibility.
4.2 POWERS AND DUTIES OF THE ADMINISTRATOR. The Administrator shall
have such duties and powers as may be necessary to discharge its duties
hereunder, including, but not by way of limitation, the following:
(a) to construe and interpret the Plan, decide all questions of
eligibility, determine the status and rights of Participants, and determine the
amount, manner and time of payment of any benefits hereunder;
(b) to receive from the Participating Companies and from Participants
such information as shall be necessary for the proper administration of the
Plan;
(c) to furnish the Participating Companies, upon request, such annual
reports with respect to the administration of the Plan as are reasonable and
appropriate;
(d) to appoint or employ individuals to assist in the administration of
the Plan and any other agents it deems advisable, including legal and actuarial
counsel;
(e) to defend and initiate any lawsuit on behalf of the Plan or the
Eligible Employees if the Administrator deems it reasonably necessary to protect
the Plan or the Participants.
If there shall arise any misunderstanding or ambiguity concerning the
meaning of any of the provisions of the Plan arising out of the
-12-
<PAGE> 14
administration thereof, the Administrator shall have the sole right to construe
such provisions. Subject to the limitations of the Plan and applicable law, the
Administrator may make such rules and regulations as it deems necessary or
proper for the administration of the Plan and the transaction of business
thereunder.
The decisions of the Administrator with respect to any matter it is
empowered to act on shall be made by it in its sole discretion based on the Plan
documents and shall be final, conclusive and binding on all persons.
-13-
<PAGE> 15
ARTICLE V
AMENDMENT AND TERMINATION
5.1 AMENDMENTS. The Company reserves the right to amend this Plan from
time to time in any respect, including without limitation a prospective
reduction in accrual of benefits. See Section 5.4 regarding prohibition of
retroactive reduction of benefits accrued under this Plan.
5.2 ACTION BY COMPANY. Any amendments to this Plan by the Company shall
be made in writing and executed by the Senior Vice President, Corporate Human
Resources or other officer holding such position, or by the President or Chief
Executive Officer of the Company. Neither the consent of any Employee nor that
of any payee is required for any amendment to the Plan.
5.3 TERMINATION BY COMPANY. The Plan may be terminated in whole or in
part by the Company at any time. The Plan as a whole shall be terminated only
pursuant to a resolution of the Board of Directors of the Company. The Plan may
be terminated in part in the same manner as is prescribed for the adoption of
amendments. Neither the consent of any Employee nor that of any payee is
required for any termination of the Plan.
5.4 EFFECT OF AMENDMENT OR TERMINATION BY COMPANY. Any amendment or
termination of this Plan by the Company shall be effective prospectively and
shall not serve to retroactively reduce any right to a benefit accrued under
this Plan up to the date of such amendment or termination; provided, however,
that in the event of any termination or partial termination of the Plan
(including a Participating Company's ceasing to be a Participating Company
pursuant to Section 6.2), the Company shall have the right to immediately cash
out each affected Participant's benefit, notwithstanding any elections that have
been made.
-14-
<PAGE> 16
ARTICLE VI
ADOPTION BY AFFILIATE
6.1 ADOPTION BY AFFILIATE. Any Affiliate may, with the consent of the
Company, become a Participating Company under the Plan by a resolution of the
Board of Directors of the Affiliate under which:
(a) The Affiliate shall agree to be bound by all the provisions of the
Plan in the manner set forth herein and any amendments hereto; and
(b) The Affiliate shall agree to pay its share of expenses of the Plan
as they may be determined by the Company from time to time.
6.2 TERMINATION BY A PARTICIPATING COMPANY. Any Participating Company
may at any time elect to terminate its participation under the Plan with respect
to all or any group of the Participating Company's Employees. A Participating
Company shall terminate its participation under the Plan by resolution of the
Board of Directors of the Participating Company. Notwithstanding the above, a
Participating Company shall cease to be a Participating Company, without any
further action, upon ceasing to be an Affiliate of the Company. The termination
of participation by a Participating Company shall not relieve the Participating
Company of its liabilities under this Plan, including but not limited to those
liabilities imposed under Section 7.2 hereof.
ARTICLE VII
MISCELLANEOUS
7.1 EXCLUSIVE BENEFIT. The Plan is maintained for the exclusive benefit
of Participants.
7.2 SOURCE OF PAYMENT. All benefits under the Plan shall be paid
exclusively by the Employer or the applicable Participating Company from
-15-
<PAGE> 17
its general assets, provided that the Company shall be liable for all benefits
under the Plan.
7.3 RIGHTS OF EMPLOYEES. Nothing contained herein shall be deemed to
give any Employee the right to be retained in the service of the Employer or the
applicable Participating Company or to interfere with the right of the Employer
or the applicable Participating Company to discharge such Employee at any time,
nor shall it be deemed to give the Employer or the applicable Participating
Company the right to require the Employee to remain in its service, nor shall it
interfere with the right of the Employer or the applicable Participating Company
to terminate service at any time.
7.4 HEADINGS. The headings of the Plan are inserted for convenience of
reference only and shall have no effect upon the meaning of the provisions
hereof.
7.5 SEVERABILITY. If any provision of this Plan is held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision, and this Plan shall be construed and enforced as if such provision
were omitted.
7.6 ALIENATION OF BENEFITS. Except as provided in Section 2.6, and
except as otherwise provided by law, and consistent with Section 2.5 hereof, no
benefit under this Plan may be voluntarily or involuntarily assigned or
alienated.
7.7 LOST DISTRIBUTEES. Any benefit payable hereunder shall be deemed
forfeited if the distributee to whom payment is due cannot be located, provided
that such benefit shall be reinstated if a claim is made by the distributee for
the forfeited benefit within two years of the date the forfeited benefit was
payable pursuant to Sections 3.1, 3.2 and 3.3.
-16-
<PAGE> 18
7.8 GOVERNING LAW. This Plan shall be construed according to the laws
of the State of Connecticut to the extent not pre-empted by Federal law.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer this 1st day of June, 1999.
AETNA INC.
By: /s/ Elease E. Wright
------------------------
Its: Senior Vice President,
Corporate Human Resources
-17-
<PAGE> 19
Appendix A
LIST OF PARTICIPATING COMPANIES
<TABLE>
<CAPTION>
A. B. C.
PARTICIPATING COMPANIES TAX IDENTIFICATION END OF
NUMBER OF EMPLOYER FISCAL YEAR
----------------------- ------------------ -----------
<S> <C> <C>
Aetna Services, Inc. 06-0843808 12/31
Aetna Life Insurance Company 06-6033492 12/31
Aeltus Investment Management Inc. 06-0888148 12/31
Aetna Life Insurance and 71-0294708
Annuity Company 12/31
Aetna U.S. Healthcare Dental Plan 06-1160812 12/31
of California, Inc.
Aetna Healthcare of California, Inc. 95-3402799 12/31
Aetna International, Inc. 06-1028458 12/31
</TABLE>
-18-
<PAGE> 1
[AETNA Logo] INTEROFFICE COMMUNICATION
RICHARD L. HUBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
A801
(860) 273-7851
FAX: (860) 273-6872
To Frederick C. Copeland
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 in 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
-------------------------------
Richard L. Huber
Agreed and Accepted:
By: /s/ Frederick C. Copeland, Jr.
-------------------------------
Frederick C. Copeland, Jr.
Date: 9/30/97
-------------------------------
<PAGE> 1
[AETNA Logo] INTEROFFICE COMMUNICATION
RICHARD L. HUBER
To Thomas J. McInerney
Date April 6, 1999
Subject Employment Agreement
This memo is to confirm that your employment agreement with Aetna Inc. (the
"Company") dated as of December 19, 1995, as amended as of May 2, 1996 is not
being renewed, but instead shall terminate as of December 31, 1999 with your
employment continuing as an executive of the Company on an at-will basis. As we
discussed, this also confirms our agreement that Section 6(f) shall be of no
further force or effect. In lieu of benefits under the Company's severance plan
and upon receipt of a customary release, we have agreed that the Company shall
guarantee you a minimum of 52 weeks salary continuation in the event your
employment is ever terminated under circumstances which call for the payment of
benefits under the Company's severance plan, and for a period of 156 weeks if
your employment is terminated by the Company for any reason other than
misconduct following a "change in control" as defined in the Company's severance
plan. However, as long as any chief executive officer successor candidate (as
identified to you by the Company from time to time) hired by the Company
subsequent to June 30, 1998 is entitled to severance protection which includes
more than the formula used herein, then in such event the 52 weeks and 156 weeks
of salary continuation referred to in the prior sentence shall instead be
calculated using both base salary and your annual target bonus then in effect.
Please acknowledge the foregoing by signing and returning a copy of this memo to
Elease Wright at your convenience.
Aetna Inc.
By: /s/ Richard L. Huber
-------------------------
Richard L. Huber
Agreed:
/s/ Thomas J. McInerney
-------------------------
Thomas J. McInerney
Date: April 8, 1999
<PAGE> 1
[AETNA LOGO] INTEROFFICE COMMUNICATION
RICHARD L. HUBER
To Frederick C. Copeland, Jr.
Date May 4, 1999
Subject Employment Agreement
This memo is to confirm that in lieu of benefits under the Company's
severance and salary continuation benefits plan and upon receipt from you of a
customary release of employment-related claims and covenants in form and
substance satisfactory to the Company, we have agreed that the Company shall
guarantee you a minimum of 52 weeks salary continuation in the event your
employment is ever terminated under circumstances which call for the payment of
benefits under the Company's severance and salary continuation benefits plan,
and for a period of 156 weeks if your employment is terminated by the Company
for any reason other than misconduct following a "change in control" as defined
in the Company's severance plan.
Aetna Inc.
By: /s/Richard L. Huber
-------------------
Richard L. Huber
<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>
Six Months Ended Years Ended
June 30, December 31,
---------------- --------------------------------------------------------------------
(Million) 1999 1998 1997 1996 1995 1994
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $ 671.4 $ 1,408.3 $ 1,511.2 $ 338.7 $ 726.2 $ 627.5
Add back fixed charges 189.4 358.5 321.9 245.1 187.0 170.8
Minority interest 10.6 10.7 14.7 16.4 16.1 11.4
--------- --------- --------- --------- --------- ---------
Income as adjusted $ 871.4 $ 1,777.5 $ 1,847.8 $ 600.2 $ 929.3 $ 809.7
========= ========= ========= ========= ========= =========
Fixed charges:
Interest on indebtedness (1) $ 128.7 $ 250.9 $ 235.8 $ 168.3 $ 115.9 $ 98.6
Portion of rents representative
of interest factor 60.7 107.6 86.1 76.8 71.1 72.2
--------- --------- --------- --------- --------- ---------
Total fixed charges $ 189.4 $ 358.5 $ 321.9 $ 245.1 $ 187.0 $ 170.8
========= ========= ========= ========= ========= =========
Preferred stock dividend
requirements 45.6 92.2 92.4 41.1 -- --
--------- --------- --------- --------- --------- ---------
Total combined fixed charges
and preferred stock dividend
requirements $ 235.0 $ 450.7 $ 414.3 $ 286.2 $ 187.0 $ 170.8
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges 4.60 4.96 5.74 2.45 4.97 4.74
========= ========= ========= ========= ========= =========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.71 3.94 4.46 2.10 4.97 4.74
========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 15 of Notes to Consolidated Financial Statements in the
Company's 1998 Annual Report.)
Page 1
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
---------------- -------------------------------------------------
(Millions) 1999 1998 1997 1996
---------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax income from continuing operations $ 473.0 $ 1,162.7 $ 1,505.2 $ 335.0
Add back fixed charges 187.9 354.3 318.1 243.8
Minority interest 9.7 10.8 15.7 16.4
--------- --------- --------- ---------
Income as adjusted $ 670.6 $ 1,527.8 $ 1,839.0 $ 595.2
========= ========= ========= =========
Fixed charges:
Interest on indebtedness (2) $ 128.7 $ 250.9 $ 234.0 $ 168.3
Portion of rents representative
of interest factor 59.2 103.4 84.1 75.5
--------- --------- --------- ---------
Total fixed charges $ 187.9 $ 354.3 $ 318.1 $ 243.8
========= ========= ========= =========
Preferred stock dividend requirements -- -- -- --
Total combined fixed charges and preferred
stock dividend requirements $ 187.9 $ 354.3 $ 318.1 $ 243.8
========= ========= ========= =========
Ratio of earnings to fixed charges 3.57 4.31 5.78 2.44
========= ========= ========= =========
Ratio of earnings to combined fixed charges
and preferred stock dividends 3.57 4.31 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 14 of Notes to Financial
Statements in the Company's 1998 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 15 of Notes to Consolidated Financial Statements in the
Company's 1998 Annual Report.)
Page 2
<PAGE> 1
Exhibit 15
Letter Re: Unaudited Interim Financial Information
- ---------------------------------------------------
Aetna Inc.
Hartford, Connecticut
Ladies and Gentlemen:
Re: Registration Statements No. 333-07169, 333-08427, 333-08429, 333-08431,
333-52321, 333-68881, 333-52321-01, 333-52321-02, 333-52321-03, 333-52321-04,
and 333-52321-05.
With respect to the subject Registration Statements filed by Aetna Inc. or its
Subsidiaries, we acknowledge our awareness of the use therein of our report
dated July 28, 1999 related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Hartford, Connecticut
July 28, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the six months ended June
30, 1999 for Aetna Inc. and is qualified in its entirety by reference to such
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 29,827
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 880
<MORTGAGE> 3,440
<REAL-ESTATE> 311
<TOTAL-INVEST> 37,134
<CASH> 2,086
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,976
<TOTAL-ASSETS> 107,705
<POLICY-LOSSES> 18,717
<UNEARNED-PREMIUMS> 218
<POLICY-OTHER> 3,889
<POLICY-HOLDER-FUNDS> 16,610
<NOTES-PAYABLE> 2,488
862
0
<COMMON> 3,263
<OTHER-SE> 7,151
<TOTAL-LIABILITY-AND-EQUITY> 107,705
8,962
<INVESTMENT-INCOME> 1,466
<INVESTMENT-GAINS> 27
<OTHER-INCOME> 1,191
<BENEFITS> 8,488
<UNDERWRITING-AMORTIZATION> 102
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 672
<INCOME-TAX> 265
<INCOME-CONTINUING> 407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407
<EPS-BASIC> 2.69
<EPS-DILUTED> 2.66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
