<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 MARCH 31, 2000.
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.
Common Capital Stock (par value $.01) 140,933,296
- ------------------------------------- -------------------------------------
(Class) Shares Outstanding at March 31, 2000
===============================================================================
<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 22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 44
Item 5. Other Information. 48
Item 6. Exhibits and Reports on Form 8-K. 49
Signatures 51
</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
March 31,
---------------------------
(Millions, except per common share data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Premiums $6,393.9 $4,381.4
Net investment income 786.7 749.4
Fees and other income 712.8 544.5
Net realized capital gains (losses) (3.1) 17.1
- ---------------------------------------------------------------------------------------------------------------
Total revenue 7,890.3 5,692.4
- ---------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Current and future benefits 5,883.0 4,141.3
Operating expenses:
Salaries and related benefits 665.3 479.3
Other 788.7 564.5
Interest expense 82.7 64.6
Amortization of goodwill and other acquired intangible assets 116.1 107.7
Amortization of deferred policy acquisition costs 58.8 50.0
- ---------------------------------------------------------------------------------------------------------------
Total benefits and expenses 7,594.6 5,407.4
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 295.7 285.0
Income taxes:
Current 96.8 105.3
Deferred 29.5 10.1
- ---------------------------------------------------------------------------------------------------------------
Total income taxes 126.3 115.4
- ---------------------------------------------------------------------------------------------------------------
Net income $ 169.4 $ 169.6
===============================================================================================================
Net income applicable to common ownership $ 169.4 $ 155.8
===============================================================================================================
Results per common share:
Basic $ 1.20 $ 1.10
Diluted 1.19 1.09
Dividends declared .20 .20
- ---------------------------------------------------------------------------------------------------------------
</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>
March 31, December 31,
(Millions, except share data) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value (amortized cost $31,168.9 and $29,409.4) $ 30,644.5 $ 28,661.6
Debt securities held to maturity, at amortized cost 126.8 -
Equity securities, at fair value (cost $1,640.7 and $732.6) 1,774.2 791.1
Short-term investments 606.1 788.2
Mortgage loans 3,181.2 3,238.2
Commercial loans 1,156.6 -
Real estate 485.3 361.8
Policy loans 811.7 541.5
Other 1,724.6 1,394.8
- --------------------------------------------------------------------------------------------------------------------------------
Total investments 40,511.0 35,777.2
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 3,314.2 2,504.5
Short-term investments under securities loan agreement 1,648.3 1,037.5
Accrued investment income 551.1 466.5
Premiums due and other receivables 2,596.2 2,751.1
Reinsurance recoverables 3,869.9 3,881.1
Deferred income taxes 308.0 352.0
Deferred policy acquisition costs 2,329.1 2,059.8
Goodwill and other acquired intangible assets 9,062.5 9,335.4
Other assets 2,099.7 1,341.7
Separate Accounts assets 56,688.7 53,332.2
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $122,978.7 $112,839.0
================================================================================================================================
Liabilities:
Insurance liabilities:
Future policy benefits $ 23,779.0 $ 17,599.3
Unpaid claims 4,895.3 4,976.5
Unearned premiums 528.0 507.1
Policyholders' funds left with the Company 15,289.7 15,481.4
- --------------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 44,492.0 38,564.3
- --------------------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 28.2 28.5
Short-term debt 1,548.6 1,887.7
Long-term debt 2,680.9 2,677.9
Payables under securities loan agreement 1,648.3 1,037.5
Current income taxes 407.8 307.6
Other liabilities 4,372.3 4,195.5
Minority and participating policyholders' interests 153.5 117.4
Separate Accounts liabilities 56,688.7 53,332.2
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 112,020.3 102,148.6
- --------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 4 and 11)
Shareholders' equity:
Common stock ($.01 par value; 500,000,000 shares authorized; 140,933,296 in 2000 and
142,680,694 in 1999 issued and outstanding) 3,626.1 3,719.3
Accumulated other comprehensive loss (435.9) (655.6)
Retained earnings 7,768.2 7,626.7
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,958.4 10,690.4
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $122,978.7 $112,839.0
================================================================================================================================
</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 Loss
Class C Voting ---------------------------
Mandatorily Unrealized
(Millions, except share data) Convertible Common Gains (Losses) Foreign Retained
Three Months Ended March 31, 2000 Total Preferred Stock Stock on Securities Currency Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $10,690.4 $ - $3,719.3 $(206.1) $(449.5) $7,626.7
Comprehensive income:
Net income 169.4 169.4
Other comprehensive income, net of tax:
Unrealized gains on securities
($128.9 pretax) (1) 83.8 83.8
Foreign currency ($140.5 pretax) 135.9 135.9
---------
Other comprehensive income 219.7
---------
Total comprehensive income 389.1
=========
Common stock issued for benefit
plans (37,602 shares) 1.4 1.4
Repurchase of common shares
(1,785,000 shares) (94.6) (94.6)
Common stock dividends (27.9) (27.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2000 $10,958.4 $ - $3,626.1 $(122.3) $(313.6) $7,768.2
==================================================================================================================================
Three Months Ended March 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $11,388.9 $862.1 $3,292.4 $ 382.5 $(204.7) $7,056.6
Comprehensive loss:
Net income 169.6 169.6
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(186.0) pretax) (1) (120.9) (120.9)
Foreign currency ($(119.4) pretax) (77.6) (77.6)
---------
Other comprehensive loss (198.5)
---------
Total comprehensive loss (28.9)
=========
Common stock issued for benefit
plans (204,875 shares) 15.4 15.4
Repurchase of common shares
(495,000 shares) (40.0) (40.0)
Conversion of preferred securities (1,732
preferred shares converted to 1,418
common shares) - (.1) .1
Common stock dividends (28.2) (28.2)
Preferred stock dividends (13.8) (13.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 $11,293.4 $862.0 $3,267.9 $ 261.6 $(282.3) $7,184.2
==================================================================================================================================
</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>
Three Months Ended March 31,
-----------------------------
(Millions) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 169.4 $ 169.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including investment discounts and premiums) 146.9 108.6
Net realized capital (gains) losses 3.1 (17.1)
Changes in assets and liabilities:
Increase in accrued investment income (9.7) (65.2)
(Increase) decrease in premiums due and other receivables 84.5 (15.8)
Increase in deferred policy acquisition costs (97.1) (83.0)
Increase (decrease) in income taxes 69.9 (141.1)
Net (increase) decrease in other assets and other liabilities (215.5) 139.8
Increase in insurance liabilities 145.9 101.3
Other, net 8.1 4.6
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 305.5 201.7
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales and investment maturities of:
Debt securities available for sale 7,122.6 4,919.3
Equity securities 480.1 87.5
Mortgage loans 199.5 71.6
Real estate 10.2 29.4
Other investments 602.7 304.4
Short-term investments 3,309.2 4,905.2
NYLCare Texas 420.0 -
Cost of investments in:
Debt securities available for sale (7,155.9) (4,598.7)
Equity securities (290.9) (100.6)
Mortgage loans (107.9) (52.8)
Real estate (3.8) (63.6)
Other investments (114.8) (264.4)
Short-term investments (2,909.0) (4,730.3)
Acquisitions:
NYLCare health care business - (48.8)
Other (75.0) (115.8)
Increase in property and equipment (30.3) (14.8)
Other, net (13.4) (53.0)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,443.3 274.6
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits and interest credited for investment contracts 544.2 751.6
Withdrawals of investment contracts (1,016.3) (903.2)
Repayment of long-term debt (.8) (.1)
Net decrease in short-term debt (340.7) (189.1)
Common stock issued under benefit plans 1.4 15.4
Common stock acquired (94.3) (40.0)
Dividends paid to shareholders (28.2) (42.1)
Other, net (20.2) (11.0)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (954.9) (418.5)
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 15.8 (1.2)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 809.7 56.6
Cash and cash equivalents, beginning of period 2,504.5 1,951.5
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,314.2 $2,008.1
=============================================================================================================================
Supplemental cash flow information:
Interest paid $ 142.4 $ 95.5
Income taxes paid - 174.0
- -----------------------------------------------------------------------------------------------------------------------------
</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"). All
significant intercompany balances have been eliminated. Certain non-U.S.
affiliates of the Company report operations on a one-month lag. In such
situations, operations are reported for the three-month period beginning
December 1 of the previous calendar year and ending February 29 of the current
calendar year. 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 1999 financial information to conform to the 2000 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 1999 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, 2000, the Company adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified Public
Accountants. This statement 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. The adoption of this
standard did not have a material effect on the Company's financial position or
results of operations.
Future Accounting Standard
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 impact of FAS No. 133 on the Company's financial
statements will vary based on certain factors including future interpretive
guidance from the FASB, the extent of the Company's hedging activities, the
types of hedging instruments used and the effectiveness of such instruments. The
Company is evaluating the impact of the adoption of this standard and currently
does not believe that this standard will have a material effect on the Company's
financial position or results of operations.
Page 7
<PAGE> 8
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. RECENT DEVELOPMENTS
On March 12, 2000, the Company announced that it plans to separate its health
and financial services businesses into two independent publicly-traded companies
(the "Separation"). The health business will consist of Aetna U.S. Healthcare
(including its Group Life and Disability Insurance business), the Large Case
Pensions business and Aetna International's health businesses which remain at
the time of separation. The financial services business will consist of Aetna
Financial Services and Aetna International's financial services businesses which
remain at the time of separation. As a result of the Separation, the realignment
of certain of the Company's businesses that was announced in January 2000 will
not occur.
The Company intends to complete the Separation as soon as it can be achieved in
an orderly manner, with the goal of completing the Separation by year end 2000.
However, completion of the Separation remains subject to a number of conditions,
including final approval by the Company's Board of Directors. These conditions
also include obtaining regulatory approvals and satisfying certain tax and other
legal requirements. The full impact of the Separation on the Company's financial
position, results of operations and cash flows cannot be predicted at this time,
and the Company's historical financial information may not be representative of
either the health or the financial services businesses following the completion
of the Separation. The Company expects that it will continue to incur costs as
decisions are made regarding the Separation and such costs may be material.
In addition, the Company has announced that:
- - It plans to review its international business and sell assets that do not
fit with the strategies of the newly independent health and financial
services businesses or provide an adequate return on capital. The Company
expects to use any proceeds received from the sale of international
assets for general corporate purposes, including repayment of debt,
internal growth and share repurchases;
- - It has retained an executive recruiting firm to assist in the search for
a chief executive officer for the health business;
- - It is undertaking a comprehensive review of its health business model
and strategies;
- - It is considering additional steps to strengthen its financial services
business and enhance its products and services; and
- - It is reviewing its operating expense structure in connection with the
Separation.
Page 8
<PAGE> 9
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three months ended March 31, was as
follows:
<TABLE>
<CAPTION>
Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Basic EPS
Net income $169.4 141.3 $1.20
====== =====
Effect of dilutive securities:
Stock options and other (1)(2) .8
-----
Diluted EPS
Income applicable to common ownership and assumed conversions $169.4 142.1 $1.19
==========================================================================================================================
1999
Net income $169.6
Less: preferred stock dividends 13.8
------
Basic EPS
Income applicable to common ownership $155.8 141.4 $1.10
====== =====
Effect of dilutive securities:
Stock options and other (1) 1.2
------
Diluted EPS (3)
Income applicable to common ownership and assumed conversions $155.8 142.6 $1.09
==========================================================================================================================
</TABLE>
(1) Options to purchase shares of common stock and stock appreciation rights
("SARs") in 2000 and 1999 of 11.2 million shares (with exercise prices
ranging from $51.75 to $112.63) and 5.1 million shares (with exercise
prices ranging from $83.00 to $112.63), respectively, were not included
in the calculation of diluted earnings per common share because the
options' and SARs' exercise price was greater than the average market
price of common shares.
(2) Effective February 29, 2000, the Board of Directors approved a grant of
approximately 3.8 million options to executive, middle management and
non-management employees to purchase common stock of the Company
primarily at $41.125 per share.
(3) The issuable Aetna common stock related to Class C voting manditorily
convertible preferred stock ("Class C Shares") (10.9 million weighted
average shares in 1999) was not included in the computation of diluted
earnings per common share because to do so would be antidilutive. On July
19, 1999, the Company redeemed all outstanding Class C Shares and issued
9.5 million shares of Aetna common stock to effect the redemption.
4. ACQUISITIONS AND DISPOSITIONS
Aetna U.S. Healthcare
On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion. The acquisition was accounted for as a purchase. In
addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included: (1) an asset of $130
million, representing the fair value adjustment of a reinsurance agreement
(discussed below), primarily reflecting the net benefits to be received from
Prudential over the life of the agreement; (2) a liability of $129 million,
representing a fair value adjustment for the unfavorable component of the
contracts underlying the acquired medical risk business and (3) an asset of $21
million, representing the above-market compensation component related to
supplemental fees to be received under the Company's agreement to service
Prudential's administrative services only ("ASO") contracts (discussed below).
Refer to the Company's 1999 Annual Report of Form 10-K for further discussion of
the PHC acquisition.
During the first quarter 2000, a liability of $15 million was recorded as part
of the purchase price allocation related to the Company's plan to exit certain
leased facilities of the acquired PHC businesses, currently expected to be
completed by March 31, 2001. The purchase price does not reflect any employee
termination benefits for positions that may be eliminated. Such amounts, which
currently are not reasonably estimable, will be expensed as incurred.
Page 9
<PAGE> 10
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna U.S. Healthcare (Continued)
For the three months ended March 31, 2000, the Company recorded asset
amortization of $7 million pretax related to the fair value adjustment of the
reinsurance agreement; liability amortization of $13 million pretax related to
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business and asset amortization of $7
million pretax related to the above-market compensation component related to the
supplemental fees under the ASO contracts.
The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Premium expense recognized for the three months ended
March 31, 2000 was $3 million pretax. Under the agreement, Prudential has agreed
to indemnify the Company from certain health insurance risks that arise
following the closing by reimbursing the Company for 75% of medical costs (as
calculated under the agreement) of PHC in excess of certain threshold medical
loss ratio levels through 2000 for substantially all the acquired medical and
dental risk business. The medical loss ratio threshold was 83.5% for August 6,
1999 through December 31, 1999 and is 84% for January 1, 2000 through December
31, 2000. During the three months ended March 31, 2000, reinsurance recoveries
under this agreement (reflected as a reduction of current and future benefits)
were $10 million pretax. The premium is subject to adjustment if medical costs
of PHC are below these threshold medical loss ratio levels. Prudential has also
agreed to indemnify the Company for unanticipated increases in medical claims
payable existing at the acquisition date for a period of up to nine months
following the closing.
The Company also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained the Company
to service these contracts during the run off period, but no later than June 30,
2001. In exchange for servicing the ASO business, Prudential is remitting fees
received from its ASO customers to the Company, as well as paying certain
supplemental fees. The supplemental fees are fixed in amount and decline over a
period ending 18 months following the closing. During the three months ended
March 31, 2000, the Company recorded total fees for servicing the Prudential ASO
business of approximately $106 million pretax, including supplemental fees of
approximately $48 million pretax which was net of the $7 million asset
amortization described above (reflected as fees and other income).
In connection with the PHC acquisition, the Company agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS and
other related businesses ("NYLCare Texas") acquired by the Company as part of
the 1998 acquisition of New York Life Insurance Company's health care business.
Pursuant to this agreement, on March 31, 2000, Aetna U.S. Healthcare completed
the sale of NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of
Health Care Service Corporation, for approximately $420 million in cash. The
sale resulted in an after-tax capital loss of $35 million which was previously
recognized in the fourth quarter of 1999. The after-tax loss included operating
losses from October 1, 1999 through closing. The results of operations of
NYLCare Texas were not material to the Aetna U.S. Healthcare segment or to the
Company's consolidated results of operations.
During the first quarter 2000, Aetna U.S. Healthcare acquired the remaining
minority ownership interest in InteliHealth Inc., which distributes healthcare
information principally through its internet web site and sells health products
to consumers. The aggregate purchase price was not material.
Page 10
<PAGE> 11
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna International
On January 14, 2000, Aetna International Inc. ("Aetna International") and its
Mexican partner sold two of their Mexican joint venture companies, Seguros
Monterrey Aetna, S.A. and Fianzas Monterrey Aetna, S.A., to New York Life
International, Inc., a subsidiary of New York Life Insurance Company, for
approximately $570 million in cash (Aetna International's share of the proceeds
was approximately $279 million). The sale resulted in an after-tax capital gain
of approximately $13 million. These two joint ventures contributed operating
earnings of approximately $6 million and $7 million for the three months ended
March 31, 2000 and 1999, respectively.
On November 18, 1999, Aetna International acquired a 33% ownership interest in
Aetna Heiwa Life Insurance Company Ltd., formerly known as The Heiwa Life
Insurance Company Ltd., of Japan ("Heiwa"), for approximately $20 million.
During the first quarter 2000, Aetna International increased its ownership
interest in Heiwa to 99.82% for approximately $37 million. Heiwa, which was
previously accounted for under the equity method, is now reflected on a
consolidated basis.
On October 1, 1999, Aetna International sold its Canadian operations to John
Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance
Company, for approximately $310 million in cash. Operating earnings from the
Canadian operations were $9 million for the three months ended March 31, 1999.
5. INVESTMENTS
Net investment income includes amounts allocable to experience-rated
contractholders of $250 million and $256 million for the three months ended
March 31, 2000 and 1999, respectively. Interest credited to contractholders is
included in current and future benefits.
Net realized capital gains (losses) allocable to experience-rated
contractholders of $(32) million and $6 million for the three months ended March
31, 2000 and 1999, respectively, were deducted from net realized capital gains
(losses) 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.
During the first quarter 2000, as part of the Heiwa acquisition, the Company
acquired approximately $1.2 billion of commercial loans (primarily secured
corporate working capital loans mostly to Japanese borrowers), net of an
allowance for loan losses of approximately $160 million. Interest on these loans
is accrued and credited to income based on the principal amount outstanding.
Page 11
<PAGE> 12
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INVESTMENTS (CONTINUED)
The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------------ ------------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $157.6 $22.2 $158.9 $22.2
Supporting experience-rated products 56.7 8.8 66.9 8.8
Supporting remaining products 62.3 5.1 59.2 1.1
- ----------------------------------------------------------------------------------------------------------------------------
Total impaired loans $276.6(1) $36.1 $285.0(1) $32.1
============================================================================================================================
</TABLE>
(1) Includes impaired loans of $102.8 million and $109.0 million at March 31,
2000 and December 31, 1999, respectively, for which no specific reserves
are considered necessary.
The activity in the specific and general reserves for the three months ended
March 31, 2000 and 1999 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, 1999 $28.9 $15.6 $ 4.8 $49.3
Charged to other accounts - - 1.5 1.5
Principal write-offs - - (.9) (.9)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $28.9 $15.6 $ 5.4 $49.9(1)
==================================================================================================================
Balance at December 31, 1998 $29.5 $29.6 $ 7.8 $66.9
Charged to other accounts - - .6 .6
Principal write-offs (.6) (2.4) (1.4) (4.4)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $28.9 $27.2 $ 7.0 $63.1(1)
==================================================================================================================
</TABLE>
(1) Total reserves at March 31, 2000 and 1999 include $36.1 million and $43.7
million of specific reserves, respectively, and $13.8 million and $19.4
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 Three Months Ended
March 31, 2000 March 31, 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 $158.1 $2.7 $2.7 $160.1 $2.7 $2.7
Supporting experience-rated products 74.6 1.7 1.6 95.7 1.9 1.8
Supporting remaining products 51.0 2.7 2.8 36.1 .8 .6
- ----------------------------------------------------------------------------------------------------------------------------------
Total $283.7 $7.1 $7.1 $291.9 $5.4 $5.1
==================================================================================================================================
</TABLE>
Page 12
<PAGE> 13
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 $5 million and
$8 million for the three months ended March 31, 2000 and 1999, respectively.
7. ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive 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>
Three Months
Ended March 31,
---------------------------
(Millions) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $87.2 $ (96.1)
Less: reclassification adjustment for gains and other items included in net income (2) 3.4 24.8
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $83.8 $(120.9)
============================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$134.1 million and $(147.8) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $5.2 million and $38.2 million for 2000 and 1999,
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 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. The Company's results of
operations would be adversely affected to the extent that future losses on the
products are greater than anticipated and positively affected to the extent that
future losses are less than anticipated. The current reserve reflects
management's best estimate of anticipated future losses.
The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).
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 that was used to calculate the
reserve. The offsetting payable, on which interest is similarly accrued, is
reflected in continuing products. Interest on the payable generally offsets the
investment income on the assets available to fund the shortfall. At March 31,
2000, the receivable from continuing products, net of related deferred taxes
payable of $69 million on the accrued interest income, was $469 million. At
December 31, 1999, the receivable from continuing products, net of related
deferred taxes payable of $67 million on accrued interest income, was $464
million. These amounts were 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)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three months ended March 31, 2000 Results Future Losses Net(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $121.7 $ - $121.7
Net realized capital gains .1 (.1) -
Interest earned on receivable from continuing products 8.1 - 8.1
Other income 13.0 - 13.0
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 142.9 (.1) 142.8
- ---------------------------------------------------------------------------------------------------------------------
Current and future benefits 116.2 23.1 139.3
Operating expenses 3.5 - 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 119.7 23.1 142.8
- ---------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 23.2 $(23.2) $ -
=====================================================================================================================
Three months ended March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
Net investment income $122.1 $ - $122.1
Net realized capital gains 10.2 (10.2) -
Interest earned on receivable from continuing products 8.4 - 8.4
Other income 10.4 - 10.4
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 151.1 (10.2) 140.9
- ---------------------------------------------------------------------------------------------------------------------
Current and future benefits 130.2 7.3 137.5
Operating expenses 3.4 - 3.4
- ---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 133.6 7.3 140.9
- ---------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 17.5 $(17.5) $ -
=====================================================================================================================
</TABLE>
(1) Amounts are reflected in the March 31, 2000 and 1999 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which was eliminated in consolidation.
Assets and liabilities supporting discontinued products at March 31, 2000 and
December 31, 1999 were as follows (1):
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Debt securities available for sale $4,437.3 $4,533.0
Mortgage loans 788.0 768.8
Real estate 116.6 112.7
Short-term and other investments 542.4 453.9
- ---------------------------------------------------------------------------------------------------------------
Total investments 5,884.3 5,868.4
Short-term investments under securities loan agreement 154.1 243.8
Current and deferred income taxes 101.0 134.1
Receivable from continuing products (2) 538.7 530.6
Other - 82.6
- ---------------------------------------------------------------------------------------------------------------
Total assets $6,678.1 $6,859.5
===============================================================================================================
Liabilities:
Future policy benefits $4,535.0 $4,566.0
Policyholders' funds left with the Company 793.2 902.1
Reserve for anticipated future losses on discontinued products 1,170.8 1,147.6
Payables under securities loan agreement 154.1 243.8
Other 25.0 -
- ---------------------------------------------------------------------------------------------------------------
Total liabilities $6,678.1 $6,859.5
===============================================================================================================
</TABLE>
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products was eliminated in consolidation.
Page 14
<PAGE> 15
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. DISCONTINUED PRODUCTS (CONTINUED)
At March 31, 2000, net unrealized capital losses on available-for-sale debt
securities are included above in other liabilities. At December 31, 1999, net
unrealized capital losses on available-for-sale debt securities are included
above in other assets. These net unrealized capital losses 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 reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates and the cost of
asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.
The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's mortality table
which has been used since then.
The Company's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liabilities have run off.
The activity in the reserve for anticipated future losses on discontinued
products for the three months ended March 31, 2000 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- -----------------------------------------------------------
<S> <C>
Reserve at December 31, 1999 $1,147.6
Operating income 13.2
Net realized capital gains .1
Mortality and other 9.9
- -----------------------------------------------------------
Reserve at March 31, 2000 $1,170.8
===========================================================
</TABLE>
Page 15
<PAGE> 16
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 (collectively, the "Aetna Services Debt").
Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks that terminates in June 2001. Various
interest rate options are available under this 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 March 31, 2000
is at an annual rate of .08%. There are no borrowings under this facility as of
March 31, 2000. This 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
(loss)), of at least $7.5 billion.
Aetna Services also has an additional revolving credit facility in an aggregate
amount of $500 million with a worldwide group of banks that terminates in March
2001. Various interest rate options are available under this facility and any
borrowings mature on the expiration date of the applicable credit commitment.
Aetna Services pays facility fees ranging from .07% to .25% per annum, depending
upon its long-term senior unsecured debt rating. The facility fee at March 31,
2000 is at an annual rate of .08%. There are no borrowings under this facility
as of March 31, 2000. This facility also supports Aetna Services' commercial
paper borrowing program. As a guarantor under this credit facility, Aetna Inc.
is required to maintain shareholders' equity, excluding net unrealized capital
gains and losses (accumulated other comprehensive income (loss)), 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>
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments (excluding Separate Accounts) $ 38,280.0 $33,258.1
Total assets 110,157.2 99,338.8
Total insurance liabilities 41,689.7 35,665.1
Total liabilities 108,913.0 98,342.2
Total shareholder's equity 1,244.2 996.6
- --------------------------------------------------------------------------------------------------
</TABLE>
Statements of Income Information:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $3,345.8 $2,653.2
Total benefits and expenses 3,053.1 2,465.2
Income before income taxes 292.7 188.0
Net income 178.5 128.5
- -------------------------------------------------------------------------------------------------
</TABLE>
The amount of dividends that may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at March 31, 2000
without prior approval by state regulatory authorities is limited to
approximately $504 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 16
<PAGE> 17
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 months ended March 31, was as follows:
<TABLE>
<CAPTION>
Aetna
Aetna U.S. Financial Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other(1) Company
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues from external customers $6,299.7 $200.5 $559.2 $ 47.3 $ - $7,106.7
Net investment income 178.4 229.6 92.0 244.5 1.9 746.4
Equity in earnings of subsidiaries - - 40.3 - - 40.3
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital gains
(losses) $6,478.1 $430.1 $691.5 $291.8 $ 1.9 $7,893.4
================================================================================================================================
Operating earnings (2) $ 131.8 $ 60.0 $ 48.9 $ 16.6 $(73.3) $ 184.0
Realized capital gains (losses), net of tax (11.6) (5.8) 2.0 .8 - (14.6)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 120.2 $ 54.2 $ 50.9 $ 17.4 $(73.3) $ 169.4
================================================================================================================================
1999
Revenues from external customers $4,295.7 $146.6 $445.2 $ 38.1 $ .3 $4,925.9
Net investment income 140.7 224.1 94.6 256.6 3.0 719.0
Equity in earnings of subsidiaries - - 30.4 - - 30.4
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital gains
(losses) $4,436.4 $370.7 $570.2 $294.7 $ 3.3 $5,675.3
================================================================================================================================
Operating earnings (2) $ 106.2 $ 47.3 $ 43.0 $ 22.3 $(60.4) $ 158.4
Realized capital gains (losses), net of tax 4.7 1.9 (1.4) 6.0 - 11.2
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 110.9 $ 49.2 $ 41.6 $ 28.3 $(60.4) $ 169.6
================================================================================================================================
</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 is comprised of income (loss) excluding realized
capital gains and losses. While operating earnings is the measure of
profit or loss used by Company's management when assessing performance or
making operating decisions, it does not replace operating income or net
income as a measure of profitability.
Page 17
<PAGE> 18
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. Lease payments are
charged to this facilities reserve as they are made and will continue to be
charged to this reserve over the remaining lease term. At March 31, 2000 and
December 31, 1999, the balance in this facilities reserve was $265 million and
$269 million, respectively.
Other
On April 6, 2000, the State of New Jersey enacted the New Jersey Insolvent
Health Maintenance Organization Assistance Fund Act of 2000 (the "Act") designed
to reimburse individuals who were covered by and providers that had contracts
with two New Jersey health maintenance organizations ("HMOs") prior to their
insolvency. The total amount to be assessed to all HMOs in New Jersey is $50
million. The Act requires that HMOs in the New Jersey market be assessed a
charge calculated based on each HMO's proportionate share of premiums written in
New Jersey relative to all HMO premiums written in New Jersey. The Company
believes its proportionate share will be significant and expects to record an
estimate of this amount in the second quarter of 2000.
Litigation
Shareholder Litigation
- ----------------------
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 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. On
August 9, 1999, the Court entered an order certifying as plaintiffs those
persons who purchased Company common stock on the market from March 6, 1997
through 7:00 a.m. on September 29, 1997. Merits discovery was completed in early
2000. On January 31, 2000, plaintiffs filed expert reports. On February 3, 2000,
defendants filed motions for summary judgment. Also on February 3, 2000,
plaintiffs moved for permission to file a third amended complaint. On March 20,
2000, the Court granted plaintiffs leave to file a third amended complaint and
adopted a revised schedule. Under the revised schedule, expert discovery is
scheduled to be completed in the second quarter of 2000 and defendants are to
file new summary judgment motions and any supplemental expert reports in May
2000. Trial is now scheduled to begin in the third quarter of 2000. Defendants
are defending the actions vigorously.
Page 18
<PAGE> 19
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Litigation (Continued)
Four purported shareholder class action complaints were filed in the Superior
Court of Connecticut, Hartford County alleging in substance that the Company and
its directors breached fiduciary duties to shareholders in responding to a
February 24, 2000 letter from Wellpoint Health Networks, Inc. and ING America
Insurance Holdings, Inc. which had invited discussions concerning a possible
transaction. These actions were filed on behalf of George Schore, Michael
Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on March 7,
2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on March 23,
2000. A fifth, substantially similar purported class action complaint was filed
on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of New York,
New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. This litigation is in the
preliminary stages. Defendants intend to defend these actions vigorously.
Health Care Litigation
- ----------------------
The Company is involved in several purported class action lawsuits that are part
of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on April 19, 1999 by Joseph Maio, Jo
Ann Maio and Gary Bender seeking various forms of relief, including unspecified
damages and treble damages, from the Company and a number of its subsidiaries
for alleged violations of the Racketeer Influenced and Corrupt Organizations Act
("RICO"), the Pennsylvania Unfair Trade Practices and Consumer Protection Law,
and state common law. On September 29, 1999, the Court dismissed the RICO claims
with prejudice and dismissed the state law claims for lack of subject matter
jurisdiction. The Court held, among other things, that the plaintiffs lacked
standing to pursue the federal RICO claims because they had not alleged an
injury in fact. Plaintiffs have appealed the dismissal to the United States
Court of Appeals for the Third Circuit, which is expected to render a decision
on the appeal during 2000.
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on October 4, 1999 by Anthony Conte
(the "Conte Complaint"). The Conte Complaint seeks various forms of relief,
including unspecified damages, from Aetna U.S. Healthcare Inc. for alleged
violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Conte Complaint alleges that Aetna U.S. Healthcare does not make adequate
disclosure of provider compensation arrangements in the literature that it makes
available to actual or prospective members. The Company intends to defend the
action vigorously and on November 1, 1999, filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. On
December 15, 1999, the Court suspended further proceedings pending the
resolution of the Maio appeal by the United States Court of Appeals for the
Third Circuit.
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on October 7, 1999 by Jo Ann O'Neill
(the "O'Neill Complaint"). An Amended Complaint was filed on November 9, 1999 by
Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The O'Neill Complaint seeks
various forms of relief, including unspecified damages and treble damages, from
the Company, Aetna U.S. Healthcare Inc., Richard L. Huber and unnamed members of
the Board of Directors of Aetna Inc. for alleged violations of ERISA and RICO.
The O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
Page 19
<PAGE> 20
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Litigation (Continued)
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright in
her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from the Company, Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and unnamed "John Doe" defendants
for alleged violations of California Business and Professions Code Sections
17200 and 17500, California Civil Code Section 1750 and state common law in
connection with the sale and marketing of health plans in California. The
Curtright Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO, POS and PPO members and members of the general
public. On December 16, 1999, defendants removed the action to the United States
District Court for the Northern District of California. On January 18, 2000,
plaintiff moved to remand the action to state court. On the same date, the
Company moved to dismiss the Curtright Complaint for failure to state a claim
upon which relief can be granted and moved for a stay of the action pending
resolution of the Maio and Conte matters. This litigation is in the preliminary
stages. Defendants intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California, County
of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen
Coalition for Patients Rights, purportedly on behalf of the general public of
the State of California (the "Ross Complaint"). The Ross Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna Inc., Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and additional unnamed "John
Doe" defendants for alleged violations of California Business and Professions
Code Sections 17200 and 17500. The Ross Complaint alleges that defendants are
liable for alleged misrepresentations and omissions relating to advertising,
marketing and member materials directed to Aetna HMO, POS and PPO members and
the general public and for alleged unfair practices relating to contracting of
doctors. This litigation is in the preliminary stages. Defendants intend to
defend the action vigorously.
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on November 22, 1999 by Raymond D.
Williamson, III (the "Williamson Complaint"). The Williamson Complaint names as
defendant The Prudential Insurance Company of America, and also names as
defendants Aetna Inc. and Aetna U.S. Healthcare Inc. solely to the extent that
the Company has assumed liability for the actions of Prudential in connection
with the Company's acquisition of the Prudential health care business. The
Williamson Complaint seeks various forms of relief from defendants, including
unspecified damages, treble damages and imposition of a constructive trust, for
alleged violations of RICO and ERISA. The Williamson Complaint alleges that the
Prudential Health Plans engaged in a nationwide fraudulent scheme of
misrepresentation by stating that coverage and treatment decisions were made on
the basis of medical necessity when Prudential allegedly implemented undisclosed
policies designed to deny or limit claims and medical services. On December 30,
1999, the Company moved to stay, dismiss or transfer the action to the United
States District Court for the Eastern District of Pennsylvania based on the fact
that the Maio and Conte Complaints were filed in that court. On January 25,
2000, the Court suspended further proceedings pending resolution of a motion in
cases involving other defendants to consolidate those actions in a single court.
This litigation is in the preliminary stages. The Company intends to defend the
action vigorously.
Page 20
<PAGE> 21
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Litigation (Continued)
A purported class action complaint was filed in the United States District Court
for the District of New Jersey on December 3, 1999 by Michael V. Amorosi (the
"Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna Inc. and Aetna U.S. Healthcare Inc. for alleged
violations of RICO and ERISA. The Amorosi Complaint alleges that defendants told
subscribers that coverage and treatment decisions would be based on medical
necessity but instead took into account undisclosed cost-based criteria that
were unrelated to members' medical needs. On January 7, 2000, the Company moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the fact that the Maio and Conte
Complaints were filed in that court. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna Inc., Aetna U.S. Healthcare Inc. and Richard L.
Huber for alleged violations of RICO. The Mangieri Complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with the Company. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
Financial Services Litigation
- -----------------------------
In recent years, several life insurance and annuity companies have been named as
defendants in lawsuits, including class action lawsuits, relating to life
insurance and annuity pricing and sales practices. A purported class action
complaint was filed in the Circuit Court of Lauderdale County, Alabama on March
28, 2000 by Loretta Shaner against Aetna Life Insurance and Annuity Company
("ALIAC"), a wholly-owned subsidiary of Aetna Inc. (the "Shaner Complaint"). The
Shaner Complaint seeks unspecified compensatory damages from ALIAC and unnamed
affiliates of ALIAC. The Shaner Complaint claims that ALIAC's sale of deferred
annuity products for use as investments in tax-deferred contributory retirement
plans (e.g., IRAs) is improper. This litigation is in the preliminary stages.
The Company intends to defend the action vigorously.
Other Litigation
- ----------------
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 21
<PAGE> 22
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of March 31, 2000, and the related condensed
consolidated statements of income, shareholders' equity and cash flows for the
three-month periods ended March 31, 2000 and 1999. 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, 1999, 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 7, 2000, 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, 1999, 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
April 26, 2000
Page 22
<PAGE> 23
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 months ended March 31,
2000 and 1999. 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 1999 Annual Report on Form 10-K.
OVERVIEW
Recent Developments
On March 12, 2000, the Company announced that it plans to separate its health
and financial services businesses into two independent publicly-traded companies
(the "Separation"). The health business will consist of Aetna U.S. Healthcare
(including its Group Life and Disability Insurance business), the Large Case
Pensions business and Aetna International's health businesses which remain at
the time of separation. The financial services business will consist of Aetna
Financial Services and Aetna International's financial services businesses which
remain at the time of separation. As a result of the Separation, the realignment
of certain of the Company's businesses that was announced in January 2000 will
not occur.
The Company intends to complete the Separation as soon as it can be achieved in
an orderly manner, with the goal of completing the Separation by year end 2000.
However, completion of the Separation remains subject to a number of conditions,
including final approval by the Company's Board of Directors. These conditions
also include obtaining regulatory approvals and satisfying certain tax and other
legal requirements. The full impact of the Separation on the Company's financial
position, results of operations and cash flows cannot be predicted at this time,
and the Company's historical financial information may not be representative of
either the health or the financial services businesses following the completion
of the Separation. The Company expects that it will continue to incur costs
relating to the Separation as decisions are made regarding the Separation and
such costs may be material.
In addition, the Company has announced that:
- - It plans to review its international business and sell assets that do not
fit with the strategies of the newly independent health and financial
services businesses or provide an adequate return on capital. The Company
projects that such sales will yield proceeds of $500 million to $1.5
billion, subject to, among other things, negotiation with potential
buyers and satisfaction of any conditions, including regulatory
approvals. The Company expects to use any proceeds received from the sale
of international assets for general corporate purposes, including
repayment of debt, internal growth and share repurchases;
- - It has retained an executive recruiting firm to assist in the search for
a chief executive officer for the health business;
- - It is undertaking a comprehensive review of its health business model and
strategies;
- - It is considering additional steps to strengthen its financial services
business and enhance its products and services; and
- - It is reviewing its operating expense structure in connection with the
Separation.
General
At March 31, 2000, the Company's operations included three core businesses -
Aetna U.S. Healthcare, Aetna Financial Services and Aetna International. Aetna
U.S. Healthcare provides a full spectrum of managed care, indemnity, and group
life and disability insurance products. Aetna Financial Services markets a wide
array of retirement and investment products to small businesses, educational
institutions, state and local governments, non-profit organizations and
individuals. 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.
Page 23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (CONTINUED)
Consolidated Results
The Company reported net income of $169 million for the three months ended March
31, 2000 compared to $170 million for the corresponding period in 1999. Net
income per diluted common share for the three months ended March 31, 2000 was
$1.19, compared with $1.09 a year ago.
Net income includes Year 2000 costs of $27 million for the three months ended
March 31, 1999. Results also include net realized capital losses of $15 million
for the three months ended March 31, 2000 and net realized capital gains of $11
million for the corresponding period in 1999. Excluding net realized capital
gains or losses, results were $184 million for the three months ended March 31,
2000 compared to $158 million for the corresponding period in 1999.
Acquisitions and Dispositions
Aetna U.S. Healthcare Transactions
Acquisition of Prudential Health Care Business
- ----------------------------------------------
On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion. The Company also agreed to service Prudential's
administrative services only ("ASO") business following the closing. Since the
closing, the Company's results have been affected by, among other things, the
operating results of PHC, the costs of financing the transaction and the
amortization of goodwill and other acquired intangible assets created as a
result of the transaction. The operations, and related amortization of
intangible assets, of PHC 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", "Liquidity and Capital
Resources" and Note 4 of the Condensed Notes to Consolidated Financial
Statements for further discussion.
Sale of NYLCare Texas
- ---------------------
In connection with the PHC acquisition, the Company agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS and
other related businesses ("NYLCare Texas") acquired by the Company as part of
the 1998 acquisition of New York Life Insurance Company's health care business
("NYLCare"). Pursuant to this agreement, on March 31, 2000, Aetna U.S.
Healthcare completed the sale of NYLCare Texas to Blue Cross and Blue Shield of
Texas ("Blue Cross"), a division of Health Care Service Corporation ("HCSC"),
for approximately $420 million in cash. Proceeds from the sale are expected to
be used for general corporate purposes, including repayment of debt, internal
growth and share repurchases. The sale included approximately 463,000 Commercial
HMO risk members, 52,000 Commercial HMO non-risk members and 5,000 PPO members
in the Houston, Austin, San Antonio, Corpus Christi, Beaumont, Dallas-Fort
Worth, San Angelo, Texarkana and Amarillo areas. Aetna U.S. Healthcare retained
approximately 127,000 NYLCare Medicare members in Texas through a reinsurance
and administrative services agreement. The sale resulted in a capital loss of
approximately $35 million after tax, which was previously recognized in the
fourth quarter of 1999. The results of operations of NYLCare Texas were not
material to the Aetna U.S. Healthcare segment or to the Company's consolidated
results of operations.
Page 24
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
OVERVIEW (CONTINUED)
Aetna International Transactions
Sale of Mexican Joint Ventures
- ------------------------------
On January 14, 2000, Aetna International, Inc. and its Mexican partner sold two
of their Mexican joint venture companies, Seguros Monterrey Aetna, S.A. and
Fianzas Monterrey Aetna, S.A., to New York Life International Inc., a subsidiary
of New York Life Insurance Company, for approximately $570 million in cash
(Aetna International, Inc.'s share of the proceeds was approximately $279
million). The sale resulted in a capital gain of approximately $13 million after
tax. The results of operations of these two Mexican joint ventures were not
material to the Aetna International segment or to the Company's consolidated
results of operations. Refer to "Aetna International" and Note 4 of the
Condensed Notes to Consolidated Financial Statements for further discussion.
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
(Millions) 2000(1) 1999 % Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 5,784.3 $ 3,912.6 47.8%
Net investment income 178.4 140.7 26.8
Fees and other income 515.4 383.1 34.5
Net realized capital gains (losses) (29.1) 7.4 -
- ------------------------------------------------------------------------------------------------------------------------
Total revenue 6,449.0 4,443.8 45.1
- ------------------------------------------------------------------------------------------------------------------------
Current and future benefits 4,984.2 3,364.6 48.1
Salaries and related benefits 545.8 378.6 44.2
Other operating expenses 606.6 392.3 54.6
Amortization of goodwill and other acquired intangible assets 109.2 101.9 7.2
- ------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 6,245.8 4,237.4 47.4
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 203.2 206.4 (1.6)
Income taxes 83.0 95.5 (13.1)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 120.2 $ 110.9 8.4%
========================================================================================================================
Net realized capital gains (losses), net of tax (included above) $ (11.6) $ 4.7 -%
========================================================================================================================`
</TABLE>
(1) Results include PHC, which was acquired on August 6, 1999.
Acquisition of the Prudential Health Care Business
On August 6, 1999, the Company acquired PHC. The Company also agreed to service
Prudential's ASO contracts following the acquisition. Included in the
acquisition are PHC's risk HMO, POS, PPO and Indemnity health lines, as well as
its dental risk business. Subsequent to the closing, Aetna U.S. Healthcare's
results have been affected by, among other things, the operating results of PHC
and the amortization of intangible assets (primarily goodwill) created by the
transaction. Refer to "Overview" and Note 4 of the Condensed Notes to
Consolidated Financial Statements for a further discussion of the PHC
acquisition and the sale of NYLCare Texas.
Page 25
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Results
Aetna U.S. Healthcare's net income for the three months ended March 31, 2000
increased $9 million compared to the corresponding period for 1999. Net income
includes Year 2000 costs of $18 million for the three months ended March 31,
1999. Results for the three months ended March 31, 2000 include costs for
electronic commerce initiatives and other technological systems improvements.
Net realized capital losses for the first quarter of 2000 reflect the Company's
rebalancing of its investment portfolio in a rising interest rate environment.
Excluding net realized capital gains or losses, results for the three months
ended March 31, 2000 increased $26 million, or 24%, compared to the
corresponding period in 1999. The earnings in the first quarter of 2000 reflect
the inclusion of PHC, including results from servicing Prudential's ASO
contracts, following the acquisition.
In order to provide a comparison that management believes better reflects the
performance of Aetna U.S. Healthcare, the operating earnings discussion that
follows excludes amortization of goodwill and other acquired intangible assets
and net realized capital gains or losses.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 2000 (1) 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating earnings:
Health Risk and PHC $ 138.1 $ 116.4
Group Insurance and Other Health 82.1 72.3
- ------------------------------------------------------------------------------------------------------
Total Aetna U.S. Healthcare $ 220.2 $ 188.7
======================================================================================================
Commercial HMO Premium PMPM $ 147.33 $ 138.70
- ------------------------------------------------------------------------------------------------------
Commercial HMO Medical Cost PMPM $ 123.40 (2) $ 114.13
- ------------------------------------------------------------------------------------------------------
Commercial HMO Medical Loss Ratio 83.8% (2) 82.3%
- ------------------------------------------------------------------------------------------------------
Medicare HMO Premium PMPM $ 532.83 $ 485.32
- ------------------------------------------------------------------------------------------------------
Medicare HMO Medical Cost PMPM $ 502.40 (2) $ 437.26
- ------------------------------------------------------------------------------------------------------
Medicare HMO Medical Loss Ratio 94.3% (2) 90.1%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Results include PHC, which was acquired on August 6, 1999.
(2) Does not include net recoveries under a reinsurance agreement with
Prudential, net amortization of the reinsurance premiums paid, or net
amortization of certain fair value amounts established as part of the PHC
purchasing accounting. Refer to "PHC Agreement" below.
Health Risk and PHC
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) and PHC
operating earnings increased $22 million for the three months ended March 31,
2000 compared to the corresponding period of 1999. The increase in 2000
operating earnings primarily reflects the addition of PHC, including the benefit
of supplemental fees for servicing Prudential's ASO customers and net recoveries
under the reinsurance agreement with Prudential. Also contributing to higher
results was favorable Commercial HMO results due to membership growth and
premium rate increases, partially offset by increased medical costs. Also,
results were partially offset by less favorable Medicare HMO results and
increased operating expenses resulting from increased selling, general and
administrative expenses and PHC related severance costs.
Page 26
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
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 reported but not yet paid. Medical claims payable are estimated
periodically, and any resulting adjustments are reflected in current-period
operating results within current and future benefits. Medical claims payable are
based on a number of factors, including those derived from historical claim
experience. An extensive degree of judgment is used in this estimation process,
considerable variability is inherent in such estimates and the adequacy of the
estimate is highly sensitive to changes in medical claims payment patterns and
changes in medical cost trends.
Based on information now known, management believes that medical cost trends for
the fourth quarter of 1999 were higher than for the third quarter of 1999. As a
result, HMO medical costs for the fourth quarter of 1999 were higher than
previously estimated. In developing estimates of HMO medical costs for the first
quarter of 2000, including medical claims payable at March 31, 2000, management
has assumed that medical cost trends were either consistent with or slightly
higher than the trend now believed to have occured in the latter half of 1999.
A worsening of medical cost trend or adverse changes in claim payment patterns
from those that were assumed in estimating medical costs would cause these
estimates to change in the near term and could have a material adverse effect
on future results of operations.
Commercial HMO
- --------------
Commercial HMO premium per member per month ("PMPM") increased 6% for the three
months ended March 31, 2000 compared to the corresponding period of 1999.
Excluding PHC, the increase would have been 7%. The increase was primarily due
to premium rate increases, partially offset by customers selecting lower premium
plans.
Commercial HMO medical cost PMPM increased 8% for the three months ended March
31, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase also would have been 8%. The increase reflects higher medical costs due
to medical cost inflation and increased utilization for specialists' services.
The Commercial HMO medical loss ratio was 83.8% for the three months ended March
31, 2000 compared to 82.3% for the three months ended March 31, 1999. The
increase is primarily due to the addition of the PHC business at a medical loss
ratio of 85.6%. Excluding PHC, the medical loss ratio would have been 82.9%.
Medicare HMO
- ------------
Medicare HMO premium PMPM increased 10% for the three months ended March 31,
2000 compared to the corresponding period of 1999. Excluding PHC, the increase
also would have been 10%. These increases were primarily due to increases in
supplemental premiums and Health Care Financing Administration ("HCFA") rate
increases.
Medicare HMO medical cost PMPM increased 15% for the three months ended March
31, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase would have been 14%. The increase reflects increased utilization for
inpatient and specialists' services and higher medical costs due to medical cost
inflation.
The Medicare HMO medical loss ratio was 94.3% for the three months ended March
31, 2000 compared to 90.1% for the three months ended March 31, 1999. Excluding
PHC, the medical loss ratio would have been 93.9%. The increase is due to
increases in medical costs outpacing supplemental premiums and HCFA rate
increases.
Page 27
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
PHC Agreement
- -------------
The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential has agreed to indemnify
the Company from certain health insurance risks that arise following the closing
by reimbursing the Company for 75% of medical costs (as calculated under the
agreement) of PHC in excess of certain threshold medical loss ratio levels
through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold was 83.5% for August 6, 1999 through
December 31, 1999 and is 84% for January 1, 2000 through December 31, 2000.
During the three months ended March 31, 2000, reinsurance recoveries under this
agreement were $10 million pretax. In addition, results were positively impacted
by $2 million pretax related to the net amortization of: the reinsurance premium
paid as part of the acquisition, the fair value adjustment of the reinsurance
agreement and the fair value adjustment of the unfavorable component of the
contracts underlying the acquired medical risk business recorded as part of the
acquisition. Such reinsurance recoveries and net amortization were reflected in
current and future benefits. Refer to Note 4 of Condensed Notes to Consolidated
Financial Statements.
The Company also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained the Company
to service these contracts during the run off period, but no later than June 30,
2001. Prudential ASO customers will remain Prudential customers as long as the
contracts remain in force. The Company is maintaining personnel, systems and
other resources necessary to service the ASO business during the run off period,
as it was not feasible to segregate these operating assets from those purchased
in the PHC transaction. In exchange for servicing the ASO business, Prudential
is remitting fees received from its ASO customers to the Company, as well as
paying certain supplemental fees. The supplemental fees are fixed in amount and
decline over a period ending 18 months following the closing. During the three
months ended March 31, 2000, the Company recorded total fees for servicing the
Prudential ASO business of approximately $106 million pretax, including
supplemental fees of approximately $48 million pretax (reflected as fees and
other income). Included in these supplemental fees is amortization of $7 million
pretax in connection with the above-market compensation component related to the
supplemental fees under the ASO contracts. The results of servicing this
business during the run off period will depend on, among other things, rate
increases that are obtained from renewing customers (most of such rate increases
were implemented by Prudential prior to the Company's servicing of these
contracts), the timing and extent of ASO contract terminations and the cost
structure for servicing these contracts. Refer to Note 4 of Condensed Notes to
Consolidated Financial Statements.
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 increased $10 million for the three months
ended March 31, 2000 compared to the corresponding period of 1999. This increase
is primarily due to higher membership levels in the nonrisk health business as
well as higher investment income, partially offset by an increase in other
operating expenses.
Page 28
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------------------------- -----------------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (1) 7,930 863 8,793 5,344 705 6,049
Medicare 676 - 676 546 - 546
Medicaid 139 72 211 140 25 165
- -------------------------------------------------------------------------------------------------------------------------
Total HMO 8,745 935 9,680 6,030 730 6,760
POS 334 3,413 3,747 225 2,455 2,680
PPO 791 3,064 3,855 945 2,942 3,887
Indemnity 241 2,022 2,263 167 2,071 2,238
- -------------------------------------------------------------------------------------------------------------------------
Total Health Membership 10,111 9,434 19,545 7,367 8,198 15,565
=========================================================================================================================
Dental 14,764 8,009
- -------------------------------------------------------------------------------------------------------------------------
Group Insurance:
Group Life 9,006 9,740
Disability 2,358 2,630
Long-Term Care 110 92
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 2,006 thousand POS members at March 31, 2000 and 1,455 thousand
POS members at March 31, 1999 who access primary care physicians and
referred care through an HMO network.
Total Health membership as of March 31, 2000 increased by 4 million members, or
26%, when compared to March 31, 1999, due to the acquisition of PHC, including
ASO members that Aetna U.S. Healthcare has agreed to service, partially offset
by the loss of NYLCare Texas members. Excluding the estimated impact of the PHC
members, growth in total HMO membership was offset by declines in other Health
membership. Total Health membership decreased approximately 1.5 million members
from year end 1999 primarily due to losses in PHC membership, which reflects the
impact of price increases, as well as the loss of NYLCare Texas members.
Total Revenue and Expense
Revenue, excluding net realized capital gains or losses, increased by $2.0
billion, or 46%, for the three months ended March 31, 2000 compared to the
corresponding period of 1999. This increase primarily was due to the acquisition
of PHC, growth in Commercial HMO membership and premiums and higher investment
income.
Operating expenses, including salaries and related benefits, increased by $382
million, or 49%, for the three months ended March 31, 2000 compared to the
corresponding period of 1999. This increase primarily was due to the acquisition
of PHC (including severance costs of $16 million) and increased costs to support
Commercial HMO membership growth. Operating expenses as a percentage of revenue
increased to 17.8% for the three months ended March 31, 2000 from 17.4% for the
corresponding period of 1999.
Page 29
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Outlook
The Separation includes a strategic review of Aetna U.S. Healthcare aimed at
improving financial performance and relationships with physicians, hospitals and
members.
The Company is currently reviewing the profitability of its Medicare business on
a market-by-market basis and expects that it will not renew its Medicare HMO
contracts in a number of markets effective January 1, 2001. Such decisions will
be made and announced by July 1, 2000.
On April 6, 2000, the State of New Jersey enacted the New Jersey Insolvent
Health Maintenance Organization Assistance Fund Act of 2000 (the "Act") designed
to reimburse individuals who were covered by and providers that had contracts
with two New Jersey HMOs prior to their insolvency. The total amount to be
assessed to all HMOs in New Jersey is $50 million. The Act requires that HMOs in
the New Jersey market be assessed a charge calculated based on each HMO's
proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. The Company believes its proportionate share
will be significant and expects to record an estimate of this amount in the
second quarter of 2000.
Refer to "Forward-Looking Information/Risk Factors" in this Report and "Aetna
U.S. Healthcare - Outlook" and "Forward-Looking Information/Risk Factors" in
Aetna Inc.'s 1999 Annual Report on Form 10-K.
Page 30
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA FINANCIAL SERVICES
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
(Millions) 2000 1999 % Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums (1) $ 36.0 $ 23.6 52.5%
Net investment income 229.6 224.1 2.5
Fees and other income 164.5 123.0 33.7
Net realized capital gains (losses) (8.9) 2.9 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 421.2 373.6 12.7
- ---------------------------------------------------------------------------------------------------------------------------------
Current and future benefits (1) 201.2 183.0 9.9
Salaries and related benefits 48.1 39.6 21.5
Operating expenses 60.4 52.9 14.2
Amortization of deferred policy acquisition costs 31.2 24.9 25.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 340.9 300.4 13.5
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 80.3 73.2 9.7
Income taxes 26.1 24.0 8.8
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 54.2 $ 49.2 10.2%
=================================================================================================================================
Net realized capital gains (losses), net of tax (included above) $ (5.8) $ 1.9 -%
=================================================================================================================================
Deposits (not included in premiums above):
Annuities -- fixed options $ 452.3 $ 545.2 (17.0)%
Annuities -- variable options 1,324.1 1,484.1 (10.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,776.4 $ 2,029.3 (12.5)%
=================================================================================================================================
Assets under management and administration:
Annuities -- fixed options (2) $ 12,404.0 $ 12,305.8 .8%
Annuities -- variable options (3) 38,181.8 27,238.7 40.2
Other investment advisory 21,581.5 15,615.9 38.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets under management 72,167.3 55,160.4 30.8
Assets under administration (4) 5,034.1 3,085.2 63.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 77,201.4 $ 58,245.6 32.5%
=================================================================================================================================
</TABLE>
(1) Includes $28.3 million for the three months ended March 31, 2000 and
$21.7 million for the three months ended March 31, 1999 of annuity
premiums on contracts converting from the accumulation phase to payout
options with life contingencies.
(2) Excludes net unrealized capital losses of approximately $198.7 million at
March 31, 2000 and net unrealized capital gains of approximately $305.7
million at March 31, 1999.
(3) Includes $15,730.8 million at March 31, 2000 and $8,404.7
million at March 31, 1999 of assets invested through Aetna Financial
Services' products in unaffiliated mutual funds.
(4) Represents assets for which Aetna Financial Services provides
administrative services only.
Results
Aetna Financial Services' ("AFS") net income for the three months ended March
31, 2000 increased $5 million compared to the corresponding period in 1999. Net
income includes Year 2000 costs of $6 million for the three months ended March
31, 1999. Excluding net realized capital gains or losses, results for the three
months ended March 31, 2000 increased $13 million, or 27%, compared to the
corresponding period in 1999. This increase in earnings primarily reflects an
increase in fees and other income partially offset by increases in operating
expenses.
Substantially all of fees and other income are calculated based on assets under
management and administration. Assets under management and administration at
March 31, 2000 increased primarily due to appreciation in the stock market and,
to a lesser extent, because of additional net deposits (i.e., deposits,
including new contracts, less surrenders) compared to the corresponding period
in 1999. Deposits for the three months ended March 31, 2000 were less than the
corresponding period in 1999 primarily because the prior period deposits
reflected plan assets of a large new case. Excluding this large case, deposits
for the three months ended March 31, 2000 would have increased 31% compared to
the corresponding period of 1999.
Page 31
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA FINANCIAL SERVICES (CONTINUED)
The increase in operating expenses, including salaries and related benefits,
reflects business growth and investments to improve systems infrastructures and
to add new distribution capabilities. Despite this overall increase, annuity
operating expenses as a percentage of assets under management decreased.
Of the $12.4 billion and $12.3 billion of fixed annuity assets under management
at March 31, 2000 and 1999, respectively, 25% were fully guaranteed and 75% were
experience-rated in each period. The average annualized earned rate on
investments supporting fully guaranteed investment contracts was 7.5% and 7.4%
for the three months ended March 31, 2000 and 1999, respectively, and the
average annualized earned rate on investments supporting experience-rated
investment contracts was 7.6% for both periods. The average annualized credited
rate on fully guaranteed investment contracts was 6.3% and the average
annualized credited rate on experience-rated investment contracts was 5.6% for
the three months ended March 31, 2000 and 1999. The resulting annualized
interest margins on fully guaranteed investment contracts were 1.2% and 1.1% for
the three months ended March 31, 2000 and 1999, respectively, and were 2.0% for
both periods on experience-rated investment contracts.
Outlook
Refer to "Forward-Looking Information/Risk Factors" in this Report and "Aetna
Financial Services - Outlook" and "Forward-Looking Information/Risk Factors"
in Aetna Inc.'s 1999 Annual Report on Form 10-K.
Page 32
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------
(Millions) 2000 1999 % Change
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 532.9 $ 416.6 27.9%
Net investment income(1) 132.3 125.0 5.8
Fees and other income 26.3 28.6 (8.0)
Net realized capital gains (losses) 34.3 (2.5) -
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 725.8 567.7 27.8
- -----------------------------------------------------------------------------------------------------------------------
Current and future benefits 439.9 342.2 28.6
Salaries and related benefits 51.2 38.1 34.4
Operating expenses 98.9 102.1 (3.1)
Interest expense 5.7 2.3 147.8
Amortization of goodwill and other acquired intangible assets 6.1 5.1 19.6
Amortization of deferred policy acquisition costs 27.5 25.0 10.0
- -----------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 629.3 514.8 22.2
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 96.5 52.9 82.4
Income taxes 45.6 11.3 -
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 50.9 $ 41.6 22.4%
=======================================================================================================================
Net realized capital gains (losses), net of tax (included above) $ 2.0 $ (1.4) -%
=======================================================================================================================
</TABLE>
(1) Includes $40.3 million for the three months ended March 31, 2000 and
$30.4 million for the three months ended March 31, 1999 of earnings from
minority-owned affiliates that are recorded on the equity method of
accounting.
Results
Aetna International's net income for the three months ended March 31, 2000
increased by $9 million compared to the corresponding period in 1999. Net income
includes Year 2000 costs of $3 million for the three months ended March 31,
1999. Excluding net realized capital gains or losses, results for the three
months ended March 31, 2000 increased $6 million, or 14%, compared to the
corresponding period in 1999.
Earnings by major geographic location, excluding net realized capital gains or
losses, are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
(Millions) 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Asia Pacific (1) $ 19.7 $ 8.6
Americas (2) 27.7 26.9
Other (3) (4.8) (8.1)
- ---------------------------------------------------------------------------------------------------
Operating earnings from continuing businesses 42.6 27.4
Sold operations (4) 6.3 15.6
- ---------------------------------------------------------------------------------------------------
Total $ 48.9 $ 43.0
===================================================================================================
</TABLE>
(1) Includes China, Hong Kong, Indonesia, Japan (for the three month period
ended March 31, 2000), Malaysia, New Zealand, Philippines, Taiwan and
Thailand.
(2) Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Poland and
Venezuela.
(3) Includes general and other miscellaneous expenses.
(4) Includes the Mexican businesses, Seguros Monterrey Aetna S.A. ("SMA") and
Fianzas Monterrey Aetna S.A. ("FMA"), for the three months ended March
31, 2000 and SMA, FMA and Canada for the three months ended March 31,
1999.
The increase in 2000 earnings from continuing businesses is due to premium
growth in Malaysia and Taiwan, the addition of Japan and heightened expense
control throughout the Asia Pacific region. Also, the Mexican pension business
experienced stronger performance primarily due to membership growth and an
increase in fees due to higher average salaries per member. Partially offsetting
these increases was a decrease in Brazil results due to higher medical
utilization and a decrease in Chile results due to losses in the life and
disability product lines.
Page 33
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AETNA INTERNATIONAL (CONTINUED)
The increase in the effective tax rate for the first quarter 2000 was primarily
due to $33 million in taxes related to the sale of the Mexican businesses and,
to a lesser extent, an increase in earnings from equity affiliates, which are
reported net of income taxes in net investment income.
On January 14, 2000, Aetna International and its Mexican partner sold two of
their Mexican joint venture companies, Seguros Monterrey Aetna, S.A. and Fianzas
Monterrey Aetna, S.A., to New York Life International Inc., a subsidiary of New
York Life Insurance Company, for approximately $570 million in cash (Aetna
International's share of the proceeds was approximately $279 million). The sale
resulted in a capital gain of approximately $13 million. These two joint
ventures contributed operating earnings of approximately $6 million during the
first quarter of 2000 and $7 million during the first quarter of 1999.
On November 18, 1999, Aetna International acquired a 33% ownership interest in
Aetna Heiwa Life Insurance Company Ltd., formerly known as The Heiwa Life
Insurance Company Ltd., of Japan ("Heiwa"), for approximately $20 million.
During the first quarter 2000, Aetna International increased its ownership
interest in Heiwa to 99.82% for approximately $37 million. Heiwa contributed
operating earnings of approximately $4 million during the first quarter of 2000.
On October 1, 1999, Aetna International sold its Canadian operations to John
Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance
Company, for approximately $310 million in cash. Operating earnings from the
Canadian operations were $9 million for the three month period ended March 31,
1999. Refer to "Aetna International" in Aetna Inc.'s 1999 Annual Report on Form
10-K for additional information related to this sale.
Outlook
In connection with the Separation, the Company may sell a significant amount of
its international assets which do not fit with the strategies of the newly
independent health and financial services businesses or provide an adequate
return on capital. The Company's international earnings would be negatively
affected in 2000 by any such dispositions. Refer to "Forward-Looking
Information/Risk Factors" in this Report and "Aetna International" and
"Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1999 Annual Report on
Form 10-K.
Page 34
<PAGE> 35
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 March 31,
-----------------------------------------------
(Millions) 2000 1999 % Change
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 40.7 $ 28.6 42.3%
Net investment income 244.5 256.6 (4.7)
Fees and other income 6.6 9.5 (30.5)
Net realized capital gains .6 9.2 (93.5)
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 292.4 303.9 (3.8)
- ---------------------------------------------------------------------------------------------------------------------
Current and future benefits 257.7 251.5 2.5
Salaries and related benefits 4.5 5.3 (15.1)
Operating expenses 2.0 2.8 (28.6)
- ---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 264.2 259.6 1.8
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 28.2 44.3 (36.3)
Income taxes 10.8 16.0 (32.5)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 17.4 $ 28.3 (38.5)%
=====================================================================================================================
Net realized capital gains, net of tax (included above) $ .8 $ 6.0 (86.7)%
=====================================================================================================================
Deposits not included in premiums above $ 163.2 $ 265.4 (38.5)%
=====================================================================================================================
Assets under management (1) (2) $25,890.3 $27,793.3 (6.8)%
=====================================================================================================================
</TABLE>
(1) Excludes net unrealized capital losses of $149.9 million at March 31,
2000 and net unrealized capital gains of $331.0 million at March 31,
1999.
(2) Includes assets under management of $5,946.1 million at March 31, 2000
and $6,546.7 million at March 31, 1999 related to discontinued products.
Results
Large Case Pensions' net income for the three months ended March 31, 2000
decreased by $11 million compared with the corresponding period in 1999. Net
income includes Year 2000 costs of $.2 million for the three months ended March
31, 1999. Excluding net realized capital gains, results for the three months
ended March 31, 2000 decreased $6 million, or 26%, compared to the corresponding
period in 1999, which reflects the redeployment of capital supporting this
business.
Assets under management at March 31, 2000 were 7% lower than a year earlier.
This decrease primarily resulted from the continuing run off of liabilities
underlying the business.
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 March 31,
-----------------------------
(Millions) 2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Scheduled contract maturities and benefit payments (1) $ 225.9 $ 241.2
Contractholder withdrawals other than scheduled contract maturities
and benefit payments 55.0 75.3
Participant directed withdrawals 10.8 22.4
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
Page 35
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
the expected cash flows from the assets supporting these products and the cash
flows expected to be required to meet the product obligations.
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that future losses on the products are greater than anticipated and positively
affected to the extent future losses are less than anticipated.
The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest margin (deficit) (1) $ 3.6 $ (5.3)
Net realized capital gains 1.9 6.6
Interest earned on receivable from continuing products 5.3 5.5
Other, net 6.3 4.6
- ------------------------------------------------------------------------------------------------------------------------------
Results of discontinued products, after tax $ 17.1 $ 11.4
==============================================================================================================================
Results of discontinued products, pretax $ 23.2 $ 17.5
==============================================================================================================================
Net realized capital gains (losses) from sales of bonds, after tax (included above) $ (20.2) $ 5.5
==============================================================================================================================
</TABLE>
(1) The interest margin (deficit) is the difference between earnings on
invested assets and interest credited to contractholders.
The interest margin for the three months ended March 31, 2000 increased by $9
million compared to the corresponding period in 1999. The increase in interest
margin is primarily a result of increased partnership distributions and higher
investment income on equities. The first quarter 2000 net realized capital gains
decreased by $5 million compared to the first quarter 1999. This decrease
primarily results from realized capital losses on bonds, due to the current
interest rate environment, offset by capital gains from the sale of equities.
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 that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $469 million at March 31, 2000 and $464
million at December 31, 1999, net of related deferred taxes payable.
Page 36
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates, as well as the
cost of asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.
The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's mortality table,
which has been used since then.
The Company's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liability run off.
The activity in the reserve for anticipated future losses on discontinued
products for the three months ended March 31, 2000 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- -----------------------------------------------------------------
<S> <C>
Reserve at December 31, 1999 $ 1,147.6
Operating income 13.2
Net realized capital gains .1
Mortality and other 9.9
- -----------------------------------------------------------------
Reserve at March 31, 2000 $ 1,170.8
=================================================================
</TABLE>
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
(Millions) March 31, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------------------
Class Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities $ 4,437.3 75.4% $ 4,533.0 77.2%
Mortgage Loans 788.0 13.4 768.8 13.1
Real Estate 116.6 2.0 112.7 1.9
Equities 263.7 4.5 239.7 4.1
Short-term and other investments 278.7 4.7 214.2 3.7
- ---------------------------------------------------------------------------------------------------
Total $ 5,884.3 100.0% $ 5,868.4 100.0%
===================================================================================================
</TABLE>
Page 37
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
(Millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Scheduled contract maturities, settlements and benefit payments $ 251.2 $ 310.5
Participant directed withdrawals 2.7 4.3
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.
Refer to Note 8 of Condensed Notes to Consolidated Financial Statements for
additional information.
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
(Millions, after tax) 2000 1999 % Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 50.0 $ 40.6 23.2%
=================================================================================================
Salaries and related benefits $ 10.2 $ 11.5 (11.3)%
Other operating expense, net 13.1 8.3 57.8
- -------------------------------------------------------------------------------------------------
Total other expense $ 23.3 $ 19.8 17.7%
=================================================================================================
</TABLE>
The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other operating expense,
net" includes corporate expenses, such as staff area expenses, advertising and
contributions, which are partially offset by net investment income. There were
no realized capital gains or losses in the first quarter 2000 or first quarter
1999.
The first quarter 2000 increase in interest expense primarily results from
additional debt incurred in connection with the PHC acquisition in August 1999.
Other operating expenses include Year 2000 costs of $1 million for the three
months ended March 31, 1999. Other operating expenses increased $5 million in
2000, primarily resulting from costs relating to the Separation.
Page 38
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
TOTAL INVESTMENTS
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).
<TABLE>
<CAPTION>
(Millions) March 31, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale $ 30,644.5 $ 28,661.6
Debt securities held to maturity 126.8 -
Equity securities 1,774.2 791.1
Short-term investments 606.1 788.2
Mortgage loans 3,181.2 3,238.2
Commercial loans 1,156.6 -
Real estate 485.3 361.8
Policy loans 811.7 541.5
Other 1,724.6 1,394.8
- -----------------------------------------------------------------------------------------------------------
Total investments $ 40,511.0 $ 35,777.2
============================================================================================================
</TABLE>
Debt Securities
Debt securities represented 76% of the Company's total general account invested
assets at March 31, 2000 and 80% at December 31, 1999 and supported the
following types of businesses:
<TABLE>
<CAPTION>
(Millions) March 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 4,437.3 $ 4,533.0
Supporting experience-rated products 11,891.5 11,879.5
Supporting remaining products 14,442.5 12,249.1
- --------------------------------------------------------------------------------------------------
Total debt securities (1) $ 30,771.3 $ 28,661.6
==================================================================================================
</TABLE>
(1) Total debt securities include "Below Investment Grade" securities of $2.4
billion at March 31, 2000 and $2.1 billion at December 31, 1999 of which
41% at March 31, 2000 and 46% at December 31, 1999 supported discontinued
and experience-rated products. Refer to Aetna Inc.'s 1999 Annual Report
on Form 10-K for a discussion of "Below Investment Grade" securities.
Debt securities reflected net unrealized capital losses of $524 million at March
31, 2000 and $748 million at December 31, 1999. Of the net unrealized capital
losses at March 31, 2000, $62 million relate to assets supporting discontinued
products and $208 million relate to experience-rated pension contractholders.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.8 billion at March 31, 2000 and $1.7 billion
at December 31, 1999. 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 March 31,
2000, approximately 2% and at December 31, 1999, approximately 1% 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 39
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
Mortgage and Commercial Loans
At March 31, 2000 and December 31, 1999, the Company's mortgage loan
investments, net of impairment reserves, supported the following types of
businesses:
<TABLE>
<CAPTION>
(Millions) March 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 788.0 $ 768.8
Supporting experience-rated products 807.2 923.4
Supporting remaining products 1,586.0 1,546.0
- --------------------------------------------------------------------------------------------------------
Total mortgage loans $ 3,181.2 $ 3,238.2
========================================================================================================
Total commercial loans $ 1,156.6 $ -
========================================================================================================
</TABLE>
During the first three months of 2000, the Company managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. The mortgage loan portfolio
balance represented 8% at March 31, 2000 and 9% at December 31, 1999 of the
Company's total general account invested assets.
Problem, restructured and potential problem loans included in mortgage loans
were $277 million at March 31, 2000 and $285 million at December 31, 1999 of
which 77% at March 31, 2000 and 79% at December 31, 1999 supported discontinued
and experience-rated products. Specific impairment reserves on these loans were
$36 million at March 31, 2000 and $32 million at December 31, 1999. Refer to
Aetna Inc.'s 1999 Annual Report on Form 10-K for a discussion of problem,
restructured and potential problem loans and Note 5 of the Condensed Notes to
Consolidated Financial Statements for additional information.
During the first quarter 2000, as part of the Heiwa acquisition, the Company
acquired approximately $1.2 billion of commercial loans, net of an allowance for
loan losses of approximately $160 million. These loans are primarily secured
corporate working capital loans mostly to Japanese borrowers.
Risk Management and Market-Sensitive Instruments
The Company manages interest rate risk by seeking to maintain a tight duration
band, while credit risk is managed by seeking to maintain 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 options to hedge interest rate, equity price and foreign exchange
risks.
The Company regularly evaluates the risk of market-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 risk, equity price risk and foreign exchange
risk, the Company believes that these changes in market rates and prices would
not materially affect the consolidated near-term financial position, results of
operations or cash flows of the Company as of March 31, 2000. Refer to Aetna
Inc.'s 1999 Annual Report on Form 10-K for a more complete discussion of "Risk
Management and Market-Sensitive Instruments".
Page 40
<PAGE> 41
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.
During the first three months of 2000, the Company used net cash generated from
investing, financing and operating activities to make approximately $75 million
of investments in core businesses and acquisitions, pay approximately $94
million for common stock repurchases and pay approximately $28 million of
dividends to shareholders. During the corresponding period of 1999, the Company
used net cash generated from investing, financing and operating activities to
make approximately $165 million of investments in core businesses and
acquisitions, pay approximately $40 million for common stock repurchases and pay
approximately $42 million of dividends to shareholders. Refer to the
"Consolidated Statements of Cash Flows" for additional information.
Dividends
On February 25, 2000, 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 April 28, 2000, payable May 15, 2000.
Financings and Financing Capacity
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services, Inc. and are fully and unconditionally guaranteed by
Aetna Inc. Refer to Note 9 of the 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 $2.0 billion during the first three months
of 2000 and $1.1 billion during the first three months of 1999.
Common Stock Transactions
On October 8, 1999, the Board of Directors authorized the repurchase of up to 20
million shares of common stock, not to exceed an aggregate purchase price of $1
billion (the "Plan"). Pursuant to the Plan, the Company has repurchased
8,705,000 shares of common stock at a cost of approximately $472 million through
March 31, 2000, of which 1,785,000 shares at a cost of $95 million were
repurchased during the first three months of 2000.
In connection with the Separation, the Company is examining the liquidity and
capital resource needs of the future independent businesses, including the
appropriate level of debt for each business. Refer to "Overview" for additional
information regarding the Separation.
Page 41
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangible assets were $9.1 billion at March 31,
2000, or approximately 83% of consolidated shareholders' equity. The
amortization of goodwill and other acquired intangible assets was $116 million
for the three months ended March 31, 2000, or approximately 39% of pretax
income. The amortization of other acquired intangible assets reflects
management's estimate of the useful life of acquired intangible assets
(primarily customer lists, health provider networks, workforce and computer
systems), generally over various periods not exceeding 25 years. Management's
estimate of the useful life of goodwill, which represents the excess of cost
over the fair value of net assets acquired, is over periods not exceeding 40
years. The risk associated with the carrying value of goodwill and other
acquired intangible assets is whether future operating income (before
amortization of goodwill and other acquired intangible assets) will be
sufficient on an undiscounted basis to recover the carrying value. The Company
regularly evaluates the recoverability of goodwill and other acquired intangible
assets and believes such amounts are currently recoverable. However, any
significant change in the useful lives of goodwill or other acquired intangible
assets, as estimated by management, could have a material adverse effect on
results of operations and financial condition.
NEW ACCOUNTING STANDARDS
Refer to Note 1 of the Condensed Notes to Consolidated Financial Statements for
a discussion of recently issued accounting standards.
REGULATORY ENVIRONMENT
The "Regulatory Environment" portion of Aetna Inc.'s 1999 Annual Report on Form
10-K contains a discussion of important regulatory issues related to the
Company's businesses. Certain recent regulatory developments are described
below.
- - On April 11, 2000, Aetna U.S. Healthcare's Texas HMOs entered into an
Agreement of Voluntary Compliance ("AVC") with the Office of the Attorney
General of Texas ("OAG") to settle, with prejudice and without admission,
litigation commenced by the OAG in December 1998 regarding certain alleged
business practices and to make additional commitments which the Company
believes will help restore public confidence in managed care. The AVC
provides for, among other things, allowing directly contracted Texas
physicians in small group or individual practice to choose whether to
participate in either or both of Aetna U.S. Healthcare's HMO/HMO-based and
PPO/PPO-based product lines; paying directly contracted capitated primary
care physicians with fewer than 100 HMO members on a fee-for-service basis
rather than a capitated basis; expanding independent external review of
coverage denials to include disputes regarding experimental and
investigational coverage, emergency coverage, prescription drug coverage
and standing referrals to specialists; and the creation of an Office of
the Ombudsman that will act as an advocate for members and assist them
with appeals or complaints. The AVC does not include any finding of fault
nor does it includes any fines or penalties. The Company does not expect
the AVC to have a material effect on its financial condition or results of
operations, and the AVC provides for potential relief should such
unexpected impact occur.
- - From time to time the Company's business practices are subject to review
by various state or federal regulatory authorities. These reviews may
result in agreements between the Company and these authorities or other
changes clarifying the Company's practices, and may result in fines or
penalties. Currently, Aetna U.S. Healthcare's contractual provisions
regarding physician participation in its product lines and its claim
payment practices are the subject of review in various jurisdictions.
Page 42
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
- - As described in Aetna Inc.'s 1999 Annual Report on Form 10-K, additional
legislation or regulation related to our businesses has been enacted or is
being considered by the federal government and many states and this could
adversely impact our businesses. It is uncertain whether we can recoup,
through higher premiums or other measures, the increased costs that we
expect to result from these types of legislation.
- On April 6, 2000, the State of New Jersey enacted the New Jersey
Insolvent Health Maintenance Organization Assistance Fund Act of 2000
(the "Act") designed to reimburse individuals who were covered by and
providers that had contracts with two New Jersey HMOs prior to their
insolvency. The total amount to be assessed to all HMOs in New Jersey
is $50 million. The Act requires that HMOs in the New Jersey market
be assessed a charge calculated based on each HMO's proportionate
share of premiums written in New Jersey relative to all HMO premiums
written in New Jersey. The Company believes its proportionate share
will be significant and expects to record an estimate of this amount
in the second quarter of 2000.
- President Clinton has signed the Gramm-Leach-Bliley Act (the "GLB
Act"), which permits affiliations among banks, insurance companies
and securities firms. The GLB Act may have competitive, operational,
financial and other implications for us. In particular, the GLB Act
includes privacy protections requiring all financial services
providers to disclose their privacy policies and restrict the sharing
of personal information for marketing purposes. Various states are
considering even more restrictive privacy measures that could
potentially affect our operations and results of operations.
FORWARD-LOOKING INFORMATION/RISK FACTORS
The "Forward-Looking Information/Risk Factors" portion of Aetna Inc.'s 1999
Annual Report on Form 10-K contains a discussion of important risk factors
related to the Company's businesses.
We also face certain risks related to our pending Separation into
independent health and wealth businesses. Our ability to complete the Separation
is subject, among other things, to receipt of required regulatory approvals and
satisfaction of certain tax and other legal requirements. We cannot control the
timing of those matters. Completion of the Separation therefore could be delayed
beyond the end of 2000, which could, among other things, increase the cost to us
of implementing the Separation.
Uncertainty resulting from the Company's March 12, 2000 announcement of the
Separation may negatively influence our customers' and potential customers'
decisions to select the Company's products and/or services, which could have an
adverse effect on our results of operations and otherwise adversely affect us.
In order for us to achieve the benefits we expect from the Separation, including
among other things improved performance by the two resulting companies, we must
be able to, among other things, successfully separate our businesses in a
manner that does not increase their overall expenses while at the same time
replicating in each of the resulting companies the functions that currently are
performed in our Corporate segment.
Recent regulatory developments could adversely affect our businesses. The
regulatory developments described in "Regulatory Environment" in this Report
could adversely affect our businesses by, among other things, increasing our
medical costs and/or operating expenses, reducing our ability to manage medical
costs and/or potentially restricting certain marketing activities. It is
uncertain whether we could counteract, through higher prices or other measures,
these adverse effects.
Page 43
<PAGE> 44
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 - Total Investments".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Shareholder Litigation
- ----------------------
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 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. On
August 9, 1999, the Court entered an order certifying as plaintiffs those
persons who purchased Company common stock on the market from March 6, 1997
through 7:00 a.m. on September 29, 1997. Merits discovery was completed in early
2000. On January 31, 2000 plaintiffs filed expert reports. On February 3, 2000,
defendants filed motions for summary judgment. Also on February 3, 2000,
plaintiffs moved for permission to file a third amended complaint. On March 20,
2000, the Court granted plaintiffs leave to file a third amended complaint and
adopted a revised schedule. Under the revised schedule, expert discovery is
scheduled to be completed in the second quarter of 2000 and defendants are to
file new summary judgment motions and any supplemental expert reports in May
2000. Trial is now scheduled to begin in the third quarter of 2000. Defendants
are defending the actions vigorously.
Four purported shareholder class action complaints were filed in the Superior
Court of Connecticut, Hartford County alleging in substance that the Company and
its directors breached fiduciary duties to shareholders in responding to a
February 24, 2000 letter from Wellpoint Health Networks, Inc. and ING America
Insurance Holdings, Inc. which had invited discussions concerning a possible
transaction. These actions were filed on behalf of George Schore, Michael
Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on March 7,
2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on March 23,
2000. A fifth, substantially similar purported class action complaint was filed
on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of New York,
New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. This litigation is in the
preliminary stages. Defendants intend to defend these actions vigorously.
Health Care Litigation
- ----------------------
The Company is involved in several purported class action lawsuits that are part
of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
Page 44
<PAGE> 45
Item 1. Legal Proceedings. (Continued)
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on April 19, 1999 by Joseph Maio, Jo
Ann Maio and Gary Bender seeking various forms of relief, including unspecified
damages and treble damages, from the Company and a number of its subsidiaries
for alleged violations of the Racketeer Influenced and Corrupt Organizations Act
("RICO"), the Pennsylvania Unfair Trade Practices and Consumer Protection Law,
and state common law. On September 29, 1999, the Court dismissed the RICO claims
with prejudice and dismissed the state law claims for lack of subject matter
jurisdiction. The Court held, among other things, that the plaintiffs lacked
standing to pursue the federal RICO claims because they had not alleged an
injury in fact. Plaintiffs have appealed the dismissal to the United States
Court of Appeals for the Third Circuit, which is expected to render a decision
on the appeal during 2000.
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on October 4, 1999 by Anthony Conte
(the "Conte Complaint"). The Conte Complaint seeks various forms of relief,
including unspecified damages, from Aetna U.S. Healthcare Inc. for alleged
violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Conte Complaint alleges that Aetna U.S. Healthcare does not make adequate
disclosure of provider compensation arrangements in the literature that it makes
available to actual or prospective members. The Company intends to defend the
action vigorously and on November 1, 1999, filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. On
December 15, 1999, the Court suspended further proceedings pending the
resolution of the Maio appeal by the United States Court of Appeals for the
Third Circuit.
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on October 7, 1999 by Jo Ann O'Neill
(the "O'Neill Complaint"). An Amended Complaint was filed on November 9, 1999 by
Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The O'Neill Complaint seeks
various forms of relief, including unspecified damages and treble damages, from
the Company, Aetna U.S. Healthcare Inc., Richard L. Huber and unnamed members of
the Board of Directors of Aetna Inc. for alleged violations of ERISA and RICO.
The O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright in
her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from the Company, Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and unnamed "John Doe" defendants
for alleged violations of California Business and Professions Code Sections
17200 and 17500, California Civil Code Section 1750 and state common law in
connection with the sale and marketing of health plans in California. The
Curtright Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO, POS and PPO members and members of the general
public. On December 16, 1999, defendants removed the action to the United States
District Court for the Northern District of California. On January 18, 2000,
plaintiff moved to remand the action to state court. On the same date, the
Company moved to dismiss the Curtright Complaint for failure to state a claim
upon which relief can be granted and moved for a stay of the action pending
resolution of the Maio and Conte matters. This litigation is in the preliminary
stages. Defendants intend to defend the action vigorously.
Page 45
<PAGE> 46
Item 1. Legal Proceedings. (Continued)
A complaint was filed in the Superior Court of the State of California, County
of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen
Coalition for Patients Rights, purportedly on behalf of the general public of
the State of California (the "Ross Complaint"). The Ross Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna Inc., Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and additional unnamed "John
Doe" defendants for alleged violations of California Business and Professions
Code Sections 17200 and 17500. The Ross Complaint alleges that defendants are
liable for alleged misrepresentations and omissions relating to advertising,
marketing and member materials directed to Aetna HMO, POS and PPO members and
the general public and for alleged unfair practices relating to contracting of
doctors. This litigation is in the preliminary stages. Defendants intend to
defend the action vigorously.
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on November 22, 1999 by Raymond D.
Williamson, III (the "Williamson Complaint"). The Williamson Complaint names as
defendant The Prudential Insurance Company of America, and also names as
defendants Aetna Inc. and Aetna U.S. Healthcare Inc. solely to the extent that
the Company has assumed liability for the actions of Prudential in connection
with the Company's acquisition of the Prudential health care business. The
Williamson Complaint seeks various forms of relief from defendants, including
unspecified damages, treble damages and imposition of a constructive trust, for
alleged violations of RICO and ERISA. The Williamson Complaint alleges that the
Prudential Health Plans engaged in a nationwide fraudulent scheme of
misrepresentation by stating that coverage and treatment decisions were made on
the basis of medical necessity when Prudential allegedly implemented undisclosed
policies designed to deny or limit claims and medical services. On December 30,
1999, the Company moved to stay, dismiss or transfer the action to the United
States District Court for the Eastern District of Pennsylvania based on the fact
that the Maio and Conte Complaints were filed in that court. On January 25,
2000, the Court suspended further proceedings pending resolution of a motion in
cases involving other defendants to consolidate those actions in a single court.
This litigation is in the preliminary stages. The Company intends to defend the
action vigorously.
A purported class action complaint was filed in the United States District Court
for the District of New Jersey on December 3, 1999 by Michael V. Amorosi (the
"Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna Inc. and Aetna U.S. Healthcare Inc. for alleged
violations of RICO and ERISA. The Amorosi Complaint alleges that defendants told
subscribers that coverage and treatment decisions would be based on medical
necessity but instead took into account undisclosed cost-based criteria that
were unrelated to members' medical needs. On January 7, 2000, the Company moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the fact that the Maio and Conte
Complaints were filed in that court. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna Inc., Aetna U.S. Healthcare Inc. and Richard L.
Huber for alleged violations of RICO. The Mangieri Complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with the Company. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
Page 46
<PAGE> 47
Item 1. Legal Proceedings. (Continued)
Financial Services Litigation
- -----------------------------
In recent years, several life insurance and annuity companies have been named as
defendants in lawsuits, including class action lawsuits, relating to life
insurance and annuity pricing and sales practices. A purported class action
complaint was filed in the Circuit Court of Lauderdale County, Alabama on March
28, 2000 by Loretta Shaner against Aetna Life Insurance and Annuity Company
("ALIAC"), a wholly-owned subsidiary of Aetna Inc. (the "Shaner Complaint"). The
Shaner Complaint seeks unspecified compensatory damages from ALIAC and unnamed
affiliates of ALIAC. The Shaner Complaint claims that ALIAC's sale of deferred
annuity products for use as investments in tax-deferred contributory retirement
plans (e.g., IRAs) is improper. This litigation is in the preliminary stages.
The Company intends to defend the action vigorously.
Other Litigation
- ----------------
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 47
<PAGE> 48
Item 5. Other Information.
(a) NAIC IRIS Ratios
The National Association of Insurance Commissioners ("NAIC") Insurance
Regulatory Information Systems ("IRIS") ratios cover 12 categories of financial
data with defined usual ranges for each category. The ratios are intended to
provide insurance regulators "early warnings" as to when a given company might
warrant special attention. An insurance company may fall out of the usual range
for one or more ratios and such variances may result from specific transactions
that are in themselves immaterial or eliminated at the consolidated level. None
of Aetna Inc.'s significant subsidiaries had more than three IRIS ratios that
were outside of the NAIC usual ranges for 1999.
(b) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed
Charges and Preferred Stock Dividends
The following table sets forth the Company's 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>
Three Months Ended
March 31, Years Ended December 31,
-------------------------- -------------------------------------------
Aetna Inc. 2000 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 3.62 4.11 4.96 5.74 2.45 4.97
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.62 3.63 3.94 4.46 2.10 4.97
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------------ -----------------------------------
Aetna Services, Inc. 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 3.71 3.61 4.31 5.78 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.71 3.61 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 13 of Notes to Consolidated Financial Statements in Aetna Inc.'s 1999
Annual Report on Form 10-K.) For the first quarter of 2000 and during 1995 there
was no preferred stock outstanding, and as a result, the ratios of earnings to
combined fixed charges and preferred stock dividends were the same as the ratios
of earnings to fixed charges.
Page 48
<PAGE> 49
Item 5. Other Information. (Continued)
(c) Ratings
The ratings of certain Aetna Inc.'s subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
-------------------------------------------------
Moody's
Duff & Investors Standard
A.M. Best Phelps Service & Poor's
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Services, Inc. (senior debt)**
February 7, 2000 * A A3 A
April 26, 2000 (1) * A A3 A
Aetna Services, Inc. (commercial paper)**
February 7, 2000 * D-1 P-2 A-1
April 26, 2000 (1) * D-1 P-2 A-1
Aetna Life Insurance Company (claims paying/financial strength)
February 7, 2000 A AA- A1 A+
April 26, 2000 (1) A AA- A1 A+
Aetna Life Insurance and Annuity Company
(claims paying/financial strength)
February 7, 2000 A AA Aa3 AA-
April 26, 2000 (1) A AA Aa3 AA-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
(1) A.M. Best Company has all the ratings under review with developing
implications. Moody's Investors Service placed the long-term credit
ratings on review, direction uncertain. Standard & Poor's has all the
ratings on CreditWatch with developing implications. Duff & Phelps Credit
Rating Company has all the ratings on Rating Watch - Uncertain.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
10.1 Amended and Restated Credit Agreement dated as of March 27, 2000
among Aetna Services, Inc. as Borrower, Aetna Inc. as Guarantor,
the banks listed on the signature pages thereof, Morgan Guaranty
Trust Company of New York as Administrative Agent, J.P. Morgan
Securities Inc. as Arranger, Deutsche Bank AG, New York Branch, as
Co-Administrative Agent, The Chase Manhattan Bank, as Senior
Managing Agent and Citibank, N.A. as Syndication Agent.
(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 three months ended March 31, 2000 and for
the years ended December 31, 1999, 1998, 1997, 1996 and 1995 for
Aetna Inc. and for the three months ended March 31, 2000 and for
the years ended December 31, 1999, 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 April 26,
2000.
(27) Financial Data Schedule.
Page 49
<PAGE> 50
Item 6. Exhibits and Reports on Form 8-K. (Continued)
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on March 3, 2000 related to the
February 24, 2000 letter received from WellPoint Health Networks, Inc.
("WellPoint") and ING America Insurance Holdings, Inc. ("ING") regarding
their desire to begin discussions concerning the acquisition of Aetna.
The Company filed a report on Form 8-K on March 13, 2000 related to the
intended separation of the Company into two publicly-held stand-alone
businesses as well as the Company's rejection of WellPoint and ING's
offer to begin discussions concerning the acquisition of Aetna.
The Company filed a report on Form 8-K on April 6, 2000 related to the
retention of an executive recruiting firm to assist in the search for a
chief executive officer for the health benefits company that will be
created when the Company completes its previously announced Separation.
Page 50
<PAGE> 51
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 April 27, 2000 By /s/ Alan M. Bennett
----------------------------------------
Alan M. Bennett
Vice President
and Corporate Controller
(Chief Accounting Officer)
Page 51
<PAGE> 52
AETNA INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
=================================================================
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
(10) Material Contracts.
10.1 Amended and Restated Credit Agreement dated as of March 27, 2000
among Aetna Services, Inc. as Borrower, Aetna Inc. as Guarantor,
the banks listed on the signature pages thereof, Morgan Guaranty
Trust Company of New York as Administrative Agent, J.P. Morgan
Securities Inc. as Arranger, Deutsche Bank AG, New York Branch, as
Co-Administrative Agent, The Chase Manhattan Bank, as Senior
Managing Agent and Citibank, N.A. as Syndication Agent.
(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 three months ended March 31, 2000 and for
the years ended December 31, 1999, 1998, 1997, 1996 and 1995 for
Aetna Inc. and for the three months ended March 31, 2000 and for
the years ended December 31, 1999, 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 April 26,
2000.
(27) Financial Data Schedule.
</TABLE>
Page 52
<PAGE> 1
Exhibit 10.1
AETNA SERVICES, INC.,
AS BORROWER
AETNA INC.,
AS GUARANTOR
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of March 27, 2000
J.P. MORGAN SECURITIES INC.,
Lead Arranger,
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Administrative Agent,
DEUTSCHE BANK AG, NEW YORK BRANCH,
Co-Administrative Agent
CITIBANK, N.A.,
Syndication Agent
THE CHASE MANHATTAN BANK,
Senior Managing Agent
<PAGE> 2
AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment and Restatement") dated as of March 27,
2000, among AETNA SERVICES, INC. (the "Borrower"),
AETNA INC. (the "Guarantor"), the BANKS listed on the
signature pages hereof (the "Banks"), and MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Administrative
Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, certain of the parties hereto have heretofore entered
into a Credit Agreement dated as of April 1, 1999 (the "Agreement");
WHEREAS, at the date hereof, there are no Loans outstanding
under the Agreement; and
WHEREAS, the parties hereto desire to amend such Agreement as
set forth herein and to restate the Agreement in its entirety to read as set
forth in the Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise
specifically defined herein, each term used herein which is defined in the
Agreement shall have the meaning assigned to such term in the Agreement. Each
reference to "hereof", "hereunder", "herein" and "hereby" and each other similar
reference and each reference to "this Agreement" and each other similar
reference contained in the Agreement shall from and after the date hereof refer
to the Agreement as amended and restated hereby.
SECTION 2. Amendment, Replacement and Restatement. (a) The
Agreement, including all schedules and exhibits thereto, is hereby terminated
and simultaneously replaced by a new credit agreement, this Amendment and
Restatement, identical to the Agreement except as expressly set forth below.
(b) Section 1.01 of the Agreement is hereby amended by (i)
deleting the definitions of the defined terms "Level I Period", "Level II
Period", "Level III Period", "Level IV Period", "Level V Period", "Level VI
Period", "Level VII Period", "Level VIII Period" and "Termination Date" in their
entirety and (ii) inserting the following definitions in the appropriate
alphabetical order:
<PAGE> 3
"Amended and Restated Credit Agreement" means the Amended and
Restated Credit Agreement dated as of March 27, 2000, with respect to
this Agreement.
"Base Rate Margin" has the meaning set forth in Section
2.08(a).
"Guarantor's 1999 Form 10-K" means the Guarantor's annual
report on Form 10-K for 1999 as filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended.
"Level I Period" means any period during which any long-term
Senior Unsecured Debt of the Borrower has ratings that are better than
or equal to at least two of the following three ratings: (i) A+ by S&P
and/or (ii) A1 by Moody's and/or (iii) A+ by Duff; provided that if S&P
or Moody's or Duff changes its rating system after the date hereof, the
new rating of such rating agency that most closely corresponds to the
level specified above for such rating agency shall be substituted for
such level.
"Level II Period" means any period (other than a Level I
Period) during which any long-term Senior Unsecured Debt of the
Borrower has ratings that are better than or equal to at least two of
the following three ratings: (i) A by S&P and/or (ii) A2 by Moody's
and/or (iii) A by Duff; provided that if S&P or Moody's or Duff changes
its rating system after the date hereof, the new rating of such rating
agency that most closely corresponds to the level specified above for
such rating agency shall be substituted for such level.
"Level III Period" means any period (other than a Level I
Period or Level II Period) during which any long-term Senior Unsecured
Debt of the Borrower has ratings that are better than or equal to at
least two of the following three ratings: (i) A- by S&P and/or (ii) A3
by Moody's and/or (iii) A- by Duff; provided that if S&P or Moody's or
Duff changes its rating system after the date hereof, the new rating of
such rating agency that most closely corresponds to the level specified
above for such rating agency shall be substituted for such level.
"Level IV Period" means any period (other than a Level I
Period, Level II Period or Level III Period) during which any long-term
Senior Unsecured Debt of the Borrower has ratings that are better than
or equal to at least two of the following three ratings: (i) BBB+
<PAGE> 4
by S&P and/or (ii) Baa1 by Moody's and/or (iii) BBB+ by Duff; provided
that if S&P or Moody's or Duff changes its rating system after the date
hereof, the new rating of such rating agency that most closely
corresponds to the level specified above for such rating agency shall
be substituted for such level.
"Level V Period" means any period (other than a Level I
Period, Level II Period, Level III Period or Level IV Period) during
which any long-term Senior Unsecured Debt of the Borrower has ratings
that are better than or equal to at least two of the following three
ratings: (i) BBB by S&P and/or (ii) Baa2 by Moody's and/or (iii) BBB by
Duff; provided that if S&P or Moody's or Duff changes its rating system
after the date hereof, the new rating of such rating agency that most
closely corresponds to the level specified above for such rating agency
shall be substituted for such level.
"Level VI Period" means any period (other than a Level I
Period, Level II Period, Level III Period, Level IV Period or Level V
Period) during which any long-term Senior Unsecured Debt of the
Borrower has ratings that are better than or equal to at least two of
the following three ratings: (i) BBB- by S&P and/or (ii) Baa3 by
Moody's and/or (iii) BBB- by Duff; provided that if S&P or Moody's or
Duff changes its rating system after the date hereof, the new rating of
such rating agency that most closely corresponds to the level specified
above for such rating agency shall be substituted for such level.
"Level VII Period" means any period other than a Level I
Period, Level II Period, Level III Period, Level IV Period, Level V
Period or Level VI Period.
"Termination Date" means the first to occur of (a) March 27,
2001, or, if such day is not a Euro-Dollar Business Day, the next
preceding Euro-Dollar Business Day, or (b) the date of the closing of
any transaction, or the date of the closing of the final transaction in
a series of transactions (including, without limitation, a distribution
to shareholders of the Guarantor), that results in all or substantially
all of the Guarantor's health care business as it exists on the date
hereof being owned, directly or indirectly, by one publicly traded
entity ("Healthco") and all or substantially all of the Guarantor's
financial services business as it exists on the date hereof being
owned,
<PAGE> 5
directly or indirectly, by a publicly traded entity other than
Healthco.
(c) Section 2.08(a) of the Agreement is hereby amended by
deleting such Section in its entirety and substituting in lieu thereof the
following:
(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made
until it becomes due, at a rate per annum equal to sum of the Base Rate
Margin plus the Base Rate for such day. Such interest shall be payable
for each Interest Period on the earlier of (i) the last day of the
Interest Period applicable thereto or (ii) the Termination Date. Any
overdue principal of and, to the extent permitted by law, overdue
interest on any Base Rate Loan shall bear interest, payable on demand,
for each day until paid at a rate per annum equal to the sum of 1% plus
the Base Rate Margin plus the Base Rate for such day.
"Base Rate Margin" applicable to any Base Rate Loan
outstanding on any day means:
(i) if such day falls within a Level I Period, Level
II Period, Level III Period, Level IV Period or Level V
Period, then 0%;
(ii) if such day falls within a Level VI Period, then
(A) 0%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .250%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .375%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%; and
(iii) if such day falls within a Level VII Period,
then .750%.
(d) Section 2.08(b) of the Agreement is hereby amended by
deleting the definition of "CD Margin" in its entirety and substituting in lieu
thereof the following:
"CD Margin" applicable to any CD Loan outstanding on any day
means:
<PAGE> 6
(i) if such day falls within a Level I Period, then
(A) .305%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .405%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .505%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(ii) if such day falls within a Level II Period, then
(A) .345%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .445%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .545%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(iii) if such day falls within a Level III Period,
then (A) .435%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is less than
or equal to 25%, (B) .535%, if such day falls within any
calendar quarter with respect to which the Utilization
Percentage is greater than 25% and less than or equal to 50%
and (C) .635%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is greater
than 50%;
(iv) if such day falls within a Level IV Period, then
(A) .515%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .615%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .715%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(v) if such day falls within a Level V Period, then
(A) .740%, if such day falls within any calendar quarter with
respect to which the
<PAGE> 7
Utilization Percentage is less than or equal to 25%, (B)
.840%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is greater than
25% and less than or equal to 50% and (C) .940%, if such day
falls within any calendar quarter with respect to which the
Utilization Percentage is greater than 50%;
(vi) if such day falls within a Level VI Period, then
(A) .950%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) 1.200%, if such day falls within any
calendar quarter with respect to which the Utilization
Percentage is greater than 25% and less than or equal to 50%
and (C) 1.325%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is greater
than 50%; and
(vii) if such day falls within a Level VII Period,
then 1.625%.
(e) Section 2.08(c) of the Agreement is hereby amended by
deleting the definition of "Euro-Dollar Margin" in its entirety and substituting
in lieu thereof the following:
"Euro-Dollar Margin" applicable to any Euro-Dollar Loan
outstanding on any day means:
(i) if such day falls within a Level I Period, then
(A) .180%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .280%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .380%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(ii) if such day falls within a Level II Period,
then (A) .220%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is less than
or equal to 25%, (B) .320%, if such day falls within any
calendar quarter with respect to which the Utilization
Percentage is greater than 25% and
<PAGE> 8
less than or equal to 50% and (C) .420%, if such day falls
within any calendar quarter with respect to which the
Utilization Percentage is greater than 50%;
(iii) if such day falls within a Level III Period,
then (A) .310%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is less than
or equal to 25%, (B) .410%, if such day falls within any
calendar quarter with respect to which the Utilization
Percentage is greater than 25% and less than or equal to 50%
and (C) .510%, if such day falls within any calendar quarter
with respect to which the Utilization Percentage is greater
than 50%;
(iv) if such day falls within a Level IV Period, then
(A) .390%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .490%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .590%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(v) if such day falls within a Level V Period, then
(A) .615%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) .715%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is
greater than 25% and less than or equal to 50% and (C) .815%,
if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 50%;
(vi) if such day falls within a Level VI Period, then
(A) .825%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is less than or
equal to 25%, (B) 1.075%, if such day falls within any
calendar quarter with respect to which the Utilization
Percentage is greater than 25% and less than or equal to 50%
and (C) 1.200%, if such day falls within any calendar quarter
with respect
<PAGE> 9
to which the Utilization Percentage is greater than 50%; and
(vii) if such day falls within a Level VII Period,
then 1.500%.
(f) Section 2.09(a) of the Agreement is hereby amended by
deleting such Section in its entirety and substituting in lieu thereof the
following:
(a) Facility Fee. The Borrower shall pay to the Agent for the
account of the Banks ratably in proportion to their Commitments, a
facility fee at the rate of (i) 0.070% per annum during each Level I
Period, (ii) 0.080% per annum during each Level II Period, (iii) 0.090%
per annum during each Level III Period, (iv) 0.110% per annum during
each Level IV Period, (v) 0.135% per annum during each Level V Period,
(vi) 0.175% during each Level VI Period and (vii) 0.250% during each
Level VII Period. Such facility fee shall accrue (i) from and including
the date on which the Amended and Restated Credit Agreement becomes
effective to but excluding the last day of the Revolving Credit Period,
in each case, on the daily average aggregate amount of the Commitments
(whether used or unused) and (ii) if any Loans remain outstanding after
the Revolving Credit Period, from and including the last day of the
Revolving Credit Period to but excluding the date such Loans shall be
repaid in full, on the daily average aggregate outstanding principal
amount of such Loans.
(g) Section 4.04 of the Agreement is hereby amended by
deleting such section in its entirety and substituting in lieu thereof the
following:
SECTION 4.04. Financial Information.
(a) The consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as of December 31, 1999, the related
consolidated statements of cash flows for the year then ended and
consolidated statement of income and retained earnings for the year
then ended, reported on by KPMG LLP and set forth in the Guarantor's
1999 Annual Report to Shareholders, copies of which have been delivered
to the Agent for distribution to each of the Banks, fairly present, in
conformity with United States generally accepted accounting principles,
the consolidated financial position of the Guarantor and its
Consolidated
<PAGE> 10
Subsidiaries as of such date and their consolidated results of
operations and cash flows for such year.
(b) Except as disclosed in the Guarantor's 1999 Form 10-K,
since December 31, 1999, there has been no material adverse change in
the business, financial position or results of operations of the
Guarantor and its Consolidated Subsidiaries, taken as a whole.
(h) Sections 4.05 and 4.09 of the Agreement are hereby amended
by deleting each reference to "the Guarantor's 1998 Form K" and substituting in
lieu thereof the following: "the Guarantor's 1999 Form K".
SECTION 3. Confirmation of Guaranty. The Guarantor confirms
that its guaranty of the obligations of the Borrower pursuant to Article IX of
the Agreement shall apply to the obligations of the Borrower under the Agreement
as amended and restated hereby.
SECTION 4. Changes in Commitments. With effect from and
including the date this Amendment and Restatement becomes effective in
accordance with Section 6,
(a) each Person listed on the signature pages hereof which is
not a party to the Agreement shall become a Bank party to the
Agreement;
(b) the Commitment of each Bank shall be the amount set forth
opposite the name of such Bank on the signature pages hereof; and
(c) any Bank not listed on the signature pages hereof shall
upon such effectiveness cease to be a Bank party to the Agreement and
shall have a Commitment of zero, and all accrued fees and other amounts
payable under the Agreement for the account of such Bank shall be due
and payable on such date; provided that, the provisions of Sections
2.13, 2.15 and 10.03 of the Agreement shall continue to inure to the
benefit of each such Bank.
SECTION 5. Governing Law. This Amendment and Restatement shall
be governed by and construed in accordance with the laws of the State of New
York.
SECTION 6. Counterparts; Conditions to Effectiveness. This
Amendment and Restatement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Amendment
<PAGE> 11
and Restatement shall become effective as of the date hereof when the Agent
shall have received:
(a) duly executed counterparts hereof signed by the Borrower,
the Guarantor and all of the Banks listed on the signature pages hereof
(or, in the case of any party as to which an executed counterpart shall
not have been received, the Agent shall have received telegraphic,
telex or other written confirmation from such party of execution of a
counterpart hereof by such party);
(b) an opinion of (i) William C. Baskin III, counsel to the
Borrower and the Guarantor, dated the date hereof and addressed to the
Banks, and of (ii) Davis Polk & Wardwell, special counsel to the
Borrower and the Guarantor, dated the date hereof and addressed to the
Banks, in each case to the effect set forth in Exhibits A-1 and A-2
hereto, and the Borrower and the Guarantor hereby instruct such counsel
to deliver such opinions to the Agent;
(c) a certificate from the Vice Chairman for Strategy and
Finance or the Vice President, Finance of each of the Borrower and the
Guarantor, dated the date hereof, and certifying that (i) no Default
has occurred and is continuing as of the date hereof and (ii) the
representations and warranties set forth in Article IV of the Agreement
as amended hereby are true and correct in all material respects on and
as of the date hereof with the same effect as though made on and as of
such date;
(d) (i) for its own account all fees due and payable to it and
in such amounts as have been previously agreed upon in writing among
the Borrower, the Guarantor and the Agent in connection with this
Amendment and Restatement and (ii) for the account of each Bank, all
accrued fees and other amounts payable under the Agreement; and
(e) receipt by the Agent of all documents it may reasonably
request relating to the existence of the Borrower and the Guarantor,
the corporate authority for and the validity of this Agreement, and any
other matters relevant hereto, all in form and substance satisfactory
to the Agent.
SECTION 7. Original Credit Agreement. Until this Amendment and
Restatement becomes effective as provided in Section 6, the Agreement shall
continue in full force and
<PAGE> 12
effect in accordance with the provisions thereof, the rights and obligations of
the parties thereto shall not be affected hereby and all fees and interest
accruing under the Agreement shall continue to accrue at the rates provided for
therein.
SECTION 8. Expenses. The Borrower agrees to reimburse the
Agent for its reasonable out-of-pocket expenses in connection with this
Amendment and Restatement including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Agent.
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment and Restatement to be duly executed as of the date first above
written.
AETNA SERVICES, INC.
by
/s/ Alan J. Weber
-------------------------------------
Name: Alan J. Weber
Title: Vice Chairman for
Strategy and Finance
Aetna Services, Inc.
151 Farmington Avenue, RE6A
Hartford, Connecticut 06156
Attention: Vice President,
Finance
Telecopier: (860) 273-1314
Telex: 99 241
With a copy to:
Aetna Inc.
151 Farmington Avenue, RC4A
Hartford, Connecticut 06156
Attention: General Counsel
Telecopier: (860) 273-8340
Telex: 99 241
<PAGE> 14
AETNA INC.
by
/s/ Alan J. Weber
---------------------------
Name: Alan J. Weber
Title: Vice Chairman for
Strategy and Finance
Aetna Inc.
151 Farmington Avenue, RE6A
Hartford, Connecticut 06156
Attention: Vice President,
Finance
Telecopier: (860) 273-1314
Telex: 99 241
With a copy to:
Aetna Inc.
151 Farmington Avenue, RC4A
Hartford, Connecticut 06156
Attention: General Counsel
Telecopier: (860) 273-8340
Telex: 99 241
<PAGE> 15
Commitment
$40,000,000.00 MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, individually and as
Administrative Agent
by
/s/ Julie A. Prince
----------------------------------
Name: Julie A. Prince
Title: Associate
<PAGE> 16
Commitment
$40,000,000.00 CITIBANK, N.A.
by
/s/ Claire Wibroe
----------------------------------
Name: Claire Wibroe
Title: Vice President
<PAGE> 17
Commitment
$40,000,000.00 DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES
by
/s/ Clinton M. Johnson
----------------------------------
Name: Clinton M. Johnson
Title: Managing Director
by
/s/ John S. McGill
----------------------------------
Name: John S. McGill
Title: Director
<PAGE> 18
Commitment
$38,000,000.00 THE CHASE MANHATTAN BANK
by
/s/ Peter Platten
----------------------------------
Name: Peter Platten
Title: Vice President
<PAGE> 19
Commitment
$34,500,000.00 BANK ONE, N.A. (CHICAGO OFFICE)
by
/s/ Timothy J. Stambaugh
----------------------------------
Name: Timothy J. Stambaugh
Title: Senior Vice President
<PAGE> 20
Commitment
$34,500,000.00 STATE STREET BANK AND TRUST
COMPANY
by
/s/ Edward M. Anderson
----------------------------------
Name: Edward M. Anderson
Title: Vice President
<PAGE> 21
Commitment
$34,500,000.00 FIRST UNION NATIONAL BANK
by
/s/ Thomas L. Stitchberry
-----------------------------------
Name: Thomas L. Stitchberry
Title: Senior Vice President
<PAGE> 22
Commitment
$34,500,000.00 FLEET BANK
by
/s/ Jan-Gee W. McCollam
------------------------------------
Name: Jan-Gee W. McCollam
Title: Senior Vice President
<PAGE> 23
Commitment
$34,500,000.00 MELLON BANK, N.A.
by
/s/ Marsha Wicker
------------------------------------
Name: Marsha Wicker
Title: Vice President
<PAGE> 24
Commitment
$34,500,000.00 WACHOVIA BANK, N.A.
by
/s/ Mark A. Edwards
------------------------------------
Name: Mark A. Edwards
Title: Senior Vice President
<PAGE> 25
Commitment
$30,000,000.00 ABN-AMRO BANK N.V.
by
/s/ Bruce D. Ballentine
------------------------------------
Name: Bruce D. Ballentine
Title: Group Vice President
by
/s/ Anne Bezelenejnykh Guiller
------------------------------------
Name: Anne Bezelenejnykh Guiller
Title: Assistant Vice President
<PAGE> 26
Commitment
$30,000,000.00 CREDIT LYONNAIS NEW YORK BRANCH
by
/s/ Peter Rasmussen
------------------------------------
Name: Peter Rasmussen
Title: Vice President
<PAGE> 27
Commitment
$25,000,000.00 BANK OF AMERICA, N.A.
by
/s/ William D. Duke
------------------------------------
Name: William D. Duke
Title: Principal
<PAGE> 28
Commitment
$25,000,000.00 BARCLAYS BANK PLC
by
/s/ Douglas Bernegger
-----------------------------------
Name: Douglas Bernegger
Title: Director
<PAGE> 29
Commitment
$25,000,000.00 CAJA DE AHORROS Y MONTE
DE PIEDAD DE MADRID
by
/s/ Carlos Stilianopoulos
------------------------------------
Name: Carlos Stilianopoulos
Title: Head of Origination
and Syndication
by
/s/ Jose Luis Garcia Perez
------------------------------------
Name: Jose Luis Garcia Perez
Title: Head of Origination
Capital Markets
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
------------------ --------------------------------------------------------------------
(Millions) 2000 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $ 295.7 $ 1,224.2 $ 1,408.3 $ 1,511.2 $ 338.7 $ 726.2
Add back fixed charges 118.5 399.5 358.5 321.9 245.1 187.0
Minority interest 14.6 17.5 10.7 14.7 16.4 16.1
- -----------------------------------------------------------------------------------------------------------------------------
Income as adjusted $ 428.8 $ 1,641.2 $ 1,777.5 $ 1,847.8 $ 600.2 $ 929.3
=============================================================================================================================
Fixed charges:
Interest on indebtedness (1) $ 82.7 $ 279.4 $ 250.9 $ 235.8 $ 168.3 $ 115.9
Portion of rents representative
of interest factor 35.8 120.1 107.6 86.1 76.8 71.1
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges $ 118.5 $ 399.5 $ 358.5 $ 321.9 $ 245.1 $ 187.0
=============================================================================================================================
Preferred stock dividend
requirements - 52.1 92.2 92.4 41.1 -
- -----------------------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 118.5 $ 451.6 $ 450.7 $ 414.3 $ 286.2 $ 187.0
=============================================================================================================================
Ratio of earnings to fixed
charges 3.62 4.11 4.96 5.74 2.45 4.97
=============================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.62 3.63 3.94 4.46 2.10 4.97
=============================================================================================================================
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(Refer to Note 13 of Notes to Consolidated Financial Statements in the
Company's Exhibit 13 of the 1999 Form 10-K.)
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>
Three Months Ended Years Ended
March 31, December 31,
------------------ -------------------------------------------------------
(Millions) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $ 292.7 $ 1,017.3 $ 1,162.7 $ 1,505.2 $ 335.0
Add back fixed charges 113.6 396.5 354.3 318.1 243.8
Minority interest 15.1 17.2 10.8 15.7 16.4
- ----------------------------------------------------------------------------------------------------------------
Income as adjusted $ 421.4 $ 1,431.0 $ 1,527.8 $ 1,839.0 $ 595.2
================================================================================================================
Fixed charges:
Interest on indebtedness (2) $ 82.7 $ 279.4 $ 250.9 $ 234.0 $ 168.3
Portion of rents representative
of interest factor 30.9 117.1 103.4 84.1 75.5
- ----------------------------------------------------------------------------------------------------------------
Total fixed charges $ 113.6 $ 396.5 $ 354.3 $ 318.1 $ 243.8
================================================================================================================
Preferred stock dividend
requirements - - - - -
- ----------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 113.6 $ 396.5 $ 354.3 $ 318.1 $ 243.8
================================================================================================================
Ratio of earnings to fixed
charges 3.71 3.61 4.31 5.78 2.44
================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.71 3.61 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. (Refer to Note 12 of Notes to Consolidated
Financial Statements in the Company's Exhibit 13 of the 1999 Form 10-K.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(Refer to Note 13 of Notes to Consolidated Financial Statements in the
Company's Exhibit 13 of the 1999 Form 10-K.)
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 Registration Statements filed by Aetna Inc. or its
Subsidiaries, we acknowledge our awareness of the use therein of our report
dated April 26, 2000 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
April 26, 2000
<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 three months ended
March 31, 2000 for Aetna Inc. and is qualified in its entirety by reference to
such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 30,645
<DEBT-CARRYING-VALUE> 127
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,774
<MORTGAGE> 3,181
<REAL-ESTATE> 485
<TOTAL-INVEST> 40,511
<CASH> 3,314
<RECOVER-REINSURE> 3,870
<DEFERRED-ACQUISITION> 2,329
<TOTAL-ASSETS> 122,979
<POLICY-LOSSES> 23,779
<UNEARNED-PREMIUMS> 528
<POLICY-OTHER> 4,895
<POLICY-HOLDER-FUNDS> 15,290
<NOTES-PAYABLE> 4,230
0
0
<COMMON> 3,626
<OTHER-SE> 7,332
<TOTAL-LIABILITY-AND-EQUITY> 122,979
6,394
<INVESTMENT-INCOME> 787
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 713
<BENEFITS> 5,883
<UNDERWRITING-AMORTIZATION> 59
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 296
<INCOME-TAX> 126
<INCOME-CONTINUING> 169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.19
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
