<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the quarter ended June 30, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-11913
Aetna Inc.
(Exact name of registrant as specified in its charter)
Connecticut 02-0488491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue 06156
Hartford, Connecticut (ZIP Code)
(Address of principal executive offices)
(860) 273-0123
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Capital Stock (par value $.01) 141,289,941
- ------------------------------------- -----------
(Class) Shares Outstanding at January 31, 2000
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Condensed Notes to Consolidated Financial Statements 8
Independent Auditors' Review Report 26
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 27
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 47
Item 4. Submission of Matters to a Vote of Security Holders. 48
Item 5. Other Information. 49
Item 6. Exhibits and Reports on Form 8-K. 50
Signatures 51
</TABLE>
Page 2
<PAGE> 3
SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS
Following a review by the staff of the Securities and Exchange Commission, Aetna
Inc. and its subsidiaries (collectively, the "Company") concluded that it would
restate its 1998 Form 10-K and 1999 Form 10-Qs. The purpose of this Form 10-Q/A
is to restate the Company's second quarter 1999 and 1998 financial statements,
and the corresponding year to date periods, and to add certain other disclosures
(the "Restatement") to reflect, among other things and to the extent applicable,
the following changes:
- - Changes to the classification and timing of amounts earned by the
Company following the 1997 sale of Human Affairs International,
Incorporated ("HAI"). Contingent payments earned by the Company
originally recorded as reductions of medical costs and as other income
on a quarterly basis in 1999 have instead been recorded as a realized
capital gain during the third quarter of 1999. Contingent payments
earned by the Company originally recorded as reductions of medical
costs and as other income on a quarterly basis in 1998 have instead
been recorded as a realized capital gain during the fourth quarter of
1998;
- - A liability relating to the extension period (2000-2003) of an
unfavorable pharmacy contract originally recorded by the Company in
connection with the July, 1998 acquisition of NYLCare has been reversed
to reflect the elimination of this liability and reduction of goodwill;
- - The breakout of salaries and benefits expense originally included in
other operating expenses for each period presented;
- - The reclassification of the Company's initial capital contributions to
separate accounts and other excess funds not held to fund current
separate account liabilities to other invested assets, originally
recorded to separate account assets;
- - The reclassification of certain long-term debt (Puttable Reset
Securities) to short-term debt; and
- - Expanded disclosures regarding the Company's discontinued products and
goodwill amortization.
The principal effects of these changes on the accompanying financial statements
are presented in Note 2 to the Consolidated Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities and Exchange Act of 1934, as amended, the Company has amended and
restated in its entirety each item of the 1999 second quarter Form 10-Q which
has been affected by the Restatement. In order to preserve the nature and
character of the disclosures originally set forth in the 1999 second quarter
Form 10-Q filed on July 29, 1999, this Form 10-Q/A does not reflect events
occurring after the filing of the original Form 10-Q, or modify or update those
disclosures in any way, except as required to reflect the effects of the
Restatement. The Company will file its 1999 Form 10-K on or before March 30,
2000.
Page 3
<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
As Restated
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
(Millions, except per common share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 4,580.5 $ 3,279.1 $ 8,961.9 $ 6,517.7
Net investment income 725.0 822.8 1,465.7 1,635.5
Fees and other income 625.3 544.8 1,173.5 1,086.6
Net realized capital gains 9.8 172.6 26.9 204.3
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue 5,940.6 4,819.3 11,628.0 9,444.1
- ----------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Current and future benefits 4,359.1 3,276.9 8,500.4 6,553.8
Operating expenses:
Salaries and related benefits 495.2 401.8 966.5 798.3
Other 585.4 506.6 1,152.9 988.3
Interest expense 64.1 56.5 128.7 113.4
Amortization of goodwill and other acquired
intangible assets 105.7 96.9 213.4 193.1
Amortization of deferred policy acquisition costs 51.7 62.8 101.7 115.2
Reduction of reserve for loss on discontinued products (77.2) - (77.2) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 5,584.0 4,401.5 10,986.4 8,762.1
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 356.6 417.8 641.6 682.0
Income taxes (benefits):
Current 47.3 169.2 152.6 295.5
Deferred 91.8 (7.4) 101.9 (27.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total income taxes 139.1 161.8 254.5 268.3
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 217.5 $ 256.0 $ 387.1 $ 413.7
=================================================================================================================================
Net income applicable to common ownership $ 203.7 $ 242.1 $ 359.5 $ 385.9
==================================================================================================================================
Results per common share:
Basic $ 1.45 $ 1.67 $ 2.55 $ 2.66
Diluted 1.43 1.63 2.53 2.62
Dividends declared .20 .20 .40 .40
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 4
<PAGE> 5
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As Restated
--------------------------
June 30, December 31,
(Millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value
(amortized cost $29,830.0 and $30,730.1) $ 29,826.8 $ 32,180.8
Equity securities, at fair value (cost $824.4 and $762.6) 879.6 800.5
Short-term investments 803.8 942.2
Mortgage loans 3,440.1 3,553.0
Real estate 311.1 270.3
Policy loans 498.7 458.7
Other 1,391.7 1,300.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments 37,151.8 39,505.8
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,086.1 1,951.5
Short-term investments under securities loan agreement 1,139.4 753.6
Accrued investment income 476.9 537.1
Premiums due and other receivables 1,694.3 1,478.1
Reinsurance recoverables 4,006.2 3,897.2
Deferred income taxes 331.0 46.6
Deferred policy acquisition costs 1,975.5 1,768.6
Goodwill and other acquired intangible assets 9,177.9 9,143.5
Other assets 946.0 1,111.9
Separate Accounts assets 48,675.5 44,936.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $107,660.6 $105,129.9
===================================================================================================================================
Liabilities:
Future policy benefits $ 18,716.5 $ 18,541.1
Unpaid claims 3,888.5 3,953.9
Unearned premiums 217.9 428.9
Policyholders' funds left with the Company 16,609.6 17,632.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 39,432.5 40,556.4
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 35.1 35.2
Short-term debt 1,173.9 1,370.1
Long-term debt 2,181.3 2,214.5
Payables under securities loan agreement 1,139.4 753.6
Current income taxes 223.5 444.8
Other liabilities 3,104.9 3,007.0
Minority and participating policyholders' interests 162.9 148.4
Separate Accounts liabilities 48,675.5 44,936.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 96,129.0 93,466.0
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company holding primarily debentures guaranteed by Aetna 275.0 275.0
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Notes 4 and 12)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock ($.01 par value;
15,000,000 shares authorized; 11,613,040 in 1999 and 11,614,816 in 1998
issued and outstanding) 862.0 862.1
Common stock ($.01 par value; 500,000,000 shares authorized; 140,963,577 in
1999 and 141,272,628 in 1998 issued and outstanding) 3,263.0 3,292.4
Accumulated other comprehensive income (loss) (228.2) 177.8
Retained earnings 7,359.8 7,056.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,256.6 11,388.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred securities and shareholders' equity $107,660.6 $105,129.9
==================================================================================================================================
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 5
<PAGE> 6
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Class C Voting Comprehensive Income (Loss)
Mandatorily ----------------------------
(Millions, except share data) Convertible Unrealized
As Restated Preferred Common Gains (Losses) Foreign Retained
Six Months Ended June 30, 1999 Total Stock Stock on Securities Currency Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $11,388.9 $ 862.1 $ 3,292.4 $ 387.2 $ (209.4) $ 7,056.6
Comprehensive income:
Net income 387.1 387.1
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(503.4) pretax) (1) (327.2) (327.2)
Foreign currency ($(121.0) pretax) (78.8) (78.8)
-------
Other comprehensive loss (406.0)
-------
Total comprehensive income (18.9)
=======
Common stock issued for benefit
plans (569,495 shares) 42.5 42.5
Repurchase of common shares
(880,000 shares) (72.0) (72.0)
Conversion of preferred securities (1,776
preferred shares converted to 1,454 (.1) .1
common shares) --
Common stock dividends (56.3) (56.3)
Preferred stock dividends (27.6) (27.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 $11,256.6 $ 862.0 $ 3,263. $ 60.0 $ (288.2) $ 7,359.8
===================================================================================================================================
Six Months Ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $11,195.4 $ 865.4 $ 3,644.4 $ 504.1 $ (197.0) $ 6,378.5
Comprehensive income:
Net income 413.7 413.7
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(52.6) pretax) (1) (34.2) (34.2)
Foreign currency ($(37.0) pretax) (24.1) (24.1)
------
Other comprehensive loss (58.3)
------
Total comprehensive income 355.4
======
Common stock issued for benefit
plans (432,469 shares) 26.2 26.2
Repurchase of common shares
(1,891,700 shares) (150.5) (150.5)
Conversion of preferred securities
(40,211 preferred shares converted to
32,952 common shares) -- (3.3) 3.3
Common stock dividends (57.7) (57.7)
Preferred stock dividends (27.8) (27.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 $11,341.0 $ 862.1 $ 3,523.4 $ 469.9 $ (221.1) $ 6,706.7
===================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
Page 6
<PAGE> 7
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
As Restated
Six Months Ended June 30,
--------------------------
(Millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 387.1 $ 413.7
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization (including investment discounts and premiums) 217.7 245.1
Net realized capital gains (26.9) (204.3)
Changes in assets and liabilities:
Decrease in accrued investment income 61.1 9.9
Increase in premiums due and other receivables (68.2) (132.6)
Increase in deferred policy acquisition costs (202.8) (135.0)
Decrease in income taxes (278.2) (173.2)
Net decrease (increase) in other assets and other liabilities 105.0 (90.8)
Increase (decrease) in insurance liabilities (including run-off liabilities funded by
investing activities below) 73.6 (6.7)
Other, net 28.4 (17.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 296.8 (91.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale 8,324.2 10,093.3
Equity securities 213.9 480.2
Mortgage loans 36.6 59.5
Real estate 40.9 125.0
Other investments 260.0 220.4
Short-term investments 8,231.9 10,886.8
Investment maturities and repayments of:
Debt securities available for sale 1,525.5 2,202.1
Mortgage loans 191.8 569.0
Cost of investments in:
Debt securities available for sale (9,095.6) (11,457.4)
Equity securities (216.6) (291.7)
Mortgage loans (134.7) (110.9)
Real estate (41.7) (20.2)
Other investments (620.6) (494.6)
Short-term investments (8,060.7) (10,705.8)
NYLCare health business (48.8) -
Increase in property and equipment (11.3) (82.7)
Net decrease in Separate Accounts 32.5 26.8
Other, net (28.1) 84.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 599.2 1,583.8
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits and interest credited for investment contracts 1,386.9 869.6
Withdrawals of investment contracts (1,744.8) (1,758.2)
Repayment of long-term debt (30.0) (140.8)
Net decrease in short-term debt (194.6) (21.3)
Common stock issued under benefit plans 42.5 26.2
Common stock acquired (72.0) (150.5)
Dividends paid to shareholders (84.1) (85.8)
Other, net (64.5) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (760.6) (1,260.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (.8) (6.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 134.6 225.6
Cash and cash equivalents, beginning of period 1,951.5 1,805.8
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,086.1 $2,031.4
===================================================================================================================================
Supplemental cash flow information:
Interest paid $ 117.7 $ 99.6
Income taxes paid 374.5 392.6
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 7
<PAGE> 8
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Restatement
The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare").
Less than majority-owned entities, in which the Company has at least a 20%
interest, are reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and are unaudited. Certain reclassifications have been made to the
1998 financial information to conform to the 1999 presentation. These interim
statements necessarily rely heavily on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all adjustments necessary
for a fair statement of results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes as presented in Aetna Inc.'s
1998 Annual Report on Form 10-K/A. 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.
Subsequent to the issuance of the Company's second quarter 1999 financial
statements and the filing of its second quarter 1999 Form 10-Q with the
Securities and Exchange Commission (the "SEC"), and following discussions with
representatives of the SEC's Division of Corporate Finance and Office of the
Chief Accountant concerning its review of the Company's financial statements,
the Company concluded it would restate its second quarter 1999 financial
statements and related disclosures. (Refer to Note 2.)
New Accounting Standard
On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). This
statement provides guidance for determining when an insurance or other
enterprise should recognize a liability for guaranty-fund and other
insurance-related assessments and guidance for measuring the liability. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations, as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
Future Accounting Standards
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
does not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This standard requires companies to record all derivatives
on the balance sheet as either assets or liabilities and measure those
instruments at fair value. The manner in which companies are to record gains or
losses resulting from changes in the values of those derivatives depends on the
use of the derivative and whether it qualifies for hedge accounting. As amended
by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, this standard is
effective for the Company's financial statements beginning January 1, 2001, with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this standard and the potential effect on its financial position and
results of operations.
Page 8
<PAGE> 9
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) RESTATEMENT
Subsequent to the issuance of the Company's second quarter 1999 financial
statements and the filing of its second quarter 1999 Form 10-Q with the
Securities and Exchange Commission (the "SEC"), and following discussions with
representatives of the SEC's Division of Corporate Finance and Office of the
Chief Accountant concerning its review of the Company's financial statements,
the Company concluded that it would restate its second quarter 1999 and 1998
financial statements and related disclosures to reflect, among other things, the
following changes:
- - Changes to the classification and timing of amounts earned by the
Company following the 1997 sale of Human Affairs International,
Incorporated ("HAI"). Contingent payments earned by the Company
originally recorded as reductions of medical costs and as other income
on a quarterly basis in 1999 have instead been recorded as a realized
capital gain during the third quarter of 1999. Contingent payments
earned by the Company originally recorded as reductions of medical
costs and as other income on a quarterly basis in 1999 have instead
been recorded as a realized capital gain during the third quarter of
1999. Contingent payments earned by the Company originally recorded as
reductions of medical costs and as other income on a quarterly basis in
1998 have instead been recorded as a realized capital gain during the
fourth quarter of 1998;
- - A liability relating to the extension period (2000-2003) of an
unfavorable pharmacy contract originally recorded by the Company in
connection with the July, 1998 acquisition of NYLCare has been reversed
to reflect the elimination of this liability and reduction of goodwill;
- - The breakout of salaries and benefits expense originally included in
other operating expenses for each period presented;
- - The reclassification of the Company's initial capital contributions to
separate accounts and other excess funds not held to fund current
separate account liabilities to other invested assets, originally
recorded to separate account assets;
- - The reclassification of certain long-term debt (Puttable Reset
Securities) to short-term debt; and
- - Expanded disclosures regarding the Company's discontinued products and
goodwill amortization.
As a result of the foregoing and other factors, the Company's second quarter
1999 and 1998 financial statements have been restated from amounts previously
reported.
Page 9
<PAGE> 10
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
(2) RESTATEMENT (CONTINUED)
Consolidated Statements of Income:
For the three months ended June 30,
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
As As
Previously Previously
(Millions, except per common share data) As Restated Reported As Restated Reported
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 4,580.5 $ 4,580.5 $ 3,279.1 $3,279.1
Net investment income 725.0 725.0 822.8 822.8
Fees and other income 625.3 634.1 544.8 553.6
Net realized capital gains 9.8 9.8 172.6 172.6
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 5,940.6 5,949.4 4,819.3 4,828.1
- -----------------------------------------------------------------------------------------------------------------------------
Benefits and Expenses:
Current and future benefits 4,359.1 4,352.9 3,276.9 3,270.7
Operating expenses:
Salaries and related benefits 495.2 - 401.8 -
Other 585.4 1,080.6 506.6 908.4
Interest expense 64.1 64.1 56.5 56.5
Amortization of goodwill and other acquired intangible
assets 105.7 105.7 96.9 96.9
Amortization of deferred policy acquisition costs 51.7 51.7 62.8 62.8
Reduction of reserve for loss on discontinued products (77.2) (77.2) - -
- -----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 5,584.0 5,577.8 4,401.5 4,395.3
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 356.6 371.6 417.8 432.8
Income taxes (benefits):
Current 47.3 52.6 169.2 174.5
Deferred 91.8 91.8 (7.4) (7.4)
- -----------------------------------------------------------------------------------------------------------------------------
Total income taxes 139.1 144.4 161.8 167.1
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 217.5 $ 227.2 $ 256.0 $ 265.7
=============================================================================================================================
Net income applicable to common ownership $ 203.7 $ 213.4 $ 242.1 $ 251.8
=============================================================================================================================
Results Per Common Share:
Basic $ 1.45 $ 1.51 $ 1.67 $ 1.74
Diluted 1.43 1.50 1.63 1.69
Dividends declared .20 .20 .20 .20
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 10
<PAGE> 11
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
(2) RESTATEMENT (CONTINUED)
Consolidated Statements of Income:
For the six months ended June 30,
---------------------------------------------------------
1999 1998
--------------------------- ----------------------------
As As
Previously Previously
(Millions, except per common share data) As Restated Reported As Restated Reported
- --------------------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C>
Premiums $ 8,961.9 $ 8,961.9 $6,517.7 $ 6,517.7
Net investment income 1,465.7 1,465.7 1,635.5 1,635.5
Fees and other income 1,173.5 1,191.0 1,086.6 1,104.1
Net realized capital gains 26.9 26.9 204.3 204.3
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 11,628.0 11,645.5 9,444.1 9,461.6
- --------------------------------------------------------------------------------------------------------------------------
Benefits and Expenses:
Current and future benefits 8,500.4 8,487.9 6,553.8 6,541.3
Operating expenses:
Salaries and related benefits 966.5 - 798.3 -
Other 1,152.9 2,119.4 988.3 1,786.6
Interest expense 128.7 128.7 113.4 113.4
Amortization of goodwill and other acquired intangible
assets 213.4 213.4 193.1 193.1
Amortization of deferred policy acquisition costs 101.7 101.7 115.2 115.2
Reduction of reserve for loss on discontinued products (77.2) (77.2) - -
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 10,986.4 10,973.9 8,762.1 8,749.6
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 641.6 671.6 682.0 712.0
Income taxes (benefits):
Current 152.6 163.1 295.5 306.0
Deferred 101.9 101.9 (27.2) (27.2)
- --------------------------------------------------------------------------------------------------------------------------
Total income taxes 254.5 265.0 268.3 278.8
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 387.1 $ 406.6 $ 413.7 $ 433.2
==========================================================================================================================
Net income applicable to common ownership $ 359.5 $ 379.0 $ 385.9 $ 405.4
==========================================================================================================================
Results Per Common Share:
Basic $ 2.55 $ 2.69 $ 2.66 $ 2.79
Diluted 2.53 2.66 2.62 2.75
Dividends declared .40 .40 .40 .40
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 11
<PAGE> 12
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
(2) RESTATEMENT (CONTINUED)
Consolidated Balance Sheets:
As of June 30,
-----------------------------------------------------------
1999 1998
---------------------------- -----------------------------
As As Previously As As Previously
(Millions, except per common share data) Restated Reported Restated Reported
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value
(amortized cost $30,730.1 and $32,694.0) $29,826.8 $29,826.8 $ 32,180.8 $ 32,180.8
Equity securities, at fair value (cost $762.6 and
$824.4) 879.6 879.6 800.5 800.5
Short-term investments 803.8 803.8 942.2 942.2
Mortgage loans 3,440.1 3,440.1 3,553.0 3,553.0
Real estate 311.1 311.1 270.3 270.3
Policy loans 498.7 498.7 458.7 458.7
Other 1,391.7 1,373.5 1,300.3 1,264.5
- -------------------------------------------------------------------------------------------------------------------------
Total investments 37,151.8 37,133.6 39,505.8 39,470.0
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,086.1 2,086.1 1,951.5 1,951.5
Short-term investments under securities loan agreement 1,139.4 1,139.4 753.6 753.6
Accrued investment income 476.9 476.9 537.1 537.1
Premiums due and other receivables 1,694.3 1,724.3 1,478.1 1,478.1
Reinsurance recoverables 4,006.2 4,006.2 3,897.2 3,897.2
Deferred income taxes 331.0 337.4 46.6 53.0
Deferred policy acquisition costs 1,975.5 1,975.5 1,768.6 1,768.6
Goodwill and other acquired intangible assets 9,177.9 9,189.7 9,143.5 9,155.3
Other assets 946.0 946.0 1,111.9 1,111.9
Separate Accounts assets 48,675.5 48,690.2 44,936.0 44,971.8
- -------------------------------------------------------------------------------------------------------------------------
Total assets $107,660.6 $107,705.3 $105,129.9 $105,148.1
=========================================================================================================================
Liabilities:
Future policy benefits $ 18,716.5 $ 18,716.5 $ 18,541.1 $ 18,541.1
Unpaid claims 3,888.5 3,888.5 3,953.9 3,953.9
Unearned premiums 217.9 217.9 428.9 428.9
Policyholders' funds left with the Company 16,609.6 16,609.6 17,632.5 17,632.5
- -------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 39,432.5 39,432.5 40,556.4 40,556.4
- -------------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 35.1 35.1 35.2 35.2
Short-term debt 1,173.9 867.5 1,370.1 1,063.4
Long-term debt 2,181.3 2,487.7 2,214.5 2,521.2
Payables under securities loan agreement 1,139.4 1,139.4 753.6 753.6
Current income taxes 223.5 234.0 444.8 444.8
Other liabilities 3,104.9 3,119.6 3,007.0 3,025.2
Minority and participating policyholders' interests 162.9 162.9 148.4 148.4
Separate Accounts liabilities 48,675.5 48,675.5 44,936.0 44,936.0
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 96,129.0 96,154.2 93,466.0 93,484.2
- -------------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary limited liability company
holding primarily debentures guaranteed by Aetna 275.0 275.0 275.0 275.0
- -------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Notes 4, 6 and 21)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock
($.01 par value; 15,000,000 shares authorized;
11,613,040 in 1999 and 11,614,816 in 1998 issued and
outstanding) 862.0 862.0 862.1 862.1
Common stock ($.01 par value; 500,000,000 shares
authorized; 140,963,577 in 1999 and 141,272,628 in
1998 issued and outstanding) 3,263.0 3,263.0 3,292.4 3,292.4
Accumulated other comprehensive income (228.2) (228.2) 177.8 177.8
Retained earnings 7,359.8 7,379.3 7,056.6 7,056.6
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,256.6 11,276.1 11,388.9 11,388.9
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred securities and
shareholders' equity $107,660.6 $107,705.3 $105,129.9 $ 105,148.1
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 12
<PAGE> 13
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) EARNINGS PER COMMON SHARE (AS RESTATED)
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three and six months ended June 30,
was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Income Shares Per Common
Millions, except per common share data) (Numerator) (Denominator) Share Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(1999
Net income $ 217.5
Less: preferred stock dividends 13.8
--------
Basic EPS
Income applicable to common ownership $ 203.7 140.9 $ 1.45
======== ========
Effect of dilutive securities:
Stock options and other (1) 1.3
Diluted EPS
Income applicable to common ownership and assumed conversions $ 203.7 142.2 $ 1.43
===================================================================================================================================
1998
Net income $ 256.0
Less: preferred stock dividends 13.9
--------
Basic EPS
Income applicable to common ownership 242.1 145.1 $ 1.67
========
Effect of dilutive securities:
Stock options and other (1) 1.2
Convertible preferred stock 13.9 11.1
-------- --------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 256.0 157.4 $ 1.63
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 (2)
Net income $ 387.1
Less: preferred stock dividends 27.6
--------
Basic EPS
Income applicable to common ownership $ 359.5 141.1 $ 2.55
========
Effect of dilutive securities:
Stock options and other (3) 1.2
--------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 359.5 142.3 $ 2.53
===================================================================================================================================
1998
Net income $ 413.7
Less: preferred stock dividends 27.8
--------
Basic EPS
Income applicable to common ownership 385.9 145.3 $ 2.66
========
Effect of dilutive securities:
Stock options and other (3) 1.2
Convertible preferred stock 27.8 11.2
-------- --------
Diluted EPS
Income applicable to common ownership and assumed conversions $ 413.7 157.7 $ 2.62
===================================================================================================================================
</TABLE>
(1) Options to purchase shares of common stock for the three months ended
June 30, 1999 and 1998 of 2.2 million and 3.6 million, respectively (with
exercise prices ranging from $80.25 - $112.63), were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common
shares.
(2) The issuable common stock related to Class C voting mandatorily
convertible preferred stock (9.5 million weighted average shares) was not
included in the computation of diluted earnings per common share for the
six months ended June 30, 1999 because to do so would be antidilutive.
(3) Options to purchase shares of common stock for the six months ended June
30, 1999 and 1998 of 5.4 million and 2.6 million, respectively (with
exercise prices ranging from $80.25 - $112.63), were not included in the
calculation of diluted earnings per common share because the options'
exercise price was greater than the average market price of common
shares.
Page 13
<PAGE> 14
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) ACQUISITIONS AND DISPOSITIONS
Aetna U.S. Healthcare
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America ("Prudential") to acquire the Prudential
health care business ("PHC") for approximately $1 billion. The Company expects
to secure remaining regulatory approval and close the transaction during the
third quarter. The Company expects to finance the transaction by issuing $500
million of three-year senior notes to Prudential and by using funds made
available from the issuance of commercial paper. The Company may ultimately
replace this commercial paper with medium- or long-term fixed income securities.
As part of the transaction, the Company has agreed to service Prudential's
administrative services only contracts following the closing.
In connection with the transaction, the Company reached an agreement with the
U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related businesses acquired by
Aetna as part of the 1998 acquisition of New York Life Insurance Company's
("NYL") health care business ("NYLCare"). The agreement primarily affects
approximately 260,000 NYLCare commercial HMO/POS members in the Houston market
and approximately 167,000 NYLCare commercial HMO/POS members in the Dallas/Ft.
Worth market, as well as related management, operating systems and other assets.
The Company has begun this divestiture process. The financial impact of the
divestiture will depend on the ultimate sales price relative to the book value
of the businesses to be sold and will be assessed as the process is completed.
As part of the transaction, the Company and Prudential have entered into a
reinsurance agreement for which the Company will pay a premium. Under the
agreement, Prudential will indemnify the Company from insurance risk which may
arise following the closing and reimburse the Company for a large portion of
medical costs of PHC in excess of certain threshold medical loss ratio levels
through the year 2000. Prudential will also pay the Company certain supplemental
fees related to the administrative service contracts to be serviced by the
Company following the closing. These fees are fixed in amount and decline over a
period ending 18 months following the closing.
On July 15, 1998, the Company acquired NYLCare for a purchase price of $1.08
billion in cash, including an adjustment as provided in the transaction
agreements. The acquisition was accounted for as a purchase. Originally, in
addition to the cash purchase price, payments totaling up to $300 million (up to
$150 million in each of two years) were potentially payable to the extent that
predetermined earnings and membership targets in future periods were achieved
(the "Earnout"). On January 29, 1999, the Company and NYL agreed to resolve all
purchase price adjustments and obligations under the Earnout. Under this
agreement, the Company paid NYL an additional $50 million to resolve such
matters. As a result, the total purchase price is approximately $1.1 billion.
In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation included approximately $35 million pretax related to
an unfavorable contract with an affiliate of NYL for providing pharmaceutical
benefits services (the "pharmacy contract"). As a condition of closing the
transaction, the pharmacy contract was extended from January 1, 2000 through
December 31, 2003 (the "extension period"). The terms of the extension period
were believed to reflect an appropriate market price, however the terms of the
pharmacy contract prior to January 1, 2000 were determined to be unfavorable.
The purchase price allocation related to the pharmacy contract is being
amortized over the period from closing to December 31, 1999. For the six months
ended June 30, 1999, approximately $9 million pretax was amortized as a
reduction of pharmacy costs. Also, a $64 million liability related to the
expected costs associated with involuntarily terminating certain NYLCare
employees and exiting certain leased NYLCare facilities was established as part
of the purchase price allocation. These costs will be charged to this liability
as actions are taken and were not significant to the Company's combined revenues
or operating results.
Page 14
<PAGE> 15
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)
The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $1.15 billion, net of related deferred taxes, being
primarily allocated to goodwill and other acquired intangible assets, which is
being amortized over a 40-year period for goodwill and over a range of three to
20 years for other acquired intangible assets.
The Company's consolidated results of operations include the NYLCare health
business from July 15, 1998.
Aetna Retirement Services
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided by the related agreements. The transaction was
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance receivable from
Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $152 million, of which $88 million was deferred and is being
recognized over approximately 15 years. Premiums ceded and reinsurance
recoveries made during 1999 totaled $284.7 million and $216.0 million,
respectively.
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale will result in a capital loss which is not expected to be
material. The revenue and earnings of the Canadian operations are not material
to the Company. Completion of the sale, which is anticipated to occur in the
fall of 1999, is subject to Canadian federal and other regulatory approvals and
other customary conditions.
On February 16, 1999, the Company entered into a joint venture with Poland's
sixth-largest bank for a 40% ownership interest in a company that sells pension
products throughout Poland following the reform and privatization of Poland's
pension sector, effective March 1, 1999.
On January 13, 1999, the Company acquired Asistencia Medica Social Argentina,
Argentina's largest HMO, for approximately $100 million.
(5) REDEMPTION OF CONVERTIBLE PREFERRED STOCK
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of
the Preferred Stock received .8197 shares of Aetna common stock for each share
of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna
common stock were issued as part of the redemption. Also, on May 25, 1999, the
Company's Board of Directors declared a cash dividend of $.84583 per share of
6.25% Class C Voting Mandatorily Convertible Preferred Stock to shareholders of
record at the close of business on July 8, 1999, payable July 19, 1999.
Page 15
<PAGE> 16
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) INVESTMENTS
Net investment income includes amounts allocable to experience-rated
contractholders of $257 million and $306 million for the three months ended June
30, 1999 and 1998, respectively, and $513 million and $621 million for the six
months ended June 30, 1999 and 1998, respectively. Interest credited to
contractholders is included in current and future benefits.
Net realized capital gains allocable to experience-rated contractholders of $3
million and $64 million for the three months ended June 30, 1999 and 1998,
respectively, and $9 million and $72 million for the six months ended June 30,
1999 and 1998, respectively, were deducted from net realized capital gains as
reflected on the Consolidated Statements of Income, and an offsetting amount is
reflected on the Consolidated Balance Sheets in policyholders' funds left with
the Company.
The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $157.8 $22.3 $161.9 $22.9
Supporting experience-rated products 93.4 19.1 95.7 21.7
Supporting remaining products 42.1 2.4 43.6 3.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $293.3(1) $43.8 $301.2(1) $47.8
=================================================================================================================================
</TABLE>
(1) Includes impaired loans of $100.0 million and $96.0 million at June 30,
1999 and December 31, 1998, respectively, for which no specific
reserves are considered necessary.
The activity in the specific and general reserves for the six months ended June
30, 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience- Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $29.5 $29.6 $ 7.8 $66.9
Charged to other accounts - - 1.4 1.4
Principal write-offs (.6) (4.4) (.2) (5.2)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $28.9 $25.2 $ 9.0 $63.1(1)
================================================================================================================================
Balance at December 31, 1997 $68.7 $31.6 $14.2 $114.5
Credited to net realized capital losses - - (2.0) (2.0)
Charged (credited) to other accounts (30.0)(2) (2.0) (2) 5.3 (26.7)
Principal write-offs (.4) (2.0) (.6) (3.0)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $38.3 $27.6 $16.9 $ 82.8(1)
================================================================================================================================
</TABLE>
(1) Total reserves at June 30, 1999 and 1998 include $43.8 million and
$47.5 million of specific reserves, respectively, and $19.3 million and
$35.3 million of general reserves, respectively.
(2) Reflects adjustments to reserves related to assets supporting
discontinued products and experience-rated products, which do not
affect the Company's results of operations.
Page 16
<PAGE> 17
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) INVESTMENTS (CONTINUED)
Income earned (pretax) and cash received on the average recorded investment in
impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
----------------------------------- -------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $158.2 $3.3 $3.3 $159.4 $ 6.0 $ 6.0
Supporting experience-rated products 95.5 2.4 2.4 93.9 4.3 4.2
Supporting remaining products 28.6 2.4 2.3 34.8 3.1 2.8
- ------------------------------------------------------------------------------------------------------------------------
Total $282.3 $8.1 $8.0 $288.1 $13.4 $13.0
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998
---------------------------------- ---------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $167.0 $3.3 $3.3 $180.2 $ 6.5 $ 6.8
Supporting experience-rated products 107.7 1.6 1.7 108.7 4.1 4.1
Supporting remaining products 51.4 .8 .6 56.6 1.7 1.6
- ------------------------------------------------------------------------------------------------------------------------
Total $326.1 $5.7 $5.6 $345.5 $12.3 $12.5
========================================================================================================================
</TABLE>
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Significant noncash investing and financing activities included acquisition of
real estate through foreclosures of mortgage loans amounting to $8 million and
$4 million for the six months ended June 30, 1999 and 1998, respectively.
(8) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $(270.1) $ 167.4
Less: reclassification adjustment for gains and other items included in net
income (2) 57.1 201.6
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities $(327.2) $ (34.2)
========================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$(415.6) million and $257.6 million for 1999 and 1998, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $87.8 million and $310.2 million for 1999 and 1998,
respectively.
Page 17
<PAGE> 18
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) DISCONTINUED PRODUCTS
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and the reserve is reviewed by management quarterly. As long as the
reserve continues to represent management's then best estimate of expected
future losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. 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 June 30,
1999, the receivable from continuing products, net of related deferred taxes
payable of $61 million on the accrued interest income, was $454 million. At
December 31, 1998, the receivable from continuing products, net of related
deferred taxes payable of $55 million on accrued interest income, was $493
million. These amounts were eliminated in consolidation.
Page 18
<PAGE> 19
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) DISCONTINUED PRODUCTS (CONTINUED)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three months ended June 30, 1999 Results Future Losses Net (1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $121.7 $ -- $121.7
- --------------------------------------------------------------------------------------------------------------------------
Net realized capital gains 8.1 (8.1) --
Interest earned on receivable from continuing products 8.5 -- 8.5
Other income 4.9 -- 4.9
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 143.2 (8.1) 135.1
- --------------------------------------------------------------------------------------------------------------------------
Current and future benefits 126.9 5.1 132.0
Operating expenses 3.1 -- 3.1
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 130.0 5.1 135.1
- --------------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 13.2 $(13.2) $ --
==========================================================================================================================
Three months ended June 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
Net investment income $134.9 $ -- $134.9
Net realized capital gains 9.9 (9.9) --
Interest earned on receivable from continuing products 8.7 -- 8.7
Other income 10.5 -- 10.5
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 164.0 (9.9) 154.1
- --------------------------------------------------------------------------------------------------------------------------
Current and future benefits 143.0 6.9 149.9
Operating expenses 4.2 -- 4.2
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 147.2 6.9 154.1
- --------------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 16.8 $(16.8) $ --
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Six months ended June 30, 1999 Results Future Losses Net (1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $243.8 $ -- $243.8
Net realized capital gains 18.3 (18.3) --
Interest earned on receivable from continuing products 16.9 -- 16.9
Other income 15.3 -- 15.3
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 294.3 (18.3) 276.0
- --------------------------------------------------------------------------------------------------------------------------
Current and future benefits 257.1 12.4 269.5
Operating expenses 6.5 -- 6.5
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 263.6 12.4 276.0
- --------------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 30.7 $(30.7) $ --
==========================================================================================================================
Six months ended June 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
Net investment income $272.6 $ -- $272.6
Net realized capital gains 75.0 (75.0) --
Interest earned on receivable from continuing products 17.3 -- 17.3
Other income 16.4 -- 16.4
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 381.3 (75.0) 306.3
- --------------------------------------------------------------------------------------------------------------------------
Current and future benefits 290.5 8.5 299.0
Operating expenses 7.3 -- 7.3
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 297.8 8.5 306.3
- --------------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 83.5 $ (83.5) $ --
==========================================================================================================================
</TABLE>
(1) Amounts are reflected in the June 30, 1999 and 1998 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products, which is eliminated in consolidation.
Page 19
<PAGE> 20
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) DISCONTINUED PRODUCTS (CONTINUED)
Assets and liabilities supporting discontinued products at June 30, 1999 and
December 31, 1998 were as follows (1):
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale $5,104.2 $5,890.5
Mortgage loans 756.7 754.2
Real estate 103.6 104.2
Short-term and other investments 432.0 350.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments 6,396.5 7,099.6
Short-term investments under securities loan agreement 129.5 143.9
Current and deferred income taxes 167.0 187.5
Receivable from continuing products (2) 514.7 548.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $7,207.7 $7,979.0
====================================================================================================================================
Future policy benefits $4,605.9 $4,653.5
Policyholders' funds left with the Company 1,186.7 1,546.0
Reserve for anticipated future losses on discontinued
products 1,167.6 1,214.1
Payables under securities loan agreement 129.5 143.9
Other 118.0 421.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities $7,207.7 $7,979.0
====================================================================================================================================
</TABLE>
(1) Assets supporting the discontinued products are distinguished from
other continuing operations assets.
(2) The receivable from continuing products is eliminated in consolidation.
Net unrealized capital gains on available-for-sale debt securities are included
above in other liabilities and are not reflected in consolidated shareholders'
equity. The reserve for anticipated future losses is included in future policy
benefits on the Consolidated Balance Sheets.
The 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. 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.
Page 20
<PAGE> 21
Item 1. Financial Statements.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) DISCONTINUED PRODUCTS (CONTINUED)
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 six months ended June 30, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
Reserve at December 31, 1998 $1,214.1
Operating income 4.3
Net realized capital gains 18.3
Mortality and other 8.1
Reserve reduction (77.2)
- --------------------------------------------------------------------------------
Reserve at June 30, 1999 $1,167.6
================================================================================
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $50 million ($77 million pretax) of the reserve was released
in the second quarter of 1999 primarily due to favorable investment performance.
The current reserve reflects management's best estimate of anticipated future
losses.
(10) DEBT AND GUARANTEE OF DEBT SECURITIES
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services (collectively the "Aetna Services
Debt"). ACLLC has issued $275 million of redeemable preferred stock, and the
Subordinated Debentures represent substantially all of the assets of ACLLC.
Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks. This credit facility terminates in June
2001. Various interest rate options are available under the facility and any
borrowings mature on the expiration date of the applicable credit commitment.
Aetna Services pays facility fees ranging from .065% to .2% per annum, depending
upon its long-term senior unsecured debt rating. The facility fee at June 30,
1999 is at an annual rate of .08%. The facility also supports Aetna Services'
commercial paper borrowing program. As a guarantor of any amounts outstanding
under the credit facility, Aetna Inc. is required to maintain shareholders'
equity, excluding net unrealized capital gains and losses (accumulated other
comprehensive income), of at least $7.5 billion.
On April 1, 1999 Aetna Services entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of banks.
This credit facility terminates on March 26, 2000. Various interest rate options
are available under the facility and any borrowings mature on the expiration
date of the applicable credit commitment. Aetna Services pays facility fees
ranging from .065% to .25% per annum, depending upon its long-term senior
unsecured debt rating. The facility fee at June 30, 1999 is at an annual rate of
.08%. The facility also supports Aetna Services' commercial paper borrowing
program. As a guarantor of any amounts outstanding under this credit facility,
Aetna Inc. is required to maintain shareholders' equity, excluding net
unrealized capital gains and losses (accumulated other comprehensive income), of
at least $7.5 billion.
Page 21
<PAGE> 22
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED)
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services is as follows (in
millions):
Balance Sheets Information:
<TABLE>
<CAPTION>
As Restated
----------------------------------
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments (excluding Separate Accounts) $35,389.9 $38,349.7
Total assets 95,445.9 93,190.9
Total insurance liabilities 37,670.1 38,566.9
Total liabilities 93,180.0 90,770.3
Total redeemable preferred stock 275.0 275.0
Total shareholder's equity 1,994.4 2,145.6
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Information:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $2,797.1 $5,450.3
Total benefits and expenses 2,512.1 4,977.3
Income before income taxes 285.1 473.0
Net income 187.7 316.2
- ------------------------------------------------------------------------------------------------------
</TABLE>
The amount of dividends which may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at June 30, 1999
without prior approval by state regulatory authorities is limited to
approximately $332 million in the aggregate. There are no such restrictions on
distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.
Page 22
<PAGE> 23
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(11) SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for the
three and six months ended June 30, was as follows:
<TABLE>
<CAPTION>
As Restated Aetna As Restated
Three months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other (1) Company
- ----------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $4,335.2 $163.0 $674.2 $ 33.3 $ .1 $5,205.8
Net investment income 138.5 213.8 97.1 258.3 1.3 709.0
Equity in subsidiaries - - 16.0 - - 16.0
==================================================================================================================================
Total revenue excluding realized
capital gains (losses) $4,473.7 $376.8 $787.3 $291.6 $ 1.4 $5,930.8
==================================================================================================================================
Operating earnings (2) $ 124.8 $ 56.3 $ 50.0 $ 21.7 $(60.2) $ 192.6
Other items (3) (20.7) (5.4) (4.6) 50.1 (.9) 18.5
Realized capital gains (losses), net
of tax (8.4) .6 3.5 13.2 (2.5) 6.4
==================================================================================================================================
Net income $ 95.7 $ 51.5 $ 48.9 $ 85.0 $(63.6) $ 217.5
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
1998
Revenues from external customers $3,190.3 $204.8 $394.3 $ 34.1 $ .4 $3,823.9
Net investment income 131.6 268.8 94.9 301.7 1.4 798.4
Equity in subsidiaries - - 24.4 - - 24.4
==================================================================================================================================
Total revenue excluding realized
capital gains (losses) $3,321.9 $473.6 $513.6 $335.8 $ 1.8 $4,646.7
==================================================================================================================================
Operating earnings (losses) (2) $ 94.9 $72.0 $ 40.7 $ 22.2 $(62.0) $ 167.8
Other item (3) (15.6) (5.1) (1.1) (.3) (2.4) (24.5 )
Realized capital gains, net of tax 21.5 6.5 5.4 9.1 70.2 112.7
==================================================================================================================================
Net income $ 100.8 $73.4 $ 45.0 $ 31.0 $ 5.8 $ 256.0
==================================================================================================================================
</TABLE>
(1) Corporate and Other includes interest, staff area expenses,
advertising, contributions, net investment income and other general
expenses, as well as consolidating adjustments.
(2) Operating earnings are comprised of net income (loss) excluding net
realized capital gains and losses and unusual items. While operating
earnings is the measure of profit or loss used by the Company's
management when assessing performance or making operating decisions,
it does not replace operating income or net income as a measure of
profitability.
(3) Other items include Year 2000 costs for all segments in 1998 and 1999
and an after-tax benefit of $50.2 million from reductions of the
reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 1999.
Page 23
<PAGE> 24
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
(11) SEGMENT INFORMATION (CONTINUED)
As Restated Aetna As Restated
Six months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other (1) Company
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from external customers $8,630.9 $ 318.3 $1,119.4 $ 66.4 $ .4 $10,135.4
Net investment income 279.2 429.2 191.6 514.9 4.3 1,419.2
Equity in subsidiaries -- -- 46.5 -- -- 46.5
- -------------------------------------------------------------------------------------- -------------------------------------------
Total revenue excluding realized
capital gains (losses) $8,910.1 $ 747.5 $1,357.5 $ 581.3 $ 4.7 $11,601.1
====================================================================================== ===========================================
Operating earnings (2) $ 248.5 $ 109.3 $ 95.6 $ 44.2 $ (119.7) $ 377.9
Other items (3) (38.2) (11.1) (7.2) 49.9 (1.8) (8.4)
Realized capital gains (losses), net of tax (3.7) 2.5 2.1 19.2 (2.5) 17.6
- -------------------------------------------------------------------------------------- --------------------------------------------
Net income $ 206.6 $ 100.7 $ 90.5 $ 113.3 $ (124.0) $ 387.1
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Revenues from external customers $6,371.6 $ 407.8 $ 745.5 $ 78.7 $ .7 $ 7,604.3
Net investment income 253.3 536.4 182.7 605.4 2.8 1,580.6
Equity in subsidiaries -- -- 54.9 -- -- 54.9
- -------------------------------------------------------------------------------------- -------------------------------------------
Total revenue excluding realized
capital gains (losses) $6,624.9 $ 944.2 $ 983.1 $ 684.1 $ 3.5 $ 9,239.8
====================================================================================== ===========================================
Operating earnings (losses) (2) $ 185.6 $ 135.8 $ 78.2 $ 44.8 $ (123.5) $ 320.9
Other item (3) (24.4) (9.2) (2.8) (.4) (4.0) (40.8)
Realized capital gains (losses), net of tax 28.6 5.1 (2.4) 33.8 68.5 133.6
- -------------------------------------------------------------------------------------- -------------------------------------------
Net income (loss) $ 189.8 $ 131.7 $ 73.0 $ 78.2 $ (59.0) $ 413.7
====================================================================================== ===========================================
</TABLE>
(1) Corporate and Other includes interest, staff area expenses,
advertising, contributions, net investment income and other general
expenses, as well as consolidating adjustments.
(2) Operating earnings are comprised of net income (loss) excluding net
realized capital gains and losses and other items. While operating
earnings is the measure of profit or loss used by the Company's
management when assessing performance or making operating decisions, it
does not replace operating income or net income as a measure of
profitability.
(3) Other items include Year 2000 costs for all segments in 1998 and 1999
and an after-tax benefit of $50.2 million from reductions of the
reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 1999.
(12) 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 June 30, 1999 and
December 31, 1998, the balance in this facilities reserve was $279 million and
$288 million, respectively.
Page 24
<PAGE> 25
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(12) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Litigation
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to
the United States District Court for the Eastern District of Pennsylvania (the
"Court") for consolidated pretrial proceedings with the cases pending there. The
plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking,
among other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint and the Court
denied that motion in March, 1999. Discovery proceedings have commenced and
trial currently is scheduled to begin in early 2000. The Company is defending
the actions vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medical bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph are
not expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.
Page 25
<PAGE> 26
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of June 30, 1999, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1999 and 1998, and the related condensed consolidated statements
of shareholders' equity and cash flows for the six-month periods ended June 30,
1999 and 1998. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Inc. and Subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 3, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 2, the accompanying condensed consolidated financial
statements have been restated.
/s/ KPMG LLP
Hartford, Connecticut
July 28, 1999, except as to
Note 2, which is as of February 7, 2000
Page 26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three and six months ended
June 30, 1999 and 1998. This review should be read in conjunction with the
consolidated financial statements and other data presented herein as well as the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Aetna Inc.'s 1998 Annual Report on Form 10-K/A.
RESTATEMENT
Following a review by the staff of the Securities and Exchange Commission, the
Company concluded that it would restate its Form 10-Qs (the "Restatement"). For
additional information concerning the Restatement refer to "Significant
Financial and Accounting Developments" contained elsewhere in this Form 10-Q/A.
OVERVIEW
General
The Company's current operations include three core businesses - Aetna U.S.
Healthcare, Aetna Retirement Services and Aetna International. Aetna U.S.
Healthcare provides a full spectrum of managed care, indemnity, and group life
and disability insurance products. Aetna Retirement Services offers a range of
financial services products including annuity contracts, investment advisory
services, financial planning and pension plan administration services. Aetna
International, through subsidiaries and joint venture operations, sells
primarily life insurance, health insurance and financial services products in
markets outside the United States. The Company also has a Large Case Pensions
business that manages a variety of retirement products for defined benefit and
defined contribution plans.
Consolidated Results
The Company reported net income of $218 million for the three months ended June
30, 1999 compared to $256 million for the same period in 1998. Net income per
diluted common share for the three months ended June 30, 1999 was $1.43,
compared with $1.63 a year ago.
Net income reflects Year 2000 costs of $32 million for the three months ended
June 30, 1999 and $25 million for the same period in 1998. Results for the three
months ended June 30, 1999 include a reduction of the reserve for loss on
discontinued products for Large Case Pensions of $50 million. Net realized
capital gains were $6 million for the three months ended June 30, 1999 and $113
million for the same period in 1998. Excluding these items, earnings were $193
million for the three months ended June 30, 1999 compared to $168 million for
the same period in 1998.
The Company reported net income of $387 million for the six months ended June
30, 1999 compared to $414 million for the same period in 1998. Net income per
diluted common share for the six months ended June 30, 1999 was $2.53, compared
with $2.62 a year ago.
Net income reflects Year 2000 costs of $59 million for the six months ended June
30, 1999 and $41 million for the same period in 1998. Results for the six months
ended June 30, 1999 include a reduction of the reserve for loss on discontinued
products for Large Case Pensions of $50 million. Net realized capital gains were
$18 million for the six months ended June 30, 1999 and $134 million for the same
period in 1998. Excluding these items, earnings were $378 million for the six
months ended June 30, 1999 compared to $321 million for the same period in 1998.
Page 27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
Acquisitions and Dispositions
Aetna U.S. Healthcare
Prudential Health Care Business
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America ("Prudential") to acquire the Prudential
health care business ("PHC") for approximately $1 billion. The Company expects
to secure remaining regulatory approval and close the transaction during the
third quarter. The Company expects to finance the transaction by issuing $500
million of three-year senior notes to Prudential and by using funds made
available from issuing commercial paper. The Company may ultimately replace this
commercial paper with medium- or long-term fixed income securities. As part of
the transaction, the Company also agreed to service Prudential's administrative
services only contracts following the acquisition.
In connection with the transaction, the Company reached an agreement with the
U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related businesses acquired by
Aetna as part of the 1998 NYLCare acquisition ("NYLCare Texas"). The agreement
primarily affects approximately 260,000 NYLCare commercial HMO/POS members in
the Houston market and approximately 167,000 NYLCare commercial HMO/POS members
in the Dallas/Ft. Worth market, as well as related management, operating systems
and other assets. The Company has begun this divestiture process. The financial
impact of the divestiture will depend on the ultimate sales price relative to
the book value of the businesses to be sold and will be assessed as the process
is completed.
Following the closing, the Company's results will be affected by, among other
things, the operating results of PHC, the costs of financing the transaction and
the amortization of intangible assets (primarily goodwill) to be created as a
result of the transaction and by the loss of the operating results of the
NYLCare Texas operations to be sold. Refer to "Aetna U.S. Healthcare",
"Corporate" and "Liquidity and Capital Resources" as well as Note 4 of Condensed
Notes to Consolidated Financial Statements, for further discussion.
NYLCare Health Business
In July 1998, the Company acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, the Company's results have been
affected by, among other things, the operating results of NYLCare, the costs of
financing the transaction and the amortization of intangible assets (primarily
goodwill) created by the transaction. The operations, and related amortization
of intangible assets, of NYLCare are reflected in the Aetna U.S. Healthcare
segment while the financing costs of the acquisition are reflected in the
Corporate segment. Refer to "Aetna U.S. Healthcare", "Corporate" and "Liquidity
and Capital Resources" as well as Note 4 of Condensed Notes to Consolidated
Financial Statements, for further discussion.
Aetna Retirement Services
In October 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation for approximately $1 billion. The
principal agreement to sell this business was generally in the form of an
indemnity reinsurance arrangement. For more details about the transaction and
the indemnity reinsurance arrangement, refer to "Aetna Retirement Services" and
Note 4 of Condensed Notes to Consolidated Financial Statements.
Page 28
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
OVERVIEW (CONTINUED)
Acquisitions and Dispositions (Continued)
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale will result in a capital loss which is not expected to be
material. The revenue and earnings of the Canadian operations are not material
to the Company. Completion of the sale, which is anticipated to occur in the
fall of 1999, is subject to Canadian federal and other regulatory approvals and
other customary conditions. Proceeds from the sale are expected to be used for
general corporate purposes, including repayment of debt, internal growth,
acquisitions and share repurchases.
Other
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of
the Preferred Stock received .8197 shares of Aetna common stock for each share
of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna
common stock were issued to effect the redemption. Refer to "Liquidity and
Capital Resources" and Note 5 of the Condensed Notes to Consolidated Financial
Statements for further discussion.
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
As Restated As Restated
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ---------------------------------
(Millions) 1999(1) 1998 % Change 1999(1) 1998 % Change
---------- ------- ---- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums $3,949.1 $2,847.0 38.7% $7,861.7 $5,686.0 38.3%
Net investment income 138.5 131.6 5.2 279.2 253.3 10.2
Fees and other income 386.1 343.3 12.5 769.2 685.6 12.2
Net realized capital gains
(losses) (12.9) 33.2 - (5.5) 44.2 -
-------- -------- ------- -------- -------- ------
Total revenue 4,460.8 3,355.1 33.0 8,904.6 6,669.1 33.5
-------- -------- ------- -------- -------- ------
Current and future benefits 3,382.1 2,442.4 38.5 6,746.7 4,885.3 38.1
Operating expenses 799.1 633.5 26.1 1,570.0 1,244.2 26.2
Amortization of goodwill and
other acquired intangible
assets 101.9 90.7 12.3 203.8 181.4 12.3
-------- -------- ------- -------- -------- ------
Total benefits and expenses 4,283.1 3,166.6 35.3 8,520.5 6,310.9 35.0
-------- -------- ------- -------- -------- ------
Income before income taxes 177.7 188.5 (5.7) 384.1 358.2 7.2
Income taxes 82.0 87.7 (6.5) 177.5 168.4 5.4
-------- -------- ------- -------- -------- ------
Net income $ 95.7 $ 100.8 (5.1)% $ 206.6 $ 189.8 8.9%
======== ======== ======= ======== ======== ======
Net realized capital gains
(losses), net of tax
(included above) $ (8.4) $ 21.5 -% $ (3.7) $ 28.6 -%
======== ======== ======= ======== ======== ======
</TABLE>
(1) Results include the acquired NYLCare health business, including the
portion that the Company must divest.
Aetna U.S. Healthcare's net income for the three months ended June 30, 1999
decreased $5 million compared to the same period in 1998, driven by net realized
capital losses. Net income includes Year 2000 costs of $21 million for the three
months ended June 30, 1999 and $16 million for the same period in 1998.
Excluding Year 2000 costs and net realized capital gains or losses, results for
the three months ended June 30, 1999 increased $30 million, or 32%, compared to
the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $17 million
compared to the same period in 1998. Net income includes Year 2000 costs of $38
million for the six months ended June 30, 1999 and $24 million for the same
period in 1998. Excluding Year 2000 costs and net realized capital gains or
losses, results for the six months ended June 30, 1999 increased $63 million, or
34%, compared to the same period in 1998.
Page 29
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Business Results
In order to provide a comparison that management believes better reflects the
underlying performance of Aetna U.S. Healthcare, the operating earnings
discussion that follows excludes the amortization of goodwill and other acquired
intangible assets (including the goodwill associated with the U.S. Healthcare
and NYLCare acquisitions), Year 2000 costs and net realized capital gains or
losses in both periods.
<TABLE>
<CAPTION>
As Restated As Restated
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- --------------------------
(Millions) 1999 (1) 1998 1999(1) 1998
- ---------- -------- ---- ------- ----
<S> <C> <C> <C> <C>
Operating earnings:
Health Risk $ 128.0 $ 85.3 $ 254.1 $ 169.2
Group Insurance and Other Health 79.4 84.3 159.5 165.9
------- ------- ------- --------
Total Aetna U.S. Healthcare $ 207.4 $ 169.6 $ 413.6 $ 335.1
======= ======= ======= ========
Commercial HMO Premium PMPM $139.68 $134.98 $139.19 $ 135.02
------- ------- ------- ---------
Commercial HMO Medical Cost PMPM $115.19 $110.01 $114.66 $ 111.12
------- ------- ------- ---------
Commercial HMO Medical Loss Ratio 82.5% 81.5% 82.4% 82.3 %
------- ------- ------- ---------
Medicare HMO Premium PMPM $488.93 $472.19 $487.16 $ 470.66
------- ------- ------- ---------
Medicare HMO Medical Cost PMPM $442.01 $450.95 $439.69 $ 443.36
------- ------- ------- ---------
Medicare HMO Medical Loss Ratio 90.4% 95.5% 90.3% 94.2 %
------- ------- ------- --------
</TABLE>
(1) Includes the acquired NYLCare health business, including the portion that
the Company must divest.
Health Risk
Health Risk (which includes all health products for which Aetna U.S. Healthcare
assumes all or a majority of health care cost and utilization risk) earnings
increased $43 million for the three months ended June 30, 1999 and $85 million
for the six months ended June 30, 1999 compared to the corresponding periods of
1998. The increase in 1999 earnings reflects membership increases from
enrollment growth and the acquisition of NYLCare as well as improved Medicare
HMO results due to the exiting of several Medicare markets as of January 1,
1999.
For the Health Risk business, the liability for medical claims payable reflects
estimates of the ultimate cost of claims that have been incurred but not yet
reported or paid. Medical claims payable are based on a number of factors,
including those derived from historical claim experience. Medical claims payable
are estimated periodically, and any resulting adjustments are reflected in
current period operating results within current and future benefits.
Commercial HMO
Commercial HMO premium per member per month ("PMPM") increased 3% for the three
and six months ended June 30, 1999 compared to the corresponding periods of
1998. This increase was primarily due to premium rate increases, partially
offset by customers selecting lower premium plans, a shift in the geographic mix
of membership and the addition of NYLCare members.
Commercial HMO medical cost PMPM increased by 5% for the three months ended June
30, 1999 and 3% for the six months ended June 30, 1999 compared to the
corresponding periods of 1998. The 1999 increase reflects medical trend,
particularly pharmacy benefits (both higher cost and utilization), as well as
the addition of NYLCare members. These increases were partially offset by
medical cost initiatives.
The Commercial HMO medical loss ratio increased 1.0 percentage points for the
three months ended June 30, 1999 and .1 percentage points for the six months
ended June 30, 1999 compared to the corresponding periods of 1998. The higher
medical loss ratio reflects medical trend, particularly pharmacy benefits, as
well as the addition of NYLCare members.
Page 30
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Medicare HMO
Medicare HMO premiums PMPM increased 4% for the three and six months ended June
30, 1999 compared to the corresponding periods of 1998. This increase was
primarily due to Health Care Financing Administration rate increases and
increases in supplemental premiums, partially offset by a shift in the
geographic mix of membership.
Medicare HMO medical costs PMPM decreased by 2% for the three months ended June
30, 1999 and .8% for the six months ended June 30, 1999 compared to the
corresponding periods of 1998. The lower medical costs in 1999 reflect the
favorable impact of exiting several markets as of January 1, 1999, partially
offset by medical trend, particularly pharmacy benefits.
The Medicare HMO medical loss ratio decreased 5.1 percentage points for the
three months ended June 30, 1999 and 3.9 percentage points for the six months
ended June 30, 1999 compared to the corresponding periods of 1998. This
improvement primarily reflects the favorable impact of exiting several markets.
Group Insurance and Other Health
Group Insurance and Other Health includes group life and disability insurance
and long-term care insurance, offered on both an insured and employer-funded
basis, and all health products offered on an employer-funded basis. Group
Insurance and Other Health results decreased $5 million for the three months
ended June 30, 1999 and $6 million for the six months ended June 30, 1999
compared to the corresponding periods of 1998. This decrease reflects less
favorable developments in claim benefit reserve estimates, partially offset by
higher investment income. Results for the Group Insurance and Other Health
businesses are expected to be level or to decrease slightly in 1999.
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
June 30, 1999 (1) June 30, 1998
----------------- -------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- ----------- ---- ------- ----- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2) 5,434 716 6,150 3,905 399 4,304
Medicare 566 -- 566 405 -- 405
Medicaid 141 39 180 69 -- 69
----- ----- ------ ----- ----- ------
Total HMO 6,141 755 6,896 4,379 399 4,778
POS 212 2,451 2,663 266 2,515 2,781
PPO 884 2,945 3,829 572 2,771 3,343
Indemnity 162 2,058 2,220 253 2,301 2,554
----- ----- ------ ----- ----- ------
Total Health Membership 7,399 8,209 15,608 5,470 7,986 13,456
===== ===== ====== ===== ===== ======
Group Insurance:
Group Life 9,732 9,507
Disability 2,522 2,737
Long-Term Care 107 92
----- ----- ------ ----- ----- ------
</TABLE>
(1) Health membership for NYLCare at the date of acquisition (July 15, 1998)
in thousands was 2,117 members, including 1,186 Commercial HMO risk, 111
Medicare HMO risk, 56 Medicaid HMO risk, 135 HMO nonrisk, 452 PPO risk and
177 PPO nonrisk. Group Insurance NYLCare membership at the date of
acquisition was 791 thousand members.
(2) Includes 1,507 thousand POS members who access primary care physicians and
referred care through an HMO network at June 30, 1999 and 1,007 thousand
at June 30, 1998.
Total Health membership as of June 30, 1999 increased by 2 million members, or
16%, when compared to June 30, 1998 primarily due to the acquisition of NYLCare.
Excluding the impact of the NYLCare members at the date of acquisition, HMO
membership increases were substantially offset by declines in point-of-service
("POS"), preferred provider organization ("PPO") and Indemnity enrollment.
Page 31
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Total Revenue and Expense
Revenue for Aetna U.S. Healthcare, excluding net realized capital gains,
increased by $1.2 billion, or 35%, for the three months ended June 30, 1999 and
$2.3 billion, or 34%, for the six months ended June 30, 1999 when compared to
the same periods in 1998. This growth was primarily due to the acquisition of
NYLCare, as well as to premium rate increases and Commercial HMO membership
growth.
Operating expenses for Aetna U.S. Healthcare increased by $166 million, or 26%,
for the three months ended June 30, 1999 and $326 million, or 26%, for the six
months ended June 30, 1999 when compared to the same periods in 1998. The
increase in 1999 reflects the acquisition of NYLCare, as well as costs to
support HMO membership increases. However, operating expenses as a percentage of
revenue decreased to 18% for the three and six months ended June 30, 1999 from
19% for the corresponding periods of 1998.
Acquisition of the NYLCare Health Business
On July 15, 1998, the Company acquired NYLCare for a purchase price of
approximately $1.1 billion. Refer to "Overview" and Note 4 of the Condensed
Notes to Consolidated Financial Statements for a further discussion of the
acquisition.
Agreement to Acquire Prudential Health Care Business
On December 9, 1998, the Company entered into definitive agreements to acquire
PHC. As part of the transaction, the Company also agreed to service Prudential's
administrative services only ("ASO") contracts following the acquisition.
Included in the acquisition are PHC's HMO, POS, PPO and Indemnity health lines,
as well as its dental business. At June 30, 1999, PHC had approximately 5.5
million health members and 8 million dental members. Following the acquisition,
Aetna U.S. Healthcare's results will be affected by, among other things, the
operating results of PHC and the amortization of intangible assets (primarily
goodwill) created as a result of the transaction.
As part of the transaction, the Company and Prudential have entered into a
reinsurance agreement for which the Company will pay a premium. Under the
agreement, Prudential will indemnify the Company from insurance risk which may
arise following the closing by reimbursing the Company for a large portion of
medical costs of PHC in excess of certain threshold medical loss ratio levels
through the year 2000. Prudential will also pay the Company certain supplemental
fees related to the administrative service contracts to be serviced by the
Company following the closing. These fees are fixed in amount and decline over a
period ending 18 months following the closing. PHC and Prudential's ASO business
have incurred significant operating losses in recent periods. Following the
closing, the Company will seek to improve profitability of PHC by reducing
administrative costs, improving underwriting and pricing discipline and
otherwise improving its operations. Refer to "Overview" and Note 4 of the
Condensed Notes to Consolidated Financial Statements for a further discussion of
the acquisition and agreement to divest NYLCare Texas.
Page 32
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA RETIREMENT SERVICES
<TABLE>
<CAPTION>
Operating Summary
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------------
(Millions) 1999 1998 (1) % Change 1999 1998(1) % Change
- ---------- ----- -------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums (2) $ 18.8 $ 34.9 (46.1)% $ 42.4 $ 75.2 (43.6)%
Net investment income 213.8 268.8 (20.5) 429.2 536.4 (20.0)
Fees and other income 144.2 169.9 (15.1) 275.9 332.6 (17.0)
Net realized capital gains 1.0 10.1 (90.1) 3.9 7.9 (50.6)
-------- -------- -------- --------- --------- --------
Total revenue 377.8 483.7 (21.9) 751.4 952.1 (21.1)
-------- -------- -------- --------- --------- --------
Current and future benefits (2) 180.1 235.3 (23.5) 363.1 485.6 (25.2)
Operating expenses 94.6 104.0 (9.0) 187.1 205.7 (9.0)
Amortization of deferred policy
acquisition costs 26.8 36.5 (26.6) 51.7 70.5 (26.7)
-------- -------- -------- --------- --------- --------
Total benefits and expenses 301.5 375.8 (19.8) 601.9 761.8 (21.0)
-------- -------- -------- --------- --------- --------
Income before income taxes 76.3 107.9 (29.3) 149.5 190.3 (21.4)
Income taxes 24.8 34.5 (28.1) 48.8 58.6 (16.7)
-------- -------- -------- --------- --------- --------
Net income $ 51.5 $ 73.4 (29.8)% $ 100.7 $ 131.7 (23.5)%
======== ======== ======== ========= ========= ========
Net realized capital gains,
net of tax (included above) $ .6 $ 6.5 (90.8)% $ 2.5 $ 5.1 (51.0)%
======== ======== ======== ========= ========= ========
Deposits not included in premiums above:
Annuities -- fixed options $ 449.1 $ 275.6 63.0% $ 994.3 $ 608.7 63.3%
Annuities -- variable options 1,061.0 947.5 12.0 2,545.1 1,854.6 37.2
Individual life insurance -- 129.6 (100.0) -- 260.7 (100.0)
-------- -------- -------- --------- --------- --------
Total $1,510.1 $1,352.7 11.6% $ 3,539.4 $ 2,724.0 30.0%
======== ======== ======== ========= ========= ========
Assets under management: (3)
Annuities -- fixed options $12,550.8 $11,947.1 5.1%
Annuities -- variable options (4) 29,499.5 23,932.5 23.3
Other investment advisory 16,737.6 11,780.2 42.1
--------- --------- --------
Financial services 58,787.9 47,659.8 23.3
Assets under administration (5) 3,729.4 2,810.9 32.7
--------- --------- --------
Total financial services' assets under
management and administration 62,517.3 50,470.7 23.9
--------- --------- --------
Individual life insurance assets under
management -- 2,798.8 (100.0)
--------- --------- --------
Total assets under management and
administration $62,517.3 $53,269.5 17.4%
========= ========= ========
</TABLE>
(1) 1998 operating results reflect the operations of the individual life
business which was sold on October 1, 1998.
(2) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $12.4 million for
the three months ended June 30, 1999, $13.7 million for the three
months ended June 30, 1998, $30.1 million for the six months ended June
30, 1999 and $28.0 million for the six months ended June 30, 1998.
(3) Excludes net unrealized capital gains of approximately $2.6 million at
June 30, 1999 and $599.9 million at June 30, 1998.
(4) Includes $9,699.8 million at June 30, 1999 and $6,603.3 million at June
30, 1998 of assets held and managed by unaffiliated mutual funds.
(5) Represents assets for which ARS provides administrative services only.
Aetna Retirement Services' ("ARS") net income for the three months ended June
30, 1999 decreased $22 million compared to the same period in 1998 due to the
sale of the individual life business on October 1, 1998. Net income includes
Year 2000 costs of $5 million for the three months ended June 30, 1999 and 1998.
Net income for the three months ended June 30, 1998 also included $24 million
related to the individual life insurance business. Excluding Year 2000 costs and
net realized capital gains, as well as the 1998 individual life earnings,
results for the three months ended June 30, 1999 increased $9 million, or 18%,
compared to the second quarter of 1998.
Page 33
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA RETIREMENT SERVICES (CONTINUED)
Net income for the six months ended June 30, 1999 decreased $31 million compared
to the same period in 1998. Net income includes Year 2000 costs of $11 million
for the six months ended June 30, 1999 and $9 million for the same period in
1998. Net income for the six months ended June 30, 1998 also included $47
million related to the individual life insurance business. Excluding Year 2000
costs and net realized capital gains, as well as the 1998 individual life
earnings, results for the six months ended June 30, 1999 increased $21 million,
or 23%, compared to the first six months of 1998.
ARS' earnings, excluding Year 2000 costs and net realized capital gains or
losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ---------------------------
(Millions) 1999 1998 1999 1998
- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Financial services $56.3 $ 47.8 $109.3 $ 88.6
Individual life insurance (1) - 24.2 - 47.2
----- ------ ------ ------
Total $56.3 $ 72.0 $109.3 $135.8
===== ====== ====== ======
</TABLE>
(1) The individual life business was sold on October 1, 1998.
The increase in earnings for financial services products primarily reflects
increased fee income from increased assets under management. Assets under
management and administration increased primarily due to appreciation in the
stock market, as well as additional net deposits (deposits less surrenders).
Partially offsetting the increases in fee income were increased operating
expenses. However, operating expenses as a percentage of assets under management
declined in both periods.
Of the $12.6 billion and $11.9 billion of fixed-annuity assets under management
at June 30, 1999 and 1998, respectively, 26% were fully guaranteed and 74% were
experience-rated in each period. The average annualized earned rates on
investments supporting fully guaranteed investment contracts were 7.4% and 7.5%
and the average annualized earned rates on investments supporting
experience-rated investment contracts were 7.6% and 7.9% for the six months
ended June 30, 1999 and 1998, respectively. The average annualized credited
rates on fully guaranteed investment contracts were 6.4% and 6.6% and the
average annualized credited rates on experience-rated investment contracts were
5.6% and 5.8% for the six months ended June 30, 1999 and 1998, respectively. The
resulting annualized interest margins on fully guaranteed investment contracts
were 1.0% and .9% and on experience-rated investment contracts were 2.0% and
2.1% for the six months ended June 30, 1999 and 1998, respectively.
Sale of Individual Life Insurance Business
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The sale resulted in an after-tax
gain of approximately $152 million. Since the principal agreement to sell this
business was generally in the form of an indemnity reinsurance arrangement, the
Company deferred approximately $88 million of the gain and is recognizing it
over approximately 15 years. Approximately $2 million of the gain was recognized
during the three months ended June 30, 1999 and approximately $4 million was
recognized during the first six months of 1999. Revenues from the business sold
were $129 million for the three months ended June 30, 1998 and were $264 million
for the first six months of 1998. For more details about the transaction and the
indemnity reinsurance arrangement, refer to Note 4 of Condensed Notes to
Consolidated Financial Statements.
Page 34
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA INTERNATIONAL
<TABLE>
<CAPTION>
Operating Summary
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
(Millions) 1999 1998 % Change 1999 1998 % Change
- ---------- ---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 583.8 $ 367.8 58.7% $1,000.4 $ 687.1 45.6%
Net investment income 113.1 119.3 (5.2) 238.1 237.6 .2
Fees and other income 90.4 26.5 -- 119.0 58.4 103.8
Net realized capital gains (losses) 5.4 7.2 (25.0) 2.9 (5.1) --
-------- -------- ---- -------- -------- --------
Total revenue 792.7 520.8 52.2 1,360.4 978.0 39.1
-------- -------- ---- -------- -------- --------
Current and future benefits 542.9 304.8 78.1 885.1 582.5 51.9
Operating expenses 150.8 121.8 23.8 291.0 236.4 23.1
Interest expenses 2.2 3.1 (29.0) 4.5 5.8 (22.4)
Amortization of goodwill and other
acquired intangible assets 3.0 5.2 (42.3) 8.1 10.3 (21.4)
Amortization of deferred policy
acquisition costs 24.8 26.1 (5.0) 49.8 44.4 12.2
-------- -------- ---- -------- -------- --------
Total benefits and expenses 723.7 461.0 57.0 1,238.5 879.4 40.8
-------- -------- ---- -------- -------- --------
Income before income taxes 69.0 59.8 15.4 121.9 98.6 23.6
Income taxes 20.1 14.8 35.8 31.4 25.6 22.7
-------- -------- ---- -------- -------- --------
Net income $ 48.9 $ 45.0 8.7% $ 90.5 73.0 $ 24.0%
======== ======== ==== ======== ======== ========
Net realized capital gains (losses), net
of tax (included above) $ 3.5 5.4 $ (35.2)% $ 2.1 $ (2.4) --%
======== ======== ==== ======== ======== ========
</TABLE>
Aetna International's net income for the three months ended June 30, 1999
increased by $4 million compared to the same period in 1998. Net income includes
Year 2000 costs of $5 million for the three months ended June 30, 1999 and $1
million for the same period in 1998. Excluding Year 2000 costs and net realized
capital gains or losses, results for the three months ended June 30, 1999
increased $9 million, or 23%, compared to the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $18 million
compared to the same period in 1998. Net income includes Year 2000 costs of $7
million for the six months ended June 30, 1999 and $3 million for the same
period in 1998. Excluding Year 2000 costs and net realized capital gains or
losses, results for the six months ended June 30, 1999 increased $17 million, or
22%, compared to the same period in 1998.
The increase in 1999 in both periods primarily reflects earnings growth in
Canada, Chile, Malaysia, Taiwan, and the Company's Mexican insurance businesses
partially offset by lower earnings in Brazil. Fluctuations in foreign currencies
did not significantly impact earnings for the second quarter of 1999. The
weakening of foreign currencies, however, did significantly offset growth in
local currency earnings in Brazil and partially offset local currency earnings
in Mexico and Chile during the six months ended June 30, 1999. Refer to
"Overview" for a discussion related to the pending sale of Aetna International's
Canadian operations.
The Company continues to monitor Latin American economies, which are in
recession, and the potential near-term impact on our businesses. Further
currency devaluations in Latin America, or in other regions where the Company
has established operations, could adversely affect future operating earnings
when translated into U.S. dollars. Refer to "Aetna International" and
"Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual Report on
Form 10-K/A for additional information.
Page 35
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
AETNA INTERNATIONAL (CONTINUED)
Earnings by major geographic location, excluding Year 2000 costs and net
realized capital gains or losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia Pacific (1) $21.3 $15.6 $30.2 $27.9
Americas (2) 32.4 28.6 76.6 57.2
Other (3) (3.7) (3.5) (11.2) (6.9)
----- ----- ----- -----
Total $50.0 $40.7 $95.6 $78.2
===== ===== ===== =====
</TABLE>
(1) Includes China, Hong Kong, Indonesia, Malaysia, New Zealand,
Philippines, Taiwan and Thailand.
(2) Includes Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru,
Poland and Venezuela.
(3) Includes general and other miscellaneous expenses.
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------------
(Millions) 1999 1998 % Change 1999 1998 % Change
------ ------ -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 28.8 $ 29.4 (2.0)% $ 57.4 $ 69.4 (17.3)%
Net investment income 258.3 301.7 (14.4) 514.9 605.4 (14.9)
Fees and other income 4.5 4.7 (4.3) 9.0 9.3 (3.2)
Net realized capital gains 20.3 14.1 44.0 29.5 52.0 (43.3)
------ ------ ------ --------- --------- ------
Total revenue 311.9 349.9 (10.9) 610.8 736.1 (17.0)
------ ------ ------ --------- --------- ------
Current and future benefits 254.0 294.4 (13.7) 505.5 600.4 (15.8)
Operating expenses 3.3 5.9 (44.1) 6.4 11.9 (46.2)
Reduction of reserve for loss on
discontinued products (77.2) - - (77.2) - -
------ ------ ------ --------- --------- ------
Total benefits and expenses 180.1 300.3 (40.0) 434.7 612.3 (29.0)
------ ------ ------ --------- --------- ------
Income before income taxes 131.8 49.6 165.7 176.1 123.8 42.2
Income taxes 46.8 18.6 151.6 62.8 45.6 37.7
------ ------ ------ --------- --------- ------
Net income $ 85.0 $ 31.0 174.2% $ 113.3 $ 78.2 44.9%
====== ====== ====== ========= ========= ======
Net realized capital gains, net of
tax (included above) $ 13.2 $ 9.1 45.1% $ 19.2 $ 33.8 (43.2)%
====== ====== ====== ========= ========= ======
Deposits not included in
premiums above $195.9 $216.6 (9.6)% $ 461.3 $ 484.0 (4.7)%
====== ====== ====== ========= ========= ======
Assets under management (1) (2) $27,365.7 $29,707.6 (7.9)%
========= ========= ======
</TABLE>
(1) Excludes net unrealized capital losses of approximately $35.5 million
at June 30, 1999 and net unrealized capital gains of approximately
$690.6 million at June 30, 1998.
(2) Includes assets under management of $6,390.1 million at June 30, 1999
and $6,974.1 million at June 30, 1998 related to discontinued products.
Large Case Pensions' net income for the three months ended June 30, 1999
increased by $54 million compared to the same period in 1998. During the three
months ended June 30, 1999, the Company released $50 million of the reserve
related to discontinued products primarily as a result of favorable investment
performance. Net income also includes Year 2000 costs of $.1 million for the
three months ended June 30, 1999 and $.3 million for the same period in 1998.
Excluding the reserve release in 1999, Year 2000 costs and net realized capital
gains in both periods, results for the three months ended June 30, 1999
decreased slightly compared to the same period in 1998.
Net income for the six months ended June 30, 1999 increased by $35 million
compared to the same period in 1998. Excluding the discontinued products reserve
release in 1999, Year 2000 costs of $.3 million for the six months ended June
30, 1999 and $.4 million for the same period in 1998 and net realized capital
gains in both periods, results for the six months ended June 30, 1999 decreased
slightly compared to the same period in 1998.
Page 36
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The decrease in results for the three and six months ended June 30, 1999
continues to reflect the redeployment of capital supporting this business,
partially offset by lower expenses. Assets under management at June 30, 1999
were 8% lower than a year earlier. This decrease primarily resulted from the
continuing runoff of underlying liabilities.
General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows
(excluding contractholder transfers to other Company products):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
(Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $237.3 $235.9 $478.5 $473.0
Contractholder withdrawals other than
scheduled contract maturities and benefit
payments 125.7 99.8 201.0 172.5
Participant directed withdrawals 21.5 24.8 43.9 52.6
------ ------ ------ ------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
(a) the expected cash flows from the assets supporting these products and (b)
the cash flows expected to be required to meet the product obligations.
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).
Page 37
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
(Millions) 1999 1998 1999 1998
- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest deficit (1) $(3.3) $(5.2) $(8.6) $(11.6)
Net realized capital gains 5.3 6.5 11.9 48.8
Interest earned on receivable from continuing
Products 5.5 5.6 11.0 11.2
Other, net 1.3 1.9 5.9 1.6
----- ----- ----- ------
Results of discontinued products, after tax $ 8.8 $ 8.8 $20.2 $ 50.0
----- ----- ----- ------
Results of discontinued products, pretax $13.2 $16.8 $30.7 $ 83.5
----- ----- ----- ------
Net realized capital gains from sales of bonds,
After tax (included above) $ 2.3 $ 6.0 $ 7.8 $ 29.1
----- ----- ----- ------
</TABLE>
(1) The interest deficit is the difference between earnings on invested assets
and interest credited to contractholders.
The interest deficit for 1999 remained relatively level compared to 1998. Net
realized capital gains for the six months ended June 30, 1998 reflect gains of
$23 million related to continued favorable developments in real estate markets.
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 $454 million at June 30, 1999, net of
related deferred taxes payable.
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. 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.
Page 38
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
<S> <C>
(Millions)
- -----------------------------------------------
Reserve at December 31, 1998 $ 1,214.1
Operating income 4.3
Net realized capital gains 18.3
Mortality and other 8.1
Reserve reduction (77.2)
---------
Reserve at June 30, 1999 $ 1,167.6
=========
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $50 million ($77 million pretax) of the reserve was released
in the second quarter of 1999 primarily due to favorable investment performance.
The current reserve reflects management's best estimate of anticipated future
losses.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
(Millions) June 30, 1999 December 31, 1998
- ---------- ------------------------- --------------------------
Class Amount Percent Amount Percent
- ----- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Debt Securities $ 5,104.2 79.8% $ 5,890.5 83.0%
Mortgage Loans 756.7 11.8 754.2 10.6
Real Estate 103.6 1.6 104.2 1.5
Equities 177.2 2.8 98.5 1.4
Short-term and other investments 254.8 4.0 252.2 3.5
--------- ----- --------- -----
Total $ 6,396.5 100.0% $ 7,099.6 100.0%
========= ===== ========= =====
</TABLE>
The investment portfolio declined in 1999 as assets were used to pay off
contractual liabilities.
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
(Millions) 1999 1998 1999 1998
- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Scheduled contract maturities, settlements
and benefit payments $356.2 $392.6 $ 666.7 $860.1
Participant directed withdrawals 4.3 6.5 8.6 12.9
--- --- --- ----
</TABLE>
Cash required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.
Refer to Note 9 of Condensed Notes to Consolidated Financial Statements and
"General Account Investments" for additional information.
Page 39
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------------
(Millions, after tax) 1999 1998 % Change 1999 1998 % Change
- --------------------- ---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Interest expense $40.1 $34.7 15.6% $80.7 $ 69.9 15.5%
===== ===== ====== ===== ====== ======
Other operating expenses, net $21.0 $29.7 (29.3)% $40.8 $ 57.6 (29.2)%
Net realized capital losses (gains) (1) 2.5 (70.2) - 2.5 (68.5) -
----- ----- ------ ----- ------ ------
Total other expense (income) $23.5 $(40.5) -% $43.3 $(10.9) -%
===== ===== ====== ===== ====== ======
</TABLE>
(1) After-tax net realized capital gains in 1998 include gains of $74.4
million during the three and six months ended June 30, 1998 related to the
sale of the Company's remaining investment in Travelers Property Casualty
Corporation.
The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other Operating Expenses"
include corporate expenses such as staff area expenses, advertising and
contributions, which are partially offset by net investment income.
The 1999 increase in interest expense primarily results from additional debt
incurred in connection with the NYLCare acquisition. Following the acquisition
of PHC, interest expense will increase due to the issuance of debt to fund the
acquisition.
Included in other operating expenses are Year 2000 costs of $1 million for the
three months ended June 30, 1999, $2 million for the same period in 1998, $2
million for the six months ended June 30, 1999 and $4 million for the same
period in 1998. Excluding Year 2000 costs, other operating expenses decreased
due to continued cost reduction initiatives, as well as system implementation
costs during the first six months of 1998 not present in 1999.
GENERAL ACCOUNT INVESTMENTS
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).
Total Investments
As Restated
----------------------------------
(Millions) June 30, 1999 December 31, 1998
- ---------- ------------- -----------------
Debt securities $ 29,826.8 $32,180.8
Equity securities 879.6 800.5
Short-term investments 803.8 942.2
Mortgage loans 3,440.1 3,553.0
Real estate 311.1 270.3
Policy loans 498.7 458.7
Other 1,391.7 1,300.3
---------- ---------
Total investments $ 37,151.8 $39,505.8
========== =========
Page 40
<PAGE> 41
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Debt Securities
Debt securities represented 80% of the Company's total general account invested
assets at June 30, 1999 and 81% at December 31, 1998. Debt securities were as
follows:
<TABLE>
<CAPTION>
(Millions) June 30, 1999 December 31, 1998
- ---------- ------------- -----------------
<S> <C> <C>
Supporting discontinued products $ 5,104.2 $ 5,890.5
Supporting experience-rated products 12,050.8 13,197.3
Supporting remaining products 12,671.8 13,093.0
-------- --------
Total debt securities (1) $29,826.8 $32,180.8
========= =========
</TABLE>
(1) Total debt securities include "Below Investment Grade" securities of $2.1
billion at June 30, 1999 and $2.0 billion at December 31, 1998 of which
43.6% at June 30, 1999 and 50.8% at December 31, 1998 supported
discontinued and experience-rated products. Refer to Aetna Inc.'s 1998
Annual Report on Form 10-K/A for a discussion of "Below Investment Grade"
securities.
Debt securities reflected net unrealized capital losses of $3.2 million at June
30, 1999 compared to net unrealized capital gains of $1.5 billion at December
31, 1998. Included in net unrealized capital losses at June 30, 1999 were
unrealized capital gains of $6.4 million related to assets supporting
discontinued products and unrealized capital losses of $34.8 million related to
assets supporting experience-rated contracts.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.8 billion at June 30, 1999 and $2.0 billion
at December 31, 1998. There are various categories of CMOs that are subject to
different degrees of risk from changes in interest rates and, for CMOs that are
not agency backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases in
interest rates resulting in the repayment of principal from the underlying
mortgages either earlier or later than originally anticipated. At June 30, 1999
and December 31, 1998, approximately 2% of the Company's CMO holdings were
invested in CMOs that are subject to more prepayment and extension risk than
traditional CMOs (such as interest- or principal-only strips).
Mortgage Loans
At June 30, 1999 and December 31, 1998, the Company's mortgage loan investments,
net of impairment reserves, were as follows:
<TABLE>
<CAPTION>
(Millions)
June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
Supporting discontinued products $ 756.7 $ 754.2
Supporting experience-rated products 1,111.8 1,183.3
Supporting remaining products 1,571.6 1,615.5
------- -------
Total mortgage loan investments $3,440.1 $3,553.0
======== ========
</TABLE>
During the first six months of 1999, the Company managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. At June 30, 1999 and December 31,
1998, the mortgage loan portfolio balance represented 9% of the Company's total
general account invested assets.
Problem, restructured, and potential problem loans included in mortgage loans
were $293 million at June 30, 1999 and $301 million at December 31, 1998 of
which 86% at June 30, 1999 and December 31, 1998 supported discontinued and
experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form
10-K/A for a discussion of problem, restructured and potential problem loans.
Specific impairment reserves on these loans were $44 million at June 30, 1999
and $48 million at December 31, 1998. (Refer to Note 6 of Condensed Notes to
Consolidated Financial Statements).
Page 41
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. The Company's use of derivatives
is generally limited to hedging purposes and has principally consisted of using
interest rate swap agreements, futures contracts, warrants, foreign exchange
forward contracts, currency swap agreements and written options to hedge certain
market risks such as interest rate, equity price and foreign exchange risk.
The Company regularly evaluates market risk sensitive instruments by examining,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term) duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.
Management also reviews, on a quarterly basis, hypothetical net losses in the
Company's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes.
Based on the Company's overall exposure to interest rate, equity price and
foreign exchange risks, the Company believes that these hypothetical changes in
market rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company as of
June 30, 1999. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K/A for a
more complete discussion of "Risk Management and Market Sensitive Instruments".
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses. In addition, the Company uses cash to invest
in core businesses, make acquisitions, repurchase common stock and pay
shareholder dividends.
During the first six months of 1999, the Company used net cash generated from
investing, financing and operating activities to make approximately $192 million
of investments in core businesses and acquisitions, pay approximately $72
million for common stock repurchases and pay approximately $84 million of
dividends to shareholders.
During the corresponding period of 1998, the Company used net cash generated
from investing, financing and operating activities to make approximately $8
million of investments in core businesses and acquisitions, pay approximately
$151 million for common stock repurchases and pay approximately $86 million of
dividends to shareholders. Refer to the "Consolidated Statements of Cash Flows"
for additional information.
Dividends
On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Holders of the Preferred Stock
received .8197 shares of Aetna common stock for each share of Preferred Stock
that was redeemed. Approximately 9.5 million shares of Aetna common stock were
issued to effect the redemption. The Company expects the redemption of the
Preferred Stock to result in approximately $48 million of annual cash dividend
savings. Refer to Note 5 of Condensed Notes to Consolidated Financial Statements
for further information.
Page 42
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On May 25, 1999, the Company's Board of Directors also declared a cash dividend
of $.84583 per share of 6.25% Class C Voting Mandatorily Convertible Preferred
Stock to shareholders of record at the close of business on July 8, 1999,
payable July 19, 1999. On June 24, 1999, the Company's Board of Directors
declared a quarterly dividend of $.20 per share of common stock to shareholders
of record at the close of business on July 30, 1999, payable August 15, 1999.
Financings and Financing Capacity
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services and are fully and unconditionally guaranteed by Aetna
Inc. Refer to Note 10 of Condensed Notes to Consolidated Financial Statements
for additional information.
The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between receipts and disbursements. The maximum amount of domestic
short-term borrowings outstanding was $1.1 billion during the first six months
of 1999 and $.7 billion during the first six months of 1998.
The Company funded the acquisition of NYLCare with funds made available from
issuing commercial paper. The Company issued $300 million of debt in the fourth
quarter of 1998 and expects to issue additional medium- or long-term fixed
income securities in 1999, subject to market conditions, to replace some of this
commercial paper.
The acquisition of PHC, which is anticipated to be completed in the third
quarter of 1999, is currently expected to be financed by issuing $500 million of
three-year senior notes to Prudential and issuing additional commercial paper
for the remainder of the purchase price (approximately $500 million). The
Company expects to issue medium- or long-term fixed income securities in 1999,
subject to market conditions, to replace some of this commercial paper.
Common Stock Transactions
In January 1999, the Board authorized the repurchase of 5.0 million shares of
common stock. As of June 30, 1999, 880,000 shares of common stock had been
repurchased under this authorization at a cost of $72 million.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangible assets were $9.2 billion at June 30,
1999, or approximately 82% of consolidated shareholders' equity. The
amortization of goodwill and other acquired intangible assets was $213 million
for the six months ended June 30, 1999, or approximately 33% 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 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 changes in the useful lives of goodwill or
other acquired intangible assets, as estimated by management, could have a
material adverse affect on results of operations and financial condition.
Page 43
<PAGE> 44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
NEW ACCOUNTING STANDARDS
Refer to Note 1 of Condensed Notes to Consolidated Financial Statements for a
discussion of recently issued accounting standards.
YEAR 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors, as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.
State of Readiness
In 1997, the Company organized a multidisciplinary Year 2000 Project Team,
including outside consultants. The Year 2000 Project Team and the Company's
businesses have developed and are currently executing a comprehensive plan
designed to make the Company's mission-critical IT systems and embedded systems
Year 2000 ready. Outside consultants have reviewed the Company's overall
process, plan and progress to date. The Company's plan for IT systems consists
of several phases: (i) inventory -- identifying all IT systems and risk rating
each according to its potential business impact; (ii) assessment -- identifying
IT systems that use date functions and assessing them for Year 2000
functionality; (iii) remediation -- reprogramming, or replacing where necessary,
inventoried items to make them Year 2000 ready; and (iv) testing and
certification -- testing the code modifications and new inventory with other
associated systems, including extensive date testing, and performing quality
assurance testing to determine if they will successfully operate in the
post-1999 environment.
The Company completed the inventory and assessment phases for substantially all
of its IT systems by year-end 1997. The Company completed the remediation,
testing and certification of substantially all of its IT systems by June 30,
1999. The Company expects to complete the remainder of its remediation, testing
and certification by September 30, 1999.
The Company has inventoried and risk rated substantially all of its embedded
systems. The results of these processes indicate that embedded systems should
not present a material Year 2000 risk to the Company. The Company's remaining
steps include testing selected embedded systems and remediating and certifying
systems that exhibit Year 2000 issues. The Company is focusing its testing and
remediation efforts on select embedded systems of its mission-critical
facilities, such as data centers, service centers, communications centers and
select office locations. The Company plans to complete the testing of these
systems by September 30, 1999, and the remediation and certification of these
systems by year-end 1999.
The Company believes that its Year 2000 project is on schedule.
Page 44
<PAGE> 45
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000 (CONTINUED)
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. In the case of mission-critical suppliers, such as
banks, financial intermediaries, telecommunications providers and other
utilities, mutual fund companies, IT vendors, financial market data providers,
national pharmacy chains, electronic claims clearinghouses, major physician
groups and major hospitals, the Company is engaged in discussions with the third
parties and is attempting to obtain detailed information as to those parties'
Year 2000 plans and state of readiness. A significant portion of the Company's
critical external relationships have informed the Company that they are not
aware of any Year 2000 related reason that they will not be able to perform
their obligations to the Company in all material respects.
Year 2000 Costs
Total Year 2000 project costs are currently estimated to be at least $85 million
(after tax) in 1999. A large majority of these costs are expected to be
incremental expenses that will not recur in 2000 or thereafter. Year 2000 costs
were $32 million (after tax) for the three months ended June 30, 1999 and $25
million (after tax) for the corresponding period in 1998. Year 2000 costs were
$59 million for the six months ended June 30, 1999 and $41 million for the
corresponding period in 1998. The Company expects that Year 2000 costs in 2000
will be immaterial. The Company expenses these costs as incurred and funds these
costs through operating cash flows.
Year 2000 readiness is critical to the Company. The Company has redeployed some
resources from noncritical system enhancements to address Year 2000 issues. Due
to the importance of IT systems to the Company's business, management has not
deferred mission-critical systems enhancements to become Year 2000 ready. The
Company does not expect these redeployments to have a material impact on the
Company's financial condition or results of operations.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process benefits claims; update customers' accounts; process financial
transactions; bill customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others; as well as business interruptions or shutdowns; financial
losses; reputational harm; increased scrutiny by regulators; and litigation
related to Year 2000 issues. The Company's international affiliates face
additional Year 2000 risk due to the diverse environments in which they operate.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues at the Company or its external
relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
Page 45
<PAGE> 46
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
YEAR 2000 (CONTINUED)
The Company is developing contingency/recovery plans aimed at sustaining the
continuity of critical business functions before and after December 31, 1999. As
part of its contingency planning process, the Company has identified reasonably
possible Year 2000 failure scenarios and is developing contingency plans for
those failure scenarios it believes could have a significant impact on the
Company's operations. These scenarios include, but are not limited to,
limitations on providers', suppliers' and customers' ability to interact
electronically with the Company, Year 2000 related failures at key external
relationships, limitations on the Company's suppliers' or customers' ability to
move funds electronically, failures in pricing securities and increased call
volumes. The Company's planned responses to these scenarios include, but are not
limited to, use of alternative suppliers, use of outside providers to supplement
internal capabilities and reallocation of existing resources.
The Company has completed its high level contingency plans and is continuing to
review and refine the detailed plans it has developed. The Company expects
contingency/recovery planning to be substantially complete by September 1999.
FORWARD-LOOKING INFORMATION/RISK FACTORS
Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual
Report on Form 10-K/A for factors that could cause actual Year 2000 results to
differ from the Company's expectations. The "Forward-Looking Information/Risk
Factors" and "Regulatory Environment" portions of that Annual Report also
contain a general discussion of other important risks related to the Company's
businesses.
As described in the Annual Report, additional legislation or regulation related
to managed care has been enacted or is being considered by the federal
government and many states and this could adversely impact our business.
Recently, these matters have included legislation exempting physicians from the
antitrust laws that prohibit price fixing, group boycotts, and other horizontal
restraints on competition. It is uncertain whether we can recoup, through higher
premiums or other measures, any increased costs caused by this type of
legislation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Refer to the information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - General Account Investments".
Page 46
<PAGE> 47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to
the United States District Court for the Eastern District of Pennsylvania (the
"Court") for consolidated pretrial proceedings with the cases pending there. The
plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking,
among other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint, and the Court
denied that motion in March, 1999. Discovery proceedings have commenced and
trial currently is scheduled to begin in early 2000. The Company is defending
the actions vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medical bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph are
not expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.
Page 47
<PAGE> 48
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders, held April 30, 1999, five matters were
submitted to a vote: the election of directors for the coming year; the
ratification of the appointment of KPMG LLP as independent public accountants
for the current calendar year; a proposal to implement cumulative voting in the
election of directors; a proposal to link executive compensation to health care
quality; and a proposal relating to the endorsement of the Coalition for
Environmentally Responsible Economies "CERES" principles. The results of the
voting on these matters follow:
Election of Directors:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
----------- ---------
<S> <C> <C>
Leonard Abramson 125,698,277 1,691,910
Betzy Z. Cohen 125,950,932 1,439,255
William H. Donaldson 125,989,009 1,401,178
Barbara Hackman Franklin 126,010,826 1,379,361
Jerome S. Goodman 125,957,029 1,433,158
Earl G. Graves 125,979,819 1,410,368
Gerald Greenwald 126,044,330 1,345,857
Ellen M. Hancock 126,061,871 1,328,316
Richard L. Huber 125,931,935 1,458,252
Michael H. Jordan 126,045,347 1,344,840
Jack D. Kuehler 126,043,415 1,346,772
Frank R. O'Keefe, Jr. 126,017,167 1,373,020
Judith Rodin 125,986,690 1,403,497
</TABLE>
Other matters voted upon:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-Votes
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Ratification of Independent
Public Accountants 126,685,487 326,796 377,904 --
Proposal to Implement Cumulative Voting
in Election of Directors 33,959,421 76,601,452 3,053,406 13,775,908
Proposal to Link Executive Compensation
to Health
Care Quality 4,929,406 104,354,449 4,330,424 13,775,908
Proposal Relating to Endorsement of the
CERES Principles 9,437,578 97,645,955 6,530,746 13,775,908
</TABLE>
Page 48
<PAGE> 49
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratio of
earnings to fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
As Restated
Six Months Ended
June 30, Years Ended December 31,
------------------- ------------------------------------------------
Aetna Inc. 1999 1998 1998 1997 1996 1995 1994
- ---------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.44 5.13 4.96 5.74 2.45 4.97 4.74
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.58 4.02 3.94 4.46 2.10 4.97 4.74
------------------- ------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
---------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Aetna Services, Inc. 1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges 3.57 4.89 4.31 5.78 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.57 4.89 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 16 of Notes to Consolidated Financial Statements in Aetna Inc.'s 1998
Annual Report on Form 10-K/A.) During 1995 and 1994 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined fixed charges
and preferred stock dividends were the same as the ratios of earnings to fixed
charges.
(b) Ratings
The ratings of certain Aetna Inc. subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
----------------------------------------------------
Moody's
Duff & Investors Standard
A.M. Best Phelps Service & Poor's
--------- ------ --------- --------
<S> <C> <C> <C> <C>
Aetna Services, Inc. (senior debt)**
April 27, 1999 * A A3 A
July 28, 1999 (1) * A A3 A
Aetna Services, Inc. (commercial paper)**
April 27, 1999 * D-1 P-2 A-1
July 28, 1999 (1) * D-1 P-2 A-1
Aetna Life Insurance Company (claims paying/financial strength)
April 27, 1999 A AA- A1 A+
July 28, 1999 (1) A AA- A1 A+
Aetna Life Insurance and Annuity Company
(claims paying/financial strength)
April 27, 1999 A AA Aa3 AA-
July 28, 1999 (1) A AA Aa3 AA-
--------- ------ --------- --------
</TABLE>
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
(1) Moody's Investors Service and Standard & Poor's have the debt and financial
strength ratings on outlook negative.
Page 49
<PAGE> 50
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
10.1 The Aetna Services, Inc. Supplemental Pension Benefit Plan
Amended and Restated as of January 1, 1999, incorporated
herein by reference to the Company's Form 10-Q filed on
July 29, 1999.*
10.2 The Aetna Services, Inc. Supplemental Incentive Savings
Plan Amended and Restated as of January 1, 1999,
incorporated herein by reference to the Company's Form 10-Q
filed on July 29, 1999.*
10.3 Pension Credit Agreement, dated as of September 26, 1997,
by and between the Company and Frederick C. Copeland, Jr.,
incorporated herein by reference to the Company's Form 10-Q
filed on July 29, 1999.*
10.4 Employment Agreement, dated as of April 6, 1999, by and
between the Company and Thomas J. McInerney, incorporated
herein by reference to the Company's Form 10-Q filed on
July 29, 1999.*
10.5 Employment Agreement, dated as of May 4, 1999, by and
between the Company and Frederick C. Copeland, Jr.,
incorporated herein by reference to the Company's Form 10-Q
filed on July 29, 1999.*
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30,
1999 and for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 for Aetna Inc. and for the six months ended
June 30, 1999 and for the years ended December 31, 1998,
1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of
a report on unaudited interim financial information, dated
July 28, 1999.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
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 February 15, 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
====================================================
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30,
1999 and for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 for Aetna Inc. and for the six months ended
June 30, 1999 and for the years ended December 31, 1998,
1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of
a report on unaudited interim financial information, dated
July 28, 1999.
(27) Financial Data Schedule.
Page 52
<PAGE> 1
Exhibit 12
AETNA INC.
RESTATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
------------------- ----------------------------------------------------------
(Millions) 1999 1998 1998 1997 1996 1995 1994
- ---------- ------- ------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $ 641.6 $ 682.0 $ 1,408.3 $ 1,511.2 $ 338.7 $ 726.2 $ 627.5
Add back fixed charges 189.4 165.4 358.5 321.9 245.1 187.0 170.8
Minority interest 10.6 0.9 10.7 14.7 16.4 16.1 11.4
------- ------- --------- --------- ------- ------- -------
Income as adjusted $ 841.6 $ 848.3 $ 1,777.5 $ 1,847.8 $ 600.2 $ 929.3 $ 809.7
======= ======= ========= ========= ======= ======= =======
Fixed charges:
Interest on indebtedness (1) $ 128.7 $ 113.4 $ 250.9 $ 235.8 $ 168.3 $ 115.9 $ 98.6
Portion of rents representative
of interest factor 60.7 52.0 107.6 86.1 76.8 71.1 72.2
------- ------- --------- --------- ------- ------- -------
Total fixed charges $ 189.4 $ 165.4 $ 358.5 $ 321.9 $ 245.1 $ 187.0 $ 170.8
======= ======= ========= ========= ======= ======= =======
Preferred stock dividend
requirements 45.7 45.7 92.2 92.4 41.1 - -
------- ------- --------- --------- ------- ------- -------
Total combined fixed charges
and preferred stock dividend
requirements $ 235.1 $ 211.1 $ 450.7 $ 414.3 $ 286.2 $ 187.0 $ 170.8
======= ======= ========= ========= ======= ======= =======
Ratio of earnings to fixed
charges 4.44 5.13 4.96 5.74 2.45 4.97 4.74
======= ======= ========= ========= ======= ======= =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.58 4.02 3.94 4.46 2.10 4.97 4.74
======= ======= ========= ========= ======= ======= =======
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(Refer to Note 16 of Notes to Consolidated Financial Statements in the
Company's 1998 Form 10-K/A.)
Page 1
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
----------------------- ----------------------------------------
(Millions) 1999 1998 1998 1997 1996
- ---------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Pretax income from continuing operations $ 473.0 $ 635.1 $ 1,162.7 $ 1,505.2 $ 335.0
Add back fixed charges 187.9 163.3 354.3 318.1 243.8
Minority interest 9.7 .4 10.8 15.7 16.4
------- ------- --------- --------- -------
Income as adjusted $ 670.6 $ 798.8 $ 1,527.8 $ 1,839.0 $ 595.2
======= ======= ======= ======= =======
Fixed charges:
Interest on indebtedness (2) $ 128.7 $ 113.4 $ 250.9 $ 234.0 $ 168.3
Portion of rents representative
of interest factor 59.2 49.9 103.4 84.1 75.5
------- ------- --------- --------- -------
Total fixed charges $ 187.9 $ 163.3 $ 354.3 $ 318.1 $ 243.8
======= ======= ======= ======= =======
Preferred stock dividend requirements - - - - -
------- ------- --------- --------- -------
Total combined fixed charges and preferred
stock dividend requirements $ 187.9 $ 163.3 $ 354.3 $ 318.1 $ 243.8
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.57 4.89 4.31 5.78 2.44
======= ======= ======= ======= =======
Ratio of earnings to combined fixed charges
and preferred stock dividends 3.57 4.89 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 15 of Notes to
Financial Statements in the Company's 1998 Form 10-K/A.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(Refer to Note 16 of Notes to Consolidated Financial Statements in the
Company's 1998 Form 10-K/A.)
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 July 28, 1999 and February 7, 2000 as to Note 2, 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
February 15, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q/A FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND 1998 FOR AETNA INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<DEBT-HELD-FOR-SALE> 29,827 33,951
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 880 892
<MORTGAGE> 3,440 3,702
<REAL-ESTATE> 311 291
<TOTAL-INVEST> 37,152 41,427
<CASH> 2,086 2,031
<RECOVER-REINSURE> 4,006 0
<DEFERRED-ACQUISITION> 1,976 2,451
<TOTAL-ASSETS> 107,661 101,957
<POLICY-LOSSES> 18,717 18,283
<UNEARNED-PREMIUMS> 218 182
<POLICY-OTHER> 3,889 3,354
<POLICY-HOLDER-FUNDS> 16,610 17,961
<NOTES-PAYABLE> 3,355 2,432
862 862
0 0
<COMMON> 3,263 3,523
<OTHER-SE> 7,132 6,956
<TOTAL-LIABILITY-AND-EQUITY> 107,661 101,957
8,962 6,518
<INVESTMENT-INCOME> 1,466 1,636
<INVESTMENT-GAINS> 27 204
<OTHER-INCOME> 1,174 1,087
<BENEFITS> 8,423 6,554
<UNDERWRITING-AMORTIZATION> 102 115
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 642 682
<INCOME-TAX> 255 268
<INCOME-CONTINUING> 387 414
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 387 414
<EPS-BASIC> 2.55 2.66
<EPS-DILUTED> 2.53 2.62
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
