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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended DECEMBER 31, 1999
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.)
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151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156 (860) 273-0123
(Address of principal executive offices) (ZIP Code) (Registrant's telephone number, including area code)
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Title of each class Name of each exchange on which registered
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Common Stock $.01 par value New York Stock Exchange
6 3/8% Notes due August 15, 2003 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non affiliates of the
registrant as of January 31, 2000 was $7,467,027,791.
As of January 31, 2000, 141,289,941 shares of the registrant's Common Stock $.01
par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1999 Annual Report to Shareholders (the "Annual
Report"). (Parts I, II and IV)
Portions of the registrant's proxy statement to be filed on or about March 20,
2000 (the "Proxy Statement"). (Parts III and IV)
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business.
A. Organization of Business. 3
B. Financial Information about Industry Segments. 4
C. Description of the Business.
1. Aetna U.S. Healthcare. 4
2. Aetna Financial Services. 13
3. Aetna International. 16
4. Large Case Pensions. 18
5. Total Investments. 19
6. Other Matters.
a. Regulation. 20
b. NAIC IRIS Ratios. 22
c. Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends. 23
d. Trademarks. 23
e. Ratings. 24
f. Miscellaneous. 24
Item 2. Properties. 25
Item 3. Legal Proceedings. 25
Item 4. Submission of Matters to a Vote of Security Holders. 28
Executive Officers of Aetna Inc. 28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 29
Item 6. Selected Financial Data. 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 29
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 29
Item 8. Financial Statements and Supplementary Data. 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 30
PART III
Item 10. Directors and Executive Officers of the Registrant. 30
Item 11. Executive Compensation. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management. 30
Item 13. Certain Relationships and Related Transactions. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 30
Index to Financial Statement Schedules. 37
Signatures. 50
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PART I
Item 1. Business.
A. Organization of Business
Aetna Inc. and its subsidiaries (collectively, the "Company") constitute one of
the nation's largest health benefits companies, based on membership, and one of
the nation's largest insurance and financial services organizations. Aetna Inc.,
a Connecticut corporation, is the parent corporation of Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. The Company acquired New York
Life Insurance Company's NYLCare health business ("NYLCare") on July 15, 1998,
and the Company sold its domestic individual life insurance business on October
1, 1998. On August 6, 1999, the Company acquired The Prudential Insurance
Company of America's ("Prudential's") health care business ("PHC"), and on
October 1, 1999, completed the sale of its Canadian operations. The Company also
acquired several international operations in 1999.
At December 31, 1999, the Company's business operations were conducted in the
following segments: Aetna U.S. Healthcare, Aetna Financial Services (formerly
Aetna Retirement Services), Aetna International and Large Case Pensions. The
principal products included in these segments are:
Aetna U.S. Healthcare:
Health products (including health maintenance organization,
point-of-service, preferred provider organization and indemnity products)
Group life and disability insurance
Long-term care insurance
Aetna Financial Services:
Financial services products (including fixed and variable annuity
contracts, investment advisory services, financial planning services and
pension plan administrative services)
Aetna International:
Primarily life insurance, health insurance and financial services products
Large Case Pensions:
Retirement products (including pension and annuity products) primarily for
defined benefit and defined contribution plans
In addition, the Corporate segment includes interest expense and corporate
expenses not directly related to the Company's business segments, such as staff
area expenses, national advertising and charitable contributions.
Business Realignment
In January 2000, the Company announced a realignment of the Company's
health care, financial services and international businesses, a structure
intended to strengthen the linkage between the international and domestic
businesses and increase the sharing of technology and product expertise. Under
this new structure, Global Health will be made up of the following: Aetna U.S.
Healthcare (except its Group Life and Disability Insurance business) and Aetna
International's health businesses. Global Financial Services will be made up of
the following: Aetna Financial Services, Aetna International's life and pension
businesses, Aetna U.S. Healthcare's group life and disability insurance business
and the Large Case Pension business. This realignment will result in the
formation of new reportable segments in 2000.
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B. Financial Information about Industry Segments
Required financial information by industry segment is set forth in Note 17 of
Notes to Consolidated Financial Statements, which is incorporated herein by
reference to the Annual Report. Revenue and income from continuing operations
attributable to each industry segment are incorporated herein by reference to
the Selected Financial Data in the Annual Report.
Certain reclassifications have been made to the 1998 and 1997 financial
information to conform to the 1999 presentation.
C. Description of Industry Segments
1. Aetna U.S. Healthcare
Products and Services
Aetna U.S. Healthcare provides a full spectrum of health products (managed care
and indemnity) and group insurance products (life, disability and long-term
care) on both an insured and an employer-funded basis. Under insured plans, the
Company assumes all or a majority of health care cost, utilization, mortality,
morbidity or other risk depending on the product. Under employer-funded plans,
the plan sponsor, and not the Company, assumes all or a majority of these risks.
Aetna U.S. Healthcare consists of the Health Risk and PHC business and the Group
Insurance and Other Health business.
The Health Risk and PHC business includes health plans offered on an insured
basis and the results of servicing Prudential's administrative services only
business.
The Group Insurance and Other Health business includes group life and disability
insurance, long-term care insurance and dental products, offered on both an
insured and employer-funded basis, and all health plans offered on an
employer-funded basis.
The following table summarizes premiums and fees and other income for the Health
Risk and PHC and Group Insurance and Other Health businesses:
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(Millions) 1999 (1) 1998 (2) 1997
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Health Risk and PHC $ 17,467.2 $ 11,780.8 $ 9,735.0
Group Insurance and Other Health 2,812.7 2,666.5 2,573.5
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Total Aetna U.S. Healthcare $ 20,279.9 $ 14,447.3 $ 12,308.5
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(1) Includes results of PHC since August 6, 1999.
(2) Includes results of NYLCare since July 15, 1998.
Under insured plans, Aetna U.S. Healthcare charges a premium and under
employer-funded plans, Aetna U.S. Healthcare charges a fee for administrative
and claim services.
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The principal Commercial health products offered by Aetna U.S. Healthcare are:
Health Maintenance Organization ("HMO") plans offer comprehensive managed care
benefits generally through participating network physicians, hospitals and other
providers. When an individual enrolls in one of the Company's HMOs, he or she
selects a primary care physician ("PCP") from among the physicians participating
in the Aetna U.S. Healthcare network. PCPs generally are family practitioners,
internists, general practitioners or pediatricians who provide necessary
preventive and primary medical care, and are generally responsible for
coordinating other necessary health care, including making referrals to
participating network specialists. Preventive care and quality improvement are
emphasized in these plans. The Company offers HMO plans with varying levels of
copayments which result in different levels of premium rates. HMO plans are
principally offered on an insured basis. Commercial HMO membership totaled 7.1
million as of December 31, 1999 (including 3.0 million PHC members), 4.4 million
as of December 31, 1998 and 3.3 million as of December 31, 1997.
Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity
plans. Members can have comprehensive HMO-style benefits through network
providers with minimum out-of-pocket expense (copayments) and also can go
directly, without a referral, to any provider they choose, subject to, among
other things, certain deductibles and coinsurance, with member cost sharing
limited by out-of-pocket maximums. POS plans are offered on both an insured and
employer-funded basis. Commercial POS membership totaled 6.2 million as of
December 31, 1999 (including 1.2 million PHC members), 4.1 million as of
December 31, 1998 and 3.7 million as of December 31, 1997.
Preferred Provider Organization ("PPO") plans offer the member the ability to
select any health care provider, with benefits paid at a higher level when care
is received from a network provider. Coverage is subject to deductibles and
coinsurance, with member cost sharing limited by out-of-pocket maximums. PPO
plans are offered on both an insured and employer-funded basis. PPO membership
totaled 4.0 million as of December 31, 1999 (including .1 million PHC members),
and December 31, 1998 and 3.6 million as of December 31, 1997.
Indemnity plans offer the member the ability to select any health care provider
for covered services. Some managed care and medical cost containment features
may be included in these plans, such as inpatient precertification, limiting
payments to reasonable and customary charges and benefits for preventive
services. Coverage is subject to deductibles and coinsurance, with member cost
sharing limited by out-of-pocket maximums. Indemnity plans are offered on both
an insured and employer-funded basis. Indemnity membership totaled 2.8 million
as of December 31, 1999 (including .6 million PHC members), 2.5 million as of
December 31, 1998 and 2.6 million as of December 31, 1997.
In addition to Commercial health products, the Company also offers coverage for
Medicare beneficiaries and individuals eligible for Medicaid benefits and
subsidized children's health insurance programs. Such coverages include the
following:
Through annual contracts with the Health Care Financing Administration ("HCFA"),
Aetna U.S. Healthcare HMOs offer coverage for Medicare-eligible individuals in
certain geographic areas. Generally, services must be obtained through network
providers, with the exception of emergency and urgent care. Members generally
receive enhanced benefits over standard Medicare fee-for-service coverage,
including vision, hearing and pharmacy coverage. Such Medicare plans are offered
on an insured basis. Medicare membership totaled .7 million as of December 31,
1999 (including .1 million PHC members), .5 million as of December 31, 1998 and
.4 million as of December 31, 1997.
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The Company exited certain unprofitable Medicare markets effective January 1,
1999, and certain additional unprofitable Medicare markets were exited on
January 1, 2000. The Company continues to review the profitability of its
Medicare business in certain markets.
In the past the Company also served as an administrator of Medicare benefits in
certain states, providing claim services for physicians, hospitals, skilled
nursing facilities and home health agencies in exchange for a fee. The contract
with HCFA to provide these services expired on September 30, 1997.
The Company has contracts with certain state and local agencies to offer
coverage for individuals eligible for Medicaid and subsidized children's health
insurance programs. Benefits are determined by the contracting agencies. This
coverage is offered on an insured basis. This coverage membership totaled .2
million as of December 31, 1999, and .1 million as of December 31, 1998 and
1997.
Aetna U.S. Healthcare offers a variety of specialty health care coverages
offered as either supplements to health products or as stand-alone products.
Such coverages include indemnity and managed dental plans and prescription drug
and vision programs. These specialty health coverages and services are included
in either Health Risk and PHC or Group Insurance and Other Health business, with
the exception of behavioral health (including employee assistance programs) and
network-based workers' compensation case management services, which are included
in Group Insurance and Other Health.
During 1997, the Company sold certain subsidiaries primarily to more effectively
focus its health business resources. On December 5, 1997, the Company sold Human
Affairs International ("HAI"), a behavioral health management business. Aetna
U.S. Healthcare continues to market HAI's behavioral health services, including
employee assistance programs, through a long-term arrangement with the acquiring
company. During 1997, the Company also sold Healthcare Data Interchange
Corporation ("HDIC"), a provider of health care electronic data interchange
services, and Aetna Professional Management Corporation ("APMC"), a physician
practice management business.
Aetna U.S. Healthcare Group Insurance and Other Health products consist
primarily of the following:
Group Life Insurance consists principally of renewable term coverage, the
amounts of which may be fixed or linked to individual employee wage levels.
Basic and supplemental term coverage and spouse and dependent coverages are
available. Group universal life and accidental death benefit coverages are also
available. Group life insurance is offered on an insured basis. Group life
insurance membership totaled 9.4 million as of December 31, 1999 and 9.8 million
as of December 31, 1998 and 1997.
Group Disability Insurance provides coverage for disabled employees' income
replacement benefits for both short-term disability and long-term disability.
The Company also offers a managed disability product with additional case
management features. Group disability insurance coverages are offered on both an
insured and employer-funded basis. Group disability membership totaled 2.3
million as of December 31, 1999 and 2.6 million as of December 31, 1998 and
1997.
Long-Term Care Insurance provides coverage for long-term care expenses in a
nursing home, adult day care or home setting. Long-term care insurance is
offered on an insured basis. Long-term care membership totaled .1 million as of
December 31, 1999, 1998 and 1997.
Many group insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.
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Provider Networks
General
Aetna U.S. Healthcare provides members of its managed care plans with access to
health care services through networks of independent health care providers. The
Company contracts with providers to participate in its provider networks in
order to provide members with broad access to high quality, cost effective
medical care. The providers in the Company's networks are independent
contractors and are neither employees nor agents of the Company.
The HMOs operated by Aetna U.S. Healthcare most closely adhere to the individual
practice model. Under the individual practice model, the HMO contracts with
independent physicians who are broadly dispersed throughout a community and who
care for patients in their own offices. Participating physicians generally also
have patients who are not members of the Company's HMOs. In the Company's HMOs,
the primary care physician plays an important role in practicing preventive
medicine and acts on behalf of the HMO member to coordinate the care provided by
specialist physicians, hospitals, and other health care providers.
Aetna U.S. Healthcare uses a variety of practices to help contain the rate of
increase in the cost of medical services. In addition to contracts with health
care providers, such procedures include the development and implementation of
standards for the appropriate utilization of health care resources and working
with health care providers to review data in order to help them improve
consistency and quality.
At December 31, 1999, Aetna U.S. Healthcare had approximately 429,000 providers
in its networks nationwide.
Contracting
Primary Care Physicians
Compensation by the Company's HMOs to directly contracted PCPs is principally on
a capitated basis, although fee-for-service contracts also exist. Under a
capitation arrangement, physicians receive a monthly fixed fee for each HMO
member, regardless of the medical services provided to the member. In some
instances, the capitation rate is subject to adjustment based on the attainment
of certain criteria including comprehensiveness of care, quality of care and
utilization. This quality-based incentive program is administered via the
Company's Quality Care Compensation System. In a fee-for-service arrangement,
network physicians are paid for health care services provided to the member
based upon a fee schedule.
Hospitals
The Company typically enters into contracts that provide for all-inclusive per
diem and per case, with fixed rates for ambulatory surgery and emergency room
services. Certain contracted hospitals' final compensation is based upon
attainment of agreed-upon quality and other measures. The Company has some
hospital contracts that pay a percentage of billed charges.
Aetna U.S. Healthcare HMOs generally require precertification of elective
admissions and monitoring of the length of hospital stays. Participating
physicians generally admit their HMO patients to participating hospitals using
referral procedures that direct the hospital to contact the Company's patient
management unit, which confirms the patient's membership status while obtaining
pertinent data. This unit also coordinates related activities, including the
subsequent transition to the home environment and home care, if necessary. Case
management assistance for complex or "catastrophic" cases is provided by a
special case unit.
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Specialist and Ancillary Services
Specialist physicians participating in the Company's networks are generally
reimbursed at contracted rates per visit or procedure.
Aetna U.S. Healthcare's HMOs have capitated payment arrangements for most mental
health, substance abuse, laboratory, radiology, diagnostic imaging, podiatric
and physical therapy services.
Integrated Delivery Systems
Aetna U.S. Healthcare has developed contractual relationships with integrated
delivery systems ("IDS") to provide comprehensive medical and hospital services.
Under these arrangements, the Company's HMOs contract with an IDS for a fixed,
per member fee or a percentage of premium. These arrangements cover most or all
of the care required by the member which is generally delivered by the IDS and
its affiliated PCPs, hospitals and specialists.
Quality Assessment
Quality assessment programs begin with the initial selection of providers.
Physicians wanting to participate in the Company's HMO networks must satisfy an
extensive set of criteria, including licensing, hospital admission privileges,
demonstrated proficiency, written references, patient access, office standards,
after-hours coverage and many other factors. Hospitals also have an extensive
set of criteria, including HCFA and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") accreditation.
Participating physicians are recredentialed regularly. Recredentialing of PCPs
covers many aspects of patient care including an analysis of member grievances
filed with the Company, the transfer and termination rate of members from the
practice, on-site interviews, analysis of utilization patterns, extensive member
surveys and analysis of drug prescription patterns. Committees, each composed of
a peer group of participating private physicians, review participating PCPs
being considered for recredentialing.
The Company also offers quality and outcome measurement and improvement
programs, and health care data analysis systems for providers and purchasers of
health care.
The Company seeks accreditation for certain of its HMO plans from the National
Committee for Quality Assurance ("NCQA"), a national organization established to
review the quality and medical management systems of HMOs and other managed care
plans. Accreditation by NCQA is a nationally recognized standard. As of December
31, 1999, 16 of the Company's HMOs have received full 3 year accreditation by
the NCQA.
Principal Markets and Sales
Total Commercial, Medicare and Medicaid HMO, POS, PPO and Indemnity membership
("health membership") is widely dispersed throughout the United States. The
Company offers a wide array of benefit plans, many of which are available in all
50 states.
Products offered by the Group Insurance and Other Health business are available
in all 50 states. Depending on the product, the Company markets to small groups
up to National Accounts (i.e., those with at least 3,000 eligible lives).
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The following table presents total health membership by region and funding
arrangement, for the years indicated:
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1999 (1) 1998 (2) 1997
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(Thousands) Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast 1,535 858 2,393 1,347 708 2,055 1,089 735 1,824
Mid-Atlantic 2,140 1,462 3,602 1,759 1,268 3,027 1,864 1,159 3,023
Capitol 900 1,107 2,007 791 984 1,775 315 950 1,265
Southeast 1,518 1,263 2,781 613 1,009 1,622 509 1,045 1,554
Mid-West 1,091 1,995 3,086 710 1,817 2,527 497 1,814 2,311
West Central 711 998 1,709 208 785 993 146 1,046 1,192
Southwest 1,785 1,286 3,071 997 910 1,907 266 860 1,126
Pacific Coast 1,359 1,047 2,406 878 881 1,759 649 790 1,439
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Total Health
Membership 11,039 10,016 21,055 7,303 8,362 15,665 5,335 8,399 13,734
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(1) Includes 5,093 PHC health members of which 1,688 represent Administrative
Services Only members that Aetna U.S. Healthcare has agreed to service for
Prudential.
(2) Includes 1,975 NYLCare members.
For membership composition of Aetna U.S. Healthcare's products by funding
arrangement, refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") - Aetna U.S. Healthcare -
Membership in the Annual Report.
For both Health Risk and PHC and Group Insurance and Other Health businesses,
products and services are marketed primarily to employers for the benefit of
employees and their dependents. Frequently, employers offer employees a choice
of coverages, from which the employee makes his or her selection during a
designated annual open enrollment period. In some instances, Aetna U.S.
Healthcare is the only health care coverage offered. Employers pay all or a
portion of the monthly premiums, and employees, through payroll deductions, pay
any premium not provided as an employee benefit.
Within the Health Risk and PHC business, Medicare coverage is sold on an
individual basis as well as through employer groups to their retirees. Medicaid
and subsidized children's health insurance programs are marketed to individuals
rather than employer groups.
Aetna U.S. Healthcare products are sold primarily through Company sales
personnel who frequently work with independent consultants and brokers who
assist in the production and servicing of business. Sales representatives also
sell to employers on a direct basis.
For large customers, independent consultants and brokers are frequently involved
in employer health plan selection decisions and sales.
Marketing and sales efforts are promoted by an advertising program which
includes television, radio, billboards and print media, supported by market
research and direct marketing efforts.
Health Pricing
For insured Commercial plans, customer contracts are generally established in
advance of the policy period, for a duration of one year. In determining the
premium rates to be charged to the customer, prospective and retrospective
rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the beginning of
the policy period. Unanticipated increases in medical costs cannot be recovered
in the current policy year; however, prior experience for a product in the
aggregate is considered, among other factors, in determining premium rates for
future periods. Federally-qualified HMOs are required to set premiums in this
manner.
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Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior to
contract inception, without regard to actual utilization of services incurred by
individual members, using one of three approved community rating methods. These
rates may vary from account to account to reflect projected family size and
contract mix, benefit levels, renewal date, and other factors. Under the
"traditional community rating" method, an HMO establishes premium rates based on
its revenue requirements for its entire enrollment in a given community. Under
the "community rating by class" method, an HMO establishes premium rates based
on its revenue requirements for broad classes of membership distinguished by
factors such as age and sex. Under the "group specific community rating" method,
an HMO establishes premium rates based on the HMO's revenue requirements for
providing services to the group. State laws, in certain of the states in which
the Company operates HMOs, require the filing with and approval by the state of
HMO premium rates, and certain states may prohibit the use of one or more of
these rating methods. In addition to reviewing anticipated medical costs, some
states also review anticipated administrative costs as part of the approval
process. Future results of the Company could be affected if the premium rates
requested by the Company are not approved or are adjusted downward by state
regulators.
Under retrospective rating, a preliminary premium rate is determined at the
beginning of the policy period. Once the policy period has ended, the actual
experience is reviewed. If the experience is positive (i.e., actual claim costs
and other expenses are less than those expected) then a refund is credited to
the policy. If the experience is negative, then the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the
deficit is considered in setting future premium levels. If a customer elects to
terminate coverage, these deficits generally cannot be recovered. Retrospective
rating is often used for non-HMO, employee funded plans which exceed 300 lives.
Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these annual contracts, HCFA pays the HMO at a capitated rate based on
membership and adjusted for demographic factors and a user fee. Inflation,
changes in utilization patterns and benefit plans, demographic factors such as
age and sex, and both local county and national fee for service average per
capita Medicare costs are considered in the rate calculation process. Amounts
payable under Medicare risk arrangements are subject to annual unilateral
revision by HCFA. In addition to premiums received from HCFA, some of the
Medicare products offered by Aetna U.S. Healthcare require a supplemental
premium to be paid by the member. Under Medicare risk arrangements, Aetna U.S.
Healthcare assumes the risk of higher than expected medical expenses. Medicare
contracts generate higher per member per month revenues, but also higher per
member per month medical expenses, than Commercial plans.
Aetna U.S. Healthcare also has HMO contracts with a variety of federal
government employee groups under the Federal Employees Health Benefit Program.
Premium rates are subject to federal government review and audit. Premium rates
for these contracts are set prospectively but are subject to retrospective
adjustments.
Premiums and fees from the federal government accounted for 21% of Aetna U.S.
Healthcare's revenue in 1999. Contracts with HCFA accounted for 81% of these
premiums and fees, with the balance from federal employee related benefit
programs.
The Company has contracts with state and local agencies to provide fully-insured
health benefits to persons eligible for Medicaid and subsidized children's
health insurance program benefits. These contracts are generally for a period of
one to three years. Aetna U.S. Healthcare receives a fixed monthly payment based
on membership in return for the coverage of health care services. The rates are
subject to periodic unilateral revision by the contracting agencies. Aetna U.S.
Healthcare assumes the risk of higher than expected medical expenses.
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Contracts with the customer to provide administrative services for
employer-funded plans are generally for a period of one year. Aetna U.S.
Healthcare has entered into certain guarantees with respect to certain functions
such as customer service response time, claim processing accuracy and claim
processing turnaround time, as well as certain guarantees that claim expenses to
be incurred by the customer will fall within a certain range. With any of these
guarantees, Aetna U.S. Healthcare is financially at risk if the conditions of
the arrangements are not met, though the maximum at risk is typically 10% - 30%
of fees for the customer involved.
Competition
Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing and pricing, a proliferation of
competing products, including new products developed in an effort to contain
health care costs, and increased quality and price sensitivity. New entrants
into the marketplace as well as significant consolidation within the industry
have also contributed to the more intense competitive environment.
Aetna U.S. Healthcare believes that the most significant factors which
distinguish competing health plans are quality of service and managed care
programs (including NCQA accreditation status), comprehensiveness of coverage,
cost (including both premium and member out-of-pocket costs), product design,
financial stability and the geographic scope of provider networks and the
providers available in such networks. Aetna U.S. Healthcare believes that it is
competitive in each of these areas. The ability to increase the number of
persons covered by Aetna U.S. Healthcare benefits or to increase revenues is
affected by competition in any particular area. In addition, the ability to
increase the number of persons enrolled in Health Risk products is affected by
the desire and ability of employers to self fund their health coverage.
Competition may also affect the availability of services from health care
providers, including primary care physicians, specialists and hospitals.
Within the Health Risk and PHC business, Aetna U.S. Healthcare competes with
local and regional managed care plans, in addition to managed care plans
sponsored by large health insurance companies and Blue Cross/Blue Shield plans.
Additional competitors include other types of medical and dental provider
organizations, various specialty service providers, integrated health care
delivery organizations, and in certain plans, with programs sponsored by the
federal or state governments.
Within the Other Health component of the Group Insurance and Other Health
business, Aetna U.S. Healthcare competes primarily with other commercial
insurance companies and third party administrators.
For the Group Insurance industry, Aetna U.S. Healthcare believes that the most
significant factors which distinguish competing companies are price, quality of
service, comprehensiveness of coverage, and product array and design. Specialty
carriers have increased market penetration in the life and disability business.
The deeply-penetrated group life market remains highly competitive.
Reserves
For the Health Risk and PHC business, the liability for medical claims payable
reflects estimates of the ultimate cost of claims that have been incurred but
not yet reported or reported but not yet paid. Medical claims payable are
estimated periodically, and any resulting adjustments are reflected in current
period operating results within current and future benefits. Medical claims
payable are based on a number of factors, including those derived from
historical claim experience. An extensive degree of judgment is used in this
estimation process, considerable variability is inherent in such estimates and
the adequacy of the estimate is highly sensitive to changes in medical claims
payment patterns and changes in medical cost trends. Refer to the MD&A - Aetna
U.S. Healthcare - Health Risk and PHC for a discussion of certain factors
relating to reserves at December 31, 1999.
Page 11
<PAGE> 12
For Group Insurance products, reserves are established as premiums become due to
reflect the present value of expected future obligations net of the present
value of expected future premiums. Policy reserves for group paid-up life
insurance generally reflect long-term fixed obligations and are computed on the
basis of assumed or guaranteed yield and benefit payments. Assumptions are based
on the Company's historical claim experience. For long-term disability products,
reserves are established for (i) lives currently in payment status (using both
standard industry, as well as the Company's own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so and (iii) claims that have been incurred but not yet reported.
Long-term care reserves are a long-term obligation calculated using industry
data for morbidity and mortality assumptions. Reserves for unpaid claims for
other group health products (including short duration contracts) are estimated
periodically and any resulting adjustments are reflected in current earnings.
Group health and group insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such premiums are recognized as
the related experience emerges.
Reinsurance
Aetna U.S. Healthcare uses reinsurance agreements with nonaffiliated insurers
for Group Insurance businesses to control its exposure to large losses and
certain other risks. The Company maintains catastrophic life reinsurance which
provides protection against accidents involving five or more covered lives. For
disability business, certain reinsurance arrangements have been established to
reflect the circumstances of the specific disability risks. These include an
excess individual amount arrangement for a particular market segment of the
disability business, a quota share treaty for another market segment of the
disability business, and facultative treaties on a case by case basis. In
addition, the Company carries excess medical malpractice professional liability
insurance.
In connection with the acquisition of PHC, the Company and Prudential entered
into a reinsurance agreement for which the Company paid a premium. Refer to Note
3 of Notes to Consolidated Financial Statements for further discussion.
Group Life Insurance In Force and Other Statistical Data
The following table summarizes changes in group life insurance in force before
deductions for reinsurance ceded to other companies for the years indicated:
<TABLE>
<CAPTION>
(Dollars in Millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In force, end of year $ 355,014 $ 378,727 $ 316,478
- --------------------------------------------------------------------------------------------------------------------------------
Terminations (lapses and all other) $ 77,648 $ 14,018 $ 10,678
- --------------------------------------------------------------------------------------------------------------------------------
Number of policies and contracts in force, end of year:
Group Life Contracts (1) 14,519 14,044 13,849
Group Conversion Policies (2) 28,767 31,024 32,660
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Due to the diversity of coverages and size of covered groups, statistics
are not provided for average size of policies in force.
(2) Reflects conversion privileges exercised by insureds under group life
policies to replace those policies with individual life policies.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Aetna U.S. Healthcare's business, refer to the MD&A - Forward-Looking
Information/Risk Factors, Aetna U.S. Healthcare - Outlook and financial results
discussions in the Annual Report.
Page 12
<PAGE> 13
2. Aetna Financial Services
Products and Services
Aetna Financial Services ("AFS") (formerly Aetna Retirement Services) offers
financial services products primarily through Aetna Life Insurance and Annuity
Company ("ALIAC") and Aetna Insurance Company of America ("AICA"), indirect
wholly owned subsidiaries of the Company. Prior to October 1, 1998, AFS also
offered individual life insurance products through ALIAC. Investment advisory
services are offered through ALIAC and Aeltus Investment Management, Inc.
("Aeltus"), which are registered investment advisers, and other indirect wholly
owned subsidiaries of the Company. Aeltus is also an adviser to most of Aetna's
mutual funds. Financial planning services are offered through Financial Network
Investment Corporation ("FNIC"), a broker/dealer acquired in 1997, and Aetna
Financial Services, Inc. ("AFSI"), an indirect wholly owned subsidiary of the
Company. Aetna Investment Services, Inc., an indirect wholly owned subsidiary of
the Company, acts as distributor for many of the securities products AFS offers.
Financial Services
AFS principally offers financial services products to employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408
and 457 (collectively "qualified plans"), and to individuals on a qualified and
nonqualified basis. These products include annuity contracts that offer a
variety of funding and payout options, mutual funds, and products that offer a
combination of both. Annuity contracts may be deferred or immediate ("payout
annuities"). These products also include programs offered to qualified plans and
nonqualified deferred compensation plans that package administrative and
recordkeeping services along with a menu of investment options, including mutual
funds (both Aetna and nonaffiliated mutual funds) and variable, and fixed
investment options. Financial services also includes investment advisory
services, financial planning, pension plan administrative services and trust
services.
Individual Life Insurance
AFS' domestic individual life insurance business was sold on October 1, 1998.
The transaction was generally in the form of an indemnity reinsurance
arrangement. Individual life insurance products included universal life and
variable universal life, which have both life insurance and investment
characteristics, traditional whole life and term insurance. Refer to MD&A -
Overview and Aetna Financial Services and Note 3 of Notes to Consolidated
Financial Statements in the Annual Report for more information.
Investment Options
AFS' financial services products provide customers with variable and/or fixed
investment options. Variable options and mutual funds generally provide for full
assumption (and, in limited cases, provide for partial assumption) by the
customer of investment risks. Assets supporting variable options are held in
separate accounts that invest in Aetna mutual funds and/or unaffiliated mutual
funds. Aetna mutual funds include funds managed by Aeltus and, beginning in
November 1997, funds managed by outside investment advisors under subadvisory
arrangements. Variable separate account investment income and realized capital
gains and losses are not reflected in the Company's consolidated results of
operations. Fixed options can be either "fully guaranteed" or "experience-
rated". Fully guaranteed options provide guarantees on investment return,
maturity values, and if applicable, benefit payments. Experience-rated options
require the customer to assume investment (including realized capital gains and
losses) and other risks subject, among other things, to certain minimum
guarantees. As long as minimum guarantees are not triggered, the effect of
experience-rated products' investment performance does not impact the Company's
consolidated results.
Page 13
<PAGE> 14
Fees and Investment Margins
Insurance charges, investment management or other fees earned by AFS vary by
product and depend, among other factors, on the funding option selected by the
customer under the product. For products where assets are allocated to variable
funding options, AFS may charge the separate account an asset-based insurance
fee and expense charge. In addition, where the customer selects an Aetna mutual
fund as a variable funding option, AFS receives an asset-based investment
management fee and, in the case of those funds subadvised by outside managers,
AFS pays a subadvisory fee to the fund manager. For unaffiliated mutual funds,
AFS receives distribution fees and/or expense reimbursements. For fixed funding
options, AFS earns an investment margin, which is based on the difference
between income earned on the investments supporting the liability and interest
credited to customers. Other fees or charges, such as administrative fees, may
be assessed depending on the nature of the product or service provided.
AFS also provides direct investment advisory services to unaffiliated customers
through Aeltus and FNIC generally for fees based on assets under management.
FNIC provides financial planning services generally for fees which may or may
not be asset based.
Assets Under Management and Administration
The substantial portion of fees or other charges and investment margins that AFS
receives are based on assets under management. Assets under management are
principally affected by net deposits (i.e., deposits, including new contracts,
less surrenders), investment growth (e.g., interest credited to customer
accounts for fixed options or market performance for variable options) and
customer retention. Financial Services' assets under management, excluding net
unrealized capital gains and losses on debt securities other than those held in
separate accounts, were $68.0 billion at December 31, 1999, $51.9 billion at
December 31, 1998 and $42.2 billion at December 31, 1997. Approximately 96% of
assets under management at December 31, 1999 and 95% at December 31, 1998,
allowed for contractholder withdrawal. Approximately 88% at December 31, 1999
and 84% at December 31, 1998 are subject to market value adjustments and/or
deferred surrender charges.
To encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception, which may be waived at the
Company's discretion. The period of time and level of the charge vary by
product. In addition, an approach incorporated into recent variable annuity
contracts with fixed funding options allows contractholders to receive an
incremental interest rate if withdrawals from the fixed account are spread over
a period of five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing tax penalties
on annuity distributions prior to age 59-1/2 provide further disincentive to
customers for premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.
A portion of AFS' fee revenue is also based on assets under administration.
Assets under administration are assets for which AFS provides administrative
services only. Assets under administration were $4.4 billion at December 31,
1999, $2.9 billion at December 31, 1998 and $2.3 billion at December 31, 1997.
Page 14
<PAGE> 15
Life Insurance In Force and Other Statistical Data
For individual life insurance products, life insurance in force is a key
determinant of earnings as contract charges for cost of insurance coverage are
typically based on amounts of coverage in force less accumulated policy
reserves. The key drivers of life insurance in force are new sales, surrenders
and mortality. The table below summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies. As a result of the
sale of the individual life business on October 1, 1998, substantially all of
the in force amounts shown in the table for the years 1999 and 1998 have been
ceded to an outside company.
<TABLE>
<CAPTION>
(Dollars in Millions, except average size of policies in force) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and additions:
Permanent:
Nonparticipating $ 1,490 $ 3,522 $ 4,281
Participating 9 13 13
Term:
Nonparticipating 180 513 1,586
Participating - 18 53
- ------------------------------------------------------------------------------------------------------
Total $ 1,679 $ 4,066 $ 5,933
======================================================================================================
Terminations:
Surrenders and conversions $ 2,861 $ 1,807 $ 1,865
Lapses 1,778 2,046 2,126
Other 1,087 323 1,130
- ------------------------------------------------------------------------------------------------------
Total $ 5,726 $ 4,176 $ 5,121
======================================================================================================
In force, end of year:
Permanent $ 37,567 $ 39,275 $ 36,614
Term 8,071 10,410 13,181
- ------------------------------------------------------------------------------------------------------
Total $ 45,638 $ 49,685 $ 49,795
======================================================================================================
Number of policies in force, end of year:
Nonparticipating 516,160 554,776 597,221
Participating 83,999 90,904 97,533
- ------------------------------------------------------------------------------------------------------
Total 600,159 645,680 694,754
======================================================================================================
Average size of policies in force, end of year:
Nonparticipating $ 79,147 $ 79,357 $ 72,654
Participating 56,965 62,266 65,664
- ------------------------------------------------------------------------------------------------------
</TABLE>
Refer to Note 11 of Notes to Consolidated Financial Statements in the Annual
Report for a discussion of participating life insurance contracts.
The following table summarizes premiums and deposits for AFS:
<TABLE>
<CAPTION>
(Millions) 1999 1998 (1) 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 107.5 $ 131.9 $ 158.5
Deposits 6,907.7 5,142.5 4,969.0
- -----------------------------------------------------------------------------------------------------
Total $ 7,015.2 $ 5,274.4 $ 5,127.5
=====================================================================================================
</TABLE>
(1) 1998 amounts reflect the operations of the individual life business through
the sale date of October 1, 1998.
Principal Markets and Method of Distribution
AFS products and services are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate markets.
AFS products generally are sold through pension professionals, independent
agents and brokers, third party administrators, banks, dedicated career agents
and financial planners.
Page 15
<PAGE> 16
Competition
AFS competes with other insurance companies and an array of financial services
companies including banks and mutual funds, as well as other investment
managers. Principal competitive factors are reputation for investment
performance, product features, service, cost and the perceived financial
strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of AFS' products and services.
Reserves
Reserves for limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, morbidity and
expenses and include a margin for adverse deviation. The assumptions vary by
plan, year of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life contingent payouts) are
equal to cumulative deposits plus credited interest less withdrawals and charges
thereon. Of those investment contracts which are experience-rated, the reserves
also reflect net realized capital gains/losses (which AFS reflects through
credited rates on an amortized basis) and unrealized capital gains/losses
related to Financial Accounting Standard ("FAS") No. 115.
Prior to the sale of the individual life business on October 1, 1998, reserves
for universal life products were equal to cumulative deposits less withdrawals
and charges plus credited interest thereon, plus/less net realized capital
gains/losses (which were reflected through credited rates on an amortized
basis). These reserves also included unrealized capital gains/losses related to
FAS No. 115. As a result of the sale and transfer of assets supporting the
business, reserves for universal life products no longer include net realized
capital gains/losses and unrealized gains/losses related to FAS No. 115 for the
years ended December 31, 1998 and beyond. Reserves for all other fixed
individual life contracts are computed on a basis consistent with that described
above for limited payment contracts.
Because the sale of the individual life business was substantially in the form
of an indemnity reinsurance agreement, the Company reported an addition to its
reinsurance receivable approximating the total AFS individual life reserves at
the sale date.
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
AFS' business, refer to the MD&A - Forward-Looking Information/Risk Factors,
Aetna Financial Services - Outlook and financial results discussions in the
Annual Report.
3. Aetna International
Aetna International, through subsidiaries and joint venture affiliates, sells
primarily life insurance, health insurance and financial services products in
markets outside of the United States.
The Company seeks to invest in emerging and other selected markets outside the
U.S. that have the potential for attractive long-term returns. The Company
intends to sharpen its focus on its international operations as part of its
realignment and may explore opportunities for additional international
investments or divestitures, where appropriate.
Page 16
<PAGE> 17
The Company may invest in a new market or increase its position in a market
through a combination of acquisitions, joint ventures and de novo initiatives.
Over the past 5 years, the Company has invested $1.2 billion in its
international operations, of which $200 million was invested in 1999, a majority
of which related to the acquisition of Assistencia Medica Social Argentina S.A.,
Argentina's largest HMO.
Aetna International conducts its business in the following major geographic
locations:
- Asia Pacific - Operations are conducted through majority-owned
subsidiaries in Hong Kong, Indonesia, Malaysia, New Zealand, the
Philippines, Taiwan and Thailand as well as through an equity
affiliate in China. In the fourth quarter of 1999, the Company
acquired an equity interest in a Japanese life insurance company. It
expects to acquire substantially all outstanding shares of that
company during the first quarter of 2000. The products and services
sold by these businesses include individual and group life and health
insurance, deposit administration and related financial products and
services.
- Americas - Operations are conducted through wholly owned and
majority-owned subsidiaries in Argentina and Chile and equity
affiliates in Brazil, Colombia, Mexico, Peru, Poland and Venezuela.
The products and services sold by these businesses include individual
and group life and health insurance, annuities, personal and
commercial property-casualty insurance, and pension fund
administration services.
Each of the affiliates through which Aetna International conducts business
operates within guidelines established by the Company. Methods of distributing
products vary by country and product depending on local laws, customs and the
needs of the particular customer segment. Distribution channels include career
agents, independent agents and brokers, financial institutions and direct sales.
Competition varies by country and includes well established local companies, as
well as foreign based companies with a strong international presence.
The following table sets forth Aetna International's revenue and operating
earnings or losses by major geographic location (including its share of net
income in minority owned affiliates and excluding Year 2000 costs in 1999 and
1998 and net realized capital gains or losses in all three years) and premiums,
before deductions for reinsurance ceded to other companies:
<TABLE>
<CAPTION>
Revenue Operating Earnings
---------------------------------------------- -------------------------------------------------
(Millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asia Pacific (1) $ 1,621.5 $ 1,191.6 $ 1,092.6 $ 67.5 $ 65.2 $ 55.7
Americas (2) 1,153.8 982.5 863.1 147.5 112.9 83.0
Other (3) 1.7 2.4 3.1 (20.8) (12.4) (10.0)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 2,777.0 $ 2,176.5 $ 1,958.8 $ 194.2 $ 165.7 $ 128.7
=================================================================================================================================
</TABLE>
(1) Includes China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand,
Philippines, Taiwan and Thailand.
(2) Includes Argentina, Brazil, Canada (through September 30, 1999), Chile,
Colombia, Mexico, Peru, Poland and Venezuela.
(3) Includes general and other miscellaneous expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums (included in
revenue above) $ 2,152.3 $ 1,578.5 $ 1,434.1
- --------------------------------------------------------------------------------------
</TABLE>
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Aetna International's business, refer to the MD&A - Forward-Looking
Information/Risk Factors, Aetna International - Outlook and financial results
discussions in the Annual Report.
Page 17
<PAGE> 18
4. Large Case Pensions
Principal Products
Large Case Pensions manages a variety of retirement products (including pension
and annuity products) offered to IRC Section 401 qualified defined benefit and
defined contribution plans. Contracts provide nonguaranteed, partially
guaranteed (experience-rated) and fully guaranteed investment options through
general and Separate Account products. The majority of Large Case Pensions'
products that use Separate Accounts provide contractholders with a vehicle for
investments under which the contractholders assume the investment risk as well
as the benefit of favorable performance. Large Case Pensions earns a management
fee on these Separate Accounts.
In 1993, the Company discontinued its fully guaranteed large case pension
products. (For additional information, refer to MD&A - Large Case Pensions -
Discontinued Products in the Annual Report.)
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect
Large Case Pension's business, refer to the MD&A - Forward-Looking
Information/Risk Factors, Large Case Pensions - Outlook and financial results
discussions in the Annual Report.
Page 18
<PAGE> 19
5. Total Investments
Consistent with the nature of the contract obligations involved in the Company's
health, life, annuity and pension operations, the majority of general account
assets have been invested in intermediate and long-term, fixed-income
obligations such as treasury obligations, mortgage-backed securities, corporate
debt securities and mortgage loans.
For information concerning the valuation of investments, refer to Notes 1, 4 and
7 of Notes to Consolidated Financial Statements in the Annual Report.
The following table sets forth the distribution of invested assets, cash and
cash equivalents and accrued investment income of the Company's general account
portfolio (excluding Discontinued Operations) as of the end of the years
indicated: (1) (2)
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Bonds:
U.S. government and government agencies and authorities $ 2,315.9 $ 1,998.6 $ 3,928.6
States, municipalities and political subdivisions 769.0 550.1 206.6
U.S. corporate securities:
Utilities 2,259.9 2,578.0 2,505.5
Financial 4,061.9 4,945.9 5,216.8
Transportation/capital goods 2,055.1 2,501.9 2,589.4
Health care/consumer products 2,876.4 2,656.3 1,735.3
Natural resources 412.3 1,550.7 1,559.9
Other corporate securities 864.6 1,355.8 1,506.2
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 12,530.2 15,588.6 15,113.1
- ------------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 2,210.2 2,883.8 2,629.8
Utilities 231.7 676.6 689.1
Other 2,397.7 2,868.0 3,830.4
- ------------------------------------------------------------------------------------------------------------------------------
Total foreign securities 4,839.6 6,428.4 7,149.3
- ------------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,825.3 2,322.7 1,812.5
Collateralized mortgage obligations 2,782.6 2,041.2 2,710.4
- ------------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 4,607.9 4,363.9 4,522.9
- ------------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities 2,482.5 2,123.2 1,622.0
Other asset-backed securities 985.8 971.0 1,635.1
- ------------------------------------------------------------------------------------------------------------------------------
Total bonds 28,530.9 32,023.8 34,177.6
Redeemable preferred stocks 130.7 157.0 67.4
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 28,661.6 32,180.8 34,245.0
- ------------------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks 619.5 566.9 866.4
Nonredeemable preferred stocks 171.6 233.6 175.0
- ------------------------------------------------------------------------------------------------------------------------------
Total equity securities 791.1 800.5 1,041.4
- ------------------------------------------------------------------------------------------------------------------------------
Short-term investments 788.2 942.2 1,003.9
Mortgage loans 3,238.2 3,553.0 4,207.8
Real estate 361.8 270.3 369.5
Policy loans 541.5 458.7 746.9
Other 1,394.8 1,300.3 974.3
- ------------------------------------------------------------------------------------------------------------------------------
Total investments $ 35,777.2 $ 39,505.8 $ 42,588.8
==============================================================================================================================
Cash and cash equivalents $ 2,504.5 $ 1,951.5 $ 1,805.8
==============================================================================================================================
Accrued investment income $ 466.5 $ 537.1 $ 545.8
==============================================================================================================================
</TABLE>
(1) Excludes Separate Accounts.
(2) Includes $5.9 billion in 1999, $7.1 billion in 1998 and $7.9 billion in
1997 of investments supporting discontinued products.
Page 19
<PAGE> 20
The following table summarizes the Company's investment results: (1)
<TABLE>
<CAPTION>
Net Earned Net Net Realized Change in
Investment Investment Capital Accumulated Other
(Dollar amounts in millions) Income (2) Income Rate (3) Gains (4) Comprehensive Income (5)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year:
1999 $ 2,965.9 7.4 % $ 71.9 $(1,038.1)
1998 3,220.5 7.7 271.8 (199.3)
1997 3,392.7 7.8 334.2 (50.6)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes Separate Accounts and investments in affiliates.
(2) Net investment income excludes net realized capital gains and losses, as
well as income taxes and includes investment expenses.
(3) The Earned Net Investment Income Rate for any given year is equal to (a)
net investment income divided by (b) the average amount of cash, invested
assets, excluding unrealized gains and losses, and accrued investment
income for the year.
(4) Net realized capital gains exclude income taxes and gains and losses
allocable to experience-rated pension contractholders.
(5) Accumulated other comprehensive income (loss) excludes federal income taxes
and changes in unrealized capital gains (losses) related to
experience-rated contractholders and discontinued products.
6. Other Matters
a. Regulation
General
The Company's operations are subject to comprehensive regulation throughout the
United States and the foreign jurisdictions in which it does business. The laws
of these jurisdictions establish supervisory agencies, including state health,
insurance and securities departments, with broad authority to grant licenses to
transact business and regulate many aspects of the products and services offered
by the Company, as well as solvency and reserve adequacy. Many agencies also
regulate investment activities on the basis of quality, diversification, and
other quantitative criteria. The Company's operations and accounts are subject
to examination at regular intervals by certain of these regulators.
Health Care
The federal government and the states in which the Company conducts its HMO and
other health operations have adopted laws and regulations that govern the
business activities of the Company to varying degrees. These laws and
regulations may restrict how the Company conducts its businesses and may result
in additional burdens and costs to the Company. Areas of governmental regulation
include licensure, premium rates, benefits, service areas, quality assurance
procedures, plan design, eligibility requirements, provider rates of payment,
surcharges on provider payments, provider contract forms, underwriting,
financial arrangements, financial condition (including reserves) and corporate
governance. These laws and regulations are subject to amendments and changing
interpretations in each jurisdiction.
States generally require HMOs to obtain a certificate of authority prior to
commencing operations. To establish an HMO in any state where it does not
presently operate an HMO, the Company generally has to obtain such a
certificate. The time necessary to obtain such a certificate varies from state
to state. Each HMO must file periodic financial and operating reports with the
states in which it does business. In addition, the HMOs are subject to state
examination and periodic license renewal.
Page 20
<PAGE> 21
The provision of services to certain employee health benefit plans is subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of
laws and regulations subject to interpretation and enforcement by the Internal
Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain
aspects of the relationships between the Company and employers who maintain
employee benefit plans subject to ERISA. Some of the administrative services and
other activities of the Company may also be subject to regulation under ERISA.
In addition, some states require licensure or registration of companies
providing third party claims administration services for benefit plans.
Many legislative and regulatory changes related to health products have recently
been enacted or are being seriously considered by the federal and state
governments. For a discussion of these matters refer to MD&A - Regulatory
Environment and Forward-Looking Information/Risk Factors in the Annual Report.
For information regarding regulation of pricing by the Company's HMOs, refer to
"Aetna U.S. Healthcare - Health Pricing", on page 9.
Investment and Retirement Products and Services
Operations conducted by AFS and Large Case Pensions are subject to regulation by
various government agencies where the Company conducts business, in particular
the insurance departments of Connecticut and New York. Among other matters,
these agencies may regulate premium rates, trade practices, agent licensing,
policy forms, underwriting and claims practices, the maximum interest rates that
can be charged on life insurance policy loans, and the minimum rates that must
be provided for accumulation of surrender value.
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of broker-dealer and
investment advisory subsidiaries of the Company. Regulations of the SEC, DOL and
Internal Revenue Service also impact certain of the Company's pension, annuity,
life insurance and other investment and retirement products. These products
involve Separate Accounts of ALIAC and AICA and mutual funds registered under
the Investment Company Act of 1940.
International
The nature and extent of regulations affecting the Company's international
operations varies by jurisdiction and line of business. Most operations are
subject to local insurance and/or health laws and regulations. These laws
typically regulate the types of business that can be written, policy forms and
terms, currency, permitted investments, reserves, taxation and other matters
affecting the conduct of the business. International operations are also subject
to a variety of additional investment and other controls that may be imposed by
governments. Certain jurisdictions may require that portions of the business be
reinsured through designated state-affiliated institutions. As a foreign
investor, the Company is also subject to a variety of restrictions regarding
permitted levels of equity ownership, remittance of foreign earnings,
repatriation of capital, exchange of currency, and entry into new lines of
business. Regulation of international operations may also be subject to other
political factors not typically associated with doing business in the United
States, such as more rapid change of regulatory policy, possible nationalization
of businesses, hostilities and unrest.
Federal Employee Benefit Regulation
AFS and Large Case Pensions also provide a variety of products and services to
employee benefit plans that are covered by ERISA.
Page 21
<PAGE> 22
In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit policy" were
"plan assets" for purposes of ERISA and that the insurance company had fiduciary
responsibility with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 DOL interpretive bulletin that had suggested that
insurance company general account assets were not plan assets.
The Small Business Job Protection Act (the "Act") was signed into law in 1996.
The Act created a framework for resolving potential issues raised by the Supreme
Court decision. The Act provides that, absent criminal conduct, insurers
generally will not have liability with respect to general account assets held
under contracts that are not guaranteed benefit policies based on claims that
those assets are plan assets. The relief afforded extends to conduct that
occurred before the date that is eighteen months after the DOL issues final
regulations required by the Act, except as provided in the anti-avoidance
portion of the regulations. The regulations, which were issued on January 5,
2000 address ERISA's application to the general account assets of insurers
attributable to contracts issued on or before December 31, 1998 that are not
guaranteed benefit policies. The conference report relating to the Act states
that policies issued after December 31, 1998 that are not guaranteed benefit
policies will be subject to ERISA's fiduciary obligations. The Company is not
currently able to predict how these matters may ultimately affect its
businesses.
HMO and Insurance Holding Company Laws
A number of states, including Connecticut, regulate affiliated groups of HMOs
and insurers such as the Company under holding company statutes. These laws may
require these companies to maintain certain levels of equity. For information
regarding restrictions on certain payments of dividends or other distributions
by HMO and insurance company subsidiaries of the Company, refer to MD&A -
Liquidity and Capital Resources in the Annual Report. Some of these laws also
regulate changes in control (as do Connecticut corporate laws), and other
matters such as transactions with affiliates. Refer to Note 15 of Notes to
Consolidated Financial Statements in the Annual Report.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants.
There were no material charges to earnings for guaranty fund obligations during
1999, 1998, or 1997. While the Company historically has recovered more than half
of guaranty fund assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future efforts to recover
such assessments.
For information regarding certain other potential regulatory changes relating to
the Company's businesses, refer to MD&A - Regulatory Environment and
Forward-Looking Information/Risk Factors. (Refer to Note 1 of Notes to
Consolidated Financial Statements for further discussion of accounting standards
related to guaranty fund assessments.)
b. NAIC IRIS Ratios
The National Association of Insurance Commissioners' ("NAIC") Insurance
Regulatory Information System ("IRIS") ratios cover 12 categories of financial
data with defined usual ranges for each category. The ratios are intended to
provide insurance regulators with "early warnings" as to when a given company
might warrant special attention. An insurance company may fall out of the usual
range for one or more ratios, and such variances may result from specific
transactions that are in themselves immaterial or eliminated at the consolidated
level. In 1999, none of Aetna Inc.'s significant insurance subsidiaries had more
than three IRIS ratios that were outside of the NAIC usual ranges.
Page 22
<PAGE> 23
Management does not expect that any of the Company's significant subsidiaries
will have more than three IRIS ratios outside of the NAIC usual ranges for 2000.
Refer to MD&A - Liquidity and Capital Resources in the Annual Report for
additional discussion regarding solvency regulation.
c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratios of
earnings to fixed charges and ratios of earnings to combined fixed charges and
preferred stock dividends for the years indicated:
<TABLE>
<CAPTION>
Aetna Inc. 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.11 4.96 5.74 2.45 4.97
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends 3.63 3.94 4.46 2.10 4.97
</TABLE>
<TABLE>
<CAPTION>
Aetna Services, Inc. 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 3.61 4.31 5.78 2.44
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends 3.61 4.31 5.78 2.44
</TABLE>
For purposes of computing both the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
"earnings" represent consolidated earnings from continuing operations before
income taxes, cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of interest (and the
portion of rental expense deemed representative of the interest factor) and
include the dividends paid to preferred shareholders of a subsidiary. (Refer to
Note 13 of Notes to Consolidated Financial Statements in the Annual Report.)
During 1995, there was no preferred stock outstanding. As a result, the ratio of
earnings to combined fixed charges and preferred stock dividends was the same as
the ratio of earnings to fixed charges. On July 19, 1999, the Company redeemed
all outstanding shares of its preferred stock. Therefore, there were no
preferred stock dividends paid after that date.
d. Trademarks
The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Registered
Trademark), and U.S. Healthcare (Registered Trademark), together with the
corresponding design logos are owned by the Company. The Company considers these
trademarks and its other trademarks and trade names important in the operation
of its business. However, the business of the Company is not dependent on any
individual trademark or trade name.
Page 23
<PAGE> 24
e. Ratings
The ratings of certain of Aetna Inc.'s subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
----------------------------------------------------
Moody's
Duff & Investors Standard
A.M. Best Phelps Service & Poor's
----------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Services, Inc. (senior debt)**
October 27, 1999 * A A3 A
February 7, 2000 (1) * A A3 A
Aetna Services, Inc. (commercial paper)**
October 27, 1999 * D-1 P-2 A-1
February 7, 2000 (1) * D-1 P-2 A-1
Aetna Life Insurance Company (claims paying/financial strength)
October 27, 1999 A AA- A1 A+
February 7, 2000 (1) A AA- A1 A+
Aetna Life Insurance and Annuity Company (claims paying/
financial strength)
October 27, 1999 A AA Aa3 AA-
February 7, 2000 (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.
f. Miscellaneous
The Company had approximately 46,700 domestic employees at December 31, 1999. In
addition, the Company had approximately 9,200 international employees at
December 31, 1999 in its majority and wholly owned non-U.S. subsidiaries.
Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and its internal auditors
and are modified as considered necessary. Refer to MD&A - Year 2000 for
information regarding the results to date of the Company's efforts to prepare
its systems, applications and facilities to accommodate Year 2000 date-sensitive
information.
The federal government is a significant customer of the Aetna U.S. Healthcare
segment and the Company, accounting for approximately 17% of the Company's
consolidated revenue in 1999. No other customer accounted for 10% or more of the
Company's consolidated revenues in 1999. No other segment of the Company's
business is dependent upon a single customer or a few customers, the loss of
which would have a significant effect on the earnings of the segment. Refer to
Note 17 of Notes to Consolidated Financial Statements in the Annual Report
regarding segment information.
The loss of business from any one, or a few, independent brokers or agents would
not have a material adverse effect on the earnings of the Company or any of its
segments.
Page 24
<PAGE> 25
Item 2. Properties.
The home office of the Company is a building complex located at 151 Farmington
Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The
Company and certain of its subsidiaries also own or lease other space in the
greater Hartford area; Blue Bell, Pennsylvania; Fairfield, New Jersey and
Roseland, New Jersey; as well as various field locations throughout the country.
The Company believes its properties are adequate and suitable for its business
as presently conducted.
The foregoing does not include numerous investment properties held by the
Company in its general and Separate Accounts.
Item 3. Legal Proceedings.
Class Action Complaints were filed in the United States District Court for the
Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and
Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring.
Other Class Action Complaints were filed in the United States District Court for
the District of Connecticut on November 25, 1997 by Evelyn Silvert; on November
26, 1997 by the Rainbow Fund, Inc.; and on December 24, 1997 by Terry B. Cohen.
The Connecticut actions were transferred to the United States District Court for
the Eastern District of Pennsylvania (the "Court") for consolidated pretrial
proceedings with the cases pending there. The plaintiffs filed a Consolidated
and Amended Complaint (the "Complaint") seeking, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaint alleged that the Company and three of its current
or former officers or directors, Ronald E. Compton, Richard L. Huber and Leonard
Abramson, are liable for certain misrepresentations and omissions regarding,
among other matters, the integration of the merger with U.S. Healthcare and the
Company's medical claim reserves. The Company and the individual defendants
filed a motion to dismiss the Complaint on July 31, 1998. On February 2, 1999,
the Court dismissed the Complaint, but granted the plaintiffs leave to file a
second amended complaint. On February 22, 1999, the plaintiffs filed a second
amended complaint against the Company, Ronald E. Compton and Richard L. Huber.
The Company and the remaining individual defendants filed a motion to dismiss
the second amended complaint, and the Court denied that motion in March 1999.
On August 9, 1999, the Court entered an order certifying as plaintiffs those
persons who purchased Company common stock on the market from March 6, 1997
through 7:00 a.m. on September 29, 1997. Merits discovery was completed in early
2000. On February 3, 2000, defendants filed motions for summary judgment
dismissing the complaint. Also on February 3, 2000, plaintiffs moved for
permission to file a third amended complaint and file expert reports.
Proceedings regarding defendants' summary judgment motions, along with the
remaining exchange of expert reports and expert discovery, are scheduled to be
completed in the second quarter of 2000. Trial is scheduled to begin in the
second quarter of 2000. Defendants are defending the actions vigorously.
The Company is involved in several purported class action lawsuits that it
believes are part of a wave of similar actions targeting the health care
industry and, in particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on April 19, 1999 by Joseph Maio, Jo
Ann Maio and Gary Bender seeking various forms of relief, including unspecified
damages and treble damages, from the Company and a number of its subsidiaries
for alleged violations of the Racketeer Influenced and Corrupt Organizations Act
("RICO"), the Pennsylvania Unfair Trade Practices and Consumer Protection Law,
and state common law. On September 29, 1999, the Court dismissed the RICO claims
with prejudice and dismissed the state law claims for lack of subject matter
jurisdiction. The Court held, among other things, that the plaintiffs lacked
standing to pursue the federal RICO claims because they had not alleged an
injury in fact. Plaintiffs have appealed the dismissal to the United States
Court of Appeals for the Third Circuit.
Page 25
<PAGE> 26
A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on October 4, 1999 by Anthony Conte
(the "Conte Complaint"). The Conte Complaint seeks various forms of relief,
including unspecified damages, from Aetna U.S. Healthcare Inc. for alleged
violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Conte Complaint alleges that Aetna U.S. Healthcare does not make adequate
disclosure of provider compensation arrangements in the literature that it makes
available to actual or prospective members. The Company intends to defend the
action vigorously and on November 1, 1999, filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. On
December 15, 1999, the Court suspended further proceedings pending the
resolution of the Maio appeal by the Third Circuit Court of Appeals.
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on October 7, 1999 by Jo Ann O'Neill
(the "O'Neill Complaint"). An Amended Complaint was filed on November 9, 1999 by
Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The O'Neill Complaint seeks
various forms of relief, including unspecified damages and treble damages, from
the Company, Aetna U.S. Healthcare Inc., Richard L. Huber and unnamed members of
the Board of Directors of Aetna Inc. for alleged violations of ERISA and RICO.
The O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion by another managed care company in
separate cases to consolidate those actions in a single court for pretrial
purposes. This litigation is in the preliminary stages. Defendants intend to
defend the action vigorously.
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright in
her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from the Company, Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and unnamed "John Doe" defendants
for alleged violations of California Business and Professions Code Sections
17200 and 17500, California Civil Code Section 1750 and state common law in
connection with the sale and marketing of health plans in California. The
Curtright Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO, POS and PPO members and members of the general
public. On December 16, 1999, defendants removed the action to the United States
District Court for the Northern District of California. On January 18, 2000,
plaintiff moved to remand the action to state court. On the same date, the
Company moved to dismiss the Curtright Complaint for failure to state a claim
upon which relief can be granted and moved for a stay of the action pending
resolution of the Maio and Conte matters. This litigation is in the preliminary
stages. Defendants intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California, County
of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen
Coalition for Patients Rights, purportedly on behalf of the general public of
the State of California (the "Ross Complaint"). The Ross Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna Inc., Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California, Inc. and additional unnamed "John
Doe" defendants for alleged violations of California Business and Professions
Code Sections 17200 and 17500. The Ross Complaint alleges that defendants are
liable for alleged misrepresentations and omissions relating to advertising,
marketing and member materials directed to Aetna HMO, POS and PPO members and
the general public and for alleged unfair practices relating to contracting of
doctors. This litigation is in the preliminary stages. Defendants intend to
defend the action vigorously.
Page 26
<PAGE> 27
A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on November 22, 1999 by Raymond D.
Williamson, III (the "Williamson Complaint"). The Williamson Complaint names as
defendant The Prudential Insurance Company of America, and also names as
defendants Aetna Inc. and Aetna U.S. Healthcare Inc. solely to the extent that
the Company has assumed liability for the actions of Prudential in connection
with the Company's acquisition of the Prudential health care business. The
Williamson Complaint seeks various forms of relief from defendants, including
unspecified damages, treble damages and imposition of a constructive trust, for
alleged violations of RICO and ERISA. The Williamson Complaint alleges that the
Prudential Health Plans engaged in a nationwide fraudulent scheme of
misrepresentation by stating that coverage and treatment decisions were made on
the basis of medical necessity when Prudential allegedly implemented undisclosed
policies designed to deny or limit claims and medical services. On December 30,
1999, the Company moved to stay, dismiss or transfer the action to the United
States District Court for the Eastern District of Pennsylvania based on the fact
that the Maio and Conte Complaints were filed in that court. On January 25,
2000, the Court suspended further proceedings pending resolution of a motion by
another managed care company in separate cases to consolidate those actions in a
single court for pretrial purposes. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
A purported class action complaint was filed in the United States District Court
for the District of New Jersey on December 3, 1999 by Michael V. Amorosi (the
"Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna Inc. and Aetna U.S. Healthcare Inc. for alleged
violations of RICO and ERISA. The Amorosi Complaint alleges that defendants told
subscribers that coverage and treatment decisions would be based on medical
necessity but instead took into account undisclosed cost-based criteria that
were unrelated to members' medical needs. On January 7, 2000, the Company moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the fact that the Maio and Conte
Complaints were filed in that court. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna Inc., Aetna U.S. Healthcare Inc. and Richard L.
Huber for alleged violations of RICO. The Mangieri Complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with the Company. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
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 27
<PAGE> 28
Item 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF AETNA INC.*
The Chairman of the Company is elected and all other executive officers listed
below are appointed by the Board of Directors of the Company at its Annual
Meeting each year to hold office until the next Annual Meeting of the Board or
until their successors are elected or appointed. None of these officers have
family relationships with any other executive officer or Director.
<TABLE>
<CAPTION>
Name of Officer Principal Position Age *
- --------------- ------------------ ---
<S> <C> <C>
William H. Donaldson Chairman, President and Chief 68
Executive Officer
Michael J. Cardillo Executive Vice President, 56
Aetna U.S. Healthcare
Timothy A. Holt Senior Vice President, 46
Aetna Investment
Management Group
Thomas J. McInerney Executive Vice President, 43
Aetna Financial Services
L. Edward Shaw, Jr. Senior Vice President and 55
General Counsel
Alan J. Weber Vice Chairman for Strategy 51
and Finance
</TABLE>
*As of February 28, 2000
EXECUTIVE OFFICERS' BUSINESS EXPERIENCE DURING PAST FIVE YEARS
WILLIAM H. DONALDSON was named Chairman, President and Chief Executive Officer
on February 25, 2000. Prior to assuming his current position, he served as
Co-Founder and Senior Advisor of Donaldson, Lufkin & Jenrette, Inc. (investment
banking) since September 1995. Mr. Donaldson served as Chairman and Chief
Executive Officer of the New York Stock Exchange, Inc. from January 1991 to June
1995.
MICHAEL J. CARDILLO has served in his current position since July 19, 1996. He
also serves as President of Aetna U.S. Healthcare Inc., a position he assumed in
March 1997 after serving as Co-President since July 19, 1996. Mr. Cardillo had
been Co-President of U.S. Healthcare Inc. since 1995.
Page 28
<PAGE> 29
TIMOTHY A. HOLT assumed his current position on January 29, 1999, having served
as Vice President, Aetna Investment Management Group since September 1997. From
1996 to September 1997, he served as Vice President and Chief Financial Officer
of Aetna Financial Services. He served as Vice President, Portfolio Management
Group, from 1992 to 1996.
THOMAS J. MCINERNEY assumed his current position on August 18, 1997, having
served as Vice President, Strategic Planning, since March 1997. He also
currently serves as President, Aetna Financial Services. From 1996 to 1997, he
served as Vice President, National Accounts, for Aetna Health Plans and then as
Vice President, National Accounts and Sales and Marketing, for the successor
business, Aetna U.S. Healthcare. During 1995 and 1996, he also served as Vice
President, Corporate Strategy. From 1992 to 1996, Mr. McInerney served as Vice
President, Large Case Pensions.
L. EDWARD SHAW, JR. assumed his current position on May 24, 1999. From August
1997 to May 1999, he served as Chief Corporate Officer, North America of
National Westminster Bank and from May 1996 to August 1997, he served as General
Counsel of NatWest Markets. From 1985 to 1996, Mr. Shaw served as Executive Vice
President and General Counsel of The Chase Manhattan Corporation.
ALAN J. WEBER assumed his current position on August 1, 1998. From July 1994 to
July 1998, Mr. Weber served as Chairman of Citibank International.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Aetna Inc.'s common stock is listed on the New York Stock Exchange. Its symbol
is AET. As of January 31, 2000, there were 17,704 record holders of the common
stock.
The dividends declared and the high and low sales prices with respect to the
Company's common stock for each quarterly period for the past two years are
incorporated herein by reference from "Quarterly Data" in the Annual Report.
Information regarding restrictions on the Company's present and future ability
to pay dividends is incorporated herein by reference from Note 15 of Notes to
Consolidated Financial Statements and MD&A - Liquidity and Capital Resources in
the Annual Report.
Item 6. Selected Financial Data.
The information contained in "Selected Financial Data" in the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report is incorporated herein
by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Total Investments" in the Annual Report is
incorporated herein by reference.
Page 29
<PAGE> 30
Item 8. Consolidated Financial Statements and Supplementary Data.
The 1999 Consolidated Financial Statements and the report of the registrant's
independent auditors and the unaudited information set forth under the caption
"Quarterly Data" are incorporated herein by reference to the Annual Report.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I pursuant to
General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with Section 16 (a)
of the Securities Exchange Act of 1934 is incorporated herein by reference to
the Proxy Statement.
Item 11. Executive Compensation.
The information under the captions, "Director Compensation in 1999", "Other
Information Regarding Directors" and "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Security Ownership of Certain Beneficial
Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption, "Other Information Regarding Directors" and
"Certain Transactions and Relationships" in the Proxy Statement is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements and the report of the registrant's
independent auditors are incorporated herein by reference to the Annual Report.
2. Financial statement schedules:
The supporting schedules of the consolidated entity are included in this Item
14. Refer to Index to Financial Statement Schedules on page 37.
Page 30
<PAGE> 31
3. Exhibits: *
(3) Articles of Incorporation and By-Laws.
3.1 Aetna Inc. Amended and Restated Certificate of Incorporation,
incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 333-5791) filed on June
12, 1996.
3.2 Aetna Inc. Bylaws, as amended, incorporated herein by reference to
Exhibit 3.1 to the Company's Form 10-K filed on February 28, 1997.
(4) Instruments defining the rights of security holders, including indentures.
4.1 Rights Agreement dated as of September 24, 1999, between the Company
and First Chicago Trust Company of New York, as Rights Agent,
incorporated herein by reference to the Company's Registration
Statement on Form 8-A filed on October 15, 1999.
4.2 Designations, Rights and Preferences of the Company's Class B Voting
Preferred Stock, Class B Voting Preferred Stock, Series A, and 6.25%
Class C Voting Preferred Stock, incorporated herein by reference to
Exhibit 4.1 to the Company's Form 8-K filed on July 26, 1996.
4.3 Indenture, dated as of October 15, 1986, between Aetna Services, Inc.
and The First National Bank of Boston, Trustee, incorporated herein
by reference to Exhibit 4 to the Company's Form 10-K filed on
February 26, 1999.
4.4 First Indenture Supplement, dated as of August 1, 1996, to Indenture,
dated as of October 15, 1986, between Aetna Services, Inc. and State
Street Bank and Trust Company, as Successor Trustee, incorporated
herein by reference to Exhibit 4.6 to the Company's Form 10-Q filed
on October 25, 1996.
4.5 Indenture, dated as of August 1, 1993, between Aetna Services, Inc.
and State Street Bank and Trust Company of Connecticut, National
Association, as Trustee, incorporated herein by reference to Aetna
Services, Inc.'s Registration Statement on Form S-3 (File No.
33-50427).
4.6 First Indenture Supplement, dated as of August 1, 1996, to the
Indenture dated as of August 1, 1993 between Aetna Services, Inc. and
State Street Bank and Trust Company of Connecticut, National
Association, as Trustee, incorporated herein by reference to Exhibit
4.8 to the Company's Form 10-Q filed on October 25, 1996.
4.7 Senior Indenture, dated July 1, 1996, among Aetna Services, Inc., the
Company and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee, incorporated herein reference to
Exhibit 4.1 to the Company's Form 10-Q filed on October 25, 1996.
4.8 Form of Subordinated Indenture, dated as of July 1, 1996, among the
Company, Aetna Services, Inc. and State Street Bank and Trust Company
of Connecticut, National Association, as Trustee (including the forms
of Subordinated Debt Securities and Subordinated Debt Guarantees),
incorporated herein by reference to Exhibit 4.2 to the Company's and
Aetna Services, Inc.'s Amendment No. 1 to its Registration Statement
on Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02;
333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.
4.9 Form of Junior Subordinated Indenture among the Company, Aetna
Services, Inc. and The First National Bank of Chicago, as Trustee,
incorporated herein by reference to Exhibit 4.3 to the Company's and
Aetna Services, Inc.'s Amendment No. 1 to its Registration Statement
on Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02;
333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.
Page 31
<PAGE> 32
4.10 Form of Supplemental Indenture to be used in connection with the
issuance of Junior Subordinated Debt Securities and Preferred
Securities (including the forms of Junior Subordinated Debt
Securities and Junior Subordinated Debt Guarantees), incorporated
herein by reference to Exhibit 4.3.1 to the Company's and Aetna
Services, Inc.'s Amendment No. 1 to its Registration Statement on
Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02;
333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.
4.11 Declaration of Trust of Aetna Capital Trust I, incorporated herein by
reference to Exhibit 4.4 to the Company's and Aetna Services, Inc.'s
Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.12 Declaration of Trust of Aetna Capital Trust II, incorporated herein
by reference to Exhibit 4.5 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.13 Declaration of Trust of Aetna Capital Trust III, incorporated herein
by reference to Exhibit 4.6 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.14 Declaration of Trust of Aetna Capital Trust IV, incorporated herein
by reference to Exhibit 4.7 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.15 Certificate of Trust of Aetna Capital Trust I, incorporated herein by
reference to Exhibit 4.8 to the Company's and Aetna Services, Inc.'s
Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.16 Certificate of Trust of Aetna Capital Trust II, incorporated herein
by reference to Exhibit 4.9 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.17 Certificate of Trust of Aetna Capital Trust III, incorporated herein
by reference to Exhibit 4.10 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.18 Certificate of Trust of Aetna Capital Trust IV, incorporated herein
by reference to Exhibit 4.11 to the Company's and Aetna Services,
Inc.'s Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on May 11, 1998.
4.19 Form of Amended and Restated Declaration of Trust for each of Aetna
Capital Trust I, II, III, and IV (including the form of Preferred
Securities), incorporated herein by reference to Exhibit 4.12 to the
Company's and Aetna Services, Inc.'s Amendment No. 1 to its
Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05)
filed on June 19, 1998.
4.20 Form of Guarantee Agreement among the Company, Aetna Services, Inc.,
and The First National Bank of Chicago, as Trustee, with respect to
each of Aetna Capital Trust I, II, III and IV's Preferred Securities,
incorporated herein by reference to Exhibit 4.13 to the Company's and
Aetna Services, Inc.'s Amendment No. 1 to its Registration Statement
on Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02;
333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.
4.21 Indenture, dated as of August 5, 1999, by and among the Company,
Aetna Services, Inc. and State Street Bank and Trust Company of
Connecticut, National Association, incorporated herein by reference
to Exhibit 4.03 to the Company's Form 8-K filed on August 9, 1999.
Page 32
<PAGE> 33
4.22 Certificate dated August 6, 1999 representing Stock Appreciation
Rights to purchase shares of Common Stock of the Company,
incorporated herein by reference to Exhibit 4.01 to the Company's
Form 8-K filed on August 9, 1999.
(10) Material contracts.
10.1 Stock Purchase Agreement, dated as of November 28, 1995, between The
Travelers Insurance Group Inc. and Aetna Services, Inc. relating to
the purchase and sale of 100% of the Common Stock of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company,
incorporated herein by reference to Exhibit 10.1 to Aetna Services,
Inc.'s Form 10-K filed on February 26, 1996.
10.2 Letter Agreement, dated as of January 31, 1996, between Aetna
Services, Inc. and The Travelers Insurance Group Inc., incorporated
herein by reference to Exhibit 10.5 to Aetna Services, Inc.'s Form
10-Q filed on April 26, 1996.
10.3 Amendment, dated as of April 2, 1996, to Stock Purchase Agreement,
dated as of November 28, 1995, between Aetna Services, Inc. and The
Travelers Insurance Group Inc., incorporated herein by reference to
Exhibit 10.6 to Aetna Services, Inc.'s Form 10-Q filed on April 26,
1996.
10.4 Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna
Services, Inc., U.S. Healthcare, Inc., the Company, Antelope Sub,
Inc. and New Merger Corporation, incorporated herein by reference to
Exhibit 10.1 to Aetna Services, Inc.'s Form 10-Q filed on April 26,
1996.
10.5 Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan
of Merger, dated as of March 30, 1996, among Aetna Services, Inc.,
U.S. Healthcare, Inc., the Company, Antelope Sub, Inc. and New Merger
Corporation, incorporated herein by reference to Exhibit 2.2 to the
Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.
10.6 Registration Rights Agreement, dated as of August 6, 1999, by and
between the Company and The Prudential Insurance Company of America,
incorporated herein by reference to Exhibit 4.02 to the Company's
Form 8-K filed on August 9, 1999.
10.7 Share Exchange and Registration Rights Agreement dated as of December
16, 1999, between the Company and Citibank, N.A.
10.8 $2,500,000 Credit Agreement dated as of June 28, 1996, among Aetna
Services, Inc., as Borrower, the Company, as Guarantor, the Banks
listed therein, and Morgan Guaranty Trust Company of New York, as
Administrative Agent, incorporated herein by reference to Exhibit 1
to Aetna Services, Inc.'s Form 8-K filed on July 16, 1996.
10.9 Notification from Aetna Services, Inc. dated October 22, 1996
electing to reduce Credit Facility to $1.5 billion, incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-K filed
on February 28, 1997.
10.10 Assignment dated June 29, 1998 of Credit Agreement dated as of June
28, 1996, incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q filed on August 5, 1998.
10.11 $500,000,000 Credit Agreement dated as of April 1, 1999, among Aetna
Services, Inc., as Borrower, the Company, as Guarantor, the Banks
listed therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent, J.P. Morgan Securities Inc., as Arranger,
Deutsche Bank AG, New York Branch, as Co-Administrative Agent, The
Chase Manhattan Bank, as Senior Managing Agent, and Citibank, N.A.,
as Syndication Agent, incorporated herein by reference to Exhibit
10.3 to the Company's Form 10-Q filed on April 28, 1999.
Page 33
<PAGE> 34
10.12 Amended and Restated Agreement, dated as of May 30, 1996, between the
Company and Leonard Abramson, incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-4
(Registration No. 333-5791) filed on June 12, 1996.
10.13 Amendment dated as of April 9, 1997, to the Amended and Restated
Agreement, dated as of May 30, 1996, between the Company and Leonard
Abramson, incorporated herein by reference to Exhibit 10.4 to the
Company's Form 10-Q filed on May 6, 1997.
10.14 Amendment, dated as of September 4, 1997, to the Amended and Restated
Agreement, dated as of May 30, 1996, between the Company and Leonard
Abramson, incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q filed on November 4, 1997.
10.15 Registration Rights Agreement, dated as of March 30, 1996, between
the Company and Leonard Abramson, incorporated herein by reference to
Exhibit 10.3 to Aetna Services, Inc.'s Form 10-Q filed on April 26,
1996.
10.16 Amendment No. 1, dated as of May 30, 1996, to the Registration Rights
Agreement, dated as of March 30, 1996, between the Company and
Leonard Abramson, incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.
10.17 Split Dollar Insurance Agreement, dated as of February 1, 1990, among
Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson),
Nancy Wolfson, Judith Abramson and David B. Soll, and U.S.
Healthcare, Inc., and the related Collateral Assignment Agreement,
dated as of February 1, 1990, among Madlyn K. Abramson, Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson
and David B. Soll, and U.S. Healthcare, Inc.
10.18 Split Dollar Insurance Agreement, dated as of January 21, 1991, among
Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and
U.S. Healthcare, Inc., and the related Collateral Assignment
Agreement, dated as of January 21, 1991, among Marcy A. Shoemaker
(formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare,
Inc.
10.19 Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated
herein by reference to Exhibit 10.18 to U.S. Healthcare, Inc.'s Form
10-K filed on March 30, 1995.**
10.20 The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form S-4 (Registration No. 333-5791) filed on June 12, 1996.**
10.21 The Aetna Inc. Annual Incentive Plan, incorporated herein by
reference to Exhibit 10.6 to the Company's Registration Statement on
Form S-4 (Registration No. 333-5791) filed on June 12, 1996.**
10.22 The Aetna Services, Inc. Supplemental Incentive Savings Plan Amended
and Restated as of January 1, 1999, incorporated herein by reference
to Exhibit 10.2 to the Company's Form 10-Q filed on July 29, 1999.**
10.23 The Aetna Services, Inc. Supplemental Pension Benefit Plan Amended
and Restated as of January 1, 1999, incorporated herein by reference
to Exhibit 10.1 to the Company's Form 10-Q filed on July 29, 1999.**
10.24 The Aetna Inc. Non-Employee Director Deferred Stock and Deferred
Compensation Plan, as amended, incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-K filed on February 28, 1997.**
Page 34
<PAGE> 35
10.25 The Aetna Inc. 1998 Stock Incentive Plan, incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (Registration No. 333-68881) filed on December 14, 1998.**
10.26 1999 Director Charitable Award Program, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q filed on April
28, 1999.**
10.27 Employment Agreement, dated as of December 19, 1995, between Aetna
Services, Inc. and Daniel P. Kearney, incorporated herein by
reference to Exhibit 10.5 to Aetna Services, Inc.'s Form 10-K filed
on February 26, 1996.**
10.28 Amendment dated as of July 22, 1996, to Employment Agreement, dated
as of December 19, 1995, between Aetna Services, Inc. and Daniel P.
Kearney, incorporated herein by reference to Exhibit 10.7 to the
Company's Form 10-Q filed on May 6, 1997.**
10.29 Amendment, dated as of September 8, 1997, to Employment Agreement,
dated as of December 19, 1995, between Aetna Services, Inc. and
Daniel P. Kearney, incorporated herein by reference to Exhibit 10.2
to the Company's Form 10-Q filed on November 4, 1997.**
10.30 Letter Agreement, dated January 19, 1995, between Aetna Services,
Inc. and Richard L. Huber, incorporated herein by reference to
Exhibit 10.2 to Aetna Services, Inc.'s Form 10-K filed on February
26, 1996.**
10.31 Amendment No. 1, dated March 1, 1996, to Letter Agreement, dated
January 19, 1995, between Aetna Services, Inc. and Richard L. Huber,
incorporated herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-4 (Registration No. 333-5791) filed
on June 12, 1996.**
10.32 Amendment, dated July 22, 1996, to Letter Agreement, dated as of
January 19, 1995, between the Company and Richard L. Huber,
incorporated herein by reference to Exhibit 10.5 to the Company's
Form 10-Q filed on May 6, 1997.**
10.33 Employment Agreement, dated as of March 30, 1996, between U.S.
Healthcare, Inc. and Michael Cardillo, incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q filed on October
25, 1996.**
10.34 Letter Agreement, dated as of June 6, 1995, between Aetna Services,
Inc. and Frederick C. Copeland, Jr.**
10.35 Amendment, dated July 22, 1996, to Letter Agreement, dated as of June
6, 1995, between the Company and Frederick C. Copeland, Jr.**
10.36 Letter Agreement, dated as of September 26, 1997, between the Company
and Frederick C. Copeland, Jr., incorporated herein by reference to
Exhibit 10.3 to the Company's Form 10-Q filed on July 29, 1999.**
10.37 Letter Agreement, dated as of May 4, 1999, between the Company and
Frederick C. Copeland, Jr., incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q filed on July 29, 1999.**
10.38 Letter Agreement, dated December 3, 1999, between the Company and
Frederick C. Copeland, Jr.**
10.39 Letter Agreement, dated as of April 6, 1999, between the Company and
Thomas J. McInerney, incorporated herein by reference to Exhibit 10.4
to the Company's Form 10-Q filed on July 29, 1999.**
Page 35
<PAGE> 36
10.40 Letter Agreement, dated as of June 11, 1998, between the Company and
Alan J. Weber, incorporated herein by reference to Exhibit 10.2 to
the Company's Form 10-Q filed on April 28, 1999.**
10.41 Description of certain arrangements not embodied in formal documents,
as described under the headings "Director Compensation in 1999" and
"Executive Compensation", are incorporated herein by reference to the
Company's 2000 Proxy Statement.
* Exhibits other than those listed are omitted because they are not required
to be listed or are not applicable. Copies of exhibits (including certain
investments defining the rights of holders of long-term debt of the
Company and certain of its subsidiaries that are not required to be
listed) will be furnished without charge upon written request to the
Office of the Corporate Secretary, Aetna Inc., 151 Farmington Avenue,
Hartford, Connecticut 06156.
** Management contract or compensatory plan or arrangement.
(11) Statement re: computation of per share earnings.
Incorporated herein by reference to Note 2 of Notes to Consolidated Financial
Statements in the Annual Report.
(12) Statement re: computation of ratios.
Statement re: computation of ratio of earnings to fixed charges for the Company
for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 and Aetna
Services for the years ended December 31, 1999, 1998 and 1997.
Statement re: computation of ratio of earnings to combined fixed charges and
preferred stock dividends for the Company for the years ended December 31, 1999,
1998, 1997, 1996 and 1995 and Aetna Services for the years ended December 31,
1999, 1998 and 1997.
(13) Annual Report to security holders.
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial Statements and the
report of the Company's independent auditors, and unaudited Quarterly Data are
incorporated herein by reference to the Annual Report.
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel.
Consent of Independent Auditors to Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.
(24.1) Power of attorney.
(24.2) Power of attorney.
(27) Financial data schedule.
(b) Reports on Form 8-K
None.
Page 36
<PAGE> 37
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 38
I Summary of Investments - Other than Investments in Affiliates as of December 31, 1999. 39
II Condensed Financial Information of the Registrant:
Balance sheet of Aetna Inc. as of December 31, 1999 and 1998
and the related statements of income, shareholders' equity and
cash flows for the years ended December 31, 1999, 1998 and
1997. 40
III Supplementary Insurance Information as of and for the years ended December 31,
1999, 1998 and 1997. 46
V Valuation and Qualifying Accounts and Reserves for the years ended December 31,
1999, 1998 and 1997. 49
</TABLE>
Certain of the required information is shown in the Consolidated Financial
Statements or Notes thereto in the Annual Report. Certain information has been
omitted from the schedules filed because the information is not applicable.
Certain reclassifications have been made to the 1998 and 1997 financial
information to conform to the 1999 presentation.
Page 37
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
Under date of February 7, 2000, we reported on the consolidated balance sheets
of Aetna Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999, as contained in
the 1999 annual report to shareholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut
February 7, 2000
Page 38
<PAGE> 39
AETNA INC. AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1999
<TABLE>
<CAPTION>
Amount
at which
shown in the
(Millions) Cost Value* balance sheet
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Bonds:
U. S. government and government agencies and authorities $ 2,357.6 $ 2,315.9 $ 2,315.9
States, municipalities and political subdivisions 778.3 769.0 769.0
U.S. corporate securities:
Utilities 2,317.1 2,259.9 2,259.9
Financial 4,206.1 4,061.9 4,061.9
Transportation/capital goods 2,102.9 2,055.1 2,055.1
Health care/consumer products 2,999.2 2,876.4 2,876.4
Natural resources 426.6 412.3 412.3
Other corporate securities 917.6 864.6 864.6
- --------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 12,969.5 12,530.2 12,530.2
- --------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 2,190.3 2,210.2 2,210.2
Utilities 237.3 231.7 231.7
Other 2,434.4 2,397.7 2,397.7
- --------------------------------------------------------------------------------------------------------------------------
Total foreign securities 4,862.0 4,839.6 4,839.6
- --------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,891.1 1,825.3 1,825.3
Collateralized mortgage obligations 2,793.0 2,782.6 2,782.6
- --------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 4,684.1 4,607.9 4,607.9
- --------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities 2,621.3 2,482.5 2,482.5
Other asset-backed securities 996.9 985.8 985.8
- --------------------------------------------------------------------------------------------------------------------------
Total bonds 29,269.7 28,530.9 28,530.9
Redeemable preferred stocks 139.7 130.7 130.7
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities $ 29,409.4 $ 28,661.6 $ 28,661.6
==========================================================================================================================
Equity securities:
Common stocks:
Public utilities $ 12.3 $ 13.1 $ 13.1
Banks, trust and insurance companies 77.6 81.0 81.0
Industrial, miscellaneous and all other 465.8 525.4 525.4
- --------------------------------------------------------------------------------------------------------------------------
Total common stocks 555.7 619.5 619.5
Nonredeemable preferred stocks 176.9 171.6 171.6
- --------------------------------------------------------------------------------------------------------------------------
Total equity securities $ 732.6 $ 791.1 $ 791.1
==========================================================================================================================
Short-term investments 788.2 788.2
Mortgage loans 3,238.2 3,238.2
Real estate 361.8 361.8
Policy loans 541.5 541.5
Other 935.0(1) 1,394.8(2)
- --------------------------------------------------------------------------------------------------------------------------
Total investments $ 36,006.7 $ 35,777.2
==========================================================================================================================
</TABLE>
* Refer to Notes 1 and 4 of Notes to Consolidated Financial Statements in the
Company's 1999 Annual Report.
(1) Excludes investments in affiliates of $459.8 million.
(2) Includes investments in affiliates of $459.8 million.
Page 39
<PAGE> 40
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $ 2.2 $ 2.0 $ .5
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 2.2 2.0 .5
Operating expenses - - -
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in earnings of affiliates 2.2 2.0 .5
Income taxes 1.7 .6 .1
Equity in earnings of affiliates 716.4 846.7 900.7
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 716.9 $ 848.1 $ 901.1
=============================================================================================================================
</TABLE>
See Notes to Condensed Financial Statements.
Page 40
<PAGE> 41
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
(Millions, except share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Short-term investments $ 4.0 $ 3.1
Investments in affiliates 10,674.3 11,400.7
- -------------------------------------------------------------------------------------------------------------------------
Total investments 10,678.3 11,403.8
Cash and cash equivalents 11.7 15.8
Due from affiliates 3.4 2.2
Affiliate dividends receivable 70.0 50.0
Deferred income taxes 1.6 1.5
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 10,765.0 $ 11,473.3
=========================================================================================================================
Liabilities:
Dividends payable to shareholders $ 28.5 $ 35.2
Other liabilities 23.5 29.0
Current income taxes 22.6 20.2
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 74.6 84.4
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Class C Voting Mandatorily Convertible Preferred Stock
($.01 par value; 15,000,000 shares authorized;
11,614,816 in 1998 issued and outstanding) - 862.1
Common stock ($.01 par value; 500,000,000 shares authorized,
142,680,694 in 1999 and 141,272,628 in 1998 issued and
outstanding) 3,719.3 3,292.4
Accumulated other comprehensive income (loss) (655.6) 177.8
Retained earnings 7,626.7 7,056.6
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,690.4 11,388.9
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,765.0 $ 11,473.3
=========================================================================================================================
</TABLE>
See Notes to Condensed Financial Statements.
Page 41
<PAGE> 42
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Three years ended December 31, 1999
---------------------------------------------------------
Accumulated Other
Comprehensive Income(Loss)
---------------------------
Unrealized Foreign
Retained Gains(Losses) Currency
(Millions, except share data) Total Earnings on Securities Gains(Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $ 10,889.7 $ 5,651.5 $ 440.7 $(100.7)
==============================================================================================================================
Comprehensive income:
Net income 901.1 901.1
Other comprehensive loss, net of tax:
Unrealized gains on securities ($66.5 pretax) (1) 43.2 43.2
Foreign currency (($117.1) pretax) (76.1) (76.1)
----------
Other comprehensive loss (32.9)
----------
Total comprehensive income 868.2
==========
Common stock issued for benefit
plans (1,883,945 shares) 134.7
Repurchase of common shares (6,173,3,900 shares) (523.1)
Common stock dividends (118.6) (118.6)
Preferred stock dividends (55.5) (55.5)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 11,195.4 $ 6,378.5 $ 483.9 (176.8)
==============================================================================================================================
Comprehensive income:
Net income 848.1 848.1
Other comprehensive loss, net of tax:
Unrealized losses on securities (($156.0) pretax) (1) (101.4) (101.4)
Foreign currency (($43.3) pretax) (27.9) (27.9)
----------
Other comprehensive loss (129.3)
----------
Total comprehensive income 718.8
==========
Common stock issued for benefit
plans (576,387 shares) 39.6
Repurchase of common shares (5,131,700 shares) (394.9)
Conversion of preferred securities (40,390 preferred
shares converted to 33,097 shares)
Common stock dividends (114.7) (114.7)
Preferred stock dividends (55.3) (55.3)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 11,388.9 $ 7,056.6 $ 382.5 $(204.7)
==============================================================================================================================
Comprehensive loss:
Net income 716.9 716.9
Other comprehensive loss, net of tax:
Unrealized losses on securities (($904.9) pretax) (1) (588.2) (588.2)
Foreign currency (($377.2) pretax) (245.2) (245.2)
----------
Other comprehensive loss (833.4)
----------
Total comprehensive loss (116.5)
==========
Common stock issued for benefit
plans (588,580 shares) 44.8
Issuance of stock appreciation rights 32.5
Repurchase of common shares (8,700,00 shares) (512.5)
Conversion of preferred securities (11,614,816
preferred shares converted to 9,519,486 shares)
Common stock dividends (116.3) (116.3)
Preferred stock dividends (30.5) (30.5)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $ 10,690.4 $ 7,626.7 $ (205.7) $(449.9)
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three years ended December 31, 1999
-----------------------------------
Class C
Voting
Mandatorily
Convertible
Preferred Common
(Millions, except share data) Stock Stock
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balances at December 31, 1996 $ 865.4 $ 4,032.8
===================================================================================================
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Unrealized gains on securities ($66.5 pretax)
Foreign currency (($117.1) pretax)
Other comprehensive loss
Total comprehensive income
Common stock issued for benefit
plans (1,883,945 shares) 134.7
Repurchase of common shares (6,173,900 shares) (523.1)
Common stock dividends
Preferred stock dividends
- ---------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 865.4 $ 3,644.4
===================================================================================================
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Unrealized losses on securities (($156.0) pretax)
Foreign currency (($43.3) pretax)
Other comprehensive loss
Total comprehensive income
Common stock issued for benefit
plans (576,387 shares) 39.6
Repurchase of common shares (5,131,700 shares) (394.9)
Conversion of preferred securities (40,390 preferred (3.3) 3.3
shares converted to 33,097 shares)
Common stock dividends
Preferred stock dividends
- ---------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 862.1 $ 3,292.4
===================================================================================================
Comprehensive loss:
Net income
Other comprehensive loss, net of tax:
Unrealized losses on securities (($904.9) pretax)
Foreign currency (($377.2) pretax)
Other comprehensive loss
Total comprehensive loss
Common stock issued for benefit
plans (588,580 shares) 44.8
Issuance of stock appreciation rights 32.5
Repurchase of common shares (8,700,00 shares) (512.5)
Conversion of preferred securities (11,614,816 (862.1) 862.1
preferred shares converted to 9,519,486 shares)
Common stock dividends
Preferred stock dividends
- ---------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $ - $ 3,719.3
===================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to the Condensed Financial Statements.
Page 42
<PAGE> 43
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
(Millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 716.9 $ 848.1 $ 901.1
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Equity in earnings of affiliates (716.4) (846.7) (900.7)
Other, net (4.1) 2.4 (8.4)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (3.6) 3.8 (8.0)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of short-term investments 540.4 431.6 619.4
Cost of investments in short-term investments (541.3) (431.5) (613.8)
Capital contributions to affiliates (12.8) - (160.0)
Dividends received from affiliates 634.7 520.0 746.2
Other, net (.3) (4.0) (25.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 620.7 516.1 566.5
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Common stock issued under benefit plans 44.8 39.6 134.7
Common shares repurchased (512.5) (394.9) (523.1)
Dividends paid to shareholders (153.5) (170.9) (174.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (621.2) (526.2) (563.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4.1) (6.3) (4.8)
Cash and cash equivalents, beginning of year 15.8 22.1 26.9
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 11.7 $ 15.8 $ 22.1
=================================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ - $ - $ -
Income taxes paid (received), net $ (9.8) $ (1.1) $ 1.0
=================================================================================================================================
</TABLE>
See Notes to Condensed Financial Statements.
Page 43
<PAGE> 44
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements
1. Background of Organization
Aetna Inc. was incorporated under the Stock Corporation Act of the state of
Connecticut on March 25, 1996 for the purpose of effecting the combination of
Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life and Casualty
Company) and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") (formerly
U.S. Healthcare, Inc. ("U.S. Healthcare")) in accordance with the terms of the
Agreement and Plan of Merger dated as of March 30, 1996. The merger was
consummated on July 19, 1996. As a result, Aetna Services and Aetna U.S.
Healthcare are each direct wholly owned subsidiaries of Aetna Inc. The
accompanying condensed financial statements should be read in conjunction with
the Consolidated Financial Statements and Notes thereto in the Annual Report.
2. Guarantee of Debt Securities
Aetna Inc. had 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. These Subordinated Debentures
represented substantially all of the assets of ACLLC until they were redeemed
in December 1999.
ACLLC issued $275 million of 9.5% Cumulative Monthly Income Preferred
Securities, Series A. These securities were redeemed on December 10, 1999.
Refer to Note 14 of Notes to Consolidated Financial Statements in the Annual
Report for a description of outstanding debt.
3. Dividends
Cash dividends paid to Aetna Inc. by Aetna Services were $.5 billion in 1999
and 1998, and $.4 billion in 1997. Cash dividends paid to Aetna Inc. by Aetna
U.S. Healthcare were $.1 billion in 1999 and $.3 billion in 1997. No dividends
were paid by Aetna U.S. Healthcare in 1998. Also, in 1997 Aetna U.S. Healthcare
made a non-cash dividend of $.3 billion to Aetna Inc. Refer to Note 15 of Notes
to Consolidated Financial Statements in the Annual Report for a description of
dividend restrictions.
4. New Accounting Standards
Refer to Note 1 of Notes to Consolidated Financial Statements in the Annual
Report for a description of new accounting standards.
5. Discontinued Products
Refer to Note 8 of Notes to Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
Page 44
<PAGE> 45
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements (Continued)
6. Other Acquisitions and Dispositions
Refer to Note 3 of Notes to Consolidated Financial Statements in the Annual
Report for a description of other acquisitions and dispositions.
7. Income Taxes
Refer to Note 9 of Notes to Consolidated Financial Statements in the Annual
Report for a description of income taxes.
Page 45
<PAGE> 46
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1999
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claims Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 3.7 $ 1,170.9 $4,820.0 $458.5 $ 678.6 $18,522.6
Aetna Financial Services 1,046.4 4,201.8 29.9 - 11,292.2 107.5
Aetna International 1,009.7 3,981.5 124.8 48.6 33.6 2,152.3
Large Case Pensions - 8,245.1 1.8 - 3,477.0 118.9
- ---------------------------------------------------------------------------------------------------------------------------------
Total $2,059.8 $17,599.3 $4,976.5 $507.1 $15,481.4 $20,901.3
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Other income Current policy Other
Net investment (including realized and future acquisition operating Premiums
Segment income (1) capital gains) benefits (2) costs expenses (3) written (4)
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 612.8 $1,752.6 $15,890.7 $ .5 $4,194.4 $17,627.5
Aetna Financial Services 904.7 518.2 746.5 104.9 389.4 -
Aetna International 456.5 199.0 1,850.2 99.1 603.7 803.6
Large Case Pensions 982.5 70.4 904.1 - 31.3 -
Corporate 9.4 45.3 - - 413.7 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total $2,965.9 $2,585.5 $19,391.5 $204.5 $5,632.5 $18,431.1
=================================================================================================================================
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, salaries and related benefits, interest
expense, amortization of goodwill and other acquired intangible assets and
severance and facilities charges (reserve reductions).
(4) Excludes life insurance business pursuant to Regulation S-X.
Page 46
<PAGE> 47
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1998
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claims Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 3.6 $ 1,165.8 $3,807.1 $306.3 $ 608.5 $13,006.2
Aetna Financial Services 893.1 4,178.0 14.4 - 11,473.9 131.9
Aetna International 871.9 4,429.3 131.0 122.6 343.7 1,578.5
Large Case Pensions - 8,768.0 1.4 - 5,206.4 122.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total $1,768.6 $18,541.1 $3,953.9 $428.9 $17,632.5 $14,839.3
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Other income Current policy Other
Net investment (including realized and future acquisition operating Premiums
Segment income (1) capital gains) benefits (2) costs expenses (3) written (4)
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 537.2 $1,576.0 $11,186.5 $ .6 $3,133.3 $12,058.7
Aetna Financial Services 1,054.1 701.4 918.2 128.3 408.6 -
Aetna International 459.8 109.3 1,336.6 86.4 532.7 594.7
Large Case Pensions 1,152.5 88.7 1,054.4 - 37.1 -
Corporate 16.9 106.6 - - 410.8 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total $3,220.5 $2,582.0 $14,495.7 $215.3 $4,522.5 $12,653.4
=================================================================================================================================
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, salaries and benefits, interest expense,
amortization of goodwill and other acquired intangible assets and severance
and facilities charges (reserve reductions).
(4) Excludes life insurance business pursuant to Regulation S-X.
Page 47
<PAGE> 48
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1997
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claims Unearned with the Premium
Segment costs benefits expenses premiums Company revenue
- -----------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 19.5 $ 1,166.5 $3,163.5 $254.2 $ 556.9 $10,844.6
Aetna Financial Services 1,645.3 4,111.9 40.4 - 11,339.5 158.5
Aetna International 702.5 3,430.7 89.0 105.0 384.1 1,434.1
Large Case Pensions - 9,128.0 1.5 - 6,480.7 155.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $2,367.3 $17,837.1 $3,294.4 $359.2 $18,761.2 $12,592.2
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Other income Current policy Other
Net investment (including realized and future acquisition operating Premiums
Segment income (1) capital gains) benefits (2) costs expenses (3) written (4)
- -----------------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna U.S. Healthcare $ 451.2 $1,605.6 $ 9,239.2 $ 20.3 $2,797.1 $10,001.9
Aetna Financial Services 1,129.9 614.1 1,034.1 110.6 385.6 -
Aetna International 384.4 157.0 1,206.3 86.6 486.1 465.0
Large Case Pensions 1,408.7 71.3 1,199.9 - 47.3 -
Corporate 18.5 119.8 - - 428.4 -
- -----------------------------------------------------------------------------------------------------------------------------
Total $3,392.7 $2,567.8 $12,679.5 $217.5 $4,144.5 $10,466.9
=============================================================================================================================
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, salaries and benefits, interest expense,
amortization of goodwill and other acquired intangible assets and severance
and facilities charges (reserve reductions).
(4) Excludes life insurance business pursuant to Regulation S-X.
Page 48
<PAGE> 49
AETNA INC. AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
For the years ended December 31,
(Millions)
<TABLE>
<CAPTION>
Additions
-------------------------------------
Charged
Balance at Balance at Charged (credited) to Balance
beginning beginning of (credited) to costs other accounts- Deductions- at end of
of period Adjustments period as adjusted and expenses (1) describe (2) describe (3) period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Asset valuation
Reserves:
Mortgage loans $ 66.9 $ - $ 66.9 $ 4.6 $ (1.5) $(20.7) $ 49.3
Real Estate 91.1 - 91.1 2.0 .1 - 93.2
Other 2.8 - 2.8 - - - 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
$160.8 $ - $160.8 $ 6.6 $ (1.4) $(20.7) $ 145.3
====================================================================================================================================
1998
Asset valuation
Reserves:
Mortgage loans $114.5 $ - $114.5 $(8.0) $(34.3) $ (5.3) $ 66.9
Real Estate 101.3 - 101.3 5.5 2.8 (18.5) 91.1
Other 2.8 - 2.8 - - - 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
$218.6 $ - $218.6 $(2.5) $(31.5) $(23.8) $ 160.8
====================================================================================================================================
1997
Asset valuation
Reserves:
Mortgage loans $247.0 $ - $247.0 $(10.6) $(45.0) $ (76.9) $ 114.5
Real Estate 142.1 - 142.1 6.1 14.8 (61.7) 101.3
Other 2.8 - 2.8 - - - 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
$391.9 $ - $391.9 $ (4.5) $(30.2) $(138.6) $ 218.6
====================================================================================================================================
</TABLE>
(1) Charged (credited) to net realized capital (gains) losses in the
Consolidated Statements of Income.
(2) Reflects additions to (reductions of) reserves related to assets
supporting experience-rated contracts and discontinued products for which
a corresponding reduction was included in Policyholders' Funds Left with
the Company in the Consolidated Balance Sheets and the reserve for future
losses, respectively.
(3) Reduction in reserves is primarily a result of related asset write-downs
(including foreclosures of real estate) and sales.
Page 49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 29, 2000 AETNA INC.
By /s/ Alan M. Bennett
---------------------------
Alan M. Bennett
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 29, 2000.
<TABLE>
<S> <C>
* *
- -------------------------------------------------------- -----------------------------------------------------------
William H. Donaldson Gerald Greenwald, Director
Chairman, President, Chief Executive Officer
and Director *
(Principal Executive Officer) -----------------------------------------------------------
Ellen M. Hancock, Director
*
* -----------------------------------------------------------
- -------------------------------------------------------- Michael H. Jordan, Director
Leonard Abramson, Director
*
* -----------------------------------------------------------
- -------------------------------------------------------- Jack D. Kuehler, Director
Betsy Z. Cohen, Director
*
* -----------------------------------------------------------
- -------------------------------------------------------- Frank R. O'Keefe, Jr., Director
Barbara Hackman Franklin, Director
*
* -----------------------------------------------------------
- -------------------------------------------------------- Judith Rodin, Director
Jeffrey E. Garten, Director
*
* -----------------------------------------------------------
- -------------------------------------------------------- Alan J. Weber
Jerome S. Goodman, Director Vice Chairman for Strategy and Finance
(Principal Financial Officer)
*
- --------------------------------------------------------
Earl G. Graves, Sr., Director
/s/ Alan M. Bennett
- --------------------------------------------------------
Alan M. Bennett, Vice President
and Corporate Controller
*By /s/ Alan M. Bennett
-------------------------------------------------
(Attorney-in-Fact)
</TABLE>
Page 50
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
<S> <C> <C>
10.7 Share Exchange and Registration Rights Agreement dated as Electronic
of December 16, 1999, between the Company and Citibank,
N.A.
10.17 Split Dollar Insurance Agreement, dated as of February 1, Electronic
1990, among Madlyn K. Abramson, Marcy A. Shoemaker
(formerly Marcy Abramson), Nancy Wolfson, Judith Abramson
and David B. Soll, and U.S. Healthcare, Inc., and the
related Collateral Assignment Agreement, dated as of
February 1, 1990, among Madlyn K. Abramson, Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc.
10.18 Split Dollar Insurance Agreement, dated as of January 21, Electronic
1991, among Marcy A. Shoemaker (formerly Marcy Abramson),
Nancy Wolfson, Judith Abramson, David B. Soll, Jerome
Goodman and Edward M. Glickman, and U.S. Healthcare, Inc.,
and the related Collateral Assignment Agreement, dated as
of January 21, 1991, among Marcy A. Shoemaker (formerly
Marcy Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S.
Healthcare, Inc.
10.34 Letter Agreement, dated as of June 6, 1995, between Aetna Electronic
Services, Inc. and Frederick C. Copeland, Jr.
10.35 Amendment, dated July 22, 1996, to Letter Agreement, dated as of Electronic
June 6, 1995, between the Company and Frederick C. Copeland, Jr.
10.38 Letter Agreement, dated as of December 3, 1999, between Electronic
the Company and Frederick C. Copeland, Jr.
12 Statement re: computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed charges
for the Company for the years ended December 31, 1999, 1998,
1997, 1996, and 1995 and Aetna Services for the years ended
December 31, 1999, 1998, 1997 and 1996.
Statement re: computation of ratio of earnings to combined fixed
charges and preferred stock dividends for the Company for the
years ended December 31, 1999, 1998, 1997, 1996, and 1995 and
Aetna Services for the years ended December 31, 1999, 1998, 1997
and 1996.
13 Annual Report to security holders. Electronic
Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Consolidated
Financial Statements and the report of the Company's independent
auditors, and unaudited Quarterly Data from the Annual Report.
21 Subsidiaries of the registrant. Electronic
A listing of subsidiaries of Aetna Inc.
</TABLE>
Page 51
<PAGE> 52
INDEX TO EXHIBITS
(Continued)
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
<S> <C> <C>
23 Consents of experts and counsel. Electronic
Consent of Independent Auditors to Incorporation by
Reference in the Registration Statements
on Form S-3 and Form S-8.
24.1 Power of attorney. Electronic
24.2 Power of attorney. Electronic
27 Financial data schedule for December 31, 1999. Electronic
</TABLE>
Page 52
<PAGE> 1
Exhibit 10.7
SHARE EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
SHARE EXCHANGE AND REGISTRATION RIGHTS AGREEMENT dated as of December
16, 1999 between Aetna Inc., a Connecticut corporation (the "COMPANY") and
Citibank, N.A. ("Citibank").
WHEREAS,
Citibank has entered into the Loan Agreement with Ta Hsing, which Loan
Agreement is secured in part by a pledge of 20% of the shares of ALICA Holdings,
Inc., a Connecticut corporation that owns all of the non-voting shares of common
stock of Aetna Life Insurance Company of America ("ALICA");
Aetna International, Inc. ("AII"), a subsidiary of the Company, owns
the remaining shares of ALICA and ALICA Holdings;
In order to assist Ta Hsing in obtaining the loan evidenced by the Loan
Agreement, AII has consented to the pledge by Ta Hsing of Ta Hsing's shares of
ALICA Holdings in favor of Citibank and the Company has agreed to enter into
this Agreement.
In consideration of the foregoing and the agreements contained herein, the
parties agree as follows.
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"1933 ACT" means the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"1934 ACT" means the Securities Exchange Act of 1934, as amended and the
rules and regulations thereunder.
"AII" has the meaning ascribed to it in the preambles to this Agreement.
"ALICA" has the meaning ascribed to it in the preambles to this
Agreement.
"ANCILLARY AGREEMENT" OR "ANCILLARY AGREEMENTS" means all other documents
entered into between Ta Hsing and Citibank in connection with the Loan
Agreement, including, without limitation, a share mortgage relating to the
Collateral.
<PAGE> 2
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in either of the States of New Jersey or New York are
authorized by law to close.
"COLLATERAL" means the 20% of the shares of common stock of ALICA
Holdings, Inc., a Connecticut corporation, owned by Ta Hsing and pledged under a
share mortgage to secure payment of the loan under the Loan Agreement.
"COLLATERAL VALUE" has the meaning ascribed to it in Section 2.05.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Common Stock, par value $0.01 per
share.
"COMPANY'S 1999 FORM 10-Q" means the Company's quarterly report on Form
10-Q as filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
"CONSOLIDATED SUBSIDIARY" means, at any date, any Subsidiary or other
entity the accounts of which would be consolidated with those of the Company in
its consolidated financial statements if such statements were prepared as of
such date.
"LENDER DEFAULT AMOUNT" means the sum of all unpaid principal, accrued
interest, costs and other amounts due and owing to Citibank by Ta Hsing under
the Loan Agreement from time to time and as certified by Citibank (whose
certification shall be conclusive and binding on the Company and Citibank in the
absence of demonstrable error) following the occurrence of an Event of Default
as defined in the Loan Agreement.
"LOAN AGREEMENT" means that certain revolving credit facility in the
original principal amount of US $154 million between Citibank and Ta Hsing dated
or to be dated 17 December 1999.
"MINIMUM VALUE" has the meaning ascribed to it in Section 2.05.
"PERSON" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"PIGGYBACK REGISTRATION" means a Piggyback Registration as defined in
Section 3.02.
"REGISTRABLE SECURITIES" means all shares of Common Stock issued to
Citibank or its nominee upon the exercise by the Company of the right to issue
shares of Common Stock contained in Section 2.01 of this Agreement.
"SHELF REGISTRATION STATEMENT" means the Shelf Registration Statement
as defined in Section 3.01.
2
<PAGE> 3
"SUBSIDIARY" means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Company.
"TA HSING" means Ta Hsing Corp. Limited, a Liberian company controlled by
Dr. Samuel Yin.
"UNDERWRITER" means a securities dealer who purchases any Registrable
Securities as principal and not as part of such dealer's market-making
activities.
ARTICLE 2
SHARE EXCHANGE RIGHTS
SECTION 2.01 Aetna Options on Event of Default. If any Event of Default, as
defined in the Loan Agreement or any Ancillary Agreement, shall occur and be
continuing under circumstances in which Citibank has the right to exercise its
power of sale in respect of the Collateral, then Citibank shall promptly after
becoming aware of the same so notify the Company and certify the Lender Default
Amount to the Company. Upon receipt of notice from Citibank that Citibank has
elected to exercise such power of sale, the Company shall be obliged forthwith
to pay Citibank or its nominee in full the Collateral Value, but not to exceed
Lender Default Amount, which it may do in one or a combination of the following,
such combination being chosen at the discretion of the Company:
(a) Cash in immediately available funds wired to an account
designated in writing by Citibank;
(b) Registrable Securities, determined in accordance with Section
4.03.
Provided that, to the extent that payment is made in whole or in part by
Registrable Securities, the Lender Default Amount shall not be reduced and shall
continue to accrue interest and/or default interest under the Loan Agreement
until the Registrable Securities are sold and the proceeds of such sale applied,
as described in Sections 2.03 and 3.04.
SECTION 2.02 Transfer of Collateral to Aetna In exchange for and in
consideration of the Company's payment(s) to Citibank or its nominee described
in Section 2.01, concurrently with such payment(s), Citibank or its nominee
shall immediately exercise its power of sale in favour of AII in respect of all
of the Collateral.
SECTION 2.03 Citibank Rights on Receipt of Shares If the Company shall issue
Registrable Securities to Citibank or its nominee under Section 2.01, then
Citibank or its nominee shall have the right to sell such Registrable Securities
under the following terms:
3
<PAGE> 4
(a) If the Company provides Citibank or its nominee with an opinion of
reputable outside counsel that the Registrable Securities may
immediately be sold under SEC Rule 144 or any successor rule, then
Citibank or its nominee shall be required to sell such number of
Registrable Securities as may then be sold pursuant to Rule 144
and may not exercise the rights set forth in Article 3 of this
Agreement with respect to such Registrable Shares.
(b) If the Company is unable to or does not provide Citibank or its
nominee with such an opinion as to any or all of the Registrable
Securities, then Citibank or its nominee may exercise the rights
set forth in Article 3 with respect to the Registrable Securities
that are not subject to immediate sale pursuant to the opinion
received pursuant to Section 2.03(a) above by giving written
notice to the Company of its intent to exercise such rights.
Citibank or its nominee shall sell all the Registrable Securities that may be
immediately sold promptly after receipt of the opinion referenced in Section
2.03(a) above, and shall apply the proceeds of any such sale in or towards
satisfaction of the Lender Default Amount. Where the proceeds of such sale
exceed the Lender Default Amount, Citibank will promptly pay such excess amount
to the Company in cash in immediately available funds and return to the Company
any residual Registrable Securities held by Citibank or its nominee. If the
proceeds of such sale are less than the Lender Default Amount, the Company will
proceed with the registration as provided in Article 3 below, provided that if
all Registrable Securities have been sold by Citibank or its nominee then
promptly following receipt of a certificate from Citibank or its nominee stating
the amount of the shortfall (which certificate shall be binding on the Company
and Citibank and/or its nominee in the absence of demonstrable error) the
Company will pay the amount of such shortfall to Citibank or its nominee in cash
in immediately available funds.
SECTION 2.04 Nature of Registrable Securities Citibank acknowledges that the
Registrable Securities will, when issued to it, be "restricted securities" under
the 1933 Act and may not be resold absent compliance with Section 2.03 or
Article 3.
SECTION 2.05 Maintenance of Collateral Value Throughout the continuance of this
Agreement and in consideration of having no other operating covenants or
restrictions related to ALICA, the Company covenants and agrees that it will
cause its Subsidiary, Aetna International, Inc. the controlling shareholder of
ALICA, to maintain the ALICA in such a manner that the fair market value of the
Collateral (the "Collateral Value"), as may be determined by an
internationally-recognized independent appraisal company reasonably selected by
the Company, will not fall below $175 million (the "Minimum Value"). Immediately
upon receipt of notice from pursuant to Clause 2.1 above that Citibank has
elected to exercise it right of sale, the Company will furnish Citibank with a
estimate of the Collateral Value. If this estimate indicates that Aetna is not
in compliance with the covenant contained in the first sentence of this Clause
(i.e. the estimate is less than the Minimum Value), then in lieu of any other
determination of damages resulting from such non-compliance and in liquidation
of any such damages the amount
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payable to Citibank pursuant to Clause 2.1 shall be the Lender Default Amount,
without regard to the Collateral Value.
SECTION 2.06 No Default or Acceleration The Company's obligation to make payment
under this Article 2, if timely made, shall not be deemed to be an event of
default or acceleration of an obligation of Company, notwithstanding the
existence of an Event of Default with respect to the Borrower's obligations or a
determination of non-compliance pursuant to Clause 2.05 above.
ARTICLE 3
REGISTRATION RIGHTS
SECTION 3.01. Shelf Registration. (a) Promptly following receipt of a
notice from Citibank or its nominee under Section 2.03(b), the Company shall
prepare and file with the Commission a shelf registration statement (as amended
and supplemented from time to time, the "SHELF REGISTRATION STATEMENT") relating
to the Registrable Securities in accordance with Rule 415 under the 1933 Act and
will use its best efforts to cause such Shelf Registration Statement to be
declared effective no later than the date which is forty-five (45) days from the
date of such notice under Section 2.03(b) and, subject to Section 6.01 hereof,
to keep such Shelf Registration Statement continuously effective and in
compliance with the 1933 Act and usable for resale of such Registrable
Securities, for the greater of (a) a period from the date on which the
Commission declares such Shelf Registration Statement effective until the first
date upon which the aggregate amount of Registrable Securities then owned by
Citibank or its nominee could be sold without restriction as to amount or manner
of sale pursuant to Rule 144 under the 1933 Act within 15 trading days or (b)
for at least a period of sixty (60) days; provided, however, that such 60-day
period shall be extended for a period of time equal to the period Citibank or
its nominee refrains from selling any securities included in such registration
at the request of an underwriter of Common Stock (or other securities) engaged
by the Company.
(b) If the aggregate proceeds from an offering of Registrable Securities
pursuant to the Shelf Registration Statement are expected to be more than $100
million and if Citibank or its nominee so elects, such offering may be in the
form of an underwritten offering. Citibank or its nominee shall select the
managing Underwriters and any additional investment bankers and managers to be
used in connection with such offering; provided that such managing Underwriters
and additional investment bankers must be reasonably satisfactory to the
Company.
SECTION 3.02. Piggyback Registration. If the Company proposes to file a
registration statement under the 1933 Act with respect to an offering of Common
Stock (i) for the Company's own account (other than a registration statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the Commission))
or (ii) for the account of any of its holders of Common Stock, then the Company
shall give written notice of such proposed filing to Citibank or its nominee as
soon as practicable (but in no event less than 10 days before the anticipated
filing date), and such notice shall offer Citibank or its nominee the
opportunity to register such number
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of shares of Registrable Securities as Citibank or its nominee may request on
the same terms and conditions as the Company's or such holder's Common Stock (a
"PIGGYBACK REGISTRATION").
SECTION 3.03. Reduction of Offering. Notwithstanding anything contained
herein, if the managing Underwriter of an offering described in Section 3.02
delivers a written opinion to the Company that (i) the size of the offering that
Citibank, the Company and any other Persons intend to make or (ii) the
combination of securities that Citibank, the Company and such other Persons
intend to include in such offering are such that the success of the offering
would be materially and adversely affected, then (A) if the size of the offering
is the basis of such Underwriter's opinion, the amount of Registrable Securities
to be offered for the account of Citibank shall be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing Underwriter; provided that
in the case of a Piggyback Registration, if securities are being offered for the
account of Persons other than the Company, then the proportion by which the
amount of such Registrable Securities intended to be offered for the account of
Citibank is reduced shall not exceed the proportion by which the amount of such
securities intended to be offered for the account of such other Persons is
reduced; and (B) if the combination of securities to be offered is the basis of
such Underwriter's opinion, (x) the Registrable Securities to be included in
such offering shall be reduced as described in clause (A) above (subject to the
proviso in clause (A)), and (y) if the actions described in sub-clause (x) of
this clause (B) would, in the judgment of the managing Underwriter, be
insufficient substantially to eliminate the adverse effect that inclusion of the
Registrable Securities requested to be included would have on such offering,
such Registrable Securities will be excluded from such offering.
SECTION 3.04. Sale following registration. Citibank agrees, and agrees to
cause its nominee to use all reasonable efforts to sell all the Registrable
Securities promptly after the effective date of any relevant registration
referred to in this Article 3 and to apply the proceeds of any such sale in or
towards satisfaction of the Lender Default Amount. Where the proceeds of such
sale exceed the Lender Default Amount, Citibank will promptly pay such excess
amount to the Company in cash in immediately available funds and return to the
Company any residual Registrable Securities held by Citibank or its nominee. If
on the earlier of (i) the date Citibank and/or its nominee have sold all of the
Registrable Securities or (ii) on hundred and twenty (120) days following the
date of notice from Citibank pursuant to Section 2.03(b), if the aggregate
proceeds received by Citibank and its nominee(s) from any sale of Registrable
Securities is less than the Lender Default Amount (including in circumstances
where the Registrable Securities have not all been sold within 120 days as
above), then promptly following receipt of a certificate from Citibank or its
nominee stating the amount of such shortfall (which shortfall shall be the
amount required, after applying any sales proceeds, to ensure Citibank receives
the Lender Default Amount, such certificate shall be binding on the Company and
Citibank and its nominee(s) in the absence of demonstrable error) the Company
will pay the amount of such shortfall to Citibank or its nominee in cash in
immediately available funds and if applicable, Citibank will return to the
Company any residual Registrable Securities held by Citibank or its nominee.
ARTICLE 4
REGISTRATION PROCEDURES
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SECTION 4.01. Filings; Information. In connection with the Shelf
Registration Statement pursuant to Section 3.01 hereof, the Company and Citibank
agree as follows:
(a) Citibank will notify Company at least l0 days prior to making any
offer or sale of any Registrable Securities pursuant to the Shelf Registration
Statement. The Company shall be entitled, by notifying Citibank within 5 days of
receiving the aforementioned notice from the Citibank, to postpone or suspend
for a reasonable period of time (in no event to exceed 75 days) the offering of
any Registrable Securities if the Company shall determine in good faith that
such offering will interfere with a pending or contemplated financing, merger,
sale or acquisition of assets, recapitalization or other corporate action or
policies of the Company. If the Company elects to so postpone or suspend the
offering of any Registrable Securities, the Company shall, to the extent
necessary, amend or supplement the Shelf Registration Statement to permit the
offering of Registrable Securities within 75 days of receiving the
aforementioned notice from the Citibank.
(b) The Company will, if requested, prior to filing the Shelf
Registration Statement or any amendment or supplement thereto (but not including
any document incorporated by reference in the Shelf Registration Statement),
furnish to Citibank or its nominee and each applicable managing Underwriter, if
any, without charge, copies thereof, and thereafter furnish to Citibank or its
nominee and each such Underwriter, if any, without charge, such number of copies
of such registration statement, amendment and supplement thereto (including all
exhibits thereto and any document incorporated by reference in the Shelf
Registration Statement) and the prospectus included in such registration
statement (including each preliminary prospectus) as Citibank or its nominee or
each such Underwriter may reasonably request in order to facilitate the sale of
the Registrable Securities.
(c) After the filing of the Shelf Registration Statement, the Company
will promptly notify Citibank or its nominee of any stop order issued or, to the
Company's knowledge, threatened to be issued by the Commission and use its best
efforts to prevent the entry of such stop order or to remove it if entered at
the earliest possible date.
(d) The Company will use its best efforts in cooperation with Citibank or
its nominee and the Underwriters or agents, as the case may be, to qualify the
Registrable Securities for offer and sale under such other securities or blue
sky laws of such jurisdictions in the United States as Citibank or its nominee
reasonably requests; provided that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (d), (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction.
(e) At any time when a prospectus relating to the sale of the Registrable
Securities is required by law to be delivered in connection with sales by an
Underwriter or dealer, the Company will as promptly as is practicable notify
Citibank or its nominee of the occurrence of any event requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Registrable Securities, such prospectus will not
contain an untrue statement of a material fact or omit to state any material
fact required to be
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stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading and shall as promptly
as practicable make available to Citibank or its nominee and to the Underwriters
any such supplement or amendment. Citibank agrees that, upon receipt of any
notice from the Company of the occurrence of any event of the kind described in
the preceding sentence, Citibank or its nominee will forthwith discontinue the
offer and sale of Registrable Securities pursuant to the registration statement
covering such Registrable Securities until receipt by Citibank or its nominee
and the Underwriters of the copies of such supplemented or amended prospectus
and, if so directed by the Company, Citibank or its nominee will deliver to the
Company all copies, other than permanent file copies then in Citibank's or its
nominee's possession, of the most recent prospectus covering such Registrable
Securities at the time of receipt of such notice.
(f) The Company will deliver to Citibank or its nominee and each
Underwriter or agent participating in an offering pursuant to the Shelf
Registration Statement, without charge, as many copies of each preliminary
prospectus as Citibank or its nominee or such Underwriter or agent may
reasonably request, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will deliver to Citibank or
its nominee and each Underwriter or agent participating in such offering,
without charge, from time to time during the period when a prospectus is
required to be delivered under the 1933 Act, such number of copies of such
prospectus (as supplemented or amended) as Citibank or its nominee or such
Underwriter or agent may reasonably request.
(g) The Company will comply with the 1933 Act and the rules and
regulations of the Commission thereunder, and the 1934 Act and the rules and
regulations of the Commission thereunder so as to permit the completion of the
distribution of the Registrable Securities pursuant to the Shelf Registration
Statement in accordance with the intended method or methods of distribution
contemplated in the prospectus relating thereto.
(h) Upon the request of Citibank or its nominee or the managing
Underwriter or agent, as the case may be, or if required by the rules,
regulations or instructions applicable to the registration form used by the
Company, or by the 1933 Act or by any other rules and regulations thereunder in
connection with the offering of Registrable Securities pursuant to the Shelf
Registration Statement, the Company will prepare a prospectus supplement that
complies with the 1933 Act and the rules and regulations of the Commission
thereunder and that sets forth the aggregate amount of the Registrable
Securities being sold, the name or names of any Underwriters or agents
participating in the offering, the price at which the Registrable Securities are
to be sold, any discounts, commissions or other items constituting compensation,
and such other information as Citibank or the managing Underwriter or agent, as
the case may be, and the Company deem appropriate in connection with the
offering of the Registrable Securities prior to its being used or filed with the
Commission.
(i) The Company may require Citibank or its nominee to promptly furnish
in writing to the Company such information regarding the distribution of the
Registrable Securities as may be legally required in connection with such
registration.
(j) The Company will enter into customary agreements (including an
underwriting
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agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the sale of such Registrable
Securities.
(k) The Company will furnish to Citibank or its nominee and to each
Underwriter a signed counterpart, addressed to Citibank or its nominee or such
Underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a
comfort letter or comfort letters from the Company's independent public
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, as
Citibank or its nominee or the managing Underwriter reasonably requests.
(l) The Company will file any reports required to be filed by it under
the 1933 Act and the 1934 Act and the rules and regulations of the Commission
thereunder.
(m) The Company will use its reasonable efforts to cause all such
Registrable Securities to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
SECTION 4.02. Registration Expenses. In connection with the Shelf
Registration Statement and in connection with any Piggyback Registration, the
Company shall pay the following expenses incurred in connection with such
registration: (i) filing fees with the Commission, (ii) fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) printing expenses, (iv) fees and expenses
incurred in connection with the listing of the Registrable Securities, (v) fees
and expenses of counsel and independent certified public accountants for the
Company; (vi) the reasonable fees and expenses of any additional experts
retained by the Company in connection with such registration; and (vii) any
underwriting fees, discounts or commissions attributable to the sale of
Registrable Securities and any out-of-pocket expenses of Citibank.
SECTION 4.03 Offering Proceeds and Release of Citibank The Company and
Citibank agree that the number of Registrable Securities shall be determined
based on the Company's reasonable estimate of the amount of such Securities that
must be registered in order to provide Citibank with net sale proceeds equal to
the Lender Default Amount. Under no circumstances will the Company be obligated
to issue Citibank more than 3,200,000 shares of Registrable Securities.
Immediately upon receipt of proceeds from the sale of Registrable Securities and
cash payments from the Company in the aggregate amount of the Lender Default
Amount, Citibank shall provide the Company with written acknowledgement of the
satisfaction and release in full of all obligations of the Company to Citibank
under this Agreement.
ARTICLE 5
INDEMNIFICATION AND CONTRIBUTION
SECTION 5.01. Indemnification by the Company. The Company agrees to
indemnify and hold harmless Citibank, its officers and directors, and each
Person, if any, who controls Citibank within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and
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against any and all losses, claims, damages and liabilities (or actions in
respect thereof) caused by any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus relating to
the Registrable Securities (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus,
offering circular, or other document (including any related registration
statement, notification, or the like) incident to any such registration,
qualification or compliance, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information, relating to
Citibank or the plan of distribution furnished in writing to the Company by or
on behalf of Citibank expressly for use therein; and the Company will pay to
Citibank, each of its officers and directors, or controlling person, any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such expense, loss, claim, damage, liability or action;
provided, however, that the foregoing indemnity agreement shall not apply to
amounts paid in settlement of any such expense, loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the foregoing
indemnity agreement inure to the benefit of Citibank with respect to any
preliminary prospectus if a copy of the most current prospectus at the time of
the delivery of the Registrable Securities was not provided to any purchaser and
such current prospectus would have cured the defect giving rise to such loss,
claim, damage or liability and was in fact previously furnished to the Citibank
and the managing Underwriters, if any, in quantities sufficient to deliver the
same to all such purchasers. The Company also agrees to indemnify any
Underwriters of the Registrable Securities, their officers and directors and
each person who controls such Underwriters on substantially the same basis as
that of the indemnification of Citibank provided in this Section 5.01.
SECTION 5.02. Indemnification by Citibank. Citibank agrees to indemnify
and hold harmless the Company, its officers and directors, and each Person, if
any, who controls the Company within the meaning of either Section 15 of the
1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing
indemnity from the Company to Citibank, but only with reference to information
relating to Citibank or the plan of distribution furnished in writing by or on
behalf of Citibank expressly for use in any registration statement or prospectus
relating to the Registrable Securities (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus. Citibank also agrees to indemnify and hold harmless any
Underwriters of the Registrable Securities, their officers and directors and
each person who controls such Underwriters on substantially the same basis as
that of the indemnification of the Company provided in this Section 5.02.
SECTION 5.03. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any Person in respect of which indemnity may be sought pursuant to
Section 5.01 or Section 5.02, such Person (the "INDEMNIFIED PARTY") shall
promptly notify the Person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing; and the Indemnifying Party, upon the request
of the Indemnified Party, shall retain counsel reasonably satisfactory to such
Indemnified Party to represent such Indemnified Party and any others the
Indemnifying Party may designate in such
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proceeding and shall pay the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any Indemnified Party shall have the
right to retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such Indemnified Party unless (i) the Indemnifying Party
and the Indemnified Party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the Indemnified Party and the Indemnifying Party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that the Indemnifying Party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) at any time for all such Indemnified Parties, and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Indemnified Parties, such firm shall be designated in
writing by the Indemnified Parties. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without its written consent, but
if settled with such consent, or if there be a final judgment for the plaintiff,
the Indemnifying Party shall indemnify and hold harmless such Indemnified
Parties from and against any loss or liability (to the extent stated above) by
reason of such settlement or judgment.
SECTION 5.04. Contribution. (a) If the indemnification provided for in
this Article 5 is unavailable to an Indemnified Party in respect of any losses,
claims, damages or liabilities referred to herein, then in lieu of such
indemnification (i) as between the Company, on the one hand, and Citibank, on
the other hand, the Company and Citibank shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity incurred by the Company and Citibank, as incurred, in such
proportion as is appropriate to reflect the relative fault of the Company, on
the one hand, and of Citibank, on the other hand, in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations and
(ii) as between the Company and Citibank, on the one hand, and the Underwriters
or agents, on the other hand, the Company, Citibank, Underwriters and agents
shall contribute to such aggregate losses, liabilities, claims, damages and
expenses in proportion such that (x) the Underwriters and agents are responsible
for that portion represented by the percentage that the underwriting discounts
and commissions for the offering appearing on the cover page of the relevant
prospectus (or, if not set forth on the cover page, that are applicable to the
relevant offering) bear to the initial public offering price appearing on the
cover page (or, if not set forth on the cover page, that are applicable to the
offering), and (y) Citibank and the Company are responsible to contribute pro
rata, based upon the amount of net proceeds realized by each, in respect of the
balance.
(b) The relative fault of the Company on the one hand and Citibank on the
other hand shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by Citibank and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(c) The Company and Citibank agree that it would not be just and
equitable if
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contribution pursuant to this Section 5.04 were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 5.04 (a). The amount paid or
payable by an Indemnified Party as a result of the losses, claims, damages or
liabilities referred to in Section 5.04(a) shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this Article 5, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and
Citibank shall not be required to contribute any amount in excess of the amount
by which the net proceeds of the offering (before deducting expenses) received
by Citibank exceeds the amount of any damages which Citibank has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 1l(f) of the 1933 Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
ARTICLE 6
LOAN AGREEMENT PURCHASE
SECTION 6.01. Loan Agreement Purchase. At any time during which this
Agreement remains in effect, the Company shall have the right to purchase, or to
cause its nominee to purchase, from Citibank all of Citibank's rights, benefits
and obligations under or arising out of the Loan Agreement and all Ancillary
Agreements upon (i) at least fifteen (15) days prior notice to Citibank and (ii)
payment to Citibank an amount equal to all unpaid principal, accrued interest,
costs and other amounts due and owing to Citibank by Ta Hsing as certified by
Citibank (whose certification shall be conclusive and binding on the Company and
Citibank in the absence of demonstrable error). Upon completion of such
purchase, Citibank shall assign to the Company (or its nominee) all rights of
Citibank under the Loan Agreement, this Agreement, and all Ancillary Agreements.
SECTION 6.02. Notice of Default. Citibank shall notify the Company
promptly of any Event of Default or Potential Event of Default under the Loan
Agreement (as those terms are defined therein). If within five (5) days of
receipt of such notice the Company provides Citibank with a binding written
indication that the Company will either (i) purchase Citibank's rights, benefits
and obligations under or arising out of the Loan Agreement and all Ancillary
Documents pursuant to Section 6.01 above or (ii) cure the Event of Default to
Citibank's satisfaction (assuming such Event of Default can be cured and within
the relevant cure period specified in that Event of Default), then Citibank will
refrain from declaring such Event of Default or Potential Event of Default under
the Loan Agreement pending the purchase or cure.
ARTICLE 7
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REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as follows:
SECTION 7.01. Corporate Existence and Power. The Company (i) is a
Connecticut corporation duly incorporated, validly existing as a corporation and
in good standing under the laws of the State of Connecticut, (ii) has all
corporate powers required to issue, sell and deliver the Registrable Securities
and to perform its other obligations pursuant hereto and (iii) has all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted, the failure to obtain which would,
individually or in the aggregate, have a material adverse effect on its ability
to perform its obligations hereunder or on the financial condition of the
Company and its Subsidiaries taken as a whole.
SECTION 7.02. Corporate and Governmental Authorization; No Contravention.
The execution, delivery and performance by the Company of this Agreement, the
consummation of the transactions contemplated hereby by the Company and the
issuance of the Registrable Securities in accordance with the terms hereof by
the Company are within its corporate powers, have been duly authorized by all
necessary corporate action, require no action by or in respect of, or advance
filing with, any governmental body, agency or official (except as may be
required under applicable securities laws, including the 1933 Act, the 1934 Act,
and applicable state securities or "blue sky" laws) and do not contravene, or
constitute a default under, (i) any provision of the certificate of
incorporation or by-laws of the Company, (ii) any applicable law or regulation
or any judgment, injunction, order or decree binding upon the Company, or (iii)
any material financial agreement or instrument (excluding insurance obligations)
of the Company. In addition, this Agreement has been duly executed and delivered
by the Company.
SECTION 7.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Company and is enforceable in accordance with its terms
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity.
SECTION 7.04. Issuance of Common Stock. The issuance, sale and delivery
of the Common Stock in accordance with this Agreement has been duly authorized
by all requisite corporate action on the part of the Company, and the Common
Stock, when so issued and delivered in accordance with the provisions of this
Agreement will be duly and validly issued, fully paid and nonassessable.
SECTION 7.05. Solvency. The Company and the Company and its Subsidiaries,
on a consolidated basis, are Solvent. For the purposes of this Section,
"Solvent" means, with respect to any Person on a particular date, that on such
date (a) the fair value of the property of such Person is greater than the total
amount of liabilities, including, without limitation, contingent liabilities, of
such Person, (b) the present fair salable value of the assets of such Person is
not less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay such debts and liabilities as
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they mature and (d) such Person is not engaged in business or a transaction, and
is not about to engage in business or a transaction, for which such Person's
property would constitute an unreasonably small capital. The amount of
contingent liabilities at any time shall be computed as the amount that, in the
light of all the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured liability.
SECTION 7.06. No Material Adverse Change. Except as disclosed in the
Company's 1999 Form 10-Q, since 30 September, 1999, there has been no material
adverse change in the business, financial position or results of operations of
the Company and its Consolidated Subsidiaries, taken as a whole.
SECTION 7.07. Continuing Representation and Warranty. The Company also
represents and warrants to and undertakes with Citibank that the foregoing
representations and warranties (other than those in Sections 7.05 and 7.06) will
be true and accurate throughout the continuance of this Agreement with reference
to the facts and circumstances subsisting from time to time.
ARTICLE 8
MISCELLANEOUS
SECTION 8.01. Participation in Underwritten Registrations. No Person may
participate in any underwritten registered offering contemplated hereunder
unless such Person (a) agrees to sell its securities on the basis provided in
any underwriting arrangements approved by the Persons entitled hereunder to
approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements or this Agreement.
SECTION 8.02. Rule 144. The Company covenants that it will file any
reports required to be filed by it under the 1933 Act and the 1934 Act and that
it will take such further action as Citibank may reasonably request to the
extent required from time to time to enable Citibank or its nominee to sell
Registrable Securities without registration under the 1933 Act within the
limitation of the exemptions provided by Rule 144 under the 1933 Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission. Upon the request of Citibank, the Company
will deliver to Citibank (i) a written statement as to whether it has complied
with such reporting requirements (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company as Citibank may reasonably request, and (iii) such other information
as may be reasonably requested by Citibank in availing Citibank or its nominee
of any rule or regulation of the Commission which permits the selling of any
such Registrable Securities without registration.
SECTION 8.03. Transfer of Registration Rights. None of the rights of
Citibank under this Agreement shall be assignable by Citibank except as provided
in Section 8.06 hereof.
SECTION 8.04. Notices. All notices, requests and other communications
to either party hereunder shall be in writing (including telecopy or similar
writing) and shall be given,
14
<PAGE> 15
if to the Company, to:
Aetna Inc.
151 Farmington Avenue,
Hartford, CT 06156
with a copy to:
Aetna Inc.
Office of the Corporate Secretary
151 Farmington Avenue
Hartford, CT 06156
Telecopier No.: (860) 273-8340
Attention: William J. Casazza, Esq.
and
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Telecopier No.: (212) 450-4800
Attention: David L. Caplan, Esq.
15
<PAGE> 16
if to Citibank, to:
Citibank, N.A.
399 Park Avenue
New York, NY 10043
Telecopier No.: (212) 935-4285
Attention: Maria Hackley
and to any nominee which Citibank may use to hold Registrable Securities in
which case notices shall be sent to such address as shall be notified by
Citibank to the Company in writing,
or such other address or telecopier number as such party may hereafter specify
for the purpose by notice to the other party hereto. Each such notice, request
or other communication shall be effective when delivered at the address
specified in this Section 8.04.
SECTION 8.05. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by Citibank and the Company, or in the
case of a waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or future exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 8.06. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns (it being understood that the rights of
Citibank hereunder may be assigned only to a successor corporation or any
wholly-owned subsidiary of Citibank; provided, that no such assignment shall
relieve Citibank of its obligations hereunder). Neither this Agreement nor any
provision hereof is intended to confer upon any Person other than the parties
hereto and their respective successors and permitted assigns any rights or
remedies hereunder.
SECTION 8.07. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other party hereto.
SECTION 8.08. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect thereto. No representation,
inducement, promise, understanding, condition or warranty not set forth herein
or therein has been made or relied upon by any of the parties hereto.
16
<PAGE> 17
SECTION 8.09. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
regard to the conflicts of law rules of such state.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
AETNA INC.
By: /s/ Alan J. Weber
---------------------------------------------
Name: Alan J. Weber
Title: Vice Chairman
CITIBANK, N.A.
By: /s/ Daniel Brill
---------------------------------------------
Name: Daniel Brill
Title: Vice President
The undersigned Ta Hsing Corp. Limited, a Liberian corporation, acknowledges the
terms of this Agreement and agrees to cooperate with the Company and Citibank in
taking all actions necessary or desirable to give effect to its terms.
Ta Hsing Corp. Limited
By: /s/ Lee Chao-Hsiang
---------------------------------------------
Name: Lee Chao-Hsiang
Title: Director
17
<PAGE> 1
EXHIBIT 10.17
SPLIT DOLLAR INSURANCE AGREEMENT dated February 1, 1990, by and between
MADLYN K. ABRAMSON, MARCY ABRAMSON, NANCY WOLFSON, JUDITH ABRAMSON and DAVID B.
SOLL, Trustees under Indenture of Trust of LEONARD ABRAMSON, dated February 28,
1985, ("Owner") and U.S. HEALTHCARE, INC. ("Company").
The parties hereto in consideration of the agreements and covenants
hereinafter set forth and intending to be legally bound, agree as follows:
1. This agreement relates to three policies of insurance ("Policies")
on the life of Leonard Abramson ("Insured") issued by Massachusetts Mutual Life
Insurance Company (the "Insurer"), Policy Nos. 6705612, 7662019 and 7699729.
Subject to the conditions hereinafter set forth, Owner shall be the sole owner
of the Policies.
2. The Company has heretofore and shall continue to pay the portion
of the annual premium on each of the Policies equal to the Company's "Cash
Investment" in each Policy, which shall be equal to: (i) the annual net premium,
minus (ii) the value of the death benefit to which Owner is then entitled,
- -----
determined by using the lesser of (a) the applicable one-year term premium cost
computed under Revenue Ruling 55-747, 1955-2 C.B. 228 (or any superseding ruling
----------------------
thereto) or (b) the applicable premium rates charged by the Insurer for initial
issue one-year term insurance. In any year, the "annual net premium" shall equal
the gross premium less policy dividends which are not used to purchase
additional insurance. The
<PAGE> 2
Company shall also pay to or on behalf of the Insured a bonus equal to the
remaining portion of the annual premium otherwise payable by Owner.
3. In consideration of the payments made pursuant to paragraph 2
hereof, the Company shall receive from the proceeds of each Policy, upon the
Insured's death (or upon the surrender of each Policy during the Insured's
lifetime) an amount equal to the Company's "Cash Investment" in each such Policy
as calculated under paragraph 2 hereof. The balance of the proceeds, if any,
shall be paid as provided to the Owner.
4. To secure the Cash Investment, Owner shall assign to the Company a
security interest in each of the Policies equal in amount to the Cash Investment
and such security shall be limited to the Company's right to receive such amount
out of the proceeds of each policy.
5. The assignment to the Company provided for in this agreement shall
be effectuated by the execution of a Collateral Assignment Agreement
substantially in the form attached hereto as Exhibit "A".
6. Owner shall notify the Insurer of the Collateral Assignment
Agreement and shall take no action that would impair the security interest of
the Company under the Collateral Assignment Agreement.
7. Each and every right, interest or incident of ownership associated
with each of the Policies which is not expressly assigned to the Company by the
Collateral Assignment
2
<PAGE> 3
Agreement shall be retained by Owner, including, but not limited to, the right
to designate and change the beneficiaries of the Policies, the right to transfer
the Policies subject to the rights assigned to the Company, the right to
surrender the Policies subject to the rights assigned to the Company, and the
right to exercise any option provided in the Policies.
8. Subject to taking notice of the Collateral Assignment Agreement
when it is filed at its home office, the Insurer shall have no obligation except
as set forth in the Policies. The Insurer shall not be bound to inquire into or
take notice of any of the covenants herein contained. Upon the Insured's death
(or upon surrender of any Policy prior to the Insured's death), the Insurer
shall be discharged from its obligations upon payment of the proceeds in
accordance with the provisions of each such Policy and the Collateral Assignment
Agreement and without regard to this agreement or any amendment hereof.
9. For purposes of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Company is the "Named Fiduciary" and
"Administrator" within the meaning of sections 402(a) and 3(16)(A) of ERISA,
respectively, and the fiduciary for deciding claims. All claims shall be
resolved under procedures which comply with regulations promulgated under
section 503 of ERISA.
10. Amendments may be made to this agreement by a writing signed by
each of the parties and attached hereto.
3
<PAGE> 4
11. All matters respecting the validity, effect and interpretation of
this agreement shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania.
12. This agreement shall be binding upon the parties hereto and their
successors and assigns.
IN WITNESS WHEREOF, this agreement has been executed as of the date first
above written.
<TABLE>
<CAPTION>
<S> <C>
INDENTURE OF TRUST OF LEONARD ABRAMSON
U.S. HEALTHCARE, INC. DATED FEBRUARY 28, 1985
By: /s/ Alan R. Letofsky, SR VP By: /s/ Madlyn K. Abramson (SEAL)
--------------------------------------- -------------------------------------
and Secretary Madlyn K. Abramson
Attest: /s/ Marcy Abramson (SEAL)
----------------------------------- ---------------------------------------------
Marcy Abramson
[Corporate Seal]
/s/ Nancy Wolfson (SEAL)
---------------------------------------------
Nancy Wolfson
/s/ Judith Abramson (SEAL)
---------------------------------------------
Judith Abramson
/s/ David B. Soll, M.D. (SEAL)
---------------------------------------------
David B. Soll, Trustees
</TABLE>
4
<PAGE> 5
COLLATERAL ASSIGNMENT AGREEMENT dated February 1, 1990, by and between
MADLYN K. ABRAMSON, MARCY ABRAMSON, NANCY WOLFSON, JUDITH ABRAMSON and DAVID B.
SOLL, Trustees under Indenture of Trust of LEONARD ABRAMSON, dated February 28,
1985 ("Owner") and U.S. HEALTHCARE, INC. (the "Company").
This Agreement relates to Massachusetts Mutual Life Insurance Company
Policy Nos. 6705612, 7662019 and 7699729, ("Policies") on the life of Leonard
Abramson ("Insured").
The parties have entered into a Split Dollar Insurance Agreement
contemporaneously with this Agreement ("Insurance Agreement").
Pursuant to the Insurance Agreement, Owner has agreed to assign to the
Company a security interest in the Policies in order to provide for the payment
to the Company of the Cash Investment as defined in the Insurance Agreement.
The parties hereto, in consideration of the foregoing and the agreements
and covenants hereinafter set forth and intending to be legally bound hereby,
agree as follows:
1. Owner hereby assigns to the Company a security interest in each of
the Policies in order to secure to the Company the payment of the Cash
Investment in each Policy, consisting of the following rights:
<PAGE> 6
(a) Upon the Insured's death, the Company shall have the right
to receive so much of the proceeds payable under each of the Policies as is
equal to the Cash Investment, determined as of the date of death. The Company
may collect such portion of the proceeds directly from the Insurer.
(b) In the event a Policy is surrendered by Owner prior to the
Insured's death, the Company shall have the right to receive so much of the
proceeds received as is equal to the Cash Investment, determined as of the date
of surrender. The Company may collect such portion of the proceeds on surrender
of the Policy directly from the Insurer.
2. The Insurer is authorized to rely solely on the written statement
of the Company and the Owner for the exercise of any rights under each Policy
assigned herein and as to the amount of the Cash Investment as of any date. The
Insurer is hereby authorized to recognize such statement without investigation
or the giving of any notice. The written acknowledgment of receipt by the
Company for any sums paid to it by the Insurer pursuant to the written statement
of the Cash Investment in a Policy referred to in the first sentence of this
paragraph shall be a full discharge and release of the Insurer with respect to
that Policy. Payment of the Cash Investment shall be made to the exclusive order
of the Company.
2
<PAGE> 7
3. Each and every right, interest, or incident of ownership
associated with each of the Policies which is not expressly assigned to the
Company by this Collateral Assignment Agreement is retained by Owner, including,
but not limited to, the right to designate and change the beneficiaries of the
Policies, the right to transfer the Policy subject to the rights assigned to the
Company, the right to surrender the Policies subject to the rights assigned to
the Company, and the right to exercise any option provided in each of the
Policies.
4. Each of the undersigned declares that no proceedings in bankruptcy
are pending against it or them and that its or their property is not subject to
any assignment for the benefit of creditors.
5. All matters respecting the validity, effect and interpretation of
this Collateral Assignment Agreement shall be determined in accordance with the
laws of the Commonwealth of Pennsylvania.
6. This Collateral Assignment Agreement shall be binding upon the
parties hereto and their successors and assigns.
IN WITNESS WHEREOF, the parties have hereunto set
3
<PAGE> 8
their hands and seals as of the date first above written.
<TABLE>
<CAPTION>
<S> <C>
INDENTURE OF TRUST OF LEONARD
U.S. HEALTHCARE, INC. ABRAMSON DATED FEBRUARY 28, 1985
By: /s/ Alan R. Letofsky, SR VP By: /s/ Madlyn K. Abramson (SEAL)
--------------------------------------- -------------------------------------
and Secretary Madlyn K. Abramson
Attest: /s/ Marcy Abramson (SEAL)
----------------------------------- ---------------------------------------------
[Corporate Seal] Marcy Abramson
/s/ Nancy Wolfson (SEAL)
---------------------------------------------
Nancy Wolfson
/s/ Judith Abramson (SEAL)
---------------------------------------------
Judith Abramson
/s/ David B. Soll, M.D. (SEAL)
---------------------------------------------
David B. Soll, Trustees
</TABLE>
4
<PAGE> 1
EXHIBIT 10.18
SPLIT DOLLAR INSURANCE AGREEMENT dated January 21, 1991, by and between
MARCY ABRAMSON, NANCY WOLFSON, JUDITH ABRAMSON, DAVID B. SOLL, JEROME GOODMAN
and EDWARD M. GLICKMAN, Trustees under Indenture of Trust of LEONARD ABRAMSON
and MADLYN K. ABRAMSON, dated as of November 1, 1990, ("Owner") and U.S.
HEALTHCARE, INC. ("Company").
The parties hereto in consideration of the agreements and covenants
hereinafter set forth and intending to be legally bound, agree as follows:
1. This agreement relates to a policy of insurance ("Policy") on the
lives of Leonard Abramson and Madlyn K. Abramson ("Insureds") issued by the
Prudential Insurance Company of America (the "Insurer"), Policy No. 79 671 777.
Subject to the conditions hereinafter set forth, Owner shall be the sole owner
of the Policy.
2. The Company has heretofore and shall continue to pay the portion
of the annual premium on the Policy equal to the Company's "Cash Investment" in
the Policy, which shall be equal to: (i) the annual net premium, minus (ii) the
-----
value of the death benefit to which Owner is then entitled, determined by using
the lesser of (a) the applicable one-year term premium cost computed under
Revenue Ruling 55-747, 1955-2 C.B. 228 (or any superseding ruling thereto) or
- ----------------------
(b) the applicable premium rates charged by the Insurer for initial issue
one-year term insurance. In any year, the "annual net premium" shall equal the
gross premium less policy dividends which are not used to
<PAGE> 2
purchase additional insurance. The Company shall also pay to or on behalf of the
Insureds a bonus equal to the remaining portion of the annual premium otherwise
payable by Owner.
3. In consideration of the payments made pursuant to paragraph 2
hereof, the Company shall receive from the proceeds of the Policy, upon the
death of the survivor of the Insureds (or upon the surrender of the Policy
during the Insureds' lifetimes) an amount equal to the Company's "Cash
Investment" in the Policy as calculated under paragraph 2 hereof. The balance of
the proceeds, if any, shall be paid as provided to the Owner.
4. To secure the Cash Investment, Owner shall assign to the Company a
security interest in the Policy equal in amount to the Cash Investment and such
security shall be limited to the Company's right to receive such amount out of
the proceeds of the policy.
5. The assignment to the Company provided for in this agreement shall
be effectuated by the execution of a Collateral Assignment Agreement
substantially in the form attached hereto as Exhibit "A".
6. Owner shall notify the Insurer of the Collateral Assignment
Agreement and shall take no action that would impair the security interest of
the Company under the Collateral Assignment Agreement.
7. Each and every right, interest or incident of ownership associated
with the Policy which is not expressly
2
<PAGE> 3
assigned to the Company by the Collateral Assignment Agreement shall be retained
by Owner, including, but not limited to, the right to designate and change the
beneficiaries of the Policy, the right to transfer the Policy subject to the
rights assigned to the Company, the right to surrender the Policy subject to the
rights assigned to the Company, and the right to exercise any option provided in
the Policy.
8. Subject to taking notice of the Collateral Assignment Agreement
when it is filed at its home office, the Insurer shall have no obligation except
as set forth in the Policy. The Insurer shall not be bound to inquire into or
take notice of any of the covenants herein contained. Upon the Insureds' deaths
(or upon surrender of the Policy prior to the deaths of both Insureds), the
Insurer shall be discharged from its obligations upon payment of the proceeds in
accordance with the provisions of the Policy and the Collateral Assignment
Agreement and without regard to this agreement or any amendment hereof.
9. For purposes of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Company is the "Named Fiduciary" and
"Administrator" within the meaning of sections 402(a) and 3(16)(A) of ERISA,
respectively, and the fiduciary for deciding claims. All claims shall be
resolved under procedures which comply with regulations promulgated under
section 503 of ERISA.
10. Amendments may be made to this agreement by a writing signed by
each of the parties and attached hereto.
3
<PAGE> 4
11. All matters respecting the validity, effect and interpretation of
this agreement shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania.
12. This agreement shall be binding upon the parties hereto and their
successors and assigns.
IN WITNESS WHEREOF, this agreement has been executed as of the date first
above written.
<TABLE>
<CAPTION>
<S> <C>
U.S. HEALTHCARE, INC. INDENTURE OF TRUST OF
LEONARD ABRAMSON AND
MADLYN K. ABRAMSON
DATED AS OF NOVEMBER 1, 1990
By: /s/ Alan R. Letofsky (SR VP) By: /s/ Marcy Abramson (SEAL)
--------------------------------------- -----------------------------
Marcy Abramson
Attest: /s/ Nancy A. Wolfson (SEAL)
----------------------------------- -----------------------------------
[Corporate Seal] Nancy Wolfson
/s/ Judith Abramson (SEAL)
-----------------------------------
Judith Abramson
/s/ David B. Soll, M.D. (SEAL)
-----------------------------------
David B. Soll
/s/ Jerome S. Goodman, Jr. (SEAL)
-----------------------------------
Jerome Goodman
/s/ Edward M. Glickman (SEAL)
-----------------------------------
Edward M. Glickman, Trustees
</TABLE>
4
<PAGE> 5
COLLATERAL ASSIGNMENT AGREEMENT dated January 21, 1991, by and between
MARCY ABRAMSON, NANCY WOLFSON, JUDITH ABRAMSON, DAVID B. SOLL, JEROME GOODMAN
and EDWARD M. GLICKMAN, Trustees under Indenture of Trust of LEONARD ABRAMSON
and MADLYN K. ABRAMSON, dated as of November 1, 1990 ("Owner") and U.S.
HEALTHCARE, INC. (the "Company").
This Agreement relates to The Prudential Insurance Company of America
Policy No. 79 671 777, ("Policy") on the lives of Leonard Abramson and Madlyn K.
Abramson ("Insureds").
The parties have entered into a Split Dollar Insurance Agreement
contemporaneously with this Agreement ("Insurance Agreement").
Pursuant to the Insurance Agreement, Owner has agreed to assign to the
Company a security interest in the Policy in order to provide for the payment to
the Company of the Cash Investment as defined in the Insurance Agreement.
The parties hereto, in consideration of the foregoing and the agreements
and covenants hereinafter set forth and intending to be legally bound hereby,
agree as follows:
1. Owner hereby assigns to the Company a security interest in the
Policy in order to secure to the Company the payment of the Cash Investment in
the Policy, consisting of the following rights:
<PAGE> 6
(a) Upon the death of the survivor of the Insureds, the Company
shall have the right to receive so much of the proceeds payable under the Policy
as is equal to the Cash Investment, determined as of the date of the survivor's
death. The Company may collect such portion of the proceeds directly from the
Insurer.
(b) In the event the Policy is surrendered by Owner prior to
the deaths of both Insureds, the Company shall have the right to receive so much
of the proceeds received as is equal to the Cash Investment, determined as of
the date of surrender. The Company may collect such portion of the proceeds on
surrender of the Policy directly from the Insurer.
(2) The Insurer is authorized to rely solely on the written statement
of the Company and the Owner for the exercise of any rights under the Policy
assigned herein and as to the amount of the Cash Investment as of any date. The
Insurer is hereby authorized to recognize such statement without investigation
or the giving of any notice. The written acknowledgment of receipt by the
Company for any sums paid to it by the Insurer pursuant to the written statement
of the Cash Investment in the Policy shall be a full discharge and release of
the Insurer with respect to the Policy. Payment of the Cash Investment shall be
made to the exclusive order of the Company.
2
<PAGE> 7
3. Each and every right, interest, or incident of ownership
associated with the Policy which is not expressly assigned to the Company by
this Collateral Assignment Agreement is retained by Owner, including, but not
limited to, the right to designate and change the beneficiaries of the Policy,
the right to transfer the Policy subject to the rights assigned to the Company,
and the right to exercise any option provided in the Policy.
4. Each of the undersigned declares that no proceedings in bankruptcy
are pending against it or them and that its or their property is not subject to
any assignment for the benefit of creditors.
5. All matters respecting the validity, effect and interpretation of
this Collateral Assignment Agreement shall be determined in accordance with the
laws of the Commonwealth of Pennsylvania.
6. This Collateral Assignment Agreement shall be binding upon the
parties hereto and their successors and assigns.
IN WITNESS WHEREOF, the parties have hereunto set
3
<PAGE> 8
their hands and seals as of the date first above written.
<TABLE>
<CAPTION>
<S> <C>
U.S. HEALTHCARE, INC. INDENTURE OF TRUST OF
LEONARD ABRAMSON AND
MADLYN K. ABRAMSON
DATED AS OF NOVEMBER 1, 1990
By: /s/ Alan R. Letofsky (SR VP) By: /s/ Marcy Abramson (SEAL)
--------------------------------------- -----------------------------
Marcy Abramson
Attest: /s/ Nancy A. Wolfson (SEAL)
----------------------------------- -----------------------------------
[Corporate Seal] Nancy Wolfson
/s/ Judith Abramson (SEAL)
-----------------------------------
Judith Abramson
/s/ David B. Soll, M.D. (SEAL)
-----------------------------------
David B. Soll
/s/ Jerome S. Goodman, Jr. (SEAL)
-----------------------------------
Jerome Goodman
/s/ Edward M. Glickman (SEAL)
-----------------------------------
Edward M. Glickman,
Trustees
</TABLE>
4
<PAGE> 1
EXHIBIT 10.34
151 Farmington Avenue RICHARD L. HUBER
Hartford, CT 06156 Vice Chairman
Strategy, Finance & Administration
(203) 273-7551
June 6, 1995
Frederick C. Copeland, Jr.
75 Bloomfield Avenue
Hartford, CT 06105
Dear Rick,
On behalf of Aetna, I am pleased to offer you the position of President of Aetna
International Inc. As we discussed, this offer is subject to the approval of
Aetna's Board of Directors. The specifics of the offer are as follows:
1. STARTING DATE: On or about July 1, 1995, but no later than July 15, 1995.
2. BASE SALARY: Your base salary will be $300,000 per annum payable
biweekly. This will be reviewed on the basis of your performance during
our annual salary review process in 1996 and each year thereafter as long
as you are employed by Aetna. The Company may also, from time to time,
review and adjust salaries to reflect appropriate compensation for each
position.
3. ANNUAL BONUS PROGRAM: You will also be eligible for consideration for an
award under the Company's annual incentive program beginning with the
1995 performance year (payable in 1996) as long as the plan is in effect.
For the performance year of 1995, we will guarantee you a minimum award
of $100,000.
4. FUTURE BONUS PAYMENTS: We will consider a combination of Company, and
individual performance and under the current plan, your bonus target will
be 35% of your base salary. Each year, while you are employed by Aetna,
you will be eligible for consideration for additional awards under the
annual incentive program while the plan remains in effect.
5. STOCK OPTION PLAN: We will recommend to the Aetna Board Committee on
Compensation and Organization that you be granted this year an option to
purchase 8,000 shares of Aetna's common stock. The option will be based
on the price of a share on the date on which approval is secured from the
Committee. These options are not exercisable for the first year after the
date of grant and will vest in installments thereafter. Thereafter while
employed by Aetna, you will be eligible for consideration for grants
under the Stock Incentive Plan while the plan remains in effect.
<PAGE> 2
Page 2
Frederick C. Copeland, Jr.
June 6, 1995
6. LONG-TERM INCENTIVE PROGRAM: In addition, we will recommend a grant of
4,700 ACEShares, subject to Committee approval, for the performance cycle
1995-1998, to be granted at the next Board meeting where grants will be
made (expected in September, 1995). This award will vest, if at all, only
upon attainment of performance objectives as determined by the Committee.
Details of the Company's Long-term Incentive Program exercise, ownership
and vesting provisions will be forwarded to you upon Board approval.
7. PENSION: Your participation in the pension plan will automatically begin
after you have completed one year of service with Aetna. Under the terms
of the plan currently in effect, you will receive credit for years of
service from your date of employment. We also will credit you under a
supplemental plan with an additional three years of service as follows:
the first after two years of active service; the second after three years
of active service; and the third after four years of active service.
Thereafter, you will accumulate one year for each year you remain in the
employ of the Company (but no more than 35 years, the maximum under the
plans) as long as the plan remains in effect. Under the plan, your
benefit vests after five years of credited service.
8. SIGN-ON BONUS: A one-time payment of $60,000 (before taxes) will be made
as soon as possible after you begin work at Aetna in recognition of your
career move. You will repay this amount in full to Aetna if you
voluntarily leave within twelve months.
9. INCENTIVE SAVINGS PLAN: You will be eligible to participate in the Aetna
Incentive Savings Plan after you have completed one year of service.
However, during your first year of service, you will eligible to defer up
to six percent of your base salary under a non-qualified supplemental
plan. Under the supplemental plan now in effect, the Company will match
100% of the first 5% of base salary you defer.
10. MEDICAL, DENTAL AND LIFE INSURANCE: You will be eligible to participate
in our contributory flexible benefit plan.
11. VACATION: In 1995, you will receive 10 days of accrued vacation for your
use as soon as you join the Company. Thereafter, for the purpose of
vacation day accrual only, you will be treated as a 10-year employee;
that is, currently a maximum of 20 vacation days per year.
12. SEVERANCE: If your employment is involuntarily terminated under
circumstances that would call for benefits under the provisions of the
Aetna Severance Pay Plan, subject to receipt of customary convenants and
releases, you will be entitled to the standard benefits of the plan with
a minimum total benefit, inclusive of any notice, of 52 weeks.
13. CONTINGENCIES: The offer is contingent upon receipt of documents which
show that you are legally entitled to work in the United States (these
must be presented on your first day) and satisfactory results from a drug
test which will be scheduled at your convenience prior to your start
date.
<PAGE> 3
Page 3
Frederick C. Copeland, Jr.
June 6, 1995
Please read the enclosed Benefits Handbook carefully in order to fully
understand the terms and conditions of the plans mentioned above.
We are delighted to extend this offer to you and look forward to your
acceptance. We hope this employment relationship will be mutually enjoyable and
lasting. Of course, you may terminate your employment at any time, as may Aetna.
Please acknowledge your acceptance of this offer by initialing the enclosed copy
of this letter, completing the enclosed employment application and returning
both to me. I would greatly appreciate your response within seven (7) days after
receipt of this letter. If you have any questions or would like to discuss the
terms of our offer, please do not hesitate to call me.
Sincerely,
/s/ Richard L. Huber
Richard L. Huber
Vice Chairman
/s/ Frederick C. Copeland, Jr. 6/9/95
- ----------------------------------------
Accepted
Frederick C. Copeland, Jr.
Enclosures:
<PAGE> 1
EXHIBIT 10.35
INTEROFFICE
COMMUNICATION MARY ANN CHAMPLIN
Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Frederick C. Copeland, Jr.
Date July 22, 1996
Subject EMPLOYMENT AGREEMENT
I am pleased to inform you that effective July 19, 1996, Aetna Inc. has assumed
all of the obligations of Aetna Services, Inc. (formerly Aetna Life and Casualty
Company) under your Employment Agreement with Aetna Services, Inc. All
references to the "Company" in your Employment Agreement will hereinafter be
deemed to mean both Aetna Services, Inc. and Aetna Inc. Among other things, this
means that the Change in Control provisions of your Employment Agreement would
be triggered by a change in control of either Aetna Services, Inc. or Aetna Inc.
By way of background, Aetna Inc. became the ultimate parent within the Aetna
holding company system as a result of the merger with U.S. Healthcare. Your
Employment Agreement was entered into with Aetna Services, Inc., which is now a
direct subsidiary of Aetna Inc. We felt it would be appropriate for the new
ultimate parent, Aetna Inc., to assume these obligations to place you on an
equivalent footing post-merger.
The assumption of your Employment Agreement is self-executing. You do not need
to take any action in response to this letter. If you have any questions or
concerns, please let me know.
/s/ Mary Ann Champlin
<PAGE> 1
EXHIBIT 10.38
INTEROFFICE COMMUNICATION
RICHARD L. HUBER
Office of Chairman, A801
(860) 273-7851
Fax: (860) 273-6872
To Frederick C. Copeland, Jr.
Date December 3, 1999
Subject Employment Agreement
This memo is to outline severance arrangements in effect for you through
December 31, 2001, under certain special circumstances. This special arrangement
is intended to be effective in the event of circumstances not covered by those
outlined in my memo to you dated May 4, 1999 (which remains in effect), but is
not intended to duplicate benefits.
In the event following an International Business Change in Control (as defined
below) (i) your employment is involuntarily terminated for any reason other than
misconduct, or (ii) your total target cash compensation (comprised of base
salary and annual bonus opportunity for target-level performance) is reduced,
you will be entitled to receive 24 months continuation of cash compensation
(calculated at base salary and annual bonus at target-level performance) in lieu
of any severance or salary continuation benefit to which you may otherwise have
been entitled upon delivery to Aetna Inc. (the Company) of a release of any
employment-related claims in the Company's customary form. For these purposes,
an International Business Change in Control is described in Attachment A and
incorporated herein.
Aetna Inc.
By: /s/ Richard L. Huber
--------------------
Richard L. Huber
Att: 1
<PAGE> 2
ATTACHMENT A
"International Business Change in Control" means the closing of the sale of all
or substantially all of the stock or assets (other than transfers within the
Aetna Inc. (the "Company") controlled group) of Aetna International, Inc. or its
subsidiaries constituting the entire business of the Aetna International
business segment as reported by the Company, but not including any
public-offering of securities of Aetna International, Inc. or its subsidiaries
in which no "person" as defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange
Act, but excluding the Company and any subsidiary thereof and any employee
benefit plan sponsored or maintained by the Company or any subsidiary (including
any trustee of such plan acting as trustee), directly or indirectly, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended
from time to time) of securities representing 20 percent or more of the combined
voting power of the then outstanding securities.
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
(Millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $1,224.2 $1,408.3 $1,511.2 $338.7 $726.2
Add back fixed charges 399.5 358.5 321.9 245.1 187.0
Minority interest 17.5 10.7 14.7 16.4 16.1
- ---------------------------------------------------------------------------------------------------------------------------
Income as adjusted $1,641.2 $1,777.5 $1,847.8 $600.2 $929.3
===========================================================================================================================
Fixed charges:
Interest on indebtedness (1) $ 279.4 $ 250.9 $ 235.8 $168.3 $115.9
Portion of rents representative
of interest factor 120.1 107.6 86.1 76.8 71.1
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed charges $ 399.5 $ 358.5 $ 321.9 $245.1 $187.0
===========================================================================================================================
Preferred stock dividend
requirements 52.1 92.2 92.4 41.1 -
- ---------------------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 451.6 $ 450.7 $ 414.3 $286.2 $187.0
===========================================================================================================================
Ratio of earnings to fixed
charges 4.11 4.96 5.74 2.45 4.97
===========================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.63 3.94 4.46 2.10 4.97
===========================================================================================================================
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary.
(Refer to Note 13 of Notes to Consolidated Financial Statements in the
Company's 1999 Annual Report.)
Page 1
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------------------
(Millions) 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pretax income from continuing operations $1,017.3 $1,162.7 $1,505.2 $335.0
Add back fixed charges 396.5 354.3 318.1 243.8
Minority interest 17.2 10.8 15.7 16.4
- ---------------------------------------------------------------------------------------------------------------------
Income as adjusted $1,431.0 $1,527.8 $1,839.0 $595.2
=====================================================================================================================
Fixed charges:
Interest on indebtedness (2) $ 279.4 $ 250.9 $ 234.0 $168.3
Portion of rents representative
of interest factor 117.1 103.4 84.1 75.5
- ---------------------------------------------------------------------------------------------------------------------
Total fixed charges $ 396.5 $ 354.3 $ 318.1 $243.8
=====================================================================================================================
Preferred stock dividend requirements - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total combined fixed charges and preferred
stock dividend requirements $ 396.5 $ 354.3 $ 318.1 $243.8
=====================================================================================================================
Ratio of earnings to fixed charges 3.61 4.31 5.78 2.44
=====================================================================================================================
Ratio of earnings to combined fixed charges
and preferred stock dividends 3.61 4.31 5.78 2.44
=====================================================================================================================
</TABLE>
(1) Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities
of Aetna Services, Inc. (Refer to Note 12 of Notes to Consolidated
Financial Statements in the Company's 1999 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.
(See Note 13 of Notes to Consolidated Financial Statements in the Company's
1999 Annual Report.)
Page 2
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------
(Millions, except per common share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums:
Aetna U.S. Healthcare $ 18,522.6 $ 13,006.2 $10,844.6 $ 7,765.2 $ 5,949.7
Aetna Financial Services (1) 107.5 131.9 158.5 180.7 260.2
Aetna International 2,152.3 1,578.5 1,434.1 1,166.1 1,038.5
Large Case Pensions 118.9 122.7 155.0 214.1 244.4
- -----------------------------------------------------------------------------------------------------------------------------
Total premiums 20,901.3 14,839.3 12,592.2 9,326.1 7,492.8
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income, fees and other
income, and net realized capital gains (losses):
Aetna U.S. Healthcare 2,365.4 2,113.2 2,056.8 1,968.5 1,665.7
Aetna Financial Services (1) 1,422.9 1,755.5 1,744.0 1,581.5 1,445.9
Aetna International 655.5 569.1 541.4 464.9 421.3
Large Case Pensions 1,052.9 1,241.2 1,480.0 1,775.0 2,019.3
Corporate: Other 54.7 123.5 138.3 98.0 9.7
- -----------------------------------------------------------------------------------------------------------------------------
Total net investment income, fees and other income,
and net realized capital gains (losses) 5,551.4 5,802.5 5,960.5 5,887.9 5,561.9
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue $ 26,452.7 $ 20,641.8 $18,552.7 $15,214.0 $13,054.7
=============================================================================================================================
Income from continuing operations:
Aetna U.S. Healthcare $ 437.3 $ 431.0 $ 453.8 $ 58.7 $ 286.0
Aetna Financial Services (1) 193.9 300.0 257.1 186.2 198.0
Aetna International 167.2 136.0 142.4 109.9 86.6
Large Case Pensions 151.0 169.9 234.2 258.4 89.2
Corporate: Interest (176.5) (155.9) (147.5) (103.9) (70.4)
Other (56.0) (32.9) (38.9) (304.2) (115.5)
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 716.9 848.1 901.1 205.1 473.9
- -----------------------------------------------------------------------------------------------------------------------------
Net income 716.9 848.1 901.1 651.0 251.7
- -----------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses), net of tax
(included above) (9.7) 173.9 198.4 85.9 29.5
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 112,839.0 105,129.9 96,000.6 92,912.9 84,323.7
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,677.9 2,214.5 2,346.2 2,380.0 989.1
- -----------------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary limited liability
company holding primarily debentures guaranteed by Aetna - 275.0 275.0 275.0 275.0
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 10,690.4 11,388.9 11,195.4 10,889.7 7,272.8
- -----------------------------------------------------------------------------------------------------------------------------
Per common share data:
Income from continuing operations
Basic $ 4.76 $ 5.50 $ 5.67 $ 1.37 $ 4.18
Diluted 4.72 5.41 5.60 1.36 4.14
Net Income
Basic 4.76 5.50 5.67 4.77 2.22
Diluted 4.72 5.41 5.60 4.72 2.20
Dividends declared .80 .80 .80 1.29 2.76
Shareholders' equity 74.93 74.51 70.85 66.79 63.39
Market price at year end 55.81 78.63 70.56 80.00 69.25
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Formerly Aetna Retirement Services
See Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations for significant
events affecting the comparability of current year results with 1998 and 1997
results.
Page 1
<PAGE> 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses the financial condition of Aetna Inc. and its subsidiaries
(collectively, the "Company") as of December 31, 1999 and 1998, and its results
of operations for 1999, 1998 and 1997. This Management's Discussion and Analysis
should be read in its entirety, since it contains detailed information that is
important to understand the Company's results and financial condition.
OVERVIEW
General
At December 31, 1999, the Company's operations included three core businesses -
Aetna U.S. Healthcare, Aetna Financial Services (formerly 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 Financial Services offers a range of financial services
products, including fixed and variable annuities and mutual funds, 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.
Recent Developments
On February 25, 2000 William H. Donaldson became Chairman, President and
Chief Executive Officer of the Company. He replaced Richard L. Huber, who
resigned. The Company is undertaking a review of its strategy and operations.
Business Realignment
In January 2000, the Company announced a realignment of the Company's health
care, financial services and international businesses into two businesses:
Global Health and Global Financial Services. The new structure is intended to
strengthen the linkage between the international and domestic businesses and
increase the sharing of technology and product expertise. Global Health will be
made up of the following: Aetna U.S. Healthcare (except its Group Life and
Disability Insurance business) and Aetna International's health businesses.
Global Financial Services will be made up of the following: Aetna Financial
Services, Aetna International's life and pension businesses, Aetna U.S.
Healthcare's Group Life and Disability Insurance business and the Large Case
Pensions business. This realignment will result in the formation of new
reportable segments in 2000.
Consolidated Results
The Company reported net income of $717 million in 1999, $848 million in 1998
and $901 million in 1997. Net income per diluted common share was $4.72 in
1999, $5.41 in 1998 and $5.60 in 1997.
Net income includes a reduction of the reserve for loss on discontinued products
for Large Case Pensions of $50 million in 1999, $44 million in 1998 and $108
million in 1997. Net income also includes Year 2000 costs of $88 million in 1999
and $108 million in 1998. A gain related to the sale of the domestic individual
life insurance business of $64 million is included in 1998 net income, and a
benefit of $29 million primarily related to severance and facilities actions is
included in 1997 net income. Excluding these factors and net realized capital
gains or losses in all three years, results would have been $764 million in
1999, $675 million in 1998 and $565 million in 1997.
Page 2
<PAGE> 3
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
Acquisitions and Dispositions
Aetna U.S. Healthcare Transactions
Acquisition of Prudential Health Care Business
On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion, subject to adjustment as provided in the transaction
agreements. Included in the acquisition are PHC's risk HMO, POS, PPO and
Indemnity health lines, as well as its dental risk business. The Company
financed 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 ultimately expects to replace this commercial paper with
medium- or long-term fixed-income securities. The Company also agreed to service
Prudential's administrative services only ("ASO") business.
Since the closing, the Company's results have been affected by, among other
things, the operating results of PHC, the costs of financing the transaction and
the amortization of goodwill and other acquired intangible assets created as a
result of the transaction. The operations, and related amortization of
intangible assets, of PHC are reflected in the Aetna U.S. Healthcare segment
while the financing costs of the acquisition are reflected in the Corporate
segment. Refer to "Aetna U.S. Healthcare", "Corporate", "Liquidity and Capital
Resources" and Note 3 of Notes to Consolidated Financial Statements for further
discussion.
Sale of NYLCare Texas
In connection with the PHC acquisition, the Company agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS and
other related businesses ("NYLCare Texas") acquired by the Company as part of
the 1998 acquisition of New York Life Insurance Company's health care business
("NYLCare"). Pursuant to this agreement, on September 14, 1999, Aetna U.S.
Healthcare and Health Care Service Corporation ("HCSC") entered into an
agreement for Blue Cross and Blue Shield of Texas ("Blue Cross"), a division of
HCSC, to acquire the NYLCare Texas operations for approximately $500 million in
cash, subject to certain adjustments, including an adjustment based on the level
of membership at the closing date. At December 31, 1999, the Blue Cross
agreement affected approximately 497,000 Commercial HMO risk members, 56,000
Commercial HMO non-risk members and 12,000 PPO members in the Houston, Austin,
San Antonio, Corpus Christi, Beaumont, Dallas-Fort Worth, San Angelo, Texarkana
and Amarillo areas. Aetna U.S. Healthcare expects to retain approximately
112,000 NYLCare Medicare members through a reinsurance and administrative
services agreement. The Blue Cross agreement is subject to regulatory approval,
and the transaction is expected to close during the first quarter of 2000.
Proceeds from the sale are expected to be used for general corporate purposes,
including repayment of debt, internal growth and share repurchases.
The Company currently expects that, based on certain purchase price adjustment
provisions contained in the agreements with Blue Cross, including an adjustment
based on the level of membership at the closing date, as well as other
adjustments, there will be a loss on the disposal of NYLCare Texas. Accordingly,
in the fourth quarter of 1999, the Company recognized a capital loss of
approximately $35 million after tax, which includes estimated operating losses
from October 1, 1999 through the anticipated closing date. The results of
operations of NYLCare Texas were not material to the Aetna U.S. Healthcare
segment or to the Company's consolidated results of operations.
Page 3
<PAGE> 4
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
Acquisition of 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 as a result of 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", "Liquidity
and Capital Resources" and Note 3 of Notes to Consolidated Financial Statements
for further discussion.
Sale of Aetna Financial Services' Individual Life Business
In October 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for approximately $1
billion in cash. 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 Financial
Services" and Note 3 of Notes to Consolidated Financial Statements.
Aetna International Transactions
Sale of Mexican Joint Ventures
On January 14, 2000, Aetna International, Inc. and its Mexican partner sold two
of their Mexican joint venture companies, Seguros Monterrey Aetna, S.A. and
Fianzas Monterrey Aetna, S.A., to New York Life International Inc., a subsidiary
of New York Life Insurance Company, for approximately $570 million in cash
(Aetna International, Inc.'s share of the proceeds will be approximately $279
million). The sale is not expected to result in a material capital gain or loss.
These two joint ventures contributed operating earnings of approximately $24
million during 1999 and an operating loss of approximately $1 million during
1998. Proceeds from the sale are expected to be used for general corporate
purposes, including repayment of debt, internal growth and share repurchases.
Refer to "Aetna International", "Forward-Looking Information/Risk Factors" and
Note 3 of Notes to Consolidated Financial Statements for further discussion.
Sale of Canadian Operations
On October 1, 1999, Aetna International, Inc. sold its Canadian operations to
John Hancock Canadian Holdings Limited, the parent of The Maritime Life
Assurance Company, for approximately $310 million in cash. The sale resulted in
a capital loss of $11 million, which reflects adjustments subsequent to the
recognition of the estimated loss during the third quarter of 1999. Operating
earnings from the Canadian operations were $25 million in 1999 and $23 million
in 1998. Refer to "Aetna International", "Forward-Looking Information/Risk
Factors" and Note 3 of Notes to Consolidated Financial Statements for further
discussion.
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. Approximately 9.5 million shares of Aetna common stock were
issued to effect the redemption. Refer to "Liquidity and Capital Resources" and
Note 14 of Notes to Consolidated Financial Statements for further discussion.
Page 4
<PAGE> 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
All information in this Management's Discussion and Analysis reflects the
Company's previously announced restatement of its 1998 Form 10-K and 1999 Form
10-Qs. Certain reclassifications also have been made to the 1998 and 1997
financial information to conform to the 1999 presentation.
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 (1) 1998 (2) 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 18,522.6 $ 13,006.2 $ 10,844.6
Net investment income 612.8 537.2 451.2
Fees and other income 1,757.3 1,441.1 1,463.9
Net realized capital gains (losses) (4.7) 134.9 141.7
- ------------------------------------------------------------------------------------------------------------------------
Total revenue 20,888.0 15,119.4 12,901.4
- ------------------------------------------------------------------------------------------------------------------------
Current and future benefits 15,890.7 11,186.5 9,239.2
Salaries and related benefits 1,796.8 1,251.5 1,245.8
Other operating expenses 1,977.7 1,501.1 1,253.7
Amortization of goodwill and other acquired intangible assets 420.4 381.3 362.9
Severance and facilities reserve reductions - - (45.0)
- ------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 20,085.6 14,320.4 12,056.6
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 802.4 799.0 844.8
Income taxes 365.1 368.0 391.0
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 437.3 $ 431.0 $ 453.8
========================================================================================================================
Net realized capital gains (losses), net of tax (included above) $ (22.4) $ 88.2 $ 69.9
========================================================================================================================
</TABLE>
(1) Results include PHC since August 6, 1999.
(2) Results include NYLCare since July 15, 1998, including that portion that
the Company has agreed to divest.
Aetna U.S. Healthcare consists of the Health Risk and PHC business and the Group
Insurance and Other Health business. The Health Risk and PHC business includes
health plans offered on an insured basis and the results of servicing
Prudential's ASO business. Health plans include health maintenance organization
("HMO"), point-of-service ("POS"), preferred provider organization ("PPO") and
indemnity products. The Group Insurance and Other Health business includes group
life and disability insurance and long-term care insurance, offered on both an
insured and employer-funded basis, and all health plans offered on an
employer-funded basis. Under insured plans, the Company assumes all or a
majority of health care cost, utilization, mortality, morbidity or other risk,
depending on the product. Under employer-funded plans, the customer, and not the
Company, assumes all or a majority of these risks.
Acquisition of the Prudential Health Care Business
On August 6, 1999, the Company acquired PHC. The Company also agreed to service
Prudential's ASO contracts following the acquisition. Included in the
acquisition are PHC's risk HMO, POS, PPO and Indemnity health lines, as well as
its dental risk business. Subsequent to the closing, Aetna U.S. Healthcare's
results have been affected by, among other things, the operating results of PHC
and the amortization of intangible assets (primarily goodwill) created by the
transaction. Refer to "Overview" and Note 3 of Notes to Consolidated Financial
Statements for a further discussion of the PHC acquisition and the Company's
agreement to divest NYLCare Texas.
Page 5
<PAGE> 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Results
Aetna U.S. Healthcare's net income increased $6 million in 1999 and decreased
$23 million in 1998. Net income includes Year 2000 costs of $56 million in 1999
and $64 million in 1998. Net income also includes a benefit of $29 million in
1997 primarily related to severance and facilities actions. Excluding these
items and net realized capital gains or losses in all three years, results
increased $108 million in 1999 and $53 million in 1998. These earnings reflect
the inclusion of PHC since August 6, 1999, including results from servicing
Prudential's ASO contracts following the acquisition, and the inclusion of
NYLCare since July 15, 1998.
Net realized capital losses in 1999 and net realized capital gains in 1998 each
include $39 million after tax of contingent consideration following the
Company's 1997 sale of its behavioral health subsidiary, Human Affairs
International, Incorporated ("HAI"). (Refer to Note 3 of Notes to Consolidated
Financial Statements for further discussion.) This 1999 amount was more than
offset by the recording of an estimated loss on the anticipated sale of NYLCare
Texas of $35 million and net realized capital losses from the Company's
rebalancing of its investment portfolio in a rising interest rate environment.
Refer to "Overview" for further discussion of NYLCare Texas. Net realized
capital gains for 1997 include a $31 million gain from the sale of three
subsidiaries, including HAI. These businesses were sold primarily to more
effectively focus health business resources. The earnings of these subsidiaries
were not material to the results of Aetna U.S. Healthcare.
In order to provide a comparison that management believes better reflects the
performance of Aetna U.S. Healthcare, the operating earnings discussion that
follows excludes amortization of goodwill and other acquired intangible assets,
Year 2000 costs in 1999 and 1998, the severance and facilities actions in 1997
as well as net realized capital gains or losses in all three years.
Page 6
<PAGE> 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
<TABLE>
<CAPTION>
(Millions) 1999 (1) 1998 (2) 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating earnings:
Health Risk and PHC $ 535.8 $ 368.7 $ 312.9
Group Insurance and Other Health 319.0 350.3 340.7
- --------------------------------------------------------------------------------------------
Total Aetna U.S. Healthcare $ 854.8 $ 719.0 $ 653.6
============================================================================================
Commercial HMO Premium PMPM $ 138.58 $ 134.68 $ 132.57
- --------------------------------------------------------------------------------------------
Commercial HMO Medical Cost PMPM $ 115.77 (3) $ 111.08 $ 111.69
- --------------------------------------------------------------------------------------------
Commercial HMO Medical Loss Ratio 83.5% (3) 82.5% 84.2%
- --------------------------------------------------------------------------------------------
Medicare HMO Premium PMPM $ 491.21 $ 474.67 $ 459.69
- --------------------------------------------------------------------------------------------
Medicare HMO Medical Cost PMPM $ 453.30 (3) $ 441.63 $ 429.31
- --------------------------------------------------------------------------------------------
Medicare HMO Medical Loss Ratio 92.3% (3) 93.0% 93.4%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Results include PHC since August 6, 1999.
(2) Results include NYLCare since July 15, 1998, including that portion that
the Company has agreed to divest.
(3) Does not include net recoveries under a reinsurance agreement with
Prudential, offset by the net amortization of certain fair value amounts
established as part of the PHC purchase accounting. Refer to "PHC
Agreement" below.
Health Risk and PHC
Health Risk and PHC earnings increased $167 million in 1999 and $56 million in
1998. The increase in 1999 earnings primarily reflects HMO membership growth,
improved Medicare HMO results due to the exiting of several Medicare markets as
of January 1, 1999, and the addition of PHC since August 6, 1999, including the
results from servicing Prudential's ASO customers, partially offset by increased
medical costs. The 1999 results also include a full year of NYLCare results.
The 1998 increase reflects favorable HMO results due to membership growth,
premium rate increases, the impact of medical cost initiatives, higher net
investment income and the acquisition of NYLCare. These increases were partially
offset by lower Indemnity and PPO results and increased operating expenses
related to customer service enhancements.
For the Health Risk business, the liability for medical claims payable reflects
estimates of the ultimate cost of claims that have been incurred but not yet
reported or reported but not yet paid. Medical claims payable are estimated
periodically, and any resulting adjustments are reflected in current-period
operating results within current and future benefits. Medical claims payable are
based on a number of factors, including those derived from historical claim
experience. An extensive degree of judgment is used in this estimation process,
considerable variability is inherent in such estimates and the adequacy of the
estimate is highly sensitive to changes in medical claims payment patterns and
changes in medical cost trends.
The HMO medical cost trend (the rate of increase in medical cost inflation and
utilization over the comparable prior year period) varied throughout 1999. In
the fourth quarter of 1999, management observed that medical costs associated
with medical services provided in prior periods, particularly the third quarter
of 1999, were higher than previously anticipated and that the rate of medical
cost trend for the third quarter (used in estimating medical claims payable) was
higher than that for the first and second quarters of 1999.
Page 7
<PAGE> 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Management believes (and has assumed, for purposes of estimating medical claims
payable at December 31, 1999) that the Commercial HMO medical cost trend for the
fourth quarter of 1999 has stabilized at third quarter levels, and that the
Medicare HMO medical cost trend for the fourth quarter of 1999 has improved from
the third quarter, although it is still higher than for the first half of the
year. A worsening of medical cost trend or adverse changes in claim payment
patterns from those that were assumed in estimating the reserve would cause
these estimates to change in the near term and could have a material adverse
effect on future results of operations.
Commercial HMO
Commercial HMO premiums per member per month ("PMPM") increased 3% in 1999, when
compared to 1998, and 2% in 1998, when compared to 1997. Excluding PHC, the 1999
increase would have been 4%. These increases were due to premium rate increases,
offset in part by customers selecting lower premium plans and a shift in the
geographic mix of membership growth.
Commercial HMO medical costs PMPM increased 4% in 1999, when compared to 1998,
and decreased 1% in 1998, when compared to 1997. Excluding PHC, the 1999
increase also would have been 4%. The increase in 1999 reflects higher medical
costs, primarily pharmacy, due to medical cost inflation and increased
utilization, partially offset by medical cost initiatives. The decrease in 1998
was due primarily to favorable results of medical cost initiatives, geographic
mix and customer changes in benefit plans partially offset by higher pharmacy,
physician and outpatient utilization.
The Commercial HMO medical loss ratio was 83.5% for 1999, compared to 82.5% for
1998 and 84.2% for 1997. The increase in 1999, when compared to 1998, was due to
the addition of the PHC business which had a medical loss ratio of 87.6%.
Excluding PHC, the medical loss ratio was 82.6% in 1999, as price increases
generally kept pace with medical cost inflation during 1999. The decrease in
1998, when compared to 1997, was due to growth in premiums due to rate
increases, which exceeded increases in medical costs, reflecting the benefit of
medical cost initiatives.
Medicare HMO
Medicare HMO premiums PMPM increased by 3% in 1999 and 1998. Excluding PHC, the
1999 increase also would have been 3%. These increases were due to Health Care
Financing Administration ("HCFA") rate increases and increases in supplemental
premiums partially offset, in 1999, by a shift in the geographic mix of
membership.
Medicare HMO medical costs PMPM increased by 3% in 1999, when compared to 1998,
and 3% in 1998, when compared to 1997. Excluding PHC, the 1999 increase would
have been 2%. The increase in 1999 reflects higher medical costs partially
offset by the favorable impact of exiting several markets as of January 1, 1999.
The higher medical costs in 1999 and 1998 primarily were due to higher pharmacy,
physician and outpatient utilization and medical cost inflation. The 1998 higher
medical costs were partially offset by the impact of the lower NYLCare medical
cost PMPM, geographic mix and benefit changes.
The Medicare HMO medical loss ratio was 92.3% for 1999, compared to 93.0% for
1998, and 93.4% for 1997. Excluding PHC, the 1999 medical loss ratio would have
been 91.8%. The decrease in 1999, when compared to 1998, reflects the favorable
impact of exiting several markets as of January 1, 1999. The decrease in 1998
and part of the decrease in 1999 resulted from the growth in premiums due to
rate increases and supplemental premiums which exceeded increases in medical
costs.
Page 8
<PAGE> 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
PHC Agreement
The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential has agreed to indemnify
the Company from certain health insurance risks that arise following the closing
by reimbursing the Company for 75% of medical costs (as calculated under the
agreement) of PHC in excess of certain threshold medical loss ratio levels
through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold is 83.5% for August 6, 1999 through
December 31, 1999 and 84% for January 1, 2000 through December 31, 2000. During
the period August 6, 1999 through December 31, 1999, reinsurance recoveries
under this agreement were $74 million pretax. This was offset by $10 million
pretax ($6 million after tax) related to the net amortization of the fair value
adjustment of the reinsurance agreement and the fair value adjustment of the
unfavorable component of the contracts underlying the acquired medical risk
business recorded as part of the acquisition. Such reinsurance recoveries and
net amortization were reflected in current and future benefits. Refer to Note 3
of Notes to Consolidated Financial Statements for further discussion.
The Company also agreed to service Prudential's ASO contracts. Prudential is
terminating its ASO business and has retained the Company to service these
contracts during the run off period, but no later than June 30, 2001. Prudential
ASO customers will remain Prudential customers as long as the contracts remain
in force. The Company is maintaining personnel, systems and other resources
necessary to service the ASO business during the run off period, as it was not
feasible to segregate these operating assets from those purchased in the PHC
transaction. In exchange for servicing the ASO business, Prudential is remitting
fees received from its ASO customers to the Company, as well as paying certain
supplemental fees. The supplemental fees are fixed in amount and decline over a
period ending 18 months following the closing. During the period August 6, 1999
through December 31, 1999, the Company recorded total fees for servicing the
Prudential ASO business of approximately $230 million pretax, including
supplemental fees of approximately $106 million pretax (reflected as fees and
other income). The results of servicing this business during the run off period
will depend on, among other things, rate increases that are obtained from
renewing customers (substantially all of such rate increases were implemented by
Prudential prior to the Company's servicing of these contracts), the timing and
extent of ASO contract terminations, and the cost structure for servicing these
contracts. Refer to Note 3 of Notes to Consolidated Financial Statements for
further discussion.
Group Insurance and Other Health
Group Insurance and Other Health results for 1999 reflect higher operating
expenses and unfavorable life mortality, partially offset by a full year of
NYLCare results and higher net investment income. Results for 1998 reflect
higher net investment income and the acquisition of NYLCare partially offset by
less favorable developments in claim benefit reserve estimates. Both 1999 and,
to a lesser extent, 1998 results include favorable reserve developments for life
and disability products, including NYLCare.
Page 9
<PAGE> 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
December 31, 1999 (1) December 31, 1998
------------------------------------- ---------------------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2) (3) 8,716 727 9,443 5,104 640 5,744
Medicare 703 - 703 535 - 535
Medicaid 172 75 247 132 - 132
- -----------------------------------------------------------------------------------------------------------------------
Total HMO 9,591 802 10,393 5,771 640 6,411
POS (2) 319 3,606 3,925 261 2,509 2,770
PPO (3) 870 3,112 3,982 1,089 2,943 4,032
Indemnity 259 2,496 2,755 182 2,270 2,452
- -----------------------------------------------------------------------------------------------------------------------
Total Health Membership 11,039 10,016 21,055 7,303 8,362 15,665
=======================================================================================================================
Dental 15,750 8,365
Group Insurance:
Group Life 9,415 9,769
Disability 2,258 2,592
Long-Term Care 108 91
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Health membership in thousands includes 5,093 PHC members (2,993 Commercial
HMO risk, 111 Medicare HMO risk, 24 Medicaid HMO risk, 117 POS risk, 51 PPO
risk, 109 Indemnity risk and 1,688 Administrative Services Only members
that Aetna U.S. Healthcare has agreed to service (1,129 POS nonrisk, 76 PPO
nonrisk and 483 Indemnity nonrisk)) and 8,000 Dental members. There were
no group insurance PHC members.
(2) Commercial HMO in thousands includes POS members who access primary care
physicians and referred care through an HMO network of 2,323 at
December 31, 1999 and 1,329 at December 31, 1998.
(3) Membership in thousands includes 553 Commercial HMO members and 12 PPO
members of the NYLCare Texas operations to be sold.
Total Health membership as of December 31, 1999 increased by approximately 5
million members when compared to December 31, 1998, due to the acquisition of
PHC, including the ASO members that Aetna U.S. Healthcare has agreed to service.
Excluding the impact of the PHC members, the 1999 membership increases in
Commercial HMO (including POS members who access primary care physicians and
referred care through an HMO network), Medicare HMO and Medicaid HMO were
partially offset by declines in Indemnity, PPO and POS enrollment. As expected,
the Company has experienced significant declines in PHC membership during the
January 2000 enrollment cycle.
Total Revenue and Expense
Revenues, excluding net realized capital gains or losses, increased $5.9
billion, or 39%, in 1999 and $2.2 billion, or 17%, in 1998. The 1999 revenue
growth primarily was due to the acquisition of PHC on August 6, 1999 and the
acquisition of NYLCare on July 15, 1998. Revenues in 1999 also grew because of
Commercial HMO membership growth and premium rate increases. The 1998 revenue
growth primarily was due to the acquisition of NYLCare, as well as premium rate
increases and membership growth in Commercial and Medicare HMO and POS products,
partially offset by lower Indemnity and PPO membership. Also during 1998, Aetna
U.S. Healthcare recorded higher investment income due to a higher investment
portfolio balance (including the acquired assets of NYLCare), a shift in
strategy to higher yielding investments and an increase in equity partnership
income.
Page 10
<PAGE> 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
Operating expenses, including salaries and related benefits, increased $1.0
billion, or 37%, in 1999 and $253 million, or 10%, in 1998. The 1999 increase
reflects the acquisition of PHC and NYLCare and increased costs to support the
Commercial HMO membership growth. The increase in 1998 reflects the acquisition
of NYLCare, as well as HMO membership increases, customer service enhancements
and costs related to Year 2000. Operating expenses, including salaries and
related benefits, as a percentage of revenue, excluding net realized capital
gains, was 18% in 1999 and 1998 and 20% in 1997.
Outlook
In January 2000, the Company announced a realignment of the Company's health
care, financial services and international businesses. Refer to "Overview" for
additional information related to the realignment.
Due to the size of the Company's managed care operations, the ability to
profitably grow the managed care risk business and obtain adequate pricing in an
increasingly competitive environment, while effectively managing medical costs
and operating expenses, is of critical importance to the Company.
Premiums in the Health Risk business generally are fixed by contract for
one-year periods and, accordingly, costs in excess of those reflected in pricing
cannot be recovered by prospectively or retrospectively raising premiums during
the year.
In the latter half of 1999, medical costs, particularly in the Medicare
business, increased sharply. Going forward for 2000, the Company is targeting
commercial premium increases that seek to maintain or enhance margin. The
Company is attempting to improve commercial profitability by increasing premiums
and by addressing cost increases in its contracting with providers and through
other cost management efforts. For Medicare products, the Company has increased
supplemental premiums and instituted changes in benefit plans which, in addition
to premium rate increases set by the federal government for Medicare risk
products, are designed to keep pace with the higher medical cost trend. There
can be no assurances, however, that any commercial or Medicare premium
increases, benefit plan changes, or cost savings achieved through recontracting
will be sufficient to offset the increases in medical costs, as well as any
increases in other operating costs, due to the uncertainty involved in
projecting medical cost trends, potential governmental action (including rate
decreases or reduction of rate increases), business conditions (including
intensification of competition) and other factors.
Medical loss ratios for the PHC business are higher than for the Company's other
health risk business. The effect of these higher ratios is offset, in part, by
the reinsurance agreement between Prudential and the Company, which terminates
December 31, 2000. (Refer to "PHC Agreement" for additional information
regarding the reinsurance agreement.) The Company is seeking to improve the
medical loss ratios of the acquired business through underwriting and pricing
discipline and medical cost management initiatives. If the Company is unable to
improve the medical loss ratios for the acquired business, its results of
operations for periods following termination of the reinsurance agreement could
be materially adversely affected.
The administrative costs related to the PHC business and the ASO business of
Prudential that the Company agreed to service are higher than the administrative
costs of the Company's other health business. The Company is seeking to reduce
the level of administrative costs related to this business. In addition, the
Company expects a significant decline in the membership of the acquired PHC
business and the ASO business it agreed to service. If the Company is unable to
reduce the level of administrative costs to correspond with expected levels of
membership decline, its results could be materially adversely affected.
Page 11
<PAGE> 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA U.S. HEALTHCARE (CONTINUED)
New federal regulations were recently proposed under the Health Insurance
Portability and Accountability Act relating to the privacy of health information
and certain other matters affecting the Company's administration of health and
related benefit plans. The Company is currently reviewing the potential impact
of the proposed regulations on its operations. It is reasonably possible that
the Company will incur additional expenses in connection with compliance with
any final regulations that are adopted.
In 2000, the Company also expects to increase its expenditures on e.health
(electronic commerce) initiatives.
Results for the Group Insurance and Other Health businesses in 2000 are expected
to be level or to decrease relative to 1999 results, as favorable reserve
developments that occurred in 1999 and prior years are not expected to recur.
Refer to "Regulatory Environment" and "Forward-Looking Information/Risk Factors"
for information regarding other important factors that may materially affect
Aetna U.S. Healthcare.
AETNA FINANCIAL SERVICES
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 1998(1) 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums (2) $ 107.5 $ 131.9 $ 158.5
Net investment income 904.7 1,054.1 1,129.9
Fees and other income 541.5 698.4 576.5
Net realized capital gains (losses) (23.3) 3.0 37.6
- --------------------------------------------------------------------------------------------------------------------
Total revenue 1,530.4 1,887.4 1,902.5
- --------------------------------------------------------------------------------------------------------------------
Current and future benefits (2) 746.5 918.2 1,034.1
Salaries and related benefits 167.9 193.8 181.7
Other operating expenses 221.5 213.3 203.9
Amortization of deferred policy acquisition costs 104.9 128.3 110.6
Severance and facilities charge, net - 1.5 -
- --------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,240.8 1,455.1 1,530.3
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 289.6 432.3 372.2
Income taxes 95.7 132.3 115.1
- --------------------------------------------------------------------------------------------------------------------
Net income $ 193.9 $ 300.0 $ 257.1
====================================================================================================================
Net realized capital gains and (losses), net of tax (included above) $ (15.2) $ 2.0 $ 24.2
====================================================================================================================
Deposits (not included in premiums above):
Annuities--fixed options $ 1,973.2 $ 1,125.6 $ 1,191.4
Annuities--variable options 4,934.5 3,642.7 3,291.2
Individual life insurance - 374.2 486.4
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,907.7 $ 5,142.5 $ 4,969.0
====================================================================================================================
Assets under management and administration: (3)
Annuities--fixed options $ 12,641.1 $ 12,131.1 $ 12,056.3
Annuities--variable options (4) 35,352.9 25,527.0 20,076.9
Other investment advisory 19,961.5 14,268.6 10,069.0
- --------------------------------------------------------------------------------------------------------------------
Assets under management 67,955.5 51,926.7 42,202.2
Assets under administration (5) 4,441.7 2,860.1 2,285.8
- --------------------------------------------------------------------------------------------------------------------
Total financial services' assets under management and administration 72,397.2 54,786.8 44,488.0
Individual life insurance assets under management - - 2,749.9
- --------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 72,397.2 $ 54,786.8 $ 47,237.9
====================================================================================================================
</TABLE>
(1) Operating results reflect the operations of the individual life business
through the sale date of October 1, 1998.
(2) Includes $71.5 million in 1999, $67.4 million in 1998 and $64.8 million in
1997, for annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies.
(3) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million at December 31,
1998 and $551.6 million at December 31, 1997.
(4) Includes $13,472.4 million at December 31, 1999, $7,467.5 million at
December 31, 1998 and $5,069.9 million at December 31, 1997, related to
assets invested through Aetna Financial Services' products in unaffiliated
mutual funds.
(5) Represents assets for which Aetna Financial Services provides
administrative services only.
Page 12
<PAGE> 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA FINANCIAL SERVICES (CONTINUED)
In order to more accurately reflect its business, effective October 1, 1999
Aetna Retirement Services changed its trade name to Aetna Financial Services
("AFS"). AFS offers financial services products, including fixed and variable
annuities and mutual funds, investment advisory services, financial planning
services and pension plan administrative services. AFS' domestic individual life
insurance business was sold on October 1, 1998.
Results
AFS' net income decreased $106 million in 1999 and increased $43 million in
1998. The 1999 decrease reflects the sale of the individual life business on
October 1, 1998. Net income includes Year 2000 costs of $18 million in 1999 and
$23 million in 1998. AFS' 1998 net income also includes a gain related to the
sale of its individual life business of $64 million ($99 million pretax,
included in fees and other income) and a net after-tax severance and facilities
charge of $1 million. Excluding these factors, net realized capital gains or
losses in all three years and the individual life insurance results for 1998 and
1997, AFS' results, as shown below, increased $41 million in 1999 and $29
million in 1998.
<TABLE>
<CAPTION>
(Millions) 1999 1998 (1) 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial services $ 227.3 $ 186.5 $ 157.8
Individual life insurance (1) - 71.5 75.1
- ---------------------------------------------------------------------------------------------
Total $ 227.3 $ 258.0 $ 232.9
=============================================================================================
</TABLE>
(1) Reflects the operations of the individual life business through the sale
date of October 1, 1998.
The increases in 1999 and 1998 earnings for financial services primarily reflect
increased fee income from higher levels of assets under management and
administration. Assets under management and administration for financial
services increased 32% in 1999 and 23% in 1998. Assets under management and
administration increased due to appreciation in the stock market and, to a
lesser extent, additional net deposits (i.e., deposits, including new contracts,
less surrenders). Partially offsetting the increases in fee income were
increased operating expenses. However, for annuity products, operating expenses
as a percentage of assets under management declined in both years.
Premiums relate to annuity products containing life contingencies and
traditional life insurance (prior to the sale of the domestic individual life
business on October 1, 1998). Premiums decreased by $24 million in 1999,
following a decrease of $27 million in 1998. The decrease in 1999 was due to the
sale of the domestic individual life business, offset by an increase in annuity
premiums resulting from the acquisition of a block of annuity business. The
decrease in 1998 was due to the sale of the domestic individual life insurance
business on October 1, 1998.
Annuity deposits increased 45% in 1999 and 6% in 1998, reflecting business
growth. As a result of the sale of the life business on October 1, 1998, there
were no life deposits in 1999 and a 23% decrease in 1998.
Of the $12.6 billion at December 31, 1999, $12.1 billion at December 31, 1998
and December 31, 1997 of fixed annuity assets under management, 25% were fully
guaranteed and 75% were experience-rated. The average earned rate on investments
supporting fully guaranteed investment contracts was 7.4%, 7.6% and 7.8%, and
the average earned rate on investments supporting experience-rated investment
contracts was 7.6%, 7.8% and 7.9% for the years ended December 31, 1999, 1998
and 1997, respectively. The average credited rate on fully guaranteed investment
contracts was 6.3%, 6.5% and 6.6%, and the average credited rate on
experience-rated investment contracts was 5.6%, 5.8% and 5.9% for the years
ended December 31, 1999, 1998 and 1997, respectively. The resulting interest
margins on fully guaranteed investment contracts were 1.1%, 1.1% and 1.2% and on
experience-rated investment contracts were 2.0% for the years ended December 31,
1999, 1998 and 1997, respectively.
Page 13
<PAGE> 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA FINANCIAL SERVICES (CONTINUED)
Sale of Domestic 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 generally was in the form of an indemnity reinsurance arrangement, the
Company deferred approximately $88 million of the gain and was recognizing it
over approximately 15 years. Approximately $8 million of the deferred gain was
recognized during 1999. During the fourth quarter of 1999, the Company refined
certain accrual and tax estimates that had been established in connection with
the recording of the deferred gain. As a result, the deferred gain was increased
by $22 million (after tax) to $102 million at December 31, 1999. The remaining
deferred gain will be recognized over approximately 14 years. Revenues from the
business sold were $399 million for 1998 through the sale date and $553 million
for 1997. For more details about the transaction and the indemnity reinsurance
arrangement, refer to Note 3 of Notes to Consolidated Financial Statements.
Outlook
AFS' strategy is to increase assets under management and administration and
improve profitability by focusing on strategic markets and products in the
financial services business. In doing so, AFS may take a variety of actions
intended to improve its investment and product management, marketing,
distribution and customer service. For example, AFS plans to improve its
operational efficiency and further leverage and expand its Internet capability
over time through increased spending for improved technology and operating
platforms. AFS also anticipates enhancing its product distribution capabilities
through adding new sales representatives and increasing relationships with
advisors, brokers and wholesalers. AFS also may seek acquisitions or
divestitures in order to align its businesses with strategic and financial
targets or build scale.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect AFS.
AETNA INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 2,152.3 $ 1,578.5 $ 1,434.1
Net investment income (1) 456.5 459.8 384.4
Fees and other income 168.2 138.2 140.3
Net realized capital gains (losses) 30.8 (28.9) 16.7
- -------------------------------------------------------------------------------------------------------------
Total revenue 2,807.8 2,147.6 1,975.5
- -------------------------------------------------------------------------------------------------------------
Current and future benefits 1,850.2 1,336.6 1,206.3
Salaries and related benefits 213.8 175.4 164.3
Other operating expenses 368.1 330.2 297.7
Interest expense 7.8 11.1 7.8
Amortization of goodwill and other acquired intangible assets 14.0 16.0 16.3
Amortization of deferred policy acquisition costs 99.1 86.4 86.6
- -------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,553.0 1,955.7 1,779.0
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 254.8 191.9 196.5
Income taxes 87.6 55.9 54.1
- -------------------------------------------------------------------------------------------------------------
Net income $ 167.2 $ 136.0 $ 142.4
=============================================================================================================
Net realized capital gains (losses), net of tax (included above) $ (17.1) $ (22.2) $ 13.7
=============================================================================================================
</TABLE>
(1) Includes $94.5 million in 1999, $96.5 million in 1998 and $51.5 million in
1997 of earnings from Aetna International subsidiaries that are carried on
the equity basis.
Page 14
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA INTERNATIONAL (CONTINUED)
Aetna International, through subsidiaries and joint venture affiliates, sells
primarily life insurance, health insurance and financial services products in
markets outside of the United States. During 1999, Aetna International acquired
Asistencia Medica Social Argentina ("AMSA"), the largest HMO in Argentina,
purchased an ownership percentage of a clinic-based health care insurance
operation in Colombia, increased its ownership percentage in the Hong Kong
operations, acquired a portion of a life insurance company in Japan, entered
into a pension joint venture in Poland and sold its Canadian operations. Refer
to Note 3 of Notes to Consolidated Financial Statements for additional
information.
Results
Aetna International's net income increased $31 million in 1999 and decreased $6
million in 1998. Net income includes Year 2000 costs of $10 million in 1999 and
$8 million in 1998. Excluding Year 2000 costs and net realized capital gains or
losses in all three years, results increased $29 million in 1999 and $37 million
in 1998.
The increase in the effective tax rate in 1999 primarily reflects taxes on
undistributed earnings resulting from the Company's sale of its Canadian
operations. Excluding the tax effect of these undistributed earnings and the
Company's equity in earnings of affiliates, Aetna International's effective tax
rate declined primarily due to a tax holiday and recognition of prior-year net
operating loss tax benefits in Malaysia.
Premiums increased 36% in 1999, when compared to 1998, and 10% in 1998, when
compared to 1997. The premium growth rate in 1999 primarily was due to growth in
Taiwan and Mexico, a full year of premiums from Cruz Blanca (a Chilean private
health insurance company acquired in September 1998) and the addition of AMSA
(acquired in January 1999). The 1999 and 1998 premium growth was adversely
affected by the overall weakening of foreign currencies versus the U.S. dollar.
Earnings by major geographic location, excluding Year 2000 costs in 1999 and
1998 and net realized capital gains or losses in all three years, are as
follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Asia Pacific (1) $ 67.5 $ 65.2 $ 55.7
Americas (2) 147.5 112.9 83.0
Other (3) (20.8) (12.4) (10.0)
- ---------------------------------------------------------
Total $ 194.2 $ 165.7 $ 128.7
=========================================================
</TABLE>
(1) Includes China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand,
Philippines, Taiwan and Thailand.
(2) Includes Argentina, Brazil, Canada (through September 30, 1999), Chile,
Colombia, Mexico, Peru, Poland and Venezuela.
(3) Includes general and other miscellaneous expenses.
Results in 1999 include $33 million in equity earnings from a gain on the sale
of Brasilprev Previdencia Privada S.A., an equity holding of the Company's
Brazil affiliate in the fourth quarter. Excluding these equity earnings,
operating earnings declined in 1999 primarily due to operating losses in Brazil
resulting from the effects of economic recession, higher taxes on insurance
premiums, pricing regulation, and increased medical utilization.
The 1999 results also reflect increased earnings in Mexico, Chile, Malaysia,
Taiwan and Canada (through its sale on October 1, 1999). The increase in Taiwan
was partially offset by the effects of an earthquake in September. Also
offsetting the 1999 results were losses in Argentina's Life and Health
operations due to lapses in life insurance policies and an increase in the
medical loss ratio and investment spending in Poland. Results in 1998 primarily
reflect earnings growth from the Company's operations in Brazil (acquired in
April 1997), as well as from operations in Taiwan, Canada and the Mexican
pension business. The 1998 results were offset in part by other Mexican
operations and an overall weakening of foreign currencies versus the U.S.
dollar.
Page 15
<PAGE> 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
AETNA INTERNATIONAL (CONTINUED)
Sale of Canadian Operations
On October 1, 1999, Aetna International sold its Canadian operations to John
Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance
Company, for approximately $310 million in cash. The sale resulted in a capital
loss of $11 million, which reflects adjustments subsequent to the recognition of
the estimated loss in the third quarter of 1999. Operating earnings from the
Canadian operations were $25 million in 1999 and $23 million in 1998. Refer to
"Overview" for additional information related to this sale.
Sale of Mexican Joint Ventures
On January 14, 2000, Aetna International and its Mexican partner sold two of
their Mexican joint venture companies, Seguros Monterrey Aetna, S.A. and Fianzas
Monterrey Aetna, S.A., to New York Life International Inc., a subsidiary of New
York Life Insurance Company for approximately $570 million in cash (Aetna
International's share of the proceeds will be approximately $279 million). The
sale is not expected to result in a material capital gain or loss. These two
joint ventures contributed operating earnings of approximately $24 million
during 1999 and an operating loss of approximately $1 million in 1998. Refer to
"Overview" for additional information related to these sales.
Outlook
In January 2000 the Company announced a realignment of the Company's health
care, financial services and international businesses. Refer to "Overview" for
additional information related to the realignment.
Aetna International seeks to invest in emerging and other selected markets
outside the U.S. that have the potential for attractive long-term returns. The
Company intends to sharpen its focus on its international operations as part of
its realignment and may explore opportunities for additional international
investments or divestitures, where appropriate. These investments generally are
made through the acquisition of part or all of an existing company or a start-up
investment.
The Company's international earnings are expected to be negatively affected in
2000 by the 1999 disposition of its Canadian and certain Mexican operations due
to the size of their contributions to 1999 earnings.
The Company also continues to monitor Latin American economies, which are in
recession, and declining interest rates in Asia, which could adversely affect
its international businesses. Further currency devaluations in Latin America, or
in the Company's other international markets, could adversely affect future
operating earnings when translated into U.S. dollars.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect Aetna International.
Page 16
<PAGE> 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 118.9 $ 122.7 $ 155.0
Net investment income 982.5 1,152.5 1,408.7
Fees and other income 46.2 31.2 40.6
Net realized capital gains 24.2 57.5 30.7
- --------------------------------------------------------------------------------------------------------
Total revenue 1,171.8 1,363.9 1,635.0
- --------------------------------------------------------------------------------------------------------
Current and future benefits 981.3 1,122.4 1,372.4
Salaries and related benefits 19.8 19.6 30.5
Other operating expenses 11.5 17.5 16.8
Reductions of loss on discontinued products (77.2) (68.0) (172.5)
- --------------------------------------------------------------------------------------------------------
Total benefits and expenses 935.4 1,091.5 1,247.2
- --------------------------------------------------------------------------------------------------------
Income before income taxes 236.4 272.4 387.8
Income taxes 85.4 102.5 153.6
- --------------------------------------------------------------------------------------------------------
Net income $ 151.0 $ 169.9 $ 234.2
========================================================================================================
Net realized capital gains, net of tax (included above) $ 15.8 $ 37.4 $ 20.8
========================================================================================================
Deposits (not included in premiums above):
Fully guaranteed discontinued products $ 12.5 $ 17.7 $ 14.0
Experience-rated 191.9 251.3 735.4
Nonguaranteed 579.2 950.2 849.2
- --------------------------------------------------------------------------------------------------------
Total $ 783.6 $ 1,219.2 $ 1,598.6
========================================================================================================
Assets under management: (1)
Fully guaranteed discontinued products $ 5,990.8 $ 6,737.9 $ 7,548.9
Experience-rated 7,932.1 9,546.9 11,114.7
Nonguaranteed 12,028.7 12,120.0 11,070.2
- --------------------------------------------------------------------------------------------------------
Total assets under management $ 25,951.6 $ 28,404.8 $ 29,733.8
========================================================================================================
</TABLE>
(1) Excludes net unrealized capital losses of $254.4 million at December 31,
1999, and net unrealized capital gains of $621.0 million at December 31,
1998 and $645.4 million at December 31, 1997.
The Large Case Pensions segment manages a variety of retirement products
(including pension and annuity products) primarily for defined benefit and
defined contribution plans. These products provide a variety of funding and
benefit payment distribution options and other services. Certain products
provide investment guarantees.
Results
Large Case Pensions' net income decreased $19 million in 1999 and $64 million in
1998. As further discussed under "Discontinued Products", the Company released
$50 million in 1999 and $44 million in 1998 of the reserve related to
discontinued products primarily as a result of favorable investment performance.
Also, as a result of continued favorable developments in real estate markets,
the Company released $108 million in 1997 of the reserve related to discontinued
products. Net income also includes Year 2000 costs of approximately $1 million
in 1999 and 1998. Excluding these factors and net realized capital gains in all
three years, results decreased $4 million in 1999 and $15 million in 1998. The
1999 and 1998 decreases continue to reflect the redeployment of capital
supporting this business.
Assets under management decreased during 1999 and 1998. These decreases
primarily resulted from the continuing run off of underlying liabilities.
Page 17
<PAGE> 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows
(excluding contractholder transfers to other Company products):
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities and benefit payments (1) $ 961.7 $ 935.5 $ 905.0
Contractholder withdrawals other than scheduled contract
maturities and benefit payments (2) 489.2 431.8 358.1
Participant withdrawals (2) 78.1 98.3 130.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
(2) At December 31, 1999, approximately $870 million of experience-rated
pension contracts allowed for unscheduled contractholder withdrawals,
subject to timing restrictions and formula-based market value adjustments.
Further, approximately $2.0 billion of such contracts supported by general
account assets could be withdrawn or transferred to other plan investment
options at the direction of plan participants, without market value
adjustment.
Outlook
Large Case Pensions' earnings are expected to significantly decline in 2000 as a
result of continuing run off of underlying liabilities.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect Large Case Pensions.
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
the expected cash flows from the assets supporting these products and the cash
flows expected to be required to meet the product obligations.
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that future losses on the products are greater than anticipated and positively
affected to the extent future losses are less than anticipated.
The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).
Page 18
<PAGE> 19
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>
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest margin (deficit) (1) $ (18.3) $ (22.7) $ 15.1
Net realized capital gains (losses) (7.8) 75.8 175.4
Interest earned on receivable from continuing products 21.3 22.4 21.5
Other, net 12.4 3.6 2.8
- --------------------------------------------------------------------------------------------------------------------------
Results of discontinued products, after tax $ 7.6 $ 79.1 $ 214.8
==========================================================================================================================
Results of discontinued products, pretax $ 10.7 $ 130.4 $ 337.4
==========================================================================================================================
Net realized capital gains (losses) from sales of bonds, after tax (included above) $ (21.5) $ 52.5 $ 36.6
==========================================================================================================================
</TABLE>
(1) The interest margin (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. The
decrease in 1998 as compared to 1997 primarily is due to lower investment
income, reflecting the decline in assets used to fund contractual liability run
off, as well as lower yields due to the shift in the investment portfolio to
fixed-income bonds. The 1999 net realized capital losses primarily are due to
losses on bonds resulting from higher interest rates offset by gains on the sale
of equities. The 1998 net realized capital gains reflect gains of $28 million
related to continued favorable developments in real estate markets, as well as
gains of $53 million from the sale of bonds. The 1997 net realized capital gains
primarily reflect $100 million of gains related to continued favorable
developments in real estate markets (including gains of $24 million related to
the securitization of commercial mortgage loans), gains of $37 million from the
sale of bonds and gains of $37 million resulting from the sale of other
investments in order to meet liquidity needs.
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 $464 million at December 31, 1999 and
$493 million at December 31, 1998, 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. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.
The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's Mortality table,
which has been used since then.
Page 19
<PAGE> 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (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 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- -----------------------------------------------------------------
<S> <C>
Reserve at December 31, 1996 $ 986.8
Operating income 58.7
Net realized capital gains 269.9
Mortality and other 8.8
Reserve reduction (172.5)
- -----------------------------------------------------------------
Reserve at December 31, 1997 1,151.7
Operating loss (6.6)
Net realized capital gains 116.6
Mortality and other 20.4
Reserve reduction (68.0)
- -----------------------------------------------------------------
Reserve at December 31, 1998 1,214.1
Operating income 10.1
Net realized capital losses (11.9)
Mortality and other 12.5
Reserve reduction (77.2)
- -----------------------------------------------------------------
Reserve at December 31, 1999 $ 1,147.6
=================================================================
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as further discussed above, primarily due to favorable investment
performance, $77 million ($50 million after tax) of the reserve was released in
1999 and $68 million ($44 million after tax) of the reserve was released in
1998. A similar review resulted in the Company's release of $173 million ($108
million after tax) in 1997 of the reserve due to continued favorable
developments in real estate markets. The current reserve reflects management's
best estimate of anticipated future losses.
The anticipated run off of the December 31, 1999 reserve balance is as follows:
<TABLE>
<CAPTION>
(Millions)
- ------------------------------------------------------------
<S> <C>
2000 $ 30.0
2001 30.4
2002 30.9
2003 31.7
2004 - 2008 172.6
2009 - 2013 188.4
2014 - 2018 180.0
Thereafter 483.6
- ------------------------------------------------------------
</TABLE>
The above table assumes that assets are held until maturity and that the reserve
run off is proportional to the liability run off.
Page 20
<PAGE> 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The expected liability (as of December 31, 1993) and actual balances for the GIC
and SPA liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
Expected Actual
--------------------------- -------------------------------
(Millions) GIC SPA GIC SPA
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $ 3,173.9 $ 4,685.8 $ 2,321.4 $ 4,763.0
1998 2,029.6 4,581.3 1,546.0 4,653.5
1999 1,214.5 4,472.1 902.1 4,566.0
- ----------------------------------------------------------------------------------------------------
</TABLE>
The GIC balances were lower than expected in each period, as several
contractholders redeemed their contracts prior to contract maturity. The SPA
balances in each period were higher than expected because of additional amounts
received under existing contracts.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
(Millions) December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------------------
Class Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities $ 4,533.0 77.2% $ 5,890.5 83.0%
Mortgage loans 768.8 13.1 754.2 10.6
Real estate 112.7 1.9 104.2 1.5
Equities 239.7 4.1 98.5 1.4
Short-term and other investments 214.2 3.7 252.2 3.5
- --------------------------------------------------------------------------------------------------------------
Total $ 5,868.4 100.0% $ 7,099.6 100.0%
==============================================================================================================
</TABLE>
The investment portfolio has declined in 1999, as assets were used to pay off
contractual liabilities. As mentioned above, the investment portfolio has
changed since inception. Mortgage loans have decreased from $5.4 billion (37% of
the investment portfolio) at December 31, 1993 to their current level. This was
a result of maturities, prepayments and the securitization and sale of
commercial mortgages. Also, real estate decreased from $.5 billion (4% of the
investment portfolio) at December 31, 1993 to its current level, primarily as a
result of sales. The resulting proceeds were reinvested in debt securities and
equities.
The change in the composition of the overall investment portfolio resulted in a
change in the quality of the portfolio since 1993. As the Company's exposure to
commercial mortgage loans and real estate has diminished, additional investment
return has been achieved by increasing the risk in the bond portfolio. At
December 31, 1993, 60% of the debt securities had a quality rating of AAA or AA,
and at December 31, 1999, 31% of the debt securities had a quality rating of AAA
or AA. However, management believes the level of risk in the total portfolio of
assets supporting discontinued products was lower at December 31, 1999 when
compared to December 31, 1993.
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities, settlements and benefit payments $ 1,246.9 $ 1,433.5 $ 1,683.1
Participant-directed withdrawals 14.9 21.4 36.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.
Page 21
<PAGE> 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
At December 31, 1999, scheduled maturities, future benefit payments and other
expected payments, including future interest, were as follows:
<TABLE>
<CAPTION>
(Millions)
- ----------------------------------------------------------------------
<S> <C>
2000 $ 919.4
2001 837.3
2002 695.1
2003 551.9
2004 496.7
2005 -- 2009 2,332.2
2010 -- 2014 2,034.0
2015 -- 2019 1,653.4
2020 -- 2024 1,251.6
Thereafter 2,144.5
- ----------------------------------------------------------------------
</TABLE>
Refer to Note 8 of Notes to Consolidated Financial Statements and "General
Account Investments" for additional information.
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
(Millions, after tax) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Interest expense $ 176.5 $ 155.9 $147.5
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and related benefits 37.4 43.6 50.2
Other expense (income):
Other operating expenses, net 48.4 63.1 58.5
Interest income on life sale proceeds (.6) (5.3) -
Net realized capital gains (29.2) (68.5) (69.8)
- ----------------------------------------------------------------------------------------------------------------
Total other expense $ 56.0 $ 32.9 $ 38.9
================================================================================================================
</TABLE>
The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other expense" includes
corporate expenses, such as staff expenses, advertising and contributions, which
are partially offset by net investment income.
Results
The 1999 increase in interest expense primarily reflects a full year of interest
on the debt incurred in connection with the NYLCare acquisition in July 1998 as
well as the additional debt incurred in connection with the PHC acquisition in
August 1999. The 1998 increase primarily reflects the additional debt incurred
in connection with the NYLCare acquisition.
Included in other operating expenses are Year 2000 costs of $3 million in 1999
and $11 million in 1998. Salaries and related benefits and other operating
expenses decreased during 1999 due to continued cost-reduction initiatives.
After-tax net realized capital gains in 1999 include various gains on common
stock sales and $14 million from the recognition of a deferred hedge gain. Refer
to "Liquidity and Capital Resources" for further discussion. After-tax net
realized capital gains in 1998 include gains of $74 million related to the
sale of the Company's remaining investment in Travelers Property Casualty
Corporation ("TPCC"). After-tax net realized capital gains in 1997 include gains
of $98 million related to sales of portions of the Company's investment in
TPCC offset by an after-tax realized capital loss of $29 million related to
the write-down of certain properties that the Company had classified as held for
sale.
Page 22
<PAGE> 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
CORPORATE (CONTINUED)
Outlook
Interest expense and other operating expenses are expected to increase in 2000,
due to increased debt and staffing levels related to the PHC acquisition.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect the Company.
TOTAL INVESTMENTS
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).
The Company's investment objective is to fund policyholder and other liabilities
in a manner that enhances shareholder and contractholder value, subject to
appropriate risk constraints. The Company seeks to meet this investment
objective through a mix of investments that reflect the characteristics of the
liabilities they support; diversify the types of investment risks by interest
rate, liquidity, credit and equity price risk; and achieve asset diversification
by investment type, industry, issuer and geographic location. The Company
regularly projects duration and cash flow characteristics of its liabilities and
makes appropriate adjustments in its investment portfolios.
Total investments at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities $ 28,661.6 $ 32,180.8
Equity securities 791.1 800.5
Short-term investments 788.2 942.2
Mortgage loans 3,238.2 3,553.0
Real estate 361.8 270.3
Policy loans 541.5 458.7
Other 1,394.8 1,300.3
- ------------------------------------------------------------------------------------------------------
Total investments $ 35,777.2 $ 39,505.8
======================================================================================================
</TABLE>
Debt Securities
Available-for-sale debt securities represented 80% of the Company's total
general account invested assets at December 31, 1999 and 81% at December 31,
1998 and supported the following types of businesses:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 4,533.0 $ 5,890.5
Supporting experience-rated products 11,879.5 13,197.3
Supporting remaining products 12,249.1 13,093.0
- ------------------------------------------------------------------------------------------------------
Total debt securities $ 28,661.6 $ 32,180.8
======================================================================================================
</TABLE>
Debt securities reflect net unrealized capital losses of $748 million at
December 31, 1999 compared with net unrealized capital gains of $1.5 billion at
December 31, 1998. Of the net unrealized capital losses at December 31, 1999,
$122 million relate to assets supporting discontinued products and $294 million
relate to experience-rated pension contractholders.
Page 23
<PAGE> 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
The debt securities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company on a
basis believed to be similar to that used by the rating agencies. The Company's
investments in debt securities had an average quality rating of AA- as of
December 31, 1999 and A+ as of December 31, 1998 (40% were AAA at December 31,
1999 and 33% were AAA at December 31, 1998). "Below investment grade" debt
securities carry a rating of below BBB-/Baa3 and represented 7% of the portfolio
at December 31, 1999 and 6% of the portfolio at December 31, 1998, of which 46%
at December 31, 1999 and 51% at December 31, 1998 support discontinued and
experience-rated products. Refer to Note 4 of Notes to Consolidated Financial
Statements for disclosures related to debt securities by market sector.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.7 billion at December 31, 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. Approximately 81% of the Company's
residential CMO holdings were backed by government agencies, such as GNMA, FNMA
and FHLMC, at December 31, 1999 and 67% at December 31, 1998. The principal
risks inherent in holding CMOs are prepayment and extension risks related to
dramatic decreases and increases in interest rates, resulting in the repayment
of principal from the underlying mortgages either earlier or later than
originally anticipated. At December 31, 1999, approximately 1% and at 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 December 31, 1999 and 1998, the Company's mortgage loan investments, net of
impairment reserves, supported the following types of businesses:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 768.8 $ 754.2
Supporting experience-rated products 923.4 1,183.3
Supporting remaining products 1,546.0 1,615.5
- ------------------------------------------------------------------------------------------------------
Total mortgage loans $ 3,238.2 $ 3,553.0
======================================================================================================
</TABLE>
During 1999, the Company managed its mortgage loan portfolio to maintain the
balance, relative to invested assets, by selectively pursuing refinance and new
loan opportunities.
Problem, restructured and potential problem loans included in mortgage loans
were $285 million at December 31, 1999 and $301 million at December 31, 1998, of
which 79% at December 31, 1999 and 86% at December 31, 1998 support discontinued
and experience-rated products. Specific impairment reserves on these loans were
$32 million at December 31, 1999 and $48 million at December 31, 1998. Refer to
Note 4 of Notes to Consolidated Financial Statements for additional information.
At December 31, 1999 scheduled mortgage loan principal repayments were as
follows:
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------------------
<S> <C>
2000 $ 541.2
2001 67.1
2002 159.9
2003 596.2
2004 211.1
Thereafter 1,711.9
- ---------------------------------------------------------------
</TABLE>
Page 24
<PAGE> 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
Risk Management and Market-Sensitive Instruments
The Company regularly evaluates the appropriateness of investments relative to
its management-approved investment guidelines (and operates within those
guidelines) and the business objective of the portfolios. The Company manages
interest rate risk by seeking to maintain a tight duration band, while credit
risk is managed by seeking to maintain high average quality ratings and
diversified sector exposure within the debt securities portfolio. In connection
with its investment and risk management objectives, the Company also uses
financial instruments whose market value is at least partially determined by,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term), duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.
The Company's use of derivatives generally is limited to hedging purposes and
has principally consisted of using interest rate swap agreements, futures
contracts, warrants, foreign exchange forward contracts, currency swap
agreements and options to hedge interest rate, equity price and foreign exchange
risks. These instruments, viewed separately, subject the Company to varying
degrees of interest rate, equity price, foreign exchange and credit risk.
However, when used for hedging, the expectation is that these instruments would
reduce overall risk. Refer to Note 5 of Notes to Consolidated Financial
Statements for additional information.
The risks associated with investments supporting experience-rated pension,
annuity and life products are assumed by those contractholders and not by the
Company (subject to, among other things, certain minimum guarantees).
Anticipated future losses associated with investments supporting discontinued
fully guaranteed large case pension products are provided for in the reserve for
anticipated future losses (refer to "Large Case Pensions -- Discontinued
Products"). Risks associated with the investments and liabilities related to
experience-rated pension, annuity and life products and discontinued fully
guaranteed large case pension products are not included in the analysis
presented below.
The following discussion about the Company's risk management activities includes
forward-looking statements that involve risk and uncertainties. Set forth below
are management's projections of hypothetical net losses in fair value of
shareholders' equity related to the Company's market-sensitive instruments if
certain assumed changes in market rates and prices were to occur (sensitivity
analysis). These instruments are not leveraged and are held for purposes other
than trading. While the Company believes that the assumed market rate changes
are reasonably possible in the near term, actual results may differ,
particularly as a result of any management actions that would be taken to
mitigate such hypothetical losses in the fair value of shareholders' equity.
Based on the Company's overall exposure to interest rate risk, equity price risk
and foreign exchange risk, the Company believes that these changes in market
rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company.
Interest Rate Risk
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical loss in fair value of shareholders' equity related to financial and
derivative instruments is estimated to be $202 million (after tax), (1.9% of
total shareholders' equity) at December 31, 1999, and $180 million (after tax),
(1.6% of total shareholders' equity) at December 31, 1998. The Company believes
that an interest rate shift of this magnitude represents a moderately adverse
scenario and is approximately equal to the historical annual volatility of
interest rate movements for the Company's intermediate-term available-for-sale
debt securities. The Company has included corresponding changes in certain
insurance liabilities in this sensitivity analysis.
Page 25
<PAGE> 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
The potential effect of interest rate risk on near-term net income, cash flow
and fair value was determined based on commonly used models. The models project
the impact of interest rate changes on a wide range of factors, including
duration, prepayment, put options and call options. Fair value was estimated
based on the net present value of cash flows or duration estimates using a
representative set of likely future interest rate scenarios.
Equity Price Risk
The Company's available-for-sale equity securities consist primarily of domestic
stocks, as well as certain foreign holdings. Assuming an immediate decrease of
10% in equity prices for domestic and foreign equity securities generally, and
25% for Southeast Asian and Latin American emerging market equity securities,
the hypothetical loss in fair value of shareholders' equity related to financial
and derivative instruments is estimated to be $119 million (after tax), (1.1% of
total shareholders' equity) at December 31, 1999, and $77 million (after tax),
(.7% of total shareholders' equity) at December 31, 1998.
Foreign Exchange Risk
The Company selectively hedges to manage its foreign exchange risk. The Company
generally uses short-term foreign exchange forward contracts to hedge its
foreign exchange risk arising from certain nondollar-denominated investment
securities and investments in certain foreign affiliates.
Assuming a foreign exchange rate volatility of 10% generally, and 25% for
certain Southeast Asian and Latin American emerging market currencies, the net
hypothetical loss in fair value of shareholders' equity related to financial and
derivative instruments is estimated to be $142 million (after tax), (1.3% of
total shareholders' equity) at December 31, 1999, and $206 million (after tax),
(1.8% of total shareholders' equity) at December 31, 1998. Approximately 79% at
December 31, 1999 and 80% at December 31, 1998 of total foreign exchange risk is
comprised of Brazil, Mexico, Taiwan, Chile, Malaysia and, for 1998, Canada.
Included in the calculation of net hypothetical loss above is $65 million (after
tax) at December 31, 1999 and $129 million (after tax) at December 31, 1998
related to equity investments in foreign affiliates, primarily Brazil and
Mexico. Foreign exchange exposure is calculated by: (1) translating the local
reporting currency into U.S. dollars using foreign exchange rates at December
31, and (2) applying the market volatility rate to the translated amount.
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.
The Company's current liquidity objectives are to maximize the use of available
cash to fund ongoing operating needs, pay shareholder dividends, strategically
invest in core businesses and meet common stock repurchase objectives. During
1999, net cash generated from investing, financing and operating activities was
used to make approximately $1.3 billion of investments in core businesses and
acquisitions, pay approximately $513 million for common stock repurchases and
pay approximately $154 million of dividends to shareholders. In 1998, net cash
generated by investing, financing and operating activities was used to make
approximately $1.2 billion of investments in core businesses, pay approximately
$395 million for common stock repurchases and pay approximately $171 million of
dividends to shareholders.
Page 26
<PAGE> 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company monitors the duration of its debt securities portfolio (which is
highly marketable) and mortgage loans, and executes its purchases and sales of
these investments with the objective of having adequate funds available to
satisfy the Company's maturing liabilities.
Dividends
The Board of Directors (the "Board") reviews Aetna's common stock dividend each
quarter. Among the factors considered by the Board in determining the amount of
each dividend are the Company's results of operations and the capital
requirements, growth and other characteristics of its businesses.
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 projects that the redemption of the
Preferred Stock will result in approximately $48 million of annual cash dividend
savings. Refer to Note 14 of Notes to Consolidated Financial Statements for
further information.
Financings, Financing Capacity and Capitalization
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services, Inc. ("Aetna Services") and are fully and
unconditionally guaranteed by Aetna Inc. Refer to Note 12 of 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 cash receipts and disbursements. Also, in 1999 and 1998, the
Company used these borrowings to finance an increased amount of disbursements
since an increased amount of its other funds were used in connection with
acquisitions. The maximum amount of domestic short-term borrowings outstanding
was $1.9 billion in 1999, $1.8 billion in 1998 and $858 million in 1997. Aetna
Services also has a revolving credit facility in an aggregate amount of $1.5
billion and a second facility in the aggregate amount of $500 million, each with
a worldwide group of banks and other financing entities. The facilities
terminate in June 2001 and on March 28, 2000, respectively. Refer to Note 12 of
Notes to Consolidated Financial Statements for additional information.
The Company's total debt to capital ratio (total debt divided by total debt and
shareholders' equity, adjusted for unrealized gains or losses on
available-for-sale investment securities and, at December 31, 1998 and 1997,
redeemable preferred securities) was 29.5% at the end of 1999, 24.1% at the end
of 1998 and 19.1% at the end of 1997. The increases in 1999 and 1998 primarily
reflect the PHC and NYLCare acquisitions, respectively.
The Company financed the acquisition of PHC by issuing $500 million of
three-year senior notes to Prudential and by using funds made available from
issuing commercial paper. The Company expects to ultimately replace this
commercial paper with medium- or long-term fixed-income securities, subject to
market conditions.
Page 27
<PAGE> 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company financed 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 ultimately expects to issue additional medium- or long-term
fixed-income securities, subject to market conditions, to replace some of this
commercial paper. At the time of the acquisition, the Company hedged a portion
of the anticipated issuance of fixed-income securities against interest rate
risk using futures contracts, with unrealized gains or losses on these contracts
deferred under hedge accounting. While the Company still expects to issue
fixed-income securities, continued unfavorable market conditions have delayed
this issuance from the original probable expected time frame. Accordingly, the
Company ceased hedge accounting under its policies and recognized the deferred
hedge gain of $14 million in the third quarter of 1999 as a realized capital
gain in the Corporate segment.
The Company continually monitors existing and alternative financing sources to
support the Company's capital and liquidity needs, including, but not limited
to, debt issuance, preferred or common stock issuance, intercompany borrowings
and pledging or selling of assets.
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly owned subsidiary
of Aetna Services, issued $275 million (11,000,000 shares) of 9.5% Cumulative
Monthly Income Preferred Securities, Series A. The securities were redeemable,
at the option of ACLLC with Aetna Services' consent, in whole or in part, on or
after November 30, 1999, at a redemption price of $25 per security plus
accumulated and unpaid dividends to the redemption date. On December 10, 1999,
ACLLC redeemed all $275 million of the Monthly Income Preferred Securities.
On November 18, 1998, Aetna Services issued $300 million of 5.66% Puttable Reset
Securities ("PURS"). The PURS were structured such that, on November 29, 1999
the remarketing agents were able to elect to remarket the PURS, whereby the
annual interest rate on the securities would have been reset to a specified base
rate (10-year Treasury rate plus a defined spread). However, the remarketing
agents elected not to remarket the securities, and Aetna Services was required
to repurchase the PURS in full on November 29, 1999.
Common Stock Transactions
In January 1999, the Company's Board authorized the repurchase of 5 million
shares of common stock (the "January 1999 Plan"). Through October 7, 1999,
1,780,000 shares of common stock had been repurchased under the January 1999
Plan at a cost of approximately $135 million. On October 8, 1999, the Board
authorized the repurchase of up to 20 million shares of common stock, not to
exceed an aggregate purchase price of $1 billion. This authorization replaces
the January 1999 Plan, which had 3,220,000 shares remaining. Pursuant to the
October 1999 authorization, the Company has repurchased 6,920,000 shares of
common stock at a cost of approximately $377 million through December 31, 1999.
The Company issued 588,580 shares of common stock in 1999, 576,387 shares in
1998 and 1,883,945 shares in 1997 pursuant to employee benefit plans.
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<PAGE> 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Restrictions on Certain Payments by the Company
The Company's business operations are conducted through Aetna Services and Aetna
U.S. Healthcare Inc. and their respective subsidiaries (which principally
consist of HMOs and insurance companies). In addition to general state law
restrictions on payments of dividends and other distributions to shareholders
applicable to all corporations, HMOs and insurance companies are subject to
further state regulations that, among other things, may require those companies
to maintain certain levels of equity, and restrict the amount of dividends and
other distributions that may be paid to their parent corporations. These
regulations are not directly applicable to Aetna Services, Aetna U.S. Healthcare
Inc. or Aetna Inc., as none is an HMO or insurance company. The additional
regulations applicable to the Company's indirect HMO and insurance company
subsidiaries are not expected to affect the ability of Aetna Inc. to pay
dividends, or the ability of any of the Company's subsidiaries to service their
outstanding debt.
Solvency Regulation
State insurance regulators have adopted changes in statutory accounting
practices and other initiatives to strengthen solvency regulation. The National
Association of Insurance Commissioners ("NAIC") adopted risk-based capital
("RBC") standards for life insurers that are designed to identify weakly
capitalized companies by comparing the company's adjusted surplus to its
required surplus ("RBC ratio"). The RBC ratio is designed to reflect the risk
profile of the company. Within certain ratio ranges, regulators have increasing
authority to take action as the RBC ratio decreases. There are four levels of
regulatory action, ranging from requiring insurers to submit a comprehensive
plan to the state insurance commissioner to requiring the state insurance
commissioner to place the insurer under regulatory control. The RBC ratio for
each of the Company's primary life insurance subsidiaries, as measured at
December 31, 1999, was above the levels that would require regulatory action.
External rating agencies use their own RBC standards as part of determining a
company's rating. The RBC framework described above for life insurers was
recently extended by the NAIC to health organizations, including HMOs. Although
not all states have adopted these rules at December 31, 1999, each of the
Company's active HMOs has a surplus that exceeded either the applicable state
net worth requirements or, where adopted, the levels that would require
regulatory action under the NAIC's RBC rules.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangible assets were $9.3 billion at December 31,
1999, or approximately 87% of consolidated shareholders' equity. The
amortization of goodwill and other acquired intangible assets was $437 million
in 1999, or approximately 36% 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,
work force and computer systems), generally over various periods not exceeding
25 years. Management's estimate of the useful life of goodwill, which represents
the excess of cost over the fair value of net assets acquired, is over periods
not exceeding 40 years. The risk associated with the carrying value of goodwill
and other acquired intangible assets is whether future operating income (before
amortization of goodwill and other acquired intangible assets) will be
sufficient on an undiscounted basis to recover the carrying value. The Company
regularly evaluates the recoverability of goodwill and other acquired intangible
assets and believes such amounts are currently recoverable. However, any
significant change in the useful lives of goodwill or other acquired intangible
assets, as estimated by management, could have a material adverse effect on the
Company's results of operations and financial condition.
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<PAGE> 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
NEW ACCOUNTING STANDARDS
Refer to Note 1 of 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.
The Company completed the acquisition of PHC on August 6, 1999. PHC's IT systems
and other systems and facilities were added to the Company's Year 2000 inventory
as of that date. The Year 2000 discussion below includes PHC's systems and
facilities.
Current Status
After the Year 2000 rollover, the Company conducted a series of quality control
checks on its mission-critical IT systems and embedded systems. These systems
operated as planned, in all material respects, and there were no significant
interruptions in the Company's operations. Data within the Company's IT systems
was up-to-date and customers were able to access information electronically. As
of February 25, 2000 the Company has not experienced any material difficulties
with its mission-critical IT systems, embedded systems, suppliers, or customers
due to Year 2000 issues. The Company is in the process of reassigning its Year
2000 personnel and transferring Year 2000 related responsibilities to its
businesses. The Company remains Year 2000 vigilant, and any potential future
Year 2000 issues will be addressed by IT personnel within the Company's business
segments.
Future Risks and Contingency/Recovery Planning
The Company currently does not expect any future material Year 2000 issues.
However, the Company cannot guarantee that it will not have any future material
Year 2000 issues due to the cyclical nature of certain of the Company's business
processes and those of its critical suppliers or customers. The Company has
developed contingency/recovery plans aimed at sustaining the continuity of
critical business functions in the event of future Year 2000 issues. As part of
its contingency planning process, the Company developed contingency plans for
those failure scenarios it believes could have a significant impact on the
Company's operations. Those plans remain in effect. The scenarios the Company
has planned for 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, reallocation of
existing resources, use of alternative processes and procedures, use of outside
providers to supplement internal capabilities and use of alternative suppliers.
Year 2000 Costs
Total Year 2000 project costs were $88 million (after tax) in 1999, $108 million
(after tax) in 1998, and were not material in 1997. 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.
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<PAGE> 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT
The federal and state governments continue to enact and seriously consider many
legislative and regulatory proposals that have or would materially impact
various aspects of the health care system. Many of these changes are described
below. While certain of these measures would adversely affect us, at this time
we cannot predict the extent of this impact.
Medicare
In 1997, the federal government passed legislation related to Medicare that
changed the method for determining premiums that the government pays to HMOs for
Medicare members. In general, the new method has and will reduce the premiums
payable to us compared to the old method, although the level and extent of the
reductions varies by geographic market and depends on other factors. The
legislation also requires us to pay a "user fee." The changes began to be phased
in on January 1, 1998 and will continue over five years. The federal government
also announced in 1999 that it planned to begin to phase in risk adjustments to
its premium payments over a five-year period commencing January 1, 2000. It is
anticipated that the net impact of these risk adjustments will be to reduce the
premiums payable to the Company. While the phase-in provisions provide us with
an opportunity to offset some of the premium reductions, the risk adjustments
and the user fee by adjusting the supplemental premiums that members pay to us
and by adjusting the benefits included in our products, because of competition
and other factors, the adjustments we can make may not fully offset the
reductions in premiums from the government. Because of these reduced premiums
and the user fee, as well as other factors including new Medicare + Choice
regulations issued by HCFA, we decided not to renew our Medicare HMO contracts
in certain areas effective January 1, 1999 and January 1, 2000.
HIPAA and Related Federal Legislation
The federal government enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") in 1997. The legislation has three main
effects:
- - it limits pre-existing condition exclusions that apply to individuals
changing jobs or moving to individual coverage;
- - it guarantees that employees in the small group market have available
health coverage; and
- - it prevents exclusion of individuals from coverage under group plans based
on health status.
Other federal legislation, effective January 1, 1998, mandates minimum hospital
stays after childbirth and that health plans apply lifetime limits to mental
health benefits with parity.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
Other Legislation and Regulation
The federal government and many states, including states in which we have
substantial managed care membership, have enacted or are seriously considering
additional legislation or regulation related to managed care. This legislation
or regulation includes, among other things, the following:
<TABLE>
<S> <C>
- - Assessments, surcharges or taxes on premiums or - Mandatory expanded coverage for emergency services
provider payments to fund uncompensated care, - Mandated liberalized definitions of medical necessity
graduate medical education, high-risk pools, guaranty - Mandated liberalized internal and external grievance and
funds, or government programs appeal procedures (including expedited decision making)
- - Changes to licensure or certification requirements - Mandatory maternity and other lengths of hospital inpatient
- - Eliminating or reducing the scope of ERISA stay
pre-emption of state medical and bad faith claims - Mandatory point-of-service benefits for HMO plans
under state law, exposing health plans to expanded - Prohibition of so-called "gag" and similar clauses in
liability to punitive and other extra-contractual physician agreements
damages - Prohibitions on incentives based on utilization
- - Extension of malpractice and other liability for - Prohibition or limitation of arrangements designed to manage
medical and other decisions from providers to health medical costs and improve quality of care, such as capitated
plans arrangements with providers or provider financial incentives
- - Hearings and limitations on the ability to terminate - Regulation of and restrictions on utilization management and
providers from networks review
- - Increased reserve and capital requirements - Regulation of the composition of provider networks, such as
- - Liability for negligent denials or delays in coverage any willing provider and pharmacy laws
- - Mandatory coverage of experimental procedures and - Required payment levels for out-of-network care
drugs - Exempting physicians from the antitrust laws that prohibit
- - Mandatory direct access to specialists for patients price fixing, group boycotts and other horizontal restraints
with chronic conditions on competition
- - Mandatory direct access to specialists (including - Third-party review of denials of benefits (including denials
OB/GYNs) and chiropractors based on a lack of medical necessity)
- - Mandated expanded consumer disclosures and - Restricting or eliminating the use of formularies for
notices prescription drugs
</TABLE>
For example, the House of Representatives recently passed the Norwood-Dingell
bill which would (if it became law), among other things, place limits on health
care plans' methods of operations, limit employers' and health care plans'
ability to define medical necessity and permit employers and health care plans
to be sued in state courts for coverage determinations.
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
caused by such legislation or regulation.
The health business also may be adversely impacted by court and regulatory
decisions that expand the interpretations of existing statutes and regulations,
impose medical or bad faith liability, increase our responsibilities under
ERISA, or reduce the scope of ERISA pre-emption of state law claims. The U.S.
Supreme Court is reviewing a U.S. Court of Appeals decision that could increase
our responsibilities under ERISA.
For other important information regarding regulation of our health and other
businesses, refer to "Forward-Looking Information/Risk Factors" and our 1999
Form 10-K.
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<PAGE> 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as (1) those statements
are identified as forward-looking, and (2) the statements are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those discussed in the statement.
We want to take advantage of these safe harbor provisions.
Certain information contained in this Management's Discussion and Analysis is
forward-looking within the meaning of the 1995 Act or Securities and Exchange
Commission rules. This information includes, but is not limited to: (1) the
information that appears under the headings "Outlook" in the discussion of
results of operations of each of our businesses, (2) Total Investments - Risk
Management and Market-Sensitive Instruments" and (3) "Year 2000." In writing
this Management's Discussion and Analysis, we also used the following words, or
variations of these words and similar expressions, where we intended to identify
forward-looking statements:
- Expects - Anticipates - Plans - Seeks
- Projects - Intends - Believes - Estimates
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of significant uncertainties and
other factors, many of which are outside our control, that could cause actual
results to differ materially from these statements. You should not put undue
reliance on these forward-looking statements. We disclaim any intention or
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.
Set forth below are certain important risk factors that, in addition to general
economic conditions and other factors (some of which are discussed elsewhere in
this Annual Report), may affect these forward-looking statements and our
businesses generally. In addition, you may read our reports filed with the
Securities and Exchange Commission, including our 1999 Form 10-K; for a more
detailed description of certain uncertainties and factors that could cause
actual results to differ materially from these forward-looking statements.
Certain Factors Particular to Health Operations
Medical loss ratios for the PHC business are higher than for the Company's other
health risk business. The effect of these higher ratios is offset, in part, by
the reinsurance agreement between Prudential and the Company, which terminates
December 31, 2000. (Refer to "PHC Agreement" for additional information
regarding the reinsurance agreement.) The Company is seeking to improve the
medical loss ratios of the acquired business through underwriting and pricing
discipline and medical cost management initiatives. If the Company is unable to
improve the medical loss ratios for the acquired business, its results of
operations for periods following termination of the reinsurance agreement could
be materially adversely affected.
The administrative costs related to the PHC business and the ASO business of
Prudential that the Company agreed to service are higher than the administrative
costs of the Company's other health business. The Company is seeking to reduce
the level of administrative costs related to this business. In addition, the
Company expects a significant decline in the membership of the acquired PHC
business and the ASO business it agreed to service. If the Company is unable to
reduce the level of administrative costs to correspond with expected levels of
membership decline, its results could be materially adversely affected.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Our profitability growth depends in part on an efficient integration of acquired
health operations. We acquired the NYLCare health business in July 1998 and
acquired the Prudential health care business in August 1999. Factors that can
affect the efficiency of our integration include, but are not limited to, our
success in: (1) integrating management, products, legal entities, networks and
information systems on a timely basis, (2) applying managed care expertise and
techniques throughout a broader membership base and (3) eliminating duplicative
administrative and customer service functions.
Medical costs could increase beyond our expectations for a contract year.
Premiums in our Health Risk business are generally fixed by contract for
one-year periods. We cannot recover actual costs for the contract year that are
higher than those estimated and reflected in pricing through higher premiums
from customers. However, contracts renew periodically during the year, and the
Company may be able to reflect increased costs as these contracts renew.
Factors that may increase medical costs for the contract year include increased
utilization, increases in provider contract rates, increases in noncontracted
provider charges, adverse changes in legislation and regulation, changes in
health practices and medical technologies, price increases in pharmaceuticals
and durable medical equipment and other factors. As noted in the discussion of
Aetna U.S. Healthcare's results, medical costs continued to increase in 1999,
and the rate of increase was particularly high in the later part of the year.
Actual costs of medical claims could exceed the estimates reflected in our
reserves. For the Health Risk business, our medical claims payable reflect
estimates of the ultimate cost of claims incurred by members but not yet
reported to us, and claims reported to us but not yet paid. Estimates of medical
claims payable are based on a number of factors, including those derived from
historical claim experience. We estimate medical claims payable periodically,
and we reflect any adjustments to our estimates in our current period operating
results within current and future benefits. 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 estimated periodically, and any resulting adjustments are reflected
in current period operating results within current and future benefits. Medical
claims payable are based on a number of factors, including those derived from
historical claim experience. An extensive degree of judgment is used in this
estimation process, and the adequacy of the estimate is highly sensitive to
changes in medical claims payment patterns and changes in medical cost trends.
The HMO medical cost trend (the rate of increase in medical cost inflation and
utilization over the comparable prior-year period) varied throughout 1999. In
the fourth quarter of 1999, management observed that medical costs associated
with medical services provided in prior periods, particularly the third quarter
of 1999, were higher than previously anticipated and that the rate of medical
cost trend for the third quarter (used in estimating medical claims payable) was
higher than that for the first and second quarters of 1999.
Management believes (and has assumed, for purposes of estimating medical claims
payable at December 31, 1999) that the Commercial HMO medical cost trend for the
fourth quarter of 1999 has stabilized, and that the Medicare HMO medical cost
trend for the fourth quarter of 1999 has improved from the third quarter,
although it is still higher than for the first half of the year. A worsening of
medical cost trend or adverse changes in claim payment patterns from those that
were assumed in estimating the reserves would cause these estimates to change
in the near term, and could have a material adverse effect on future results of
operations.
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<PAGE> 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
We establish reserves for Group Insurance products as premiums become due. These
reserves reflect the present value of expected future obligations net of the
present value of expected future premiums. Policy reserves for group paid-up
life insurance generally reflect long-term fixed obligations. We compute these
reserves on the basis of assumed or guaranteed yield and benefit payments. Our
assumptions for group paid-up life insurance are based on statutory tables. For
long-term disability products, we establish reserves for: (1) lives currently in
payment status (using standard industry, as well as our own, morbidity and
interest rate assumptions), (2) lives who have not yet satisfied the waiting
period, but who we expect will do so, and (3) claims that have been incurred but
not reported to us. Long-term care reserves are a long-term obligation, and we
calculate them using industry data for morbidity and mortality assumptions.
Decreases in ratings could adversely affect our Group Insurance Business.
Decreases in claims-paying ratings of Aetna Life Insurance Company (the primary
subsidiary selling Group Insurance products), if they were to occur, could cause
Group Insurance sales and earnings to decline.
Federal and state governments may adopt legislation and regulations that
adversely affect our health business. As discussed above (refer to "Regulatory
Environment"), the federal and many state governments have enacted or are
actively considering certain legislative and regulatory changes related to
health products. At this time we are unable to predict the impact of future
changes, although we anticipate that certain of these measures, if enacted,
could adversely affect health operations through:
<TABLE>
<S> <C>
- - reducing premiums
- - reducing our ability to manage medical costs - regulating levels and permitted lines of business
- - increasing medical costs and operating expenses - imposing financial assessments
- - increasing our exposure to lawsuits - regulating business practices
</TABLE>
Changes in our business mix can affect our profitability. If employers and
individuals select plans with higher copayments, deductibles or coinsurance,
then certain of our medical costs would be lower, but we also would receive
lower premiums for these plans. In addition, our profitability may become more
sensitive to changes in medical costs and premiums if:
- - more employers switch to self-funded coverage (where the employer bears
most or all of the medical cost risk);
- - our Medicare risk membership increases relative to our commercial risk
membership (Medicare plans have both relatively higher premiums and medical
costs); and/or
- - health products with relatively higher medical loss ratios are purchased.
Adverse publicity regarding managed care can hurt our sales. Adverse publicity,
like the kind currently occurring, regarding managed care may negatively
influence participants' or employers' decisions to select managed care plans
generally, and our health plans, specifically.
Government payors can determine premiums. In government-funded health programs
such as Medicare and Medicaid, the government payor determines the premium
levels. If the government payor reduces the premium levels or increases premiums
by less than our cost increases and the Company cannot offset these with
supplemental premiums and changes in benefit plans, then we could be adversely
affected. In addition, premiums for certain federal government employee groups
are subject to retroactive downward adjustments by the federal government. These
adjustments could adversely affect us.
Page 35
<PAGE> 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Changes in accreditation of our health plans could affect our competitiveness.
Accreditation by independent quality accrediting agencies, such as the National
Committee for Quality Assurance, is an important competitive factor for certain
of our HMO plans. If our plans were to lose or be denied accreditation, it could
adversely affect customer selection of our health products, and, in some
jurisdictions, could affect our licensure status.
Success of our e.health initiatives depends on developing and implementing new
and enhanced systems and processes. Development and implementation of our
e.health initiatives will require significant investments over the next several
years. In addition, we may not achieve the new product development, increases in
sales and reductions in expenses that we expect from these initiatives unless we
are able to efficiently and cost effectively develop and implement new and
enhanced information systems and redesigned business processes.
Certain Factors Particular to Financial Services Operations
Significant changes in financial markets could affect earnings. Significant
changes in financial markets could impact the level of assets under management
and administration in our Aetna Financial Services, Large Case Pensions and
Aetna International businesses, and, in turn, our level of asset-based fees in
those businesses. For example, significant increases in interest rates or
decreases in equity markets would directly affect the level of assets under
management and administration and, in addition, may increase the level of
withdrawals and decrease the level of deposits by customers. Customers under
those circumstances may seek to diversify among asset managers or seek
investment alternatives that we do not offer. Significant declines in the value
of investments also may affect our ability to pass through investment losses to
certain experience-rated customers, whether due to triggering minimum guarantees
or other business reasons.
Decreases in ratings could affect assets under management. Decreases in the
claims-paying ratings of our domestic financial services subsidiaries could have
the effect of decreasing new sales and deposits and increasing withdrawals and
surrenders in our Aetna Financial Services and Large Case Pensions businesses.
Such changes in sales and deposits, withdrawals and surrenders would adversely
affect the level of asset-based fees of those businesses. The claims-paying
ratings of these subsidiaries are periodically reviewed and subject to changes
in certain cases based on factors beyond our control.
Early withdrawal of assets could affect earnings. We incur up-front costs, such
as commissions, when we sell our annuity, life insurance and other financial
services products, including international financial services products. We
generally defer these costs and recognize them over time. As a result, the
retention of assets under those products is an important component of
profitability. We generally seek to structure our products and sales to
encourage retention of assets under management and administration or recover
costs, through surrender charges, higher credited rates to customers if we
retain their assets for longer periods, paying renewal commissions, paying
service fees or other terms. However, if customers withdraw assets earlier than
we anticipated when we priced the products, it would adversely affect
profitability. We also experience competitive pressure to lower margins.
Page 36
<PAGE> 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Certain Factors Particular to International Operations
Devaluation of foreign currencies reduces earnings calculated in U.S. dollars.
We hedge our foreign exchange risk on a selective basis. However, we generally
do not hedge the currency exposure of our investments in foreign affiliates,
since we view these investments as long term. In preparing our consolidated
financial statements, we translate our results from the foreign currency in
which we operate in a particular country into U.S. dollars. Devaluation of a
country's currency, however, could adversely affect our results of operations
when translated into U.S. dollars. Also, when economies are considered highly
inflationary (generally, cumulative inflation levels in excess of 100% over a
three-year period), we then recognize changes in the value of net monetary
assets or liabilities currently in earnings, rather than through accumulated
other comprehensive income. This would potentially make our reported earnings
more volatile. In addition, although we consider foreign exchange trends when
deciding to invest in particular countries, currency devaluation also may affect
the value of our international investments when translated into U.S. dollars.
International markets are subject to additional risks. Our Aetna International
operations involve certain other risks not typically associated with doing
business in the United States. These risks include investment and other controls
that may be imposed by governments, such as:
<TABLE>
<S> <C>
- - Permitted levels of equity ownership of companies - Restrictions on entry into new lines of business
by foreign persons - Requirements that portions of business be
- - Restrictions on remittances of foreign earnings or reinsured through state-affiliated institutions
repatriation of capital - Other restrictions affecting the conduct of business
- - Currency exchange controls
</TABLE>
Additionally, it may be more difficult for us to manage interest rate risk
because of the relatively short duration of investments that are available in
currencies that match long-term liabilities for international fixed-rate
products. Foreign economies also may experience increased volatility of equity
markets and high rates of inflation. They also may be subject to other political
and economic factors, such as more rapid change of regulatory policy,
nationalization of businesses and unrest. We generally do not insure against
foreign political risks. For example, during 1999 our operations in Brazil were
adversely affected by, among other things, an economic recession and higher
taxes on insurance premiums there.
Other Factors Affecting All of Our Businesses
Litigation can adversely affect us. Litigation also could adversely affect us,
both through costs of defense and adverse results or settlements. Refer to Note
18 of Notes to Consolidated Financial Statements and our 1999 Form 10-K for
information regarding litigation, including current shareholder litigation and
certain purported class action litigation related to our health business.
Year 2000 related issues could affect operations and results of operations. As
of February 25, 2000, we have not experienced any material Year 2000 related
difficulties. However, our operations and results of operations could be
materially and adversely affected if we or any of our mission-critical suppliers
were to experience significant Year 2000 related difficulties.
Page 37
<PAGE> 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Adverse changes in regulation could affect the operations of each of our
businesses. In addition to our health business, each of our other businesses is
subject to comprehensive regulation. These businesses could be adversely
affected by:
- - Increases in minimum capital and other financial viability requirements
for health and other insurance operations;
- - Changes in the taxation of insurance companies. For example, the
President of the United States' revenue proposal would require life
insurance companies to pay tax on certain income earned prior to 1984.
Under current law, that income is deferred for tax purposes. If this tax
change, which currently is just a proposal, were enacted, then we would
recognize a one-time charge to income in the amount of the tax; and
- - Changes in the tax treatment of annuity, pension and other insurance
products as well as changes in capital gains tax rates. Certain of these
changes, should they occur, could affect the attractiveness to customers
of our financial services products.
Our business realignment may not produce the benefits we expect. In order for us
to achieve the benefits we expect from the realignment of our businesses into
global health and global financial services, we must be able to, among other
things, successfully cross sell products from our different businesses among
domestic and international customers and efficiently realign our business
administration, technology and other processes.
Page 38
<PAGE> 39
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
(Millions, except per common share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums $20,901.3 $14,839.3 $12,592.2
Net investment income 2,965.9 3,220.5 3,392.7
Fees and other income 2,513.6 2,310.2 2,233.6
Net realized capital gains 71.9 271.8 334.2
- -------------------------------------------------------------------------------------------------------------------
Total revenue 26,452.7 20,641.8 18,552.7
- -------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Current and future benefits 19,468.7 14,563.7 12,852.0
Operating expenses:
Salaries and related benefits 2,255.9 1,707.3 1,699.6
Other 2,659.9 2,162.7 1,874.1
Interest expense 279.3 250.9 235.8
Amortization of goodwill and other acquired intangible assets 437.4 400.1 380.0
Amortization of deferred policy acquisition costs 204.5 215.3 217.5
Reductions of loss on discontinued products (77.2) (68.0) (172.5)
Severance and facilities charges (reserve reductions), net - 1.5 (45.0)
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 25,228.5 19,233.5 17,041.5
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 1,224.2 1,408.3 1,511.2
Income taxes (benefits):
Current 317.1 662.6 466.8
Deferred 190.2 (102.4) 143.3
- -------------------------------------------------------------------------------------------------------------------
Total income taxes 507.3 560.2 610.1
- -------------------------------------------------------------------------------------------------------------------
Net income $ 716.9 $ 848.1 $ 901.1
===================================================================================================================
Net income applicable to common ownership $ 686.4 $ 792.8 $ 845.6
===================================================================================================================
Results per common share:
Net income:
Basic $ 4.76 $ 5.50 $ 5.67
Diluted 4.72 5.41 5.60
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 39
<PAGE> 40
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions, except share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value (amortized cost $29,409.4 and
$30,730.1) $28,661.6 $ 32,180.8
Equity securities, at fair value (cost $732.6 and $762.6) 791.1 800.5
Short-term investments 788.2 942.2
Mortgage loans 3,238.2 3,553.0
Real estate 361.8 270.3
Policy loans 541.5 458.7
Other 1,394.8 1,300.3
- -----------------------------------------------------------------------------------------------------------------------
Total investments 35,777.2 39,505.8
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,504.5 1,951.5
Short-term investments under securities loan agreement 1,037.5 753.6
Accrued investment income 466.5 537.1
Premiums due and other receivables 2,751.1 1,478.1
Reinsurance recoverables 3,881.1 3,897.2
Deferred income taxes 352.0 46.6
Deferred policy acquisition costs 2,059.8 1,768.6
Goodwill and other acquired intangible assets 9,335.4 9,143.5
Other assets 1,341.7 1,111.9
Separate Accounts assets 53,332.2 44,936.0
- -----------------------------------------------------------------------------------------------------------------------
Total assets $112,839.0 $105,129.9
=======================================================================================================================
Liabilities:
Insurance liabilities:
Future policy benefits $ 17,599.3 $ 18,541.1
Unpaid claims 4,976.5 3,953.9
Unearned premiums 507.1 428.9
Policyholders' funds left with the Company 15,481.4 17,632.5
- -----------------------------------------------------------------------------------------------------------------------
Total insurance liabilities 38,564.3 40,556.4
- -----------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 28.5 35.2
Short-term debt 1,887.7 1,370.1
Long-term debt 2,677.9 2,214.5
Payables under securities loan agreement 1,037.2 753.6
Current income taxes 307.6 444.8
Other liabilities 4,195.8 3,007.0
Minority and participating policyholders' interests 117.4 148.4
Separate Accounts liabilities 53,332.2 44,936.0
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 102,148.6 93,466.0
- -----------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred securities of subsidiary limited
liability company holding primarily debentures guaranteed by Aetna - 275.0
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 3, 5 and 18)
Shareholders' equity:
Class C voting mandatorily convertible preferred stock ($.01 par value; 15,000,000
shares authorized; 11,614,816 issued and outstanding in 1998) - 862.1
Common stock ($.01 par value; 500,000,000 shares authorized; 142,680,694 in 1999 and
141,272,628 in 1998 issued and outstanding) 3,719.3 3,292.4
Accumulated other comprehensive income (loss) (655.6) 177.8
Retained earnings 7,626.7 7,056.6
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,690.4 11,388.9
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred securities and shareholders' equity $112,839.0 $105,129.9
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 40
<PAGE> 41
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Three Years Ended December 31, 1999
------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss)
Class C Voting --------------------------
Mandatorily Unrealized
Convertible Common Gains (Losses) Foreign Retained
(Millions, except share data) Total Preferred Stock Stock on Securities Currency Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $10,889.7 $ 865.4 $4,032.8 $ 440.7 $(100.7) $5,651.5
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 901.1 901.1
Other comprehensive loss, net of tax:
Unrealized gains on securities
($66.5 pretax)(1) 43.2 43.2
Foreign currency ($(117.1) pretax) (76.1) (76.1)
---------
Other comprehensive loss (32.9)
---------
Total comprehensive income 868.2
=========
Common stock issued for benefit plans
(1,883,945 shares) 134.7 134.7
Repurchase of common shares
(6,173,900 shares) (523.1) (523.1)
Common stock dividends (118.6) (118.6)
Preferred stock dividends (55.5) (55.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 11,195.4 865.4 3,644.4 483.9 (176.8) 6,378.5
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 848.1 848.1
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(156.0) pretax)(1) (101.4) (101.4)
Foreign currency ($(43.3) pretax) (27.9) (27.9)
---------
Other comprehensive loss (129.3)
---------
Total comprehensive income 718.8
=========
Common stock issued for benefit plans
(576,387 shares) 39.6 39.6
Repurchase of common shares
(5,131,700 shares) (394.9) (394.9)
Conversion of preferred securities
(40,390 preferred shares converted to
33,097 common shares) - (3.3) 3.3
Common stock dividends (114.7) (114.7)
Preferred stock dividends (55.3) (55.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 11,388.9 862.1 3,292.4 382.5 (204.7) 7,056.6
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net income 716.9 716.9
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(905.6) pretax)(1) (588.6) (588.6)
Foreign currency ($(132.5) pretax) (244.8) (244.8)
---------
Other comprehensive loss (833.4)
---------
Total comprehensive loss (116.5)
=========
Common stock issued for benefit plans
(588,580 shares) 44.8 44.8
Issuance of stock appreciation rights 32.5 32.5
Repurchase of common shares
(8,700,000 shares) (512.5) (512.5)
Conversion of preferred securities
(11,614,816 preferred shares converted to
9,519,486 common shares) - (862.1) 862.1
Common stock dividends (116.3) (116.3)
Preferred stock dividends (30.5) (30.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $10,690.4 $ - $3,719.3 $(206.1) $(449.5) $7,626.7
=================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements. Page 41
<PAGE> 42
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 716.9 $ 848.1 $ 901.1
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization (including investment discounts and premiums) 483.0 451.4 374.2
Gain related to sale of life business - (98.9) -
Net realized capital gains (71.9) (271.8) (334.2)
Changes in assets and liabilities:
Decrease in accrued investment income 63.0 8.5 46.0
Increase in premiums due and other receivables (260.4) (92.6) (245.8)
Increase in deferred policy acquisition costs (410.6) (278.9) (302.4)
(Increase) decrease in income taxes (93.9) (91.2) 323.3
Net (increase) decrease in other assets and other liabilities 245.0 (262.2) (193.0)
Increase in other insurance liabilities 969.6 598.4 656.4
Other, net 28.4 (2.2) 4.9
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,669.1 808.6 1,230.5
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales and investment maturities of:
Debt securities available for sale 17,918.6 20,254.6 16,247.8
Equity securities 588.6 833.4 961.4
Mortgage loans 77.5 90.4 1,078.8
Real estate 13.7 136.5 626.8
Other investments 739.8 639.1 924.7
Short-term investments 19,603.2 21,229.1 19,957.0
Life business - 1,000.0 -
Investment maturities and repayments of:
Debt securities available for sale 3,739.7 2,849.4 3,913.9
Mortgage loans 485.6 918.4 1,726.5
Cost of investments in:
Debt securities available for sale (21,609.8) (20,602.6) (21,310.1)
Equity securities (533.9) (481.5) (626.1)
Mortgage loans (480.3) (319.2) (255.3)
Real estate (58.8) (38.5) (66.8)
Other investments (812.5) (4,127.6) (1,033.5)
Short-term investments (18,924.8) (21,126.0) (20,291.7)
Acquisitions:
NYLCare health care business (48.8) (1,080.6) -
Prudential health care business (512.5) - -
Other (212.2) (84.5) (473.0)
Increase in property and equipment (123.5) (123.2) (92.4)
Other, net (9.4) (97.4) 83.0
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (159.8) (130.2) 1,371.0
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 2,503.3 2,046.4 1,872.5
Withdrawals of investment contracts (3,345.4) (3,150.9) (3,481.1)
Issuance of long-term debt 2.0 25.7 4.7
Repayment of long-term debt (33.3) (153.0) (34.3)
Net increase (decrease) in short-term debt 519.4 1,122.3 (46.7)
Common stock issued under benefit plans 44.8 39.6 134.7
Common stock acquired (512.5) (394.9) (523.1)
Redemption of mandatorily convertible preferred stock (275.0) - -
Dividends paid to shareholders (153.5) (170.9) (174.9)
Other, net 32.8 - -
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,217.4) (635.7) (2,248.2)
- --------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (.5) (5.8) (10.1)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 291.4 36.9 343.2
Cash acquired from the NYLCare health business - 108.8 -
Cash acquired from the Prudential health business 261.6 - -
Cash and cash equivalents, beginning of year 1,951.5 1,805.8 1,462.6
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,504.5 $ 1,951.5 $ 1,805.8
================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements. Page 42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aetna Inc., through its subsidiaries, provides health care benefits, group
insurance and financial services. As of December 31, 1999, Aetna Inc. had four
reportable segments: Aetna U.S. Healthcare, Aetna Financial Services (formerly
Aetna Retirement Services), Aetna International and Large Case Pensions. Aetna
U.S. Healthcare provides a full spectrum of managed care, indemnity, and group
life and disability insurance products. Aetna Financial Services offers a range
of financial services products including fixed and variable annuities and mutual
funds. Aetna International, through subsidiaries and joint venture operations,
primarily sells life insurance, health insurance and financial services products
in markets outside the United States. Large Case Pensions manages a variety of
retirement products for defined benefit and defined contribution plans. These
segments are distinct businesses that offer different products and services.
During the reporting period, they were managed separately as each business
required different market strategies, technology and capital allocation. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Aetna Inc. evaluates performance of
these business segments based on operating earnings (net income excluding net
realized capital gains and losses and any other items such as Year 2000 costs,
severance and facilities actions, reduction of the reserve for anticipated
future losses on discontinued products, etc.).
BUSINESS REALIGNMENT
In January 2000, the Company announced a realignment of the Company's health
care, financial services and international businesses into two businesses:
Global Health and Global Financial Services. The new structure is intended to
strengthen the linkage between the international and domestic businesses and
increase the sharing of technology and product expertise. Global Health will be
made up of the following: Aetna U.S. Healthcare (except its Group Life and
Disability Insurance business) and Aetna International's health businesses.
Global Financial Services will be made up of the following: Aetna Financial
Services, Aetna International's life and pension businesses, Aetna U.S.
Healthcare's Group Life and Disability Insurance business and the Large Case
Pensions business. This realignment will result in the formation of new
reportable segments in 2000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare"). All
significant intercompany balances have been eliminated. Certain non-U.S.
affiliates of the Company report operations on a one-month lag. In such
situations, operations are reported for the 12-month period beginning December 1
of the previous calendar year and ending November 30 of the current calendar
year. Less than majority-owned entities in which the Company has at least a 20%
interest are reported on the equity basis. The undistributed earnings of such
subsidiaries were $251 million as of December 31, 1999. These consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. Certain reclassifications have been made to 1998 and 1997
financial information to conform to the 1999 presentation.
NEW ACCOUNTING STANDARDS
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
As of 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"). SOP
97-3 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.
Page 43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk
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.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standard Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This standard requires companies to record all derivatives
on the balance sheet as either assets or liabilities and measure those
instruments at fair value. The manner in which companies are to record gains or
losses resulting from changes in the values of those derivatives depends on the
use of the derivative and whether it qualifies for hedge accounting. As amended
by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, this standard is
effective for the Company's financial statements beginning January 1, 2001, with
early adoption permitted. The impact of FAS No. 133 on the Company's financial
statements will vary based on certain factors including future interpretative
guidance from the FASB, the extent of the Company's hedging activities, the
types of hedging instruments used and the effectiveness of such instruments. The
Company is evaluating the impact of the adoption of this standard and currently
does not believe that it will have a material effect on its financial position
or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
Debt and equity securities are classified as available for sale and carried at
fair value. These available-for-sale securities support the following:
experience-rated products, discontinued products and general account
liabilities.
Experience-rated products are products where the customer, not the Company,
assumes investment (including realized capital gains and losses) and other
risks, subject to, among other things, minimum guarantees provided by the
Company in some instances. Net investment performance (as long as minimum
guarantees are not triggered) is allocated to the customer account daily, based
on the underlying investment's experience and, therefore, does not impact the
Company's results of operations. Realized and unrealized capital gains and
losses on investments supporting these products are reflected in policyholders'
funds left with the Company.
Page 44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
When the Company discontinued the sale of its fully guaranteed large case
pension products (refer to Note 8), it established a reserve for anticipated
future losses from these products and segregated the related investments. These
investments are managed as a separate portfolio. Investment income and net
realized capital gains and losses on this separate portfolio do not impact the
Company's results of operations. Unrealized capital gains or losses on this
separate portfolio are reflected in other liabilities.
Investment income and realized capital gains and losses on investments
supporting general account liabilities are reflected in the Company's results of
operations. Unrealized capital gains and losses related to investments
supporting general account liabilities are reflected in shareholders' equity,
net of related income taxes. Purchases and sales of debt and equity securities
are recorded on the trade date. Sales of mortgage loans and real estate are
recorded on the closing date.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments. The Company does not accrue
interest on problem debt securities when management believes the collection of
interest is unlikely.
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value of
a loaned domestic security and 105% of the market value of a loaned foreign
security. The collateral is deposited by the borrower with a lending agent, and
retained and invested by the lending agent according to the Company's guidelines
to generate additional income. The market value of the loaned securities is
monitored on a daily basis, with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates.
Mortgage loans and policy loans are carried at unpaid principal balances, net of
impairment reserves. A mortgage loan is considered impaired when it is probable
that the Company will be unable to collect amounts due according to the
contractual terms of the loan agreement (delays of up to 60 days may not result
in a loan being considered impaired). The Company accrues interest income on
impaired loans to the extent it is deemed collectible and the loan continues to
perform under its original or restructured terms. Interest income on problem
loans is generally recognized on a cash basis. Cash payments on loans in the
process of foreclosure are generally treated as a return of principal. For
impaired loans, a specific impairment reserve is established for the difference
between the recorded investment in the loan and the estimated fair value of the
collateral. The Company applies this loan impairment policy individually to all
loans in the portfolio and does not aggregate loans for the purpose of applying
such provisions. The Company records full or partial charge-offs of loans at the
time an event occurs affecting the legal status of the loan, typically at the
time of foreclosure (actual or in-substance) or upon a loan modification giving
rise to forgiveness of debt. A general reserve is established for losses
management believes are likely to arise from loans in the portfolio, other than
for those losses that have been specifically reserved. The Company does not
accrue interest on impaired loans when management believes the collection of
interest is unlikely.
Investment real estate, which the Company has the intent to hold for the
production of income, is carried at depreciated cost, including capital
additions, net of write-downs for other than temporary declines in fair value.
Properties held for sale (primarily acquired through foreclosure) are carried at
the lower of cost or fair value less estimated selling costs. Adjustments to the
carrying value of properties held for sale are recorded in a valuation reserve
when the fair value less estimated selling costs is below cost. Fair value is
generally estimated using a discounted future cash flow analysis in conjunction
with comparable sales information. Property valuations are reviewed regularly by
the Company's investment management group.
Page 45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Short-term investments, consisting primarily of money market instruments and
other debt purchased with an original maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Other invested assets consist primarily of partnerships and equity subsidiaries.
Partnerships and equity subsidiaries are carried on an equity basis.
The Company utilizes foreign exchange forward contracts, futures contracts, swap
agreements, warrants and options for other than trading purposes in order to
hedge interest rate, equity price and foreign exchange risks (collectively,
market risk). (Refer to Note 5.)
Foreign exchange forward contracts, which are designated at inception and are
effective as hedges of foreign translation and transaction exposures related to
investments classified as available for sale, are accounted for using the
deferral method. Any premium or discount associated with the acquisition of a
forward contract is amortized over the life of the related forward contract and
the amortization expense is reflected in the Company's results of operations.
Accordingly, realized and unrealized gains and losses from these foreign
exchange forward contracts are deferred on the Consolidated Balance Sheets, net
of tax, in accumulated other comprehensive income (loss). Upon disposal of the
hedged item, deferred gains or losses are recognized in net realized capital
gains or losses. Excess realized or unrealized gain or loss, if any, from the
foreign exchange forward contract compared to the foreign investment being
hedged is reported as a net realized capital gain or loss.
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net realized
capital gains or losses upon disposal of an asset. Changes in the fair value of
futures contracts that do not qualify as hedges are recorded in net realized
capital gains or losses.
Interest rate and currency swap agreements, which are designated as risk
management instruments at inception, are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such agreements
is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets of changes in the fair value of these agreements.
Warrants represent the right to purchase specific securities and are accounted
for as hedges. Upon exercise, the cost of the warrants is added to the basis of
the securities purchased.
Options are contracts that grant the purchaser, for a fee, the right but not the
obligation, to buy or sell a financial instrument at a contracted price within a
specified period of time. Changes in the fair value of the option are reported
in realized capital gains.
Hedge designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying the
hedge, and that such high correlation be maintained throughout the hedge period.
If a hedging instrument ceases to be highly correlated with the position
underlying the hedge, hedge accounting ceases at that date and excess gains and
losses on the hedging instrument are reflected in net realized capital gains or
losses. The Company may enter into contracts to hedge anticipated transactions.
If it is subsequently determined that an anticipated transaction will not occur,
any gain or loss related to the hedge instrument will be recognized as a
realized gain or loss.
Page 46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries, where the local
currency is the functional currency, are translated into U.S. dollars at the
exchange rate in effect at each year end for assets and liabilities and average
exchange rates during the year for results of operations. The related unrealized
gains or losses resulting from translation of the net assets are included in
accumulated other comprehensive income (loss). However, if the economy of the
country where a foreign subsidiary is located is considered highly inflationary
(generally, cumulative inflation levels in excess of 100% over a three-year
period), changes in the value of net monetary assets or liabilities would be
recognized currently in earnings.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over the fair value of net assets
acquired, is amortized on a straight-line basis over periods not exceeding 40
years. Other acquired intangible assets, which are primarily customer lists,
health provider networks, work force and computer systems, are amortized on a
straight-line basis over various periods not exceeding 25 years.
The Company regularly evaluates the recoverability of goodwill and other
acquired intangible assets. The carrying value of such assets would be reduced
through a direct write-off if, in management's judgment, it was probable that
projected future operating income (before amortization of goodwill and other
acquired intangible assets) would not be sufficient on an undiscounted basis to
recover the carrying value. Operating earnings considered in such an analysis
are those of the entity acquired, if separately identifiable, or the business
segment that acquired the entity if the entity's earnings are not separately
identifiable.
OTHER LONG-LIVED ASSETS
The Company evaluates the potential impairment of long-lived assets (premises
and equipment) when events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If it is
determined that the carrying value of long-lived assets may not be recoverable
based upon the relevant facts and circumstances, the Company estimates the
future undiscounted cash flows (grouped at the company wide level) expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying value of the
asset, the Company will recognize an impairment loss in the Consolidated
Statements of Income for the difference between the carrying value of the asset
and its fair value.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring certain insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new and
renewal business, consist principally of commissions, certain expenses of
underwriting and issuing contracts, and certain agency expenses. For certain
annuity and pension contracts, such costs are amortized in proportion to
estimated gross profits and adjusted to reflect actual gross profits over the
life of the contracts (up to 20 years for annuity and pension contracts).
Periodically, modifications may be made to deferred annuity contract features,
such as shortening the surrender charge period or waiving the surrender charge,
changing the mortality and expense fees, etc. Unamortized deferred policy
acquisition costs associated with these modified contracts are not written off,
but, rather, continue to be associated with the original block of business to
which these costs were previously recorded. Such costs are amortized based on
revised estimates of expected gross profits for the block of business based upon
the terms of the contract after the modification. Unamortized deferred policy
acquisition costs related to deferred annuity products were $1 billion and $893
million as of December 31, 1999 and 1998, respectively.
Page 47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
are not adequate to cover related expenses.
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities generally represent funds maintained to
meet specific investment objectives of contractholders who bear the investment
risk, subject, in some cases, to minimum guaranteed rates. Investment income and
investment gains and losses generally accrue directly to such contractholders.
The assets of each account are legally segregated and are not subject to claims
that arise out of any other business of the Company. The assets and liabilities
are carried at market value. Deposits, net investment income and realized
capital gains and losses on Separate Accounts assets are not reflected in the
Consolidated Statements of Income. Management fees charged to contractholders
are included in fees and other income.
INSURANCE LIABILITIES
Future policy benefits include reserves for limited payment and traditional life
insurance contracts. (Refer to Note 3 for further discussion on the sale of the
individual life insurance business.) Reserves for universal life contracts are
equal to cumulative premiums less charges plus credited interest thereon.
Reserves for traditional life insurance contracts represent the present value of
future benefits to be paid to or on behalf of policyholders and related expenses
less the present value of future net premiums. Reserves for limited payment
contracts are computed on the basis of assumed investment yield, mortality,
morbidity and expenses, including a margin for adverse deviation. Such
assumptions generally vary by plan, year of issue and policy duration. Reserve
interest rates averaged 6.44% in 1999. Investment yield is based on the
Company's experience. Mortality, morbidity and withdrawal rate assumptions are
based on the Company's experience and are periodically reviewed against both
industry standards and experience.
Policyholders' funds left with the Company include reserves for pension and
annuity investment contracts. Reserves on such contracts are equal to cumulative
deposits less charges plus credited interest thereon (rates averaged 9.10% in
1999), net of adjustments for investment experience that the Company is entitled
to reflect in future credited interest. Reserves on contracts subject to
experience rating reflect the rights of contractholders, plan participants and
the Company.
Reserves are established for group disability claims including an estimate of
those incurred but not reported. The reserves are based on assumed investment
yield, mortality, morbidity and recoveries from government programs.
Page 48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE LIABILITIES (CONTINUED)
Unpaid claims related to the Company's prepaid health care services (primarily
health maintenance organizations ("HMOs")) consist principally of medical claims
and capitation costs. Medical claims include estimates of payments to be made on
claims reported and estimates of health care services rendered but not yet
reported to the Company as of the balance sheet date. Such estimates include the
cost of services that will continue to be rendered after the balance sheet date
if the Company is obligated to pay for such services in accordance with contract
provisions or regulatory requirements. Reserves for unpaid claims for indemnity
and PPO products (including short-duration contracts) and medical claims payable
reflect estimates, derived from past experience, of the ultimate cost of
incurred claims, including claims that have been incurred but not yet reported,
and claims that have been reported but not yet settled. The Company discounts
certain claim liabilities related to group long-term disability and premium
waiver contracts. Generally, the discount rates reflect the expected investment
returns for the asset portfolios that support these liabilities. The discount
rates used ranged from 2.5% to 6.8% as of December 31, 1999 (except for
experience-rated contracts where the discount rates are set equal to
contractually specified levels). Unpaid claims payable are estimated
periodically and any resulting adjustments are reflected in results of
operations.
Premium deficiency losses are recognized when it is probable that expected claim
expenses will exceed future premiums on existing health and other insurance
contracts. In determining if a premium deficiency relating to short-duration
contracts exists, the Company also considers future investment income. For
purposes of premium deficiency losses, contracts are grouped in a manner
consistent with the Company's method of acquiring, servicing and measuring the
profitability of such contracts.
INTERSEGMENT TRANSACTIONS
The Company accounts for intersegment loans as if the loans were to third
parties, that is, at current market rates. The intersegment loans and related
interest are eliminated in consolidation.
REVENUE RECOGNITION
Premium revenue for prepaid health care services is recognized as income in the
month in which the enrollee is entitled to receive health care services. Premium
revenue for group life and disability products is recognized as income over the
term of the coverage. Allowances for doubtful accounts on premium receivables
were $217 million and $72 million in 1999 and 1998, respectively.
Some group contracts allow for premiums to be adjusted to reflect actual
experience. Such premiums are reasonably estimable (based on actual experience
of the customer emerging under the contract and the terms of the underlying
contract) and are recognized as the experience emerges.
For certain annuity contracts, charges assessed against policyholders' funds for
the cost of insurance, surrender charges, actuarial margin and other fees are
recorded as revenue in fees and other income. Other amounts received for these
contracts are reflected as deposits and are not recorded as revenue. Related
policy benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the contracts.
When annuity payments with life contingencies begin under contracts that were
initially investment contracts, the accumulated balance in the account is
treated as a single premium for the purchase of an annuity, and reflected as an
offsetting amount in both premiums and current and future benefits in the
Consolidated Statements of Income.
Fees and other income are also derived from contracts for claim processing or
other administrative services and are recorded over the period the service is
provided.
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<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATIONS OF EXPENSES
The Company allocates centrally incurred costs associated with specific internal
goods or services provided to a segment, such as employee services, technology
services and rent, to the business segments based on a reasonable method for
each specific cost (for example, usage, headcount, compensation or square
footage occupied). Interest expense on third-party borrowings is not currently
allocated to the reporting segments, since it is not used as a basis for
measuring the operating performance of the segment.
INCOME TAXES
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. The Company files a
consolidated federal income tax return. Foreign subsidiaries and U.S.
subsidiaries operating outside of the United States are taxed under applicable
foreign statutes. Deferred income tax expenses/benefits result from changes
during the year in cumulative temporary differences between the tax basis and
book basis of assets and liabilities.
REINSURANCE
The Company utilizes reinsurance agreements to reduce exposure to large losses
in certain aspects of its insurance business. These reinsurance contracts permit
recovery of a portion of losses from reinsurers, although they do not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
Only those reinsurance recoverables deemed probable of recovery are reflected as
assets. (Refer to Notes 3 and 16.)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") is as follows:
<TABLE>
<CAPTION>
Per Common
Income Shares Share
(Millions, except per common share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Net income $716.9
Less: Preferred stock dividends (1) 30.5
------
Basic EPS:
Income applicable to common ownership $686.4 144.1 $4.76
====== =====
Effect of dilutive securities:
Stock options and other (2) 1.2
-----
Diluted EPS
Income applicable to common ownership and assumed conversions $686.4 145.3 $4.72
=======================================================================================================================
1998
Net income $848.1
Less: Preferred stock dividends 55.3
------
Basic EPS:
Income applicable to common ownership 792.8 144.1 $5.50
=====
Effect of dilutive securities:
Stock options and other (2) 1.1
Convertible preferred stock 55.3 11.6
------ ------
Diluted EPS
Income applicable to common ownership and assumed conversions $848.1 156.8 $5.41
=======================================================================================================================
1997
Net income $901.1
Less: Preferred stock dividends 55.5
------
Basic EPS:
Income applicable to common ownership 845.6 149.2 $5.67
=====
Effect of dilutive securities:
Stock options and other (2) 1.5
Convertible preferred stock 55.5 10.2
------ ------
Diluted EPS
Income applicable to common ownership and assumed conversions $901.1 160.9 $5.60
=======================================================================================================================
</TABLE>
(1) For 1999, preferred stock dividends are reflected only through July 19,
1999, the date the Company redeemed all of its Class C preferred stock.
(Refer to Note 14.)
(2) Options to purchase shares of common stock and stock appreciation rights
(refer to Note 3) in 1999, 1998 and 1997 of 6.4 million shares (with
exercise prices ranging from $74.31 - $112.63), 3.0 million shares (with
exercise prices ranging from $76.24 - $112.63) and .2 million shares
(with exercise prices ranging from $90.50 - $112.63), respectively, 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.
3. ACQUISITIONS AND DISPOSITIONS
Aetna U.S. Healthcare
On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion, subject to adjustment as provided in the transaction
agreements. Included in the acquisition are PHC's risk HMO, POS, PPO and
Indemnity health lines, as well as its dental risk business. As part of the
purchase price, the Company issued one million stock appreciation rights
("SARs") for the Company's common stock, valued at approximately $32.5 million.
The value of the SARs is included in the purchase price. The SARs are also
reflected as a component of shareholders' equity in the consolidated financial
statements. The acquisition was accounted for as a purchase.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included the following:
- - An asset of $130 million, representing the fair value adjustment of a
reinsurance agreement (discussed below), primarily reflecting the net
benefits to be received from Prudential over the life of the agreement.
Significant assumptions utilized in the determination of the value of
this asset primarily included, for expected amounts recoverable under
the agreement, various probability outcomes above and below the medical
loss thresholds (83.5% in 1999 and 84.0% in 2000). The probability
outcomes considered the estimated medical loss ratios of the business at
the acquisition date as well as expected medical loss ratios for 2000,
with variability in relation to the thresholds, up to plus or minus
three standard deviations. A risk premium (an amount typically charged
by a third party for accepting risk under a reinsurance contract) based
on an approximate 12% after-tax return, which considers the cost of
capital to the reinsurer, was also assumed. This asset will be amortized
to expense in proportion to the benefits expected to be recognized under
the reinsurance agreement over its term;
- - A liability of $129 million, representing a fair value adjustment for
the unfavorable component of the contracts underlying the acquired
medical risk business. Significant assumptions utilized in the
determination of this fair value adjustment included an assumed market
rate medical loss ratio for the acquired contracts (83.5% for Commercial
HMO and 92.0% for Medicare HMO) as compared to the medical loss ratios
of the acquired business at the acquisition date. The fair value
adjustment considered the period from the acquisition date to the
underlying contracts' renewal dates. This liability will be amortized
over the period from the acquisition date to the renewal dates of the
underlying contracts;
- - An asset of $21 million, representing the above-market compensation
component related to supplemental fees to be received under the
Company's agreement to service Prudential's administrative services only
contracts (discussed below). This asset will be amortized over the
period of the above-market compensation component, beginning in January
2000.
The period August 6, 1999 through December 31, 1999, reflected asset
amortization of $104 million related to the fair value adjustment of the
reinsurance agreement and liability amortization of $94 million related to the
fair value adjustment of the unfavorable component of the contracts underlying
the acquired medical risk business.
The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $64 million being primarily allocated to goodwill and
approximately $218 million to 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. Other acquired intangible assets
consist primarily of customer lists, health provider networks, work force and
computer systems. The Company's consolidated results of operations include PHC
from August 6, 1999. The purchase price does not reflect the Company's plan to
exit certain activities of the acquired PHC business and provide employee
termination benefits for positions that will be eliminated. The Company's
management is in the process of finalizing this plan, expected to be completed
in the first quarter of 2000. Accordingly, the goodwill associated with the
acquisition of PHC will increase once this plan is finalized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna U.S. Healthcare (Continued)
The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential has agreed to indemnify
the Company from certain health insurance risks that arise following the closing
by reimbursing the Company for 75% of medical costs (as calculated under the
agreement) of PHC in excess of certain threshold medical loss ratio levels
through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold is 83.5% for August 6, 1999 through
December 31, 1999 and 84% for January 1, 2000 through December 31, 2000. During
the period August 6, 1999 through December 31, 1999, reinsurance recoveries
under this agreement (reflected as a reduction of current and future benefits)
were $74 million pretax. The premium is subject to adjustment if medical costs
of PHC are below these threshold medical loss ratio levels. Prudential has also
agreed to indemnify the Company for unanticipated increases in medical claims
payable existing at the acquisition date for a period of up to nine months
following the close.
The Company also agreed to service Prudential is ASO contracts. Prudential is
terminating its ASO business and has retained the Company to service these
contracts during the run off period, but no later than June 30, 2001. Prudential
ASO customers will remain Prudential customers as long as the contracts remain
in force. The Company is maintaining personnel, systems and other resources
necessary to service the ASO business during the run off period, as it was not
feasible to segregate these operating assets from those purchased in the PHC
transaction. In exchange for servicing the ASO business, Prudential is remitting
fees received from its ASO customers to the Company, as well as paying certain
supplemental fees. The supplemental fees are fixed in amount and decline over a
period ending 18 months following the closing. During the period August 6, 1999
through December 31, 1999, the Company recorded total fees for servicing the
Prudential ASO business of approximately $230 million pretax, including
supplemental fees of approximately $106 million pretax (reflected as fees and
other income).
In connection with the PHC acquisition, the Company agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS and
other related businesses ("NYLCare Texas") acquired by the Company as part of
the 1998 acquisition of New York Life Insurance Company's ("NYL") health care
business ("NYLCare"). Pursuant to this agreement, on September 14, 1999, Aetna
U.S. Healthcare and Health Care Service Corporation ("HCSC") entered into an
agreement for Blue Cross and Blue Shield of Texas ("Blue Cross"), a division of
HCSC, to acquire the NYLCare Texas operations for approximately $500 million in
cash, subject to certain adjustments, including an adjustment based on the level
of membership at the closing date. At December 31, 1999, the Blue Cross
agreement affected approximately 497,000 Commercial HMO risk members, 56,000
Commercial HMO non-risk members and 12,000 PPO members in the Houston, Austin,
San Antonio, Corpus Christi, Beaumont, Dallas-Fort Worth, San Angelo, Texarkana
and Amarillo areas. Aetna U.S. Healthcare expects to retain approximately
112,000 NYLCare Medicare members in Texas through a reinsurance and
administrative services agreement. The Blue Cross agreement is subject to
regulatory approval, and the transaction is expected to close in the first
quarter of 2000.
The Company currently expects that, based on certain purchase price adjustment
provisions contained in the agreements with Blue Cross, including an adjustment
based on the level of membership at the closing date, as well as other
adjustments, there will be a loss on the disposal of NYLCare Texas. Accordingly,
in the fourth quarter of 1999, the Company recognized a capital loss of
approximately $35 million after tax, which includes estimated operating losses
from October 1, 1999 through the anticipated closing date. The results of
operations of NYLCare Texas were not material to the Aetna U.S. Healthcare
segment or to the Company's consolidated results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna U.S. Healthcare (Continued)
On July 15, 1998, the Company acquired NYLCare for a purchase price of
approximately $1.1 billion in cash. 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, and the Company paid NYL an additional $50 million to resolve such
matters, resulting in an increase to goodwill of approximately $200 million. As
a result, the total purchase price was 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 1999 and the
period from July 16, 1998 through December 31, 1998, approximately $19 million
and $16 million pretax, respectively, 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 the costs related
to the exiting of leased NYLCare facilities was established as part of the
purchase price allocation. These costs are charged to this liability as actions
are taken and were not significant to the Company's combined revenues or
operating results.
The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $1.1 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 NYLCare from July 15, 1998.
Presented below is certain unaudited pro forma information as if NYLCare and PHC
had been acquired on January 1, 1998. These results combine the historical
results of NYLCare and PHC into the Company's Consolidated Statements of Income
and reflect adjustments which include interest expense related to the assumed
financing of the consideration paid, amortization of goodwill and intangible
assets, amortization of a fixed asset fair market value adjustment for NYLCare
and amortization of a fair value adjustment related to an unfavorable pharmacy
contract for NYLCare. However, no adjustments have been made to give effect to
the following: (1) the Prudential reinsurance agreement; (2) supplemental fees
related to the servicing of Prudential's ASO contracts following the
acquisition; (3) the amortization of fair value adjustments related to the
reinsurance agreement; (4) the unfavorable component of the contracts underlying
the acquired medical risk business; or (5) any synergies which may be realized
as a result of the acquisitions.
Page 54
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna U.S. Healthcare (Continued)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisitions occurred at the beginning of 1998, or is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
Pro Forma
For the Years Ended December 31,
(Unaudited)
----------------------------------------
(Millions) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $30,769.5 $29,114.6
Net income 563.2 538.7
Net income per common share 3.67 3.33
- -----------------------------------------------------------------------------------------
</TABLE>
During 1997, the Company's health business sold subsidiaries that were involved
in physician practice management, health electronic data interchange services
and behavioral health management. The sale of these entities resulted in a net
after-tax realized capital gain of $31 million ($82 million pretax). At the time
of the sale of the behavioral health management business, Human Affairs
International Incorporated ("HAI"), the Company entered into a long-term
strategic provider relationship that will provide its health members continued
access to HAI's, as well as the purchaser's participating behavioral health
professionals at a fixed rate over the life of the agreement. Also, the Company
may earn contingent consideration of up to $300 million ($60 million maximum per
year) during the period from the closing date through 2002 for any increases in
targeted Aetna U.S. Healthcare members (on an equivalent member basis) served by
HAI subsequent to the sale.
The calculation of the contingent consideration is based on an increase in
equivalent membership served by HAI for any contract year (member months, or
each member served for a given month, divided by 12), subject to certain
adjustments, and a maximum of $60 million per year. The contingent consideration
is recognized as realized capital gains when realizable. During 1999 and 1998,
$60 million ($39 million after-tax) of contingent consideration was earned and
recognized as a capital gain in the third and fourth quarter, respectively. The
contingent consideration does not affect the fixed rates under the long-term
strategic provider agreement.
Aetna Financial Services
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash. 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 the Company deferred approximately $88
million and was recognizing it over approximately 15 years. Approximately $8
million of the deferred gain was recognized during 1999. During the fourth
quarter of 1999, the Company refined certain accrual and tax estimates which had
been established in connection with the recording of the deferred gain. As a
result, the deferred gain was increased by $22 million (after tax) to $102
million at December 31, 1999. The remaining deferred gain will be recognized
over approximately 14 years. Premiums ceded and reinsurance recoveries made
during 1999 totaled $514 million and $552 million, respectively, and premiums
ceded and reinsurance recoveries made during 1998 totaled $156 million and $76
million, respectively.
Page 55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Aetna International
On January 14, 2000, Aetna International and its Mexican partner sold two of
their Mexican joint venture companies, Seguros Monterrey Aetna, S.A. and Fianzas
Monterrey Aetna, S.A., to New York Life International, Inc., a subsidiary of New
York Life Insurance Company for approximately $570 million in cash (Aetna
International's share of the proceeds will be approximately $279 million). The
sale is not expected to result in a material capital gain or loss. These two
joint ventures contributed operating earnings of approximately $24 million
during 1999 and an operating loss of approximately $1 million during 1998.
On December 20, 1999, Aetna International increased to 61% its direct ownership
interest in East Asia Insurance Company (Bermuda) Ltd., of Hong Kong ("East Asia
Aetna") for approximately $38 million. In addition, Aetna International has
participated in an investment venture that acquired the remaining 39% of East
Asia Aetna. Aetna International may increase its direct ownership interest in
East Asia Aetna in the future. Aetna International has pledged up to 21% of its
direct ownership interest in East Asia Aetna (book value approximately $30
million) as collateral for debt incurred by the investment venture to purchase
the remaining 39% interest in East Asia Aetna. In a related separate
transaction, Aetna International sold its 50% ownership stake in Blue Cross
(Asia Pacific) Insurance Ltd. to Bank of East Asia for approximately $9 million.
On November 18, 1999, Aetna International acquired a 33% ownership interest in
The Heiwa Life Insurance Company Ltd., of Japan (Heiwa) for approximately $20
million. On February 14, 2000, Aetna International acquired an additional 59.3%
ownership interest in Heiwa for approximately $33 million.
On October 1, 1999, Aetna International sold its Canadian operations to John
Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance
Company, for approximately $310 million in cash. The sale resulted in a capital
loss of $11 million, which reflects adjustments subsequent to the recognition of
the estimated loss during the third quarter of 1999. Operating earnings from the
Canadian operations were $25 million and $23 million in 1999 and 1998,
respectively.
On February 16, 1999, Aetna International 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, Aetna International acquired Asistencia Medica Social
Argentina, Argentina's largest HMO, for approximately $100 million.
On September 1, 1998, Aetna International acquired a 74.5% ownership interest in
Cruz Blanca, a private health insurance company in Chile, for approximately $92
million.
The total amount of Aetna International's investments in 1998, excluding its
investment in Cruz Blanca, was approximately $150 million. These investments
were individually not material to the Company.
In April 1997, Aetna International acquired a 49% ownership interest for
approximately $300 million in a Brazilian joint venture that provides health and
life insurance, as well as private pension plan products. In the fourth quarter
1999, the Company's Brazil affiliate sold its interest in Brasilprev Previdencia
Privada. The Company recognized $33 million in equity earnings from the gain on
this sale.
Page 56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Debt securities available for sale at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 (Millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and authorities $ 2,357.6 $ 13.8 $ 55.5 $ 2,315.9
States, municipalities and political subdivisions 778.3 3.5 12.8 769.0
U.S. corporate securities:
Utilities 2,317.1 25.1 82.3 2,259.9
Financial 4,206.1 17.0 161.2 4,061.9
Transportation/capital goods 2,102.9 43.7 91.5 2,055.1
Health care/consumer products 2,999.2 24.1 146.9 2,876.4
Natural resources 426.6 1.3 15.6 412.3
Other corporate securities 917.6 6.2 59.2 864.6
- --------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 12,969.5 117.4 556.7 12,530.2
- --------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 2,190.3 61.1 41.2 2,210.2
Utilities 237.3 4.7 10.3 231.7
Other 2,434.4 44.6 81.3 2,397.7
- --------------------------------------------------------------------------------------------------------------------------
Total foreign securities 4,862.0 110.4 132.8 4,839.6
- --------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,891.1 1.0 66.8 1,825.3
Collateralized mortgage obligations 2,793.0 45.5 55.9 2,782.6
- --------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 4,684.1 46.5 122.7 4,607.9
- --------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities (1) 2,621.3 4.8 143.6 2,482.5
Other asset-backed securities (2) 996.9 2.4 13.5 985.8
- --------------------------------------------------------------------------------------------------------------------------
Total bonds 29,269.7 298.8 1,037.6 28,530.9
Redeemable preferred stocks 139.7 - 9.0 130.7
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities $29,409.4 $ 298.8 $1,046.6 $28,661.6
==========================================================================================================================
1998
- --------------------------------------------------------------------------------------------------------------------------
Bonds:
U.S. government and government agencies and authorities $ 1,863.8 $ 136.4 $ 1.6 $ 1,998.6
States, municipalities and political subdivisions 531.8 18.6 .3 550.1
U.S. corporate securities:
Utilities 2,454.8 135.6 12.4 2,578.0
Financial 4,739.1 215.6 8.8 4,945.9
Transportation/capital goods 2,313.7 193.7 5.5 2,501.9
Health care/consumer products 2,495.2 167.6 6.5 2,656.3
Natural resources 1,494.3 72.9 16.5 1,550.7
Other corporate securities 1,314.5 86.0 44.7 1,355.8
- --------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 14,811.6 871.4 94.4 15,588.6
- --------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 2,722.6 243.1 81.9 2,883.8
Utilities 589.8 92.0 5.2 676.6
Other 2,802.2 126.6 60.8 2,868.0
- --------------------------------------------------------------------------------------------------------------------------
Total foreign securities 6,114.6 461.7 147.9 6,428.4
- --------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 2,248.8 78.9 5.0 2,322.7
Collateralized mortgage obligations 1,929.2 122.4 10.4 2,041.2
- --------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 4,178.0 201.3 15.4 4,363.9
- --------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities (1) 2,121.8 44.3 42.9 2,123.2
Other asset-backed securities (2) 954.9 17.2 1.1 971.0
- --------------------------------------------------------------------------------------------------------------------------
Total bonds 30,576.5 1,750.9 303.6 32,023.8
Redeemable preferred stocks 153.6 4.4 1.0 157.0
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities $30,730.1 $1,755.3 $ 304.6 $32,180.8
==========================================================================================================================
</TABLE>
(1) Includes approximately $158.7 million and $178.1 million of subordinate
and residual certificates at December 31, 1999 and 1998, respectively,
from a securitization of approximately $802.7 million of commercial
mortgage loans in 1997 which were retained by the Company.
(2) Includes approximately $81.1 million and $89.2 million of subordinate
and residual certificates at December 31, 1999 and 1998, respectively,
from a 1995 mortgage loan securitization which were retained by the
Company.
Page 57
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
At December 31, 1999 and 1998, net unrealized appreciation (depreciation) on
available-for-sale debt securities included $(122) million and $362 million,
respectively, related to discontinued products (refer to Note 8) and $(102)
million and $576 million, respectively, related to experience-rated contracts,
which were not reflected in shareholders' equity.
The carrying and fair value of debt securities are shown below by contractual
maturity. Actual maturities may differ from contractual maturities because
securities may be restructured, called or prepaid.
<TABLE>
<CAPTION>
Amortized Fair
1999 (Millions) Cost Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 1,496.6 $ 1,522.4
After one year through five years 6,394.3 6,336.6
After five years through ten years 6,264.6 6,101.9
After ten years 6,951.6 6,624.6
Mortgage-backed securities 7,305.4 7,090.2
Other asset-backed securities 996.9 985.9
- --------------------------------------------------------------------------------------
Total $29,409.4 $28,661.6
======================================================================================
</TABLE>
At December 31, 1999 and 1998, debt securities carried at $795 million and $607
million, respectively, were on deposit as required by regulatory authorities.
Investments in equity securities at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cost $732.6 $762.6
Gross unrealized capital gains 100.7 81.1
Gross unrealized capital losses (42.2) (43.2)
- --------------------------------------------------------------------------------------
Fair value $791.1 $800.5
======================================================================================
</TABLE>
Real estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Properties held for sale $ 261.1 $223.8
Investment real estate 193.9 137.6
- --------------------------------------------------------------------------------------
455.0 361.4
Valuation reserve (93.2) (91.1)
- --------------------------------------------------------------------------------------
Net carrying value of real estate $ 361.8 $270.3
======================================================================================
</TABLE>
Accumulated depreciation for investment real estate was $58 million and $60
million at December 31, 1999 and 1998, respectively.
Total real estate write-downs included in the net carrying value of the
Company's real estate holdings at December 31, 1999 and 1998 were $127 million
and $122 million, respectively (including $106 million and $104 million,
respectively, attributable to assets supporting discontinued products).
At December 31, 1999 and 1998, the total recorded investment in mortgage loans
that are considered to be impaired (including problem loans, restructured loans
and potential problem loans) and related specific reserves were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- ------------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $158.9 $22.2 $161.9 $22.9
Supporting experience-rated products 66.9 8.8 95.7 21.7
Supporting remaining products 59.2 1.1 43.6 3.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $285.0(1) $32.1 $301.2(1) $47.8
===================================================================================================================================
</TABLE>
(1) Includes impaired loans at December 31, 1999 and 1998 of $109.0 million
and $96.0 million, respectively, for which no specific reserves are
considered necessary.
Page 58
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The activity in the specific and general mortgage loan impairment reserves for
the periods indicated is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience- Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ 68.7 $ 31.6 $14.2 $114.5
- --------------------------------------------------------------------------------------------------------------------
Credited to net realized capital gains - - (8.0) (8.0)
(Credited) charged to other accounts (37.0)(1) (2.0)(1) 4.7 (34.3)
Principal write-offs (2.2) - (3.1) (5.3)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (2) 29.5 29.6 7.8 66.9
- --------------------------------------------------------------------------------------------------------------------
Credited to net realized capital losses - - 4.2 4.2
Credited to other accounts - - (3.1) (3.1)
Principal write-offs (.6) (14.0) (4.1) (18.7)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 (2) $ 28.9 $15.6 $ 4.8 $ 49.3
====================================================================================================================
</TABLE>
(1) Reflects adjustments to reserves related to assets supporting
experience-rated products and discontinued products, which do not affect
the Company's results of operations.
(2) Total reserves at December 31, 1999 and 1998 include $32.1 million and
$47.8 million, respectively, of specific reserves and $17.2 million and
$19.1 million, respectively, of general reserves.
Income earned (pretax) and cash received on the average recorded investment in
impaired loans for the 12 months ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 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 $159.3 $12.0 $11.8 $172.8 $13.5 $13.8
Supporting experience-rated products 87.2 8.1 8.1 104.1 9.9 10.1
Supporting remaining products 34.5 7.6 7.5 47.9 3.4 3.0
- ------------------------------------------------------------------------------------------------------------------------------
Total $281.0 $27.7 $27.4 $324.8 $26.8 $26.9
==============================================================================================================================
</TABLE>
Significant noncash investing and financing activities include the acquisition
of real estate through foreclosures of mortgage loans amounting to $24 million
and $13 million for 1999 and 1998, respectively.
At December 31, 1999 and 1998, the Company's mortgage loan balances net of
specific impairment reserves by geographic region and property type were as
follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 (Millions) 1999 1998
- ----------------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
South Atlantic $ 470.2 $ 554.3 Office $1,324.7 $1,519.4
Middle Atlantic 786.6 760.7 Retail 494.6 647.2
New England 280.0 294.3 Apartment 98.2 123.0
South Central 32.0 92.5 Hotel/Motel 137.7 182.6
North Central 253.6 410.3 Industrial 204.8 267.9
Pacific and Mountain 574.3 636.8 Mixed Use 158.8 238.4
Non-U.S. 858.7 823.2 Other 836.6 593.6
- ----------------------------------------------------------------- ------------------------------------------------------------
Total 3,255.4 3,572.1 Total 3,255.4 3,572.1
Less: general impairment reserve 17.2 19.1 Less: general impairment reserve 17.2 19.1
- ----------------------------------------------------------------- ------------------------------------------------------------
Net mortgage loan balance $3,238.2 $3,553.0 Net mortgage loan balance $3,238.2 $3,553.0
================================================================= ============================================================
</TABLE>
Page 59
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Carrying Estimated Fair Carrying Estimated Fair
(Millions) Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 3,238.2 $ 3,252.3 $ 3,553.0 $ 3,597.1
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 3,634.3 $ 3,587.8 $ 4,605.0 $ 3,656.9
Without a fixed maturity 11,053.0 10,306.0 11,745.1 11,131.6
Long-term debt 2,677.9 2,538.3 2,214.5 2,269.0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized capital gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Company's management
of interest rate, equity price, liquidity, and foreign exchange risks, the fair
values of all assets and liabilities should be taken into consideration, not
only those presented above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates that reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimates
of mortgage loans of lower credit quality, including problem and restructured
loans, are based on the estimated fair value of the underlying collateral.
Investment contract liabilities (included in policyholders' funds left with the
Company):
- - With a fixed maturity: Fair value is estimated by discounting cash flows
at interest rates currently being offered by, or available to, the
Company for similar contracts.
- - Without a fixed maturity: Fair value is estimated as the amount payable
to the contractholder upon demand. However, the Company has the right
under such contracts to delay payment of withdrawals that may ultimately
result in paying an amount different than that determined to be payable
on demand.
Long-term debt: Fair value is based on quoted market prices for the same or
similar issued debt or, if no quoted market prices are available, on the current
rates estimated to be available to the Company for debt of similar terms and
remaining maturities.
Page 60
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS
The notional amounts, carrying values and estimated fair values of the Company's
off-balance-sheet and other financial instruments at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -------------------------------------
Carrying Carrying
Value Estimated Value Estimated
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange forward contracts - sell:
Related to net investments in foreign affiliates $119.0 $ (.4) $(1.8) $192.4 $ (2.7) $ (3.3)
Related to investments in nondollar-
denominated assets 2.2 - - 33.6 (.1) (.1)
Foreign exchange forward contracts - buy:
Related to investments in nondollar-
denominated assets 2.0 - - 2.3 - -
Futures contracts to purchase securities 95.3 (3.1) (3.1) 233.1 (4.7) (4.7)
Futures contracts to sell securities 220.2 3.6 3.6 902.9 11.3 11.3
Options contracts to purchase securities - - - 60.3 .4 .4
Options contracts to sell securities - - - 63.5 (.4) (.4)
Interest rate swaps 43.0 - 3.7 43.0 - 8.5
Currency swaps - - - 19.8 - .5
Warrants to purchase securities 36.5 6.6 6.6 26.5 1.6 1.6
Written options - - - 50.0 .1 .1
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notional amounts of these instruments do not represent the Company's risk of
loss. The fair value of these instruments was estimated based on quoted market
prices, dealer quotations or internal price estimates believed to be comparable
to dealer quotations. These fair value amounts reflect the estimated amounts
that the Company would have to pay or would receive if the contracts were
terminated.
The Company engages in hedging activities to manage interest rate, equity price
and foreign exchange risks. Such hedging activities have principally consisted
of using off-balance-sheet instruments that involve, to varying degrees,
elements of market risk and credit risk in excess of the amounts recognized in
the Consolidated Balance Sheets. The Company evaluates the risks associated with
these instruments in a manner similar to that used to evaluate the risks
associated with on-balance-sheet financial instruments. Unlike on-balance-sheet
financial instruments, where credit risk is generally represented by the
notional or principal amount, the off-balance-sheet financial instruments' risk
of credit loss generally is significantly less than the notional value of the
instrument and is represented by the positive fair value of the instrument. The
Company generally does not require collateral or other security to support the
financial instruments discussed below. However, the Company controls its credit
risk exposure through credit approvals, credit limits and regular monitoring
procedures. There were no material concentrations of off-balance-sheet financial
instruments at December 31, 1999 or December 31, 1998.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts of
two different currencies at a specified future date and at a specified price.
The Company selectively hedges to manage its foreign exchange risk. The Company
generally utilizes short-term foreign exchange forward contracts to hedge its
foreign exchange exposure arising from certain investments in foreign affiliates
and nondollar-denominated investment securities.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell securities at
a specified future date and at a specified price or yield. Futures contracts
trade on organized exchanges and, therefore, have minimal credit risk.
Page 61
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate and Currency Swaps:
The Company utilizes interest rate swaps to manage certain exposures related to
changes in interest rates primarily by exchanging variable-rate returns for
fixed-rate returns. The Company also utilizes currency swaps to manage certain
exposures related to changes in foreign currency values primarily by exchanging
currencies and agreeing to re-exchange the currencies at the same rate of
exchange at a specified future date.
Warrants:
Warrants are instruments giving the Company the right, but not the obligation,
to buy a security at a given price during a specified period.
6. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $2,243.5 $2,387.4 $2,365.3
Equity securities 25.3 38.5 42.1
Short-term investments 65.8 71.5 51.8
Mortgage loans 303.4 353.1 610.1
Real estate 69.3 86.3 182.6
Policy loans 20.3 36.4 39.9
Other 332.1 342.5 175.5
Cash equivalents 113.6 127.3 114.9
- ---------------------------------------------------------------------------
Gross investment income 3,173.3 3,443.0 3,582.2
Less: investment expenses 207.4 222.5 189.5
- ---------------------------------------------------------------------------
Net investment income (1)(2) $2,965.9 $3,220.5 $3,392.7
- ---------------------------------------------------------------------------
</TABLE>
(1) Includes $11.8 million, $10.1 million and $15.6 million from real estate
held for sale during 1999, 1998 and 1997, respectively.
(2) Includes amounts allocable to experience-rated contractholders of $1.0
billion, $1.2 billion and $1.3 billion during 1999, 1998 and 1997,
respectively. Interest credited to contractholders is included in
current and future benefits.
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold. Provisions for impairments and
changes in the fair value of real estate held for sale are also included in net
realized capital gains or losses.
Page 62
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS AND OTHER
Net realized capital gains (losses), excluding amounts allocable to
experience-rated contractholders and discontinued products, on investments were
as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $(69.2) $ 51.7 $ 49.8
Equity securities (1) 29.0 166.2 231.2
Mortgage loans .4 19.9 19.2
Real estate 3.0 3.2 13.5
Sales of subsidiaries (2) 72.4 60.0 82.3
Other (3) 36.3 (29.2) (61.8)
- ------------------------------------------------------------------------------------------------------------
Pretax realized capital gains $ 71.9 $271.8 $334.2
============================================================================================================
After-tax realized capital gains (losses) $ (9.7) $173.9 $198.4
============================================================================================================
</TABLE>
(1) Includes pretax realized capital gains of $114.6 million and $151.0
million in 1998 and 1997, respectively, related to the sale of the
Company's investment in Travelers Property Casualty Corporation.
(2) Includes pretax realized capital gains in 1999 of $36.4 million ($(11.0)
million after tax) related to the sale of the Company's Canadian
operations, a pretax realized capital gain in both 1999 and 1998 of
$60.0 million related to contingent payments following the sale of HAI
in 1997 and a pretax loss in 1999 of $35.0 million related to the
anticipated sale of NYLCare Texas. Net realized capital gains in 1997
include pretax gains associated with the sale of HAI and certain other
health subsidiaries. (Refer to Note 3.)
(3) Includes realized capital gains in 1999 related to sales of common stock
and $21.1 million of previously deferred hedge gains related to an
anticipated debt issuance. Includes pretax realized capital losses of
$12.7 million in 1998 for futures contracts related to investments sold
as part of the sale of the individual life business and $44.0 million in
1997 related to the write-down of certain properties that the Company
had classified as held for sale.
Net realized capital gains (losses) of $(48) million, $125 million and $221
million for 1999, 1998 and 1997, respectively, allocable to experience-rated
contractholders were deducted from net realized capital gains and an offsetting
amount was reflected in policyholders' funds left with the Company.
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $17,918.6 $20,254.6 $16,247.8
Gross gains 102.0 174.8 90.2
Gross losses 171.2 123.1 40.4
- ------------------------------------------------------------------------------------
</TABLE>
Changes in shareholders' equity related to changes in accumulated other
comprehensive income (loss) (unrealized capital gains and losses on securities
and foreign currency) (excluding those related to experience-rated
contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ (845.4) $ 27.6 $ 194.5
Equity securities and other (60.2) (183.6) (128.0)
Foreign exchange (132.5) (43.3) (117.1)
- ---------------------------------------------------------------------------------------------------------------------
Subtotal (1,038.1) (199.3) (50.6)
Decrease in deferred income taxes (204.7) (70.0) (17.7)
- ---------------------------------------------------------------------------------------------------------------------
Net changes in accumulated other comprehensive income (loss) $ (833.4) $(129.3) $ (32.9)
=====================================================================================================================
</TABLE>
Page 63
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS AND OTHER (CONTINUED)
Shareholders' equity included the following accumulated other comprehensive
income (loss) which is net of amounts allocable to experience-rated
contractholders and discontinued products at December 31:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale:
Gross unrealized capital gains $ 205.6 $ 678.5
Gross unrealized capital losses (537.4) (164.9)
- ---------------------------------------------------------------------------------------------
(331.8) 513.6
- ---------------------------------------------------------------------------------------------
Equity securities and other:
Gross unrealized capital gains 71.8 135.0
Gross unrealized capital losses (56.5) (59.5)
- ---------------------------------------------------------------------------------------------
15.3 75.5
- ---------------------------------------------------------------------------------------------
Foreign exchange (448.0) (315.5)
Deferred income taxes 108.9 (95.8)
- ---------------------------------------------------------------------------------------------
Net accumulated other comprehensive income (loss) $(655.6) $ 177.8
=============================================================================================
</TABLE>
Additional Information - Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains on securities (excluding those related to experience-rated
contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $(560.8) $ 123.1 $378.6
Less: reclassification adjustment for gains and other items included in
net income (2) 27.8 224.5 335.4
==================================================================================================================================
Net unrealized gains (losses) on securities $(588.6) $(101.4) $ 43.2
==================================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$(862.8) million, $189.4 million and $582.5 million for 1999, 1998 and
1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $42.8 million, $345.4 million and $516.0 million for
1999, 1998 and 1997, respectively.
8. DISCONTINUED PRODUCTS
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and is reviewed by management quarterly. As long as the reserve
continues to represent management's then best estimate of expected future
losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. The Company's results of
operations would be adversely affected to the extent that future losses on the
products are greater than anticipated and positively affected to the extent
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).
Page 64
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DISCONTINUED PRODUCTS (CONTINUED)
At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate 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 December 31,
1999, the receivable from continuing products, net of related deferred taxes
payable of $67 million on the accrued interest income, was $464 million. At
December 31, 1998, the receivable from continuing products, net of the related
deferred taxes payable of $55 million on the accrued interest income, was $493
million. These amounts were eliminated in consolidation.
Results of discontinued products were as follows (pretax):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
(Millions) Results Future Losses Net(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Net investment income $ 471.5 $ - $471.5
Net realized capital losses (11.9) 11.9 -
Interest earned on receivable from continuing products 32.8 - 32.8
Other income 32.9 - 32.9
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 525.3 11.9 537.2
- -----------------------------------------------------------------------------------------------------------------------
Current and future benefits 499.6 22.6 522.2
Operating expenses 15.0 - 15.0
- -----------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 514.6 22.6 537.2
- -----------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 10.7 $ (10.7) $ -
=======================================================================================================================
1998
Net investment income $ 530.9 $ - $530.9
Net realized capital gains 116.6 (116.6) -
Interest earned on receivable from continuing products 34.4 - 34.4
Other income 28.5 - 28.5
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 710.4 (116.6) 593.8
- -----------------------------------------------------------------------------------------------------------------------
Current and future benefits 565.8 13.8 579.6
Operating expenses 14.2 - 14.2
- -----------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 580.0 13.8 593.8
- -----------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 130.4 $(130.4) $ -
=======================================================================================================================
1997
Net investment income $ 675.5 $ - $675.5
Net realized capital gains (2) 269.9 (269.9) -
Interest earned on receivable from continuing products 33.1 - 33.1
Other income 25.3 - 25.3
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 1,003.8 (269.9) 733.9
- -----------------------------------------------------------------------------------------------------------------------
Current and future benefits 652.3 67.5 719.8
Operating expenses 14.1 - 14.1
- -----------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 666.4 67.5 733.9
- -----------------------------------------------------------------------------------------------------------------------
Results of discontinued products $ 337.4 $(337.4) $ -
=======================================================================================================================
</TABLE>
(1) Amounts are reflected in the 1999, 1998 and 1997 Consolidated Statements
of Income, except for interest earned on the receivable from continuing
products, which was eliminated in consolidation.
(2) Includes net realized capital gains of $154.4 million (pretax) related
to continued favorable developments in real estate markets (including
gains of $37.4 million (pretax) related to the securitization of
commercial mortgage loans), as well as $57.4 million (pretax) resulting
from the sale of investments in order to meet liquidity needs.
Net realized capital gains (losses) from the sale of bonds supporting
discontinued products were $(33) million, $81 million and $56 million (pretax)
for 1999, 1998 and 1997, respectively.
Page 65
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DISCONTINUED PRODUCTS (CONTINUED)
Assets and liabilities supporting discontinued products at December 31 were as
follows: (1)
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Debt securities available for sale $4,533.0 $5,890.5
Mortgage loans 768.8 754.2
Real estate 112.7 104.2
Short-term and other investments 453.9 350.7
- ------------------------------------------------------------------------------------------------
Total investments 5,868.4 7,099.6
Short-term investments under securities loan agreement 243.8 143.9
Current and deferred income taxes 134.1 187.5
Receivable from continuing products (2) 530.6 548.0
Other 82.6 -
- ------------------------------------------------------------------------------------------------
Total assets $6,859.5 $7,979.0
================================================================================================
Liabilities:
Future policy benefits $4,566.0 $4,653.5
Policyholders' funds left with the Company 902.1 1,546.0
Reserve for anticipated future losses on discontinued products 1,147.6 1,214.1
Payables under securities loan agreement 243.8 143.9
Other - 421.5
- ------------------------------------------------------------------------------------------------
Total liabilities $6,859.5 $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.
At December 31, 1999, net unrealized capital losses on available-for-sale debt
securities are included above in other assets. At December 31, 1998, net
unrealized capital gains on available-for-sale debt securities are included
above in other liabilities. These net unrealized capital gains and losses are
not reflected in consolidated shareholders' equity. The reserve for anticipated
future losses is included in future policy benefits on the Consolidated Balance
Sheets.
The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates and the cost of
asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.
The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's mortality table
which has been used since then.
Page 66
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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 liabilities have run off.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ---------------------------------------------------------------------------------
<S> <C>
Reserve at December 31, 1996 $ 986.8
Operating income 58.7
Net realized capital gains 269.9
Mortality and other 8.8
Reserve reduction (172.5)
- ---------------------------------------------------------------------------------
Reserve at December 31, 1997 1,151.7
Operating loss (6.6)
Net realized capital gains 116.6
Mortality and other 20.4
Reserve reduction (68.0)
- ---------------------------------------------------------------------------------
Reserve at December 31, 1998 1,214.1
Operating income 10.1
Net realized capital losses (11.9)
Mortality and other 12.5
Reserve reduction (77.2)
- ---------------------------------------------------------------------------------
Reserve at December 31, 1999 $1,147.6
=================================================================================
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, primarily due to favorable investment performance, $77 million
($50 million after tax) of the reserve was released in 1999 and $68 million ($44
million after tax) of the reserve was released in 1998. A similar review
resulted in the Company's release of $173 million ($108 million after tax) in
1997 of the reserve due to continued favorable developments in real estate
markets. The current reserve reflects management's best estimate of anticipated
future losses.
The anticipated run off of the December 31, 1999 reserve balance is as follows:
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 30.0
2001 30.4
2002 30.9
2003 31.7
2004 - 2008 172.6
2009 - 2013 188.4
2014 - 2018 180.0
Thereafter 483.6
- --------------------------------------------------------------------------------
</TABLE>
The above table assumes that assets are held until maturity and that the reserve
run off is proportional to the liability run off.
Page 67
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DISCONTINUED PRODUCTS (CONTINUED)
The expected (as of December 31, 1993) and actual liability balances for the GIC
and SPA liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
Expected Actual
--------------------------- -----------------------
(Millions) GIC SPA GIC SPA
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $3,173.9 $4,685.8 $2,321.4 $4,763.0
1998 2,029.6 4,581.3 1,546.0 4,653.5
1999 1,214.5 4,472.1 902.1 4,566.0
- --------------------------------------------------------------------------------------------------------
</TABLE>
The GIC balances were lower than expected in each period as several
contractholders redeemed their contracts prior to contract maturity. The SPA
balances in each period were higher than expected because of additional amounts
received under existing contracts.
9. INCOME TAXES
Income taxes (benefits) consist of the following:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $310.3 $ 601.7 $407.1
State 32.6 39.9 34.6
Foreign (25.8) 21.0 25.1
- ----------------------------------------------------------------------------------------------
317.1 662.6 466.8
- ----------------------------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 145.6 (111.4) 141.2
State (2.7) (.2) 4.4
Foreign 47.3 9.2 (2.3)
- ----------------------------------------------------------------------------------------------
190.2 (102.4) 143.3
- ----------------------------------------------------------------------------------------------
Total $507.3 $ 560.2 $610.1
==============================================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from U.S. operations $ 928.6 $1,196.4 $1,261.8
Income from non-U.S. operations 295.6 211.9 249.4
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 1,224.2 1,408.3 1,511.2
Tax rate 35% 35% 35%
- -----------------------------------------------------------------------------------------------------------------
Application of the tax rate 428.5 492.9 528.9
Tax effect of:
Tax-exempt interest (6.7) (4.1) (2.6)
Foreign operations (89.0) (11.7) (18.3)
Excludable dividends (9.2) (11.7) (10.1)
Goodwill amortization 68.4 67.8 66.5
State income taxes 19.4 25.9 25.4
Sale of subsidiaries 103.3 .3 13.7
Other, net (7.4) .8 6.6
- -----------------------------------------------------------------------------------------------------------------
Income taxes $ 507.3 $ 560.2 $ 610.1
=================================================================================================================
</TABLE>
Page 68
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 510.5 $ 360.6
Reserve for anticipated future losses on discontinued products 401.7 407.0
Reserve for severance and facilities charges 111.7 126.7
Impairment reserves 19.7 32.8
Other postretirement benefits 171.2 188.5
Net operating loss carryforward 29.8 25.3
Deferred compensation and other 137.1 106.0
Accumulated other comprehensive loss 56.3 -
Other 51.7 45.2
- --------------------------------------------------------------------------------------------------------
Total gross assets 1,489.7 1,292.1
Less: valuation allowance 15.6 21.4
- --------------------------------------------------------------------------------------------------------
Assets, net of valuation allowance 1,474.1 1,270.7
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 644.0 542.3
Acquired intangibles other than goodwill 306.6 382.2
Accumulated other comprehensive income - 91.6
Market discount 50.5 54.4
Other 121.0 153.6
- --------------------------------------------------------------------------------------------------------
Total gross liabilities 1,122.1 1,224.1
- --------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 352.0 $ 46.6
========================================================================================================
</TABLE>
Valuation allowances are provided when it is considered unlikely that deferred
tax assets will be realized. The valuation allowance relates to future tax
benefits on certain purchased domestic and foreign net operating losses.
Management believes that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset of $352 million. The Company
expects sufficient taxable income in the future to realize the net deferred tax
asset because of the Company's long-term history of having taxable income, which
is projected to continue.
The Company has not recognized U.S. deferred taxes related to an estimated
cumulative amount of undistributed earnings of approximately $358 million on its
foreign subsidiaries and affiliates because the Company does not expect to
repatriate these earnings. A U.S. deferred tax liability will be recognized when
the Company expects that it will recover these undistributed earnings in a
taxable manner, such as through the receipt of dividends or the sale of an
investment.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was $935
million at December 31, 1999, adjusted for Internal Revenue Service (the
"Service") audits finalized to date. This amount would be taxed only under
certain conditions. No income taxes have been provided on this amount, since
management believes under current tax law the conditions under which such taxes
would become payable are remote.
The Service has completed its examination of the consolidated federal income tax
returns of Aetna Services and affiliated companies, as well as U.S. Healthcare
through 1994. Discussions are being held with the Service with respect to
proposed adjustments. Management believes there are adequate defenses against,
or sufficient reserves to provide for, any such adjustments. The Service is
continuing its examination for the years 1995 for Aetna Services and 1996 and
1997 for Aetna Inc.
The Company paid net income taxes of $472 million, $553 million and $378 million
in 1999, 1998 and 1997, respectively.
Page 69
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering
substantially all its employees and certain agents. The Retirement Plan for
Employees of Aetna Services, Inc. (the "Plan") provides pension benefits based
on years of service and annual compensation. Contributions are determined by
using the Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax deductible.
Effective January 1, 1999, the Company changed the formula for providing pension
benefits from the previous final average pay formula to a cash balance formula,
which will credit employees annually with an amount equal to a percentage of
eligible pay based on age and years of service as well as an interest credit
based on individual account balances. The formula also provides for a transition
period until December 31, 2006, which allows certain employees to receive vested
benefits at the higher of the previous final average pay or cash balance
formula. The changing of this formula did not have a material effect on the
Company's results of operations, liquidity or financial condition.
Components of the net periodic benefit cost were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual return on plan assets $ 582.4 $ 70.2 $ 731.4
Service cost (83.2) (76.0) (74.9)
Interest cost (251.6) (239.0) (231.4)
Net amortization and deferral (273.4) 255.6 (476.1)
- ----------------------------------------------------------------------------------------------------------
Net periodic benefit income (cost) $(25.8) $ 10.8 $ (51.0)
==========================================================================================================
</TABLE>
As of the measurement date (September 30), the status of the defined benefit
pension plans was as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation, beginning of year $3,672.2 $3,273.7
Service cost 83.2 76.0
Interest cost 251.6 239.0
Actuarial loss (gain) (249.5) 254.6
Sale of business (40.7) -
Benefits paid (210.4) (171.1)
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $3,506.4 $3,672.2
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, beginning of year $3,566.3 $3,587.5
Actual return on plan assets 582.4 70.2
Employer contribution 62.2 79.7
Sale of business (46.7) -
Benefits paid (210.4) (171.1)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $3,953.8 $3,566.3
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets in excess of (less than) projected benefit obligation $ 447.4 $ (105.9)
Unrecognized net loss (gain) (470.9) 97.9
Unrecognized prior service cost/other 53.1 3.7
Unrecognized net asset at date of adoption of FAS No. 87 3.1 (.2)
- ------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 32.7 $ (4.5)
========================================================================================================================
Weighted average discount rate 7.75% 7.00%
Expected return on plan assets 9.25% 9.00%
Rate of compensation increase 4.75% 4.00%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The defined benefit plans included above with benefit obligations in excess of
assets (unfunded plans) had projected benefit obligations of approximately $224
million and $206 million for 1999 and 1998, respectively. The 1999 and 1998
accumulated benefit obligations for these plans were approximately $203 million
and $173 million, respectively.
Page 70
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
The Company previously had a defined contribution pension plan which covered
substantially all of its former U.S. Healthcare employees, subject to certain
age and service requirements. Effective January 1, 1999, this plan was
terminated, as former U.S. Healthcare employees were eligible to participate in
the Plan. Pretax charges for this defined contribution pension plan were $16
million in 1998 and 1997.
In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for retired employees. A
comprehensive medical and dental plan is offered to all full-time employees
retiring at age 45 with 10 years of service. The company provides subsidized
benefits to employees whose sum of age and service is at least equal to 65.
There is a cap on the portion of the cost paid by the Company relating to
medical and dental benefits. The plan assets are held in trust and administered
by Aetna Life Insurance Company.
Components of the net periodic postretirement benefit cost were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual return on plan assets $ 3.8 $ 2.6 $ 2.4
Service cost (7.1) (5.7) (5.9)
Interest cost (30.9) (30.7) (30.2)
Net amortization 22.9 24.1 24.9
- ----------------------------------------------------------------------------------------
Net periodic benefit cost $(11.3) $ (9.7) $ (8.8)
========================================================================================
</TABLE>
As of the measurement date (September 30), the status of the postretirement
benefit plans (other than pensions) was as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, beginning of year $464.1 $426.5
Service cost 7.1 5.7
Interest cost 30.9 30.7
Actuarial (gain) loss (15.1) 36.4
Sale of business (5.7) -
Benefits paid (34.6) (35.2)
- --------------------------------------------------------------------------------
Accumulated benefit obligation, end of year $446.7 $464.1
- --------------------------------------------------------------------------------
Fair value of plan assets, beginning of year $ 57.0 $ 55.7
Actual return on plan assets 3.8 2.6
Employer contribution 46.5 33.9
Benefits paid (34.6) (35.2)
- --------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 72.7 $ 57.0
- --------------------------------------------------------------------------------
Accumulated benefit obligation in excess of
fair value of plan assets $374.0 $407.1
Unrecognized net gain 59.9 39.3
Prior service cost 42.9 57.2
- --------------------------------------------------------------------------------
Accrued postretirement benefit costs $476.8 $503.6
- --------------------------------------------------------------------------------
Weighted average discount rate 7.75% 7.00%
Expected return on plan assets 7.00% 7.00%
- --------------------------------------------------------------------------------
</TABLE>
The health care cost trend rate for the 1999 valuation decreased gradually from
8.0% for 2000 to 5.5% by the year 2005. For the 1998 valuation, the rates
decreased gradually from 8.5% for 1999 to 5.5% by the year 2005.
Page 71
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
A one-percentage-point change (increase or decrease) in assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
(Millions) Increase Decrease
- ------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components $ 1.8 $ (1.5)
Effect on postretirement benefit obligation 19.8 (17.6)
- ------------------------------------------------------------------------------------
</TABLE>
It is the Company's practice to fund amounts for postretirement life insurance
benefits to the extent the contribution is deductible for federal income taxes.
The plan assets are held in trust and administered by Aetna Life Insurance
Company. The assets are in the general account of Aetna Life Insurance Company,
and the expected rate of return on the plan assets was 7% for 1999, 1998 and
1997.
Incentive Savings Plans - Substantially all of the Company's employees are
eligible to participate in a savings plan under which designated contributions,
which may be invested in common stock of Aetna Inc. or certain other
investments, are matched, up to 5% of compensation, by the Company. The U.S.
Healthcare savings plan provided for a match of up to 2% of compensation in
common stock of Aetna Inc. Effective January 1, 1999, contributions to the U.S.
Healthcare plan ceased and such employees became eligible to participate in the
Company's Incentive Savings Plan. Pretax charges to operations for these plans
were $62 million, $42 million and $39 million for 1999, 1998 and 1997,
respectively. Plan trustees held 5,050,933, 3,795,808 and 4,177,786 shares of
the Company's common stock for plan participants at the end of 1999, 1998 and
1997, respectively.
Stock Incentive Plans - The Company's Stock Incentive Plans (the "Plans")
provide for stock options (see "Stock Options" below), deferred contingent
common stock or equivalent cash awards (see "Incentive Units" below) or
restricted stock to employees. The maximum number of shares of common stock
initially issuable under the Plans was 23,270,000. At December 31, 1999,
5,942,247 shares were available for grant under the Plans.
The compensation expense charged to operations related to the Incentive Units
was $8 million, $20 million and $22 million, pretax, for 1999, 1998 and 1997,
respectively. The Company does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. FAS No. 123, Accounting for Stock-Based Compensation,
requires disclosure of pro forma net income as if the fair value method of
valuing stock option grants were applied to such grants (disclosure
alternative). The Company's net income and earnings per common share, on a pro
forma basis, which may not be indicative of pro forma effects in future years,
would have been as follows:
<TABLE>
<CAPTION>
(Millions, except per common share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 716.9 $ 848.1 $901.1
Pro forma $ 676.5 $ 820.7 $886.3
Basic earnings per common share:
As reported $ 4.76 $ 5.50 $ 5.67
Pro forma $ 4.48 $ 5.33 $ 5.57
Diluted earnings per common share:
As reported $ 4.72 $ 5.41 $ 5.60
Pro forma $ 4.45 $ 5.25 $ 5.51
- ----------------------------------------------------------------------------------------------------
</TABLE>
The fair value of the stock options included in the pro forma amounts shown
above was estimated as of the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1% 1% 1%
Expected volatility 34% 30% 30%
Risk-free interest rate 6% 6% 7%
Expected life 4 years 3 years 4 years
- ----------------------------------------------------------------------------------------------------
</TABLE>
Page 72
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
The weighted-average grant date fair values for options granted in 1999, 1998
and 1997 were $21.51, $22.17 and $29.17, respectively.
Stock Options - Executive, middle management and nonmanagement employees may
be granted options to purchase common stock of the Company at or above the
market price on the date of grant. Options generally become 100% vested three
years after the grant is made, with one-third of the options vesting each year.
From time to time, the Company has issued options with different vesting
provisions. Vested options may be exercised at any time during the 10 years
after grant, except in certain circumstances generally related to employment
termination or retirement. At the end of the 10-year period, any unexercised
options expire.
Stock option transactions for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Weighted Average Weighted Average Weighted Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 7,910,768 $73.20 5,267,294 $63.12 7,228,550 $58.99
Granted 8,528,602 $63.68 3,684,854 $86.18 385,025 $94.22
Exercised (524,654) $59.61 (572,715) $58.07 (1,821,113) $51.94
Expired or forfeited (332,721) $80.23 (468,665) $80.50 (525,168) $68.55
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 15,581,995 $68.30 7,910,768 $73.20 5,267,294 $63.12
=======================================================================================================================
Options exercisable at year end 5,880,600 $71.08 4,020,928 $63.53 2,614,399 $54.90
=======================================================================================================================
</TABLE>
The following is a summary of information regarding options outstanding and
options exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.26 - $ 22.53 6,093 1.4 $ 15.41 6,093 $ 15.41
$22.53 - $ 33.79 71,650 3.5 $ 31.85 71,650 $ 31.85
$33.79 - $ 45.05 360,025 5.0 $ 36.85 360,025 $ 36.85
$45.05 - $ 56.31 6,377,104 8.2 $ 51.00 852,749 $ 52.96
$56.31 - $ 67.58 363,807 5.4 $ 59.56 363,807 $ 59.56
$67.58 - $ 78.84 2,249,270 6.7 $ 71.24 2,034,705 $ 71.06
$78.84 - $ 90.10 4,015,702 6.6 $ 86.43 2,122,952 $ 86.74
$90.10 - $101.36 1,973,044 9.0 $ 90.19 41,746 $ 90.44
$101.36 - $112.63 165,300 7.8 $109.41 26,873 $104.74
-------------------------------------------------------------------------------------------------
15,581,995 5,880,600
=================================================================================================
</TABLE>
Incentive Units - Executives may, from time to time, be granted incentive
units, which are rights to receive common stock or an equivalent value in cash.
Of the two cycles of incentive unit grants outstanding, each vests at the end
of a four-year vesting period (currently 2000 and 2002), conditioned upon the
employee's continued employment during that period and achievement of specified
Company performance goals related to the Company's total return to shareholders
over the four-year measurement period. The incentive units may vest within a
range from 0% to 175% at the end of the four-year period based on the
attainment of these performance goals. Interim measurements of compensation
expense are made at each reporting period based on the Company's estimated
periodic stock price and estimated forfeitures, over the four-year vesting
period. Compensation expense is recognized over the four-year vesting period;
no compensation expense is recognized at the date of grant. The incentive unit
holders are not entitled to dividends during the vesting period.
Page 73
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
Incentive unit transactions under which holders may be entitled to receive
common stock, are as follows:
<TABLE>
<CAPTION>
Number of Incentive Units
--------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year 591,820 575,145 368,217
Granted 324,600 28,625 433,500
Vested (183,367) - (202,852)
Expired or forfeited (24,778) (11,950) (23,720)
- ----------------------------------------------------------------------------------------------------
Outstanding, end of year 708,275 591,820 575,145
====================================================================================================
</TABLE>
The weighted-average grant date fair values for incentive units granted in
1999, 1998 and 1997 were $89.68, $80.64 and $85.17, respectively.
11. PARTICIPATING POLICYHOLDERS' INTERESTS
Under participating life insurance contracts issued by the Company, the
policyholder is entitled to share in the earnings of such contracts. This
business is accounted for in the Company's consolidated financial statements on
a statutory basis, since any adjustments to policy acquisition costs and
reserves on this business would have no effect on the Company's net income or
shareholders' equity. Primarily as a result of the sale of the domestic
individual life business that occurred on October 1, 1998 (refer to Note 3),
the Company no longer has significant participating policyholders' interests.
Statutory premiums, assets and liabilities allocable to the participating
policyholders in 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997
- -----------------------------------------------------
<S> <C> <C>
Premiums $ 44.4 $ 63.8
Assets 124.2 733.5
Liabilities 81.7 640.3
- -----------------------------------------------------
</TABLE>
12. DEBT AND GUARANTEE OF DEBT SECURITIES
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term debt:
Domestic:
Notes, 6.75% due 2001 $ 299.8 $ 299.8
Note, 7.5% due 2002 500.0 -
Notes, 6.375% due 2003 199.5 199.4
Notes, 7.125% due 2006 348.3 348.0
Note, 3% due 2009 1.6 1.6
Debentures, 6.75% due 2013 199.9 199.9
Eurodollar Notes, 7.75% due 2016 63.5 63.5
Debentures, 8% due 2017 (1) 110.0 140.0
Debentures, 7.25% due 2023 200.0 199.9
Debentures, 7.625% due 2026 446.3 446.1
Debentures, 6.97% due 2036 (puttable at par in 2004) 300.0 300.0
International:
Notes 5.283%-11.5% due in varying amounts to 2018 9.0 16.3
- ----------------------------------------------------------------------------------------------
Total $ 2,677.9 $2,214.5
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Subject to various redemption options which began on January 15, 1997.
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services (collectively, the "Aetna Services Debt"). Aggregate maturities
of long-term debt and sinking fund requirements for 2000 through 2004 are
approximately $3 million, $300 million, $500 million, $200 million and $300
million, respectively, and $1.4 billion, thereafter.
Page 74
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED)
On November 18, 1998, Aetna Services issued $300 million of 5.66% Puttable
Reset Securities ("PURS"). The PURS were structured such that, on November 29,
1999 the remarketing agents were able to elect to remarket the PURS, whereby
the annual interest rate on the securities would have been reset to a specified
base rate (10-year Treasury rate plus a defined spread). However, the
remarketing agents elected not to remarket the securities, and Aetna Services
was required to repurchase the PURS in full on November 29, 1999. In 1998, the
PURS were included in short-term debt on the Company's Consolidated Balance
Sheets.
At December 31, 1999, $1.9 billion of short-term borrowings were outstanding.
The weighted average interest rate on short-term borrowings was 6.13% and 5.49%
at December 31, 1999 and 1998, respectively. In addition, Aetna Services has a
revolving credit facility in an aggregate amount of $1.5 billion with a
worldwide group of banks that terminates in June 2001. Various interest rate
options are available under the facility and any borrowings mature on the
expiration date of the applicable credit commitment. Aetna Services pays
facility fees ranging from .065% to .2% per annum, depending upon its long-term
senior unsecured debt rating. The facility fee at December 31, 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 (loss)), 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 this 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 December 31, 1999
is at an annual rate of .08%. This facility also supports Aetna Services'
commercial paper borrowing program. As a guarantor of any amounts outstanding
under this credit facility, Aetna Inc. is required to maintain shareholders'
equity, excluding net unrealized capital gains and losses (accumulated other
comprehensive income (loss)), of at least $7.5 billion.
Total interest paid by the Company was $225 million, $212 million and $239
million in 1999, 1998 and 1997, respectively.
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services at December 31 and for
the year then ended, is as follows:
<TABLE>
<CAPTION>
Balance Sheets Information:
(Millions) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments (excluding Separate Accounts) $33,258.1 $38,349.7
Total assets 99,338.8 93,190.9
Total insurance liabilities 35,665.1 38,566.9
Total liabilities 98,342.2 90,770.3
Total redeemable preferred stock - 275.0
Total shareholder's equity 996.6 2,145.6
- ----------------------------------------------------------------------------------------------
Statements of Income Information:
(Millions) 1999 1998
- ----------------------------------------------------------------------------------------------
Total revenue $12,124.9 $10,616.9
Total benefits and expenses 11,107.7 9,454.2
Income before income taxes 1,017.2 1,162.7
Net income 671.3 766.4
- ----------------------------------------------------------------------------------------------
</TABLE>
Page 75
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. AETNA-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY LIMITED LIABILITY COMPANY HOLDING PRIMARILY DEBENTURES
GUARANTEED BY AETNA
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly owned subsidiary
of Aetna Services, issued $275 million (11,000,000 shares) of 9.5% Cumulative
Monthly Income Preferred Securities, Series A. The securities were redeemable,
at the option of ACLLC with Aetna Services' consent, in whole or in part, on or
after November 30, 1999, or at any time under certain limited circumstances
related to tax events, at a redemption price of $25 per security plus
accumulated and unpaid dividends to the redemption date. These securities were
redeemed in December 1999 at par value.
ACLLC had loaned the proceeds from the preferred stock issuance and the common
capital contributions to Aetna Services. In return, Aetna Services issued to
ACLLC approximately $348 million principal amount of 9.5% Subordinated
Debentures due in 2024 ("Subordinated Debentures"), which were fully and
unconditionally guaranteed by Aetna Inc. on a subordinated basis. These
Subordinated Debentures were redeemed in December 1999.
14. CAPITAL STOCK
In addition to the capital stock disclosed on the Consolidated Balance Sheets,
Aetna Inc. has the following authorized capital stock: 15,000,000 shares of
Class A Voting Preferred Stock, $.01 par value per share; 15,000,000 shares of
Class B Voting Preferred Stock, $.01 par value per share; and 15,000,000 shares
of Class D Non-Voting Preferred Stock, par value $.01 per share. At December
31, 1999 and 1998, 22,220,856 and 12,424,092 common shares, respectively, were
reserved for issuance under Aetna Inc.'s stock option plans.
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.
In January 1999, the Company's Board of Directors authorized the repurchase of
5.0 million shares of common stock (the "January 1999 Plan"). Through October
7, 1999, 1,780,000 shares of common stock had been repurchased under this
authorization at a cost of approximately $135 million. On October 8, 1999, the
Board of Directors authorized the repurchase of up to 20 million shares of
common stock, not to exceed an aggregate purchase price of $1 billion. This
authorization replaced the January 1999 Plan which had 3,220,000 shares
remaining. Pursuant to the October 1999 authorization, the Company has
repurchased 6,920,000 shares of common stock at a cost of approximately $377
million through December 31, 1999.
On September 24, 1999, the Board of Directors adopted a new shareholder rights
plan (the "1999 Plan") that replaced the Company's previous plan. The Company's
previous plan expired on November 8, 1999. Under the 1999 Plan, one new right
("New Right") was distributed on each outstanding share of Aetna common stock
to shareholders of record at the close of business on November 8, 1999, and one
New Right will be issued with each share of Aetna common stock issued after
November 8, 1999.
Since November 8, 1999, the New Rights have traded with the Aetna common stock
and will continue to do so until they become exercisable. The New Rights will
become exercisable (i) 10 days after a public announcement that a person or
group ("Person") has acquired 15% or more of the outstanding shares of Aetna
common stock (a "Triggering Acquisition"); or (ii) 10 business days after a
Person commences a tender offer or exchange offer, the consummation of which
could result in such Person owning 15% or more of the outstanding shares of
Aetna common stock; or (iii) in either event, such later date as the Board of
Directors may determine.
Page 76
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CAPITAL STOCK (CONTINUED)
Upon becoming exercisable, each New Right will entitle the holder thereof (the
"Holder") to purchase one one-hundredth of a share of Aetna Inc.'s Class B
Voting Preferred Stock, Series A ("Fractional Preferred Share") at a price of
$300 (the "Exercise Price"). Each Fractional Preferred Share had dividend,
voting and liquidation rights designed to make it approximately equal in value
to one share of Aetna common stock. Under certain circumstances, including a
Triggering Acquisition, each New Right (other than New Rights that were or are
owned by the acquirer, which are void) thereafter will entitle the Holder to
purchase Aetna common stock (or economically equivalent securities, under
certain circumstances) worth twice the Exercise Price. Under certain
circumstances, including certain acquisitions of Aetna Inc. in a merger or sale
of its assets, each New Right thereafter will entitle the Holder to purchase
equity securities of the acquirer at a 50% discount.
Under certain circumstances, Aetna Inc. may redeem all of the New Rights at a
price of $.01 per New Right. The New Rights will expire on November 8, 2009,
unless redeemed earlier. However, the 1999 Plan provides for a committee of
Aetna Inc.'s independent Directors to review the 1999 Plan at least once every
three years and recommend to the full Board of Directors whether the 1999 Plan
should be amended or the New Rights redeemed. The New Rights will have no
dilutive effect on earnings per share until exercised.
15. DIVIDEND RESTRICTIONS AND SHAREHOLDERS' EQUITY
The Company's business operations are conducted through Aetna Services and
Aetna U.S. Healthcare and their respective subsidiaries (which principally
consist of HMOs and insurance companies). In addition to general state law
restrictions on payments of dividends and other distributions to shareholders
applicable to all corporations, HMOs and insurance companies are subject to
further state regulations that, among other things, may require such companies
to maintain certain levels of equity, and restrict the amount of dividends and
other distributions that may be paid to their parent corporations. These
regulations are not directly applicable to Aetna Services, Aetna U.S.
Healthcare or Aetna Inc., as none is an HMO or insurance company. The
additional regulations applicable to the Company's indirect HMO and insurance
company subsidiaries are not expected to affect the ability of Aetna Inc. to
pay dividends, or the ability of any of the Company's subsidiaries to service
their outstanding debt.
The amount of dividends that may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at December 31,
1999 without prior approval by state regulatory authorities is limited to
approximately $699 million in the aggregate. There are no such restrictions on
distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.
The combined statutory net income for the years ended and statutory surplus as
of December 31 for the domestic insurance and HMO subsidiaries of the Company,
reflecting intercompany eliminations, were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Statutory net income $ 631.7 $ 591.0
Statutory surplus 3,500.8 2,993.2
- ---------------------------------------------------------------
</TABLE>
As of December 31, 1999, the Company does not utilize any statutory accounting
practices that are not prescribed or permitted by state regulatory authorities
which, individually or in the aggregate, materially affect statutory surplus.
Page 77
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. REINSURANCE
The Company utilizes reinsurance agreements to reduce its exposure to large
losses in certain aspects of its insurance business. These reinsurance
agreements permit recovery of a portion of losses from reinsurers, although
they do not discharge the primary liability of the Company as direct insurer of
the risks reinsured. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of its reinsurers.
Earned premiums for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
(Millions) Amount Companies Companies Amount to Net
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999(1)
Life insurance $ 3,093.4 $ 622.7 $ 77.7 $ 2,548.4 3.0%
Accident and health insurance 17,190.4 50.6 1,178.0 18,317.8 6.4%
Property-casualty insurance 65.7 31.6 1.0 35.1 2.8%
- -------------------------------------------------------------------------------------------------------
Total premiums $ 20,349.5 $ 704.9 $ 1,256.7 $ 20,901.3 6.0%
=======================================================================================================
1998(1)
Life insurance $ 2,486.7 $ 299.6 $ 68.6 $ 2,255.7 3.0%
Accident and health insurance 12,344.3 78.0 279.0 12,545.3 2.2%
Property-casualty insurance 75.3 38.9 1.9 38.3 5.0%
- ------------------------------------------------------------------------------------------------------=
Total premiums $ 14,906.3 $ 416.5 $ 349.5 $ 14,839.3 2.4%
=======================================================================================================
1997(1)
Life insurance $ 2,209.5 $ 88.2 $ 29.5 $ 2,150.8 1.4%
Accident and health insurance 10,441.5 62.6 5.5 10,384.4 .1%
Property-casualty insurance 82.5 30.9 5.4 57.0 9.5%
- -------------------------------------------------------------------------------------------------------
Total premiums $ 12,733.5 $ 181.7 $ 40.4 $ 12,592.2 .3%
=======================================================================================================
</TABLE>
(1) Excludes intercompany transactions.
There is not a material difference between premiums on a written basis versus an
earned basis. Reinsurance recoveries were approximately $675 million, $3.4
billion and $194 million in 1999, 1998 and 1997, respectively. At December 31,
1999, reinsurance receivables with a carrying value of $3.5 billion were
associated with a single reinsurer.
Effective November 1, 1999, Aetna U.S. Healthcare reinsured certain
policyholder liabilities and obligations related to paid-up group life
insurance. The transaction was in the form of an indemnity reinsurance
arrangement, whereby the assuming company contractually assumed certain
policyholder liabilities and obligations, although Aetna U.S. Healthcare
remains directly obligated to policyholders. Assets related to and supporting
these policies were transferred to the assuming company and Aetna U.S.
Healthcare recorded a reinsurance recoverable. The transaction resulted in an
after tax gain of approximately $29 million, which is being deferred and
amortized over approximately 15 years.
Page 78
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
Aetna
Aetna U.S. Financial Aetna Large Case Corporate Total
1999 (Millions) Healthcare Services International Pensions and Other (1) Company
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers (2) $20,279.9 $ 649.0 $ 2,320.5 $ 165.1 $ .4 $ 23,414.9
Net investment income 612.8 904.7 350.8 982.5 9.4 2,860.2
Equity in earnings of subsidiaries - - 105.7 - - 105.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $20,892.7 $ 1,553.7 $2,777.0 $ 1,147.6 $ 9.8 $ 26,380.8
==================================================================================================================================
Interest expense $ - $ - $ 7.8 $ - $ 271.5 $ 279.3
- ----------------------------------------------------------------------------------------------------------------------------------
Amortization $ 420.9 $ 107.9 $ 113.1 $ - $ - $ 641.9
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 365.1 $ 95.7 $ 87.6 $ 85.4 $(126.5) $ 507.3
- ----------------------------------------------------------------------------------------------------------------------------------
Operating earnings (losses) (3) $ 515.3 $ 227.3 $ 194.2 $ 85.6 $(258.4) $ 764.0
Other items (4) (55.6) (18.2) (9.9) 49.6 (3.3) (37.4)
Realized capital gains (losses),
net of tax (22.4) (15.2) (17.1) 15.8 29.2 (9.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 437.3 $ 193.9 $ 167.2 $ 151.0 $(232.5) $ 716.9
==================================================================================================================================
Segment assets (5) $21,055.8 $56,876.9 $7,102.2 $27,119.6 $ 684.5 $ 112,839.0
- ----------------------------------------------------------------------------------------------------------------------------------
Investment in equity subsidiaries $ - $ - $ 459.1 $ - $ - $ 459.1
- ----------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets $ 16.0 $ 7.5 $ 46.4 $ - $ - $ 69.9
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Corporate and Other includes interest, staff area expenses,
advertising, contributions, net investment income and other general
expenses, as well as consolidating adjustments. Realized capital gains
(losses) reflect $13.7 million of previously deferred hedge gains
related to an anticipated debt issuance.
(2) Revenues from external customers includes revenues earned from one major
customer amounting to 16.9% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any 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.
(4) Other items excluded from operating earnings include Year 2000 costs
for all segments 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.
(5) Large Case Pensions assets include $6.1 billion attributable to
discontinued products.
<TABLE>
<CAPTION>
Aetna
Aetna U.S. Financial Aetna Large Case Corporate Total
1998 (Millions) Healthcare Services International Pensions and Other (1) Company
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers (2) $14,447.3 $ 830.3 $1,716.7 $ 153.9 $ 1.3 $ 17,149.5
Net investment income 537.2 1,054.1 363.3 1,152.5 16.9 3,124.0
Equity in earnings of subsidiaries - - 96.5 - - 96.5
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $14,984.5 $ 1,884.4 $ 2,176.5 $ 1,306.4 $ 18.2 $ 20,370.0
==============================================================================================================================
Interest expense $ - $ - $ 11.1 $ - $ 239.8 $ 250.9
- ------------------------------------------------------------------------------------------------------------------------------
Amortization $ 381.9 $ 131.1 $ 102.4 $ - $ - $ 615.4
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 368.0 $ 132.3 $ 55.9 $ 102.5 $ (98.5) $ 560.2
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings (losses) (3) $ 407.1 $ 258.0 $ 165.7 $ 89.7 $(245.9) $ 674.6
Other items (4) (64.3) 40.0 (7.5) 42.8 (11.4) (.4)
Realized capital gains (losses),
net of tax 88.2 2.0 (22.2) 37.4 68.5 173.9
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 431.0 $ 300.0 $ 136.0 $ 169.9 $(188.8) $ 848.1
==============================================================================================================================
Segment assets (5) $18,600.8 $47,843.3 $8,017.4 $30,651.1 $ 17.3 $105,129.9
- ------------------------------------------------------------------------------------------------------------------------------
Investment in equity subsidiaries $ - $ - $ 493.1 $ - $ - $ 493.1
- ------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets $ 9.6 $ 10.4 $ 42.5 $ .2 $ - $ 62.7
- ------------------------------------------------------------------------------------------------------------------------------
</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) Revenues from external customers includes revenues earned from one major
customer amounting to 15.1% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any 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.
(4) Other items excluded from operating earnings include Year 2000 costs
for all segments, an after-tax gain related to the sale of the domestic
individual life insurance business of $64.0 million and a net after-tax
severance and facilities charge of $1.0 million in the Aetna Financial
Services segment and a $44.2 million after-tax benefit from reductions
of the reserve for anticipated future losses on discontinued products
in the Large Case Pensions segment.
(5) Large Case Pensions assets include $7.2 billion attributable to
discontinued products.
Page 79
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Aetna
Aetna U.S. Financial Aetna Large Case Corporate Total
1997 (Millions) Healthcare Services International Pensions and Other (1) Company
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers (2) $12,308.5 $ 735.0 $1,574.4 $ 195.6 $ 12.3 $14,825.8
Net investment income 451.2 1,129.9 332.9 1,408.7 18.5 3,341.2
Equity in earnings of subsidiaries - - 51.5 - - 51.5
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains (losses) $12,759.7 $1,864.9 $1,958.8 $1,604.3 $ 30.8 $18,218.5
=============================================================================================================================
Interest expense $ .6 $ .5 $ 7.8 $ - $ 226.9 $ 235.8
- -----------------------------------------------------------------------------------------------------------------------------
Amortization $ 383.2 $ 111.4 $ 102.9 $ - $ - $ 597.5
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 391.0 $ 115.1 $ 54.1 $ 153.6 $(103.7) $ 610.1
- -----------------------------------------------------------------------------------------------------------------------------
Operating earnings (losses) (3) $ 354.6 $ 232.9 $ 128.7 $ 105.0 $(256.2) $ 565.0
Other items (4) 29.3 - - 108.4 - 137.7
Realized capital gains, net of tax 69.9 24.2 13.7 20.8 69.8 198.4
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 453.8 $ 257.1 $ 142.4 $ 234.2 $(186.4) $ 901.1
=============================================================================================================================
</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) Revenues from external customers includes revenues earned from one major
customer amounting to 13.1% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any 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.
(4) Other items excluded from operating earnings include an after-tax
benefit of $29.3 million from the reduction of the severance and
facilities reserve in the Aetna U.S. Healthcare segment and a $108.4
million after-tax benefit from reductions of the reserve for
anticipated future losses on discontinued products in the Large Case
Pensions segment.
Selected financial information by country was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- ------------------------------ ---------------
Revenues Revenues Revenues
from External Long-Lived from External Long-Lived from External
(Millions) Customers Assets Customers Assets Customers
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $21,094.4 $ 992.9 $15,432.8 $ 877.8 $13,251.4
Taiwan 1,133.2 128.5 780.1 86.9 697.1
Chile 475.3 52.2 349.0 57.0 322.0
Canada 240.3 - 306.5 15.1 273.1
Malaysia 181.0 57.6 165.8 47.8 215.8
New Zealand 76.1 3.5 48.5 5.4 -
Argentina 152.5 48.3 12.1 5.6 6.8
Indonesia 9.1 6.0 4.5 2.6 15.9
Philippines 12.1 5.7 5.9 9.0 5.6
Other foreign countries 40.9 47.0 44.3 4.7 38.1
- -----------------------------------------------------------------------------------------------------------------
Total $23,414.9 $1,341.7 $17,149.5 $1,111.9 $14,825.8
=================================================================================================================
</TABLE>
Revenues from external customers by product were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Health risk $17,952.4 $11,979.4 $ 9,813.9
Group insurance and other health 3,003.6 2,923.0 2,812.0
Individual life (1) 819.4 1,194.7 1,219.4
Financial services 1,326.7 731.7 592.8
Large case pensions 165.1 153.9 195.6
Other 147.7 166.8 192.1
- ---------------------------------------------------------------------------------------------
Total revenue from external customers $23,414.9 $17,149.5 $14,825.8
=============================================================================================
</TABLE>
(1) The domestic individual life business was sold on October 1, 1998
(refer to Note 3 for further discussion).
Page 80
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company has entered into operating leases for office space and certain
computer and other equipment. Rental expenses for these items were $235
million, $224 million and $192 million for 1999, 1998 and 1997, respectively.
The future net minimum payments under noncancelable leases for 2000 through
2004 are estimated to be $258 million, $193 million, $148 million, $113 million
and $100 million, respectively, and $341 million, thereafter.
In connection with the property-casualty sale, the Company vacated, and the
purchaser subleased, at market rates for a period of eight years, the space
that the Company occupied in the CityPlace office facility in Hartford. In
1996, the Company recorded a charge of $292 million pretax ($190 million after
tax) which 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 reserve as
they are made and will continue to be charged to this reserve over the
remaining lease term. At December 31, 1999 and 1998, the balance in this
facilities reserve was $269 million and $288 million, respectively. Future
payments under the lease, net of expected subrentals (which are to be applied
against the reserve and are not included in the future net minimum payments
above), are approximately $36 million in each of the next five years and $153
million attributable to the subsequent four years.
OTHER
The Company has agreed, under certain circumstances, to increase Aetna
International's ownership in its 80% owned Taiwan insurance subsidiary
("Taiwan"). In the event of a default by the minority owner of Taiwan pursuant
to the minority owner's $150 million loan obligation to a third-party bank, the
Company has agreed to issue up to approximately 3 million shares of the
Company's common stock, and cash if necessary, in satisfaction of the third-
party bank's loan. In return, the Company would receive an equivalent amount of
the minority owner's shares in Taiwan, based on the fair value of Taiwan at
such time. The minority owner's loan obligation matures on December 1, 2002.
Page 81
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION
Class Action Complaints were filed in the United States District Court for the
Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and
Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring.
Other Class Action Complaints were filed in the United States District Court
for the District of Connecticut on November 25, 1997 by Evelyn Silvert; on
November 26, 1997 by the Rainbow Fund, Inc.; and on December 24, 1997 by Terry
B. Cohen. The Connecticut actions were transferred to the United States
District Court for the Eastern District of Pennsylvania (the "Court") for
consolidated pretrial proceedings with the cases pending there. The plaintiffs
filed a Consolidated and Amended Complaint (the "Complaint") seeking, among
other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the
integration of the merger with U.S. Healthcare and the Company's medical claim
reserves. The Company and the individual defendants filed a motion to dismiss
the Complaint on July 31, 1998. On February 2, 1999, the Court dismissed the
Complaint, but granted the plaintiffs leave to file a second amended complaint.
On February 22, 1999, the plaintiffs filed a second amended complaint against
the Company, Ronald E. Compton and Richard L. Huber. The Company and the
remaining individual defendants filed a motion to dismiss the second amended
complaint, and the Court denied that motion in March 1999. On August 9, 1999,
the Court entered an order certifying as plaintiffs those persons who purchased
Company common stock on the market from March 6, 1997 through 7:00 a.m. on
September 29, 1997. Merits discovery was completed in early 2000. On February
3, 2000, defendants filed motions for summary judgment dismissing the
complaint. Also on February 3, 2000, plaintiffs moved for permission to file a
third amended complaint and file expert reports. Proceedings regarding
defendants' summary judgment motions, along with the remaining exchange of
expert reports and expert discovery, are scheduled to be completed in the
second quarter of 2000. Trial is scheduled to begin in the second quarter of
2000. Defendants are defending the actions vigorously.
The Company is involved in several purported class action lawsuits that it
believes are part of a wave of similar actions targeting the health care
industry and, in particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from the Company and a number of its
subsidiaries for alleged violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999, the Court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The Court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Third Circuit.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on October 4, 1999 by Anthony
Conte (the "Conte Complaint"). The Conte Complaint seeks various forms of
relief, including unspecified damages, from Aetna U.S. Healthcare Inc. for
alleged violations of the Employee Retirement Income Security Act of 1974
("ERISA"). The Conte Complaint alleges that Aetna U.S. Healthcare does not make
adequate disclosure of provider compensation arrangements in the literature
that it makes available to actual or prospective members. The Company intends
to defend the action vigorously and on November 1, 1999, filed a motion to
dismiss the litigation for failure to state a claim upon which relief can be
granted. On December 15, 1999, the Court suspended further proceedings pending
the resolution of the Maio appeal by the Third Circuit Court of Appeals.
Page 82
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION (CONTINUED)
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill (the "O'Neill Complaint"). An Amended Complaint was filed on November
9, 1999 by Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The O'Neill
Complaint seeks various forms of relief, including unspecified damages and
treble damages, from the Company, Aetna U.S. Healthcare Inc., Richard L. Huber
and unnamed members of the Board of Directors of Aetna Inc. for alleged
violations of ERISA and RICO. The O'Neill Complaint alleges that defendants are
liable for alleged misrepresentations and omissions relating to advertising,
marketing and member materials directed to Aetna HMO members. On November 22,
1999, defendants moved to stay, dismiss or transfer the action to the United
States District Court for the Eastern District of Pennsylvania based on the
Conte and Maio complaints filed in that court. On January 25, 2000, the Court
suspended further proceedings pending resolution of a motion by another managed
care company in separate cases to consolidate those actions in a single court
for pretrial purposes. This litigation is in the preliminary stages. Defendants
intend to defend the action vigorously.
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from the Company, Aetna U.S. Healthcare
Inc., Aetna U.S. Healthcare of California Inc. and unnamed "John Doe"
defendants for alleged violations of California Business and Professions Code
Sections 17200 and 17500, California Civil Code Section 1750 and state common
law in connection with the sale and marketing of health plans in California.
The Curtright Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO, POS and PPO members and members of the general
public. On December 16, 1999, defendants removed the action to the United
States District Court for the Northern District of California. On January 18,
2000, plaintiff moved to remand the action to state court. On the same date,
the Company moved to dismiss the Curtright Complaint for failure to state a
claim upon which relief can be granted and moved for a stay of the action
pending resolution of the Maio and Conte matters. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California, County
of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen
Coalition for Patients Rights, purportedly on behalf of the general public of
the State of California (the "Ross Complaint"). The Ross Complaint seeks
various forms of relief, including injunctive relief, restitution and
disgorgement of amounts allegedly wrongfully acquired, from Aetna Inc., Aetna
U.S. Healthcare Inc., Aetna U.S. Healthcare of California, Inc. and additional
unnamed "John Doe" defendants for alleged violations of California Business and
Professions Code Sections 17200 and 17500. The Ross Complaint alleges that
defendants are liable for alleged misrepresentations and omissions relating to
advertising, marketing and member materials directed to Aetna HMO, POS and PPO
members and the general public and for alleged unfair practices relating to
contracting of doctors. This litigation is in the preliminary stages.
Defendants intend to defend the action vigorously.
Page 83
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION (CONTINUED)
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III (the "Williamson Complaint"). The Williamson Complaint names
as defendant The Prudential Insurance Company of America, and also names as
defendants Aetna Inc. and Aetna U.S. Healthcare Inc. solely to the extent that
the Company has assumed liability for the actions of Prudential in connection
with the Company's acquisition of the Prudential health care business. The
Williamson Complaint seeks various forms of relief from defendants, including
unspecified damages, treble damages and imposition of a constructive trust, for
alleged violations of RICO and ERISA. The Williamson Complaint alleges that the
Prudential Health Plans engaged in a nationwide fraudulent scheme of
misrepresentation by stating that coverage and treatment decisions were made on
the basis of medical necessity when Prudential allegedly implemented
undisclosed policies designed to deny or limit claims and medical services. On
December 30, 1999, the Company moved to stay, dismiss or transfer the action to
the United States District Court for the Eastern District of Pennsylvania based
on the fact that the Maio and Conte Complaints were filed in that court. On
January 25, 2000, the Court suspended further proceedings pending resolution of
a motion by another managed care company in separate cases to consolidate those
actions in a single court for pretrial purposes. This litigation is in the
preliminary stages. The Company intends to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on December 3, 1999 by Michael V. Amorosi
(the "Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna Inc. and Aetna U.S. Healthcare Inc. for alleged
violations of RICO and ERISA. The Amorosi Complaint alleges that defendants
told subscribers that coverage and treatment decisions would be based on
medical necessity but instead took into account undisclosed cost-based criteria
that were unrelated to members' medical needs. On January 7, 2000, the Company
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte Complaints were filed in that court. This litigation is in the
preliminary stages. The Company intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna Inc., Aetna U.S. Healthcare Inc. and Richard L.
Huber for alleged violations of RICO. The Mangieri Complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with the Company. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
Page 84
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LITIGATION (CONTINUED)
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 85
<PAGE> 86
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the financial statements of Aetna Inc., which
have been prepared in accordance with generally accepted accounting principles.
The financial statements are the products of a number of processes that include
the gathering of financial data developed from the records of the Company's
day-to-day business transactions. Informed judgments and estimates are used for
those transactions not yet complete or for which the ultimate effects cannot be
measured precisely. The Company emphasizes the selection and training of
personnel who are qualified to perform these functions. In addition, Company
personnel are subject to rigorous standards of ethical conduct that are widely
communicated throughout the organization.
The Company's internal controls are designed to reasonably assure that Company
assets are safeguarded from unauthorized use or disposition and that Company
transactions are authorized, executed and recorded properly. Company personnel
maintain and monitor these internal controls on an ongoing basis. In addition,
the Company's internal auditors review and report upon the functioning of these
controls with the right of full access to all Company personnel.
The Company engages KPMG LLP as independent auditors to audit its financial
statements and express their opinion thereon. Their audits include reviews and
tests of the Company's internal controls to the extent they believe necessary
to determine and conduct the audit procedures that support their opinion.
Members of that firm also have the right of full access to each member of
management in conducting their audits. The report of KPMG LLP appears below.
Aetna's Board of Directors has an Audit Committee composed solely of
independent directors. The Committee meets periodically with management, the
internal auditors and KPMG LLP to oversee and monitor the work of each and to
inquire of each as to their assessment of the performance of the others in
their work relating to the Company's financial statements. Both the independent
and internal auditors have, at all times, the right of full access to the Audit
Committee, without management present, to discuss any matter they believe
should be brought to the attention of the Committee.
Page 86
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
We have audited the accompanying consolidated balance sheets of Aetna Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Aetna Inc. and
Subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 7, 2000
Page 87
<PAGE> 88
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 (Millions, except per common share data) First Second(1) Third Fourth
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 5,692.4 $ 5,945.5 $ 7,068.9 $ 7,745.9
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 285.0 $ 356.6 $ 387.2 $ 195.4
Income taxes 115.4 139.1 191.9 60.9
- -------------------------------------------------------------------------------------------------------------------
Net income $ 169.6 $ 217.5 $ 195.3 $ 134.5
===================================================================================================================
Net income applicable to common shareholders $ 155.8 $ 203.7 $ 192.4 $ 134.5
===================================================================================================================
Per common share results: (2)
Net income
Basic $ 1.10 $ 1.45 $ 1.30 $ .92
Diluted 1.09 1.43 1.29 .92
- -------------------------------------------------------------------------------------------------------------------
Common stock data:
Dividends declared $ .20 $ .20 $ .20 $ .20
Common stock prices, high 90.13 99.25 89.25 60.63
Common stock prices, low 74.06 75.88 49.25 48.50
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Second quarter includes a benefit of $50.2 million after tax ($77.2
million pretax) from a reduction of the reserve for loss on discontinued
products.
(2) Calculation of the earnings per share is based on weighted average
shares outstanding during each quarter and, accordingly, the sum may
not equal the total for the year.
<TABLE>
<CAPTION>
1998 (Millions, except per common share data) First Second Third(1) Fourth(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 4,628.1 $ 4,823.0 $ 5,434.7 $ 5,756.0
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 264.2 $ 417.8 $ 335.3 $ 391.0
Income taxes 106.5 161.8 132.7 159.2
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 157.7 $ 256.0 $ 202.6 $ 231.8
=====================================================================================================================
Net income applicable to common shareholders $ 143.8 $ 242.1 $ 188.8 $ 218.1
=====================================================================================================================
Per common share results: (3)
Net income
Basic $ .99 $ 1.67 $ 1.32 $ 1.53
Diluted .98 1.63 1.30 1.50
- ---------------------------------------------------------------------------------------------------------------------
Common stock data:
Dividends declared $ .20 $ .20 $ .20 $ .20
Common stock prices, high 87.69 88.19 80.31 82.13
Common stock prices, low 69.63 71.31 60.19 63.56
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Third quarter includes a benefit of $44.2 million after tax ($68.0
million pretax) from a reduction of the reserve for loss on
discontinued products.
(2) Fourth quarter includes a gain related to the sale of the life business
of $64 million after tax ($98.9 million pretax) and a net after-tax
severance and facilities charge of $1 million.
(3) Calculation of the earnings per share is based on weighted average
shares outstanding during each quarter and, accordingly, the sum may
not equal the total for the year.
Page 88
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
- ---------- ------------- -------------
<S> <C> <C>
Aetna Inc. CT -
Aetna Services, Inc. CT 100% owned by Aetna Inc.
Aetna U.S. Healthcare Inc. PA 100% owned by Aetna Inc.
Aetna Risk Indemnity Company Limited Bermuda 100% owned by Aetna Inc.
Aetna Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Retirement Services, Inc. CT 100% owned by Aetna Services, Inc.
Aetna Health and Life Insurance Company CT 100% owned by Aetna Services, Inc.
Aetna Capital L.L.C. DE 95% owned by Aetna Services, Inc. (2)
Imperial Fire & Marine Re-Insurance Company Limited United Kingdom 10% owned by Aetna Services, Inc.
Aetna International, Inc. CT 100% owned by Aetna Services, Inc.
AUSHC Holdings, Inc. CT 100% owned by Aetna Services, Inc.
Aetna U.S. Healthcare Dental Plan Inc. PA 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Dental Plan, Inc. NJ 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Dental Plan, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
U.S. Health Insurance Company NY 100% owned by Aetna U.S. Healthcare Inc.
Primary Holdings, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
Corporate Health Insurance Company PA 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. NJ 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare, Inc. NY 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. CT 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. MA 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. (DE) DE 100% owned by Aetna U.S. Healthcare Inc.
Aetna U.S. Healthcare Inc. NH 100% owned by Aetna U.S. Healthcare Inc.
U.S. Healthcare Financial Services, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
Prudential Health Care Plan, Inc. TX 100% owned by Aetna U.S. Healthcare Inc.
Prudential Health Care Plan of New York, Inc. NY 100% owned by Aetna U.S. Healthcare Inc.
Prudential Health Care Plan of Connecticut, Inc. CT 100% owned by Aetna U.S. Healthcare Inc.
Aetna Health Management, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
NYLCare Health Plans, Inc. DE 100% owned by Aetna U.S. Healthcare Inc.
CMBS Holdings, L.L.C. CT 99% owned by Aetna Life Insurance Company (3)
AHP Holdings, Inc. CT 100% owned by Aetna Life Insurance Company
CMBS Holdings, Inc. TX 100% owned by Aetna Life Insurance Company
CMBS Holdings, Inc.-II CT 100% owned by Aetna Life Insurance Company
Aetna Affordable Housing, Inc. CT 100% owned by Aetna Life Insurance Company
85 L.L.C. DE 100% owned by Aetna Life Insurance Company
Ciculation L.L.C. CT 100% owned by Aetna Life Insurance Company
ALEC Coinvestment Fund I, L.L.C. DE 100% owned by Aetna Life Insurance Company
MAXXIM Coinvestment Fund IV, LLC DE 100% owned by Aetna Life Insurance Company
Circon Coinvestment Fund IV, LLC DE 100% owned by Aetna Life Insurance Company
EBF Group L.L.C. DE 22% owned by Aetna Life Insurance Company
PHPSNE Parent Corporation DE 55% owned by AUSHC Holdings, Inc.
Aetna Retirement Holdings, Inc. CT 100% owned by Aetna Retirement Services, Inc.
Aetna Life Insurance Company of America CT 100% owned by International, Inc.
Aetna Capital Holdings, Inc. CT 100% owned by Aetna International, Inc.
Aetna Life & Casualty (Bermuda) Ltd. Bermuda 100% owned by Aetna International, Inc.
Pacific-Aetna Life Insurance Co. Ltd. PRC 50% owned by Aetna International, Inc. (4)
Primary Investments, Inc. DE 100% owned by Primary Holdings, Inc.
Aetna U.S. Healthcare Inc. OH 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. MD 41% owned by Aetna Health Management, Inc. (5)
Aetna U.S. Healthcare, Inc. FL 100% owned by Aetna Health Management, Inc.
Aetna Dental Care of Kentucky, Inc. KY 100% owned by Aetna Health Management, Inc
Aetna U.S. Healthcare of California Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. LA 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare, Inc. AZ 100% owned by Aetna Health Management, Inc.
Med Southwest, Inc. TX 55% owned by Aetna Health Management, Inc.
Prudential Health Care Plan of California, Inc. CA 100% owned by Aetna Health Management, Inc.
Prudential Dental Maintenance Organization, Inc. TX 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare of Georgia, Inc. GA 37% owned by Aetna Health Management, Inc. (6)
</TABLE>
Page 1
<PAGE> 2
EXHIBIT 21 (Continued)
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
- ---------- ------------- -------------
<S> <C> <C>
Aetna U.S. Healthcare Dental Plan of California Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare of Illinois Inc. IL 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. TX 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Inc. TN 100% owned by Aetna Health Management, Inc.
Aetna U.S. Healthcare Dental Plan Inc. TX 100% owned by Aetna Health Management, Inc.
Lonestar Holding Co. DE 100% owned by NYLCare Health Plans, Inc.
Aetna U.S. Healthcare Inc. MD 44% owned by NYLCare Health Plans, Inc. (5)
Benefit Panel Services, Inc. CA 50% owned by NYLCare Health Plans, Inc.
NYLCare Dental Plans of the Southwest, Inc. TX 100% owned by NYLCare Health Plans, Inc.
Aetna U.S. Healthcare Inc. ME 100% owned by NYLCare Health Plans, Inc.
NYLCare Health Plans of the Southwest, Inc. TX 100% owned by NYLCare Health Plans, Inc.
The Ethix Corporation DE 100% owned by NYLCare Health Plans, Inc.
NYLCare Health Plans of New York, Inc. NY 100% owned by NYLCare Health Plans, Inc.
NYLCare Health Plans of New Jersey, Inc. NJ 100% owned by NYLCare Health Plans, Inc.
NYLCare Health Plans of Connecticut, Inc. CT 100% owned by NYLCare Health Plans, Inc.
New York Life and Health Insurance Company DE 100% owned by NYLCare Health Plans, Inc.
NYLCare of Texas, Inc. TX 100% owned by NYLCare Health Plans, Inc.
NYLCare of New England, Inc. DE 100% owned by NYLCare Health Plans, Inc.
Aetna Life Insurance and Annuity Company CT 100% owned by Aetna Retirement Holdings, Inc.
Aetna Retail Holding Company, Inc. CT 100% owned by Aetna Retirement Holdings, Inc.
Aetna Services Holding Company, Inc. CT 100% owned by Aetna Retirement Holdings, Inc.
PT Aetna Life Indonesia Indonesia 80% owned by Aetna Life Insurance Company of America
Aetna Heart Investments Holdings Limited Taiwan 30% owned by Aetna Life Insurance Company of America
Aetna Health Plans of Southern New England, Inc. CT 100% owned by PHPSNE Parent Corporation
U.S. Healthcare, Inc. MO 100% owned by Primary Investments, Inc.
United States Health Care Systems of Pennsylvania, Inc. PA 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare Inc. MD 15% owned by Primary Investments, Inc. (5)
Aetna U.S. Healthcare of the Carolinas Inc. NC 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare of Georgia, Inc. GA 63% owned by Primary Investments, Inc. (6)
U.S. Health Insurance Company CT 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare Holdings, Inc. DE 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare Inc. WA 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare, Inc. MI 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare, Inc. OK 100% owned by Primary Investments, Inc.
Aetna U.S. Healthcare of Alabama Inc. AL 100% owned by Primary Investments, Inc.
Prudential Health Care Plan of Georgia, Inc. GA 100% owned by Primary Investments, Inc.
Aetna Insurance Company of Connecticut CT 100% owned by AHP Holdings, Inc.
Southwest Physicians Life Insurance Company TX 100% owned by Med Southwest, Inc.
Aetna U.S. Healthcare of North Texas Inc. TX 100% owned by Med Southwest, Inc.
Lone Star Health Plan, Inc. TX 90% owned by Lonestar Holding Co. (7)
VivaHealth Incorporated CA 100% owned by Benefit Panel Services, Inc.
ETHIX Northwest, Inc. WA 100% owned by The Ethix Corporation
Aetna Get Fund MA 100% owned by Aetna Life Insurance and Annuity Company
Aetna Variable Encore Fund MA 97% owned by Aetna Life Insurance and Annuity Company
Aetna Variable Fund MA 98% owned by Aetna Life Insurance and Annuity Company
Aetna Income Shares MA 97% owned by Aetna Life Insurance and Annuity Company
Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance and Annuity Company
Aetna Series Fund, Inc. MD 28% owned by Aetna Life Insurance and Annuity Company (8)
</TABLE>
Page 2
<PAGE> 3
EXHIBIT 21 (Continued)
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
- ---------- ------------- -------------
<S> <C> <C>
Aetna Balance VP Inc. MD 99% owned by Aetna Life Insurance and Annuity Company
Aetna Variable Portfolios, Inc. MD 99% owned by Aetna Life Insurance and Annuity Company
Aetna Generation Portfolios, Inc. MD 99% owned by Aetna Life Insurance and Annuity Company
Portfolio Partners, Inc. MD 97% owned by Aetna Life Insurance and Annuity Company (9)
Aetna New Series Fund, Inc. MD 100% owned by Aetna Life Insurance and Annuity Company
Aetna Investment Services, Inc. CT 100% owned by Aetna Retail Holding Company, Inc.
FNI International, Inc. CA 100% owned by Aetna Retail Holding Company, Inc.
Aetna Financial Services, Inc. CT 100% owned by Aetna Retail Holding Company, Inc.
Aetna Investment Adviser Holding Company, Inc. CT 100% owned by Aetna Life Insurance and Annuity Company
Systematized Benefits Administrators, Inc. CT 100% owned by Aetna Services Holding Company, Inc.
Aetna U.S. Healthcare, Inc. CO 100% owned by Aetna U.S. Healthcare Holdings, Inc.
NYLCare Health Plans of the Gulf Coast, Inc. TX 100% owned by Lone Star Health Plan, Inc.
Aetna U.S. Healthcare of Washington Inc. WA 100% owned by Ethix Northwest, Inc.
Aeltus Investment Management, Inc. CT 100% owned by Aetna Investment Adviser Holding Company, Inc.
Financial Network Investment Corporation CA 100% owned by FNI International, Inc.
Aeltus Capital Inc. CT 100% owned by Aeltus Investment Management, Inc.
</TABLE>
(1) Percentages are rounded to the nearest whole percent and are based on
ownership of voting rights.
(2) Aetna Capital Holdings, Inc. owns 5% of Aetna Capital L.L.C.
(3) CMBS Holdings, Inc. - II owns 1% of CMBS Holdings, L.L.C.
(4) Aetna Life Insurance Company owns 1% of Pacific - Aetna Life Insurance Co.
Ltd.
(5) NYLCare Health Plans, Inc. owns 44%, Aetna Health Management, Inc. owns 41%
and Primary Investments, Inc. owns 15% of Aetna U.S. Healthcare Inc.
(6) Primary Investments, Inc. owns 63% and Aetna Health Management, Inc. owns
37% of Aetna U.S. Healthcare of Georgia, Inc.
(7) NYLCare Health Plans, Inc. owns 10% of this company.
(8) Aetna Life Insurance Company owns 1% of Aetna Series Fund, Inc.
(9) Aetna Insurance Company of America owns 3% of Portfolio Partners, Inc.
Page 3
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Aetna Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-07169, No. 333-08427, No. 333-08429, No. 333-08431, No. 333-68881, No.
333-52321, No. 333-52321-01, No. 333-52321-02, No. 333-52321-03, No.
333-52321-04 and No. 333-52321-05) of Aetna Inc. of our reports dated February
7, 2000 relating to the consolidated balance sheets of Aetna Inc. and
Subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity, and cash flows and related schedules
for each of the years in the three-year period ended December 31, 1999, which
reports appear in or are incorporated by reference in the December 31, 1999
annual report on Form 10-K of Aetna Inc.
/s/ KPMG LLP
Hartford, Connecticut
February 28, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Inc. (the "Company"), hereby
severally constitute and appoint Alan M. Bennett, William J. Casazza and Edward
L. Shaw, Jr., and each of them individually, our true and lawful attorneys, with
full power to them and each of them to sign for us, and in our names and in the
capacities indicated below, the Company's 1999 Form 10-K and any and all
amendments thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K and to
any and all amendments thereto.
Dated as of February 25, 2000.
<TABLE>
<S> <C>
/s/ Earl G. Graves, Sr.
- ----------------------------------------- ------------------------------------------
Richard L. Huber Earl G. Graves, Sr.
Chairman, Chief Executive Officer, Director
President and Director
(Principal Executive Officer)
/s/ Leonard Abramson /s/ Gerald Greenwald
- ----------------------------------------- ------------------------------------------
Leonard Abramson Gerald Greenwald
Director Director
/s/ Betsy Z. Cohen /s/ Ellen M. Hancock
- ----------------------------------------- ------------------------------------------
Betsy Z. Cohen Ellen M. Hancock
Director Director
/s/ William H. Donaldson /s/ Michael H. Jordan
- ----------------------------------------- ------------------------------------------
William H. Donaldson Michael H. Jordan
Director Director
/s/ Barbara Hackman Franklin /s/ Jack D. Kuehler
- ----------------------------------------- ------------------------------------------
Barbara Hackman Franklin Jack D. Kuehler
Director Director
/s/ Jeffrey E. Garten /s/ Frank R. O'Keefe, Jr.
- ----------------------------------------- ------------------------------------------
Jeffrey E. Garten Frank R. O'Keefe, Jr.
Director Director
/s/ Jerome S. Goodman /s/ Judith Rodin
- ----------------------------------------- ------------------------------------------
Jerome S. Goodman Judith Rodin
Director Director
/s/ Alan J. Weber
------------------------------------------
Alan J. Weber
Vice Chairman for Strategy and Finance
(Principal Financial Officer)
</TABLE>
<PAGE> 1
Exhibit 24.2
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Inc. (the "Company"), hereby
severally constitute and appoint Alan M. Bennett, William J. Casazza and Edward
L. Shaw, Jr., and each of them individually, our true and lawful attorneys, with
full power to them and each of them to sign for us, and in our names and in the
capacities indicated below, the Company's 1999 Form 10-K and any and all
amendments thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K and to
any and all amendments thereto.
Dated as of February 25, 2000.
/s/ William H. Donaldson
- -------------------------------------
William H. Donaldson
Chairman, Chief Executive Officer,
President and Director
(Principal Executive Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999 FOR AETNA INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 28,662
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 791
<MORTGAGE> 3,238
<REAL-ESTATE> 362
<TOTAL-INVEST> 35,777
<CASH> 2,505
<RECOVER-REINSURE> 3,881
<DEFERRED-ACQUISITION> 2,060
<TOTAL-ASSETS> 112,839
<POLICY-LOSSES> 17,599
<UNEARNED-PREMIUMS> 507
<POLICY-OTHER> 4,977
<POLICY-HOLDER-FUNDS> 15,481
<NOTES-PAYABLE> 4,566
0
0
<COMMON> 3,719
<OTHER-SE> 6,971
<TOTAL-LIABILITY-AND-EQUITY> 112,839
20,901
<INVESTMENT-INCOME> 2,966
<INVESTMENT-GAINS> 72
<OTHER-INCOME> 2,514
<BENEFITS> 19,392
<UNDERWRITING-AMORTIZATION> 205
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,224
<INCOME-TAX> 507
<INCOME-CONTINUING> 717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717
<EPS-BASIC> 4.76<F1>
<EPS-DILUTED> 4.72<F2>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THE EPS-PRIMARY TAG REPRESENTS BASIC EPS UNDER SFAS 128.
<F2>THE EPS-DILUTED TAG REPRESENTS DILUTED EPS UNDER SFAS 128.
</FN>
</TABLE>
