As filed with the Securities and Exchange Commission on September 1, 2000
File No. ________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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AETNA U.S. HEALTHCARE INC.
(to be renamed AETNA INC.)
(Exact Name of Registrant as Specified in Its Charter)
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Pennsylvania 23-2229683
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
151 Farmington Avenue
Hartford, Connecticut 06156
(Address of Principal Executive Offices) (Zip Code)
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(860) 273-0123
(Registrant's telephone number, including area code)
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Securities to be registered
pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Common Shares, par value $.01 per share The New York Stock Exchange
Class A Voting Preferred Shares, par value $.01 The New York Stock Exchange
per share, Purchase Rights
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Securities to be registered
pursuant to Section 12(g) of the Act:
None
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
Item 1. Business
The information required by this item is contained under the sections
"Summary," "Risk Factors," "Business of New Aetna" and "Relationship Among
Aetna, New Aetna and ING" of the Information Statement. Those sections are
incorporated herein by reference.
Item 2. Financial Information
The information required by this item is contained under the sections
"Summary," "Capitalization of New Aetna," "Selected Consolidated Financial
Data," "Unaudited Pro Forma Condensed Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Information Statement. Those sections are incorporated
herein by reference.
Item 3. Properties
The information required by this item is contained under the section
"Business -- Properties" of the Information Statement. That section is
incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained under the sections
"Management--Stock Ownership of Directors and Executive Officers" and "Security
Ownership of Aetna and New Aetna" of the Information Statement. Those sections
are incorporated herein by reference.
Item 5. Directors and Executive Officers
The information required by this item is contained under the section
"Management" of the Information Statement. That section is incorporated herein
by reference.
Item 6. Executive Compensation
The information required by this item is contained under the section
"Management" of the Information Statement. That section is incorporated herein
by reference.
Item 7. Certain Relationships and Related Transactions
The information required by this item is contained under the sections
"Relationship Among Aetna, New Aetna and ING," "Management" and "Certain
Relationships and Related Transactions" of the Information Statement. Those
sections are incorporated herein by reference.
Item 8. Legal Proceedings
The information required by this item is contained under the sections
"Business of New Aetna -- Regulation" and "Business of New Aetna -- Legal
Proceedings" of the Information Statement. Those sections are incorporated
herein by reference.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Shareholder Matters
The information required by this item is contained under the sections
"Risk Factors," "The Spin-Off," "Dividend Policy," "Management" and
"Description of New Aetna Capital Stock" of the Information Statement. Those
sections are incorporated herein by reference.
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Item 10. Recent Sales of Unregistered Securities
Not applicable.
Item 11. Description of Registrant's Securities to be Registered
The information required by this item is contained under the section
"Description of New Aetna Capital Stock" of the Information Statement. That
section is incorporated herein by reference.
Item 12. Indemnification of Directors and Officers
The information required by this item is contained under the section
"Liability and Indemnification of Officers and Directors" of the Information
Statement. That section is incorporated herein by reference.
Item 13. Financial Statements and Supplementary Data
The information required by this item is contained under the sections
"Capitalization of New Aetna," "Selected Consolidated Financial Data,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Consolidated Financial Statements" of the Information
Statement. Those sections are incorporated herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 15. Financial Statements and Exhibits
(a) Financial Statements
The information required by this item is contained under the section
"Consolidated Financial Statements" beginning on page F-1 of the Information
Statement. That section is incorporated herein by reference.
(b) Exhibits
The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
-------- -----------------
3.1 Form of Amended and Restated Articles of Incorporation of Aetna
Inc. (formerly Aetna U.S. Healthcare Inc.)*
3.2 Form of Amended and Restated Bylaws of Aetna Inc. (formerly Aetna
U.S. Healthcare Inc.)*
4.1 Form of Aetna Inc. (formerly Aetna U.S. Healthcare Inc.) Common
Share certificate.*
4.2 Form of Rights Agreement between Aetna Inc. (formerly Aetna U.S.
Healthcare Inc.) and First Chicago Trust Company of New York, as
Rights Agent.*
10.1 Agreement and Plan of Restructuring and Merger dated as of July 19,
2000 among ING America Insurance Holdings, Inc., ANB Acquisition
Corp., Aetna Inc. and, for limited purposes only, ING Groep N.V.,
incorporated herein by reference to Exhibit 2.1 to Aetna Inc.'s Form
10- Q filed on August 4, 2000.
10.2 Form of Tax Sharing Agreement among Aetna Inc., Aetna U.S. Healthcare
Inc. and ING America Insurance Holdings, Inc.
10.3 Form of Employee Benefits Agreement between Aetna Inc. and Aetna U.S.
Healthcare Inc.
10.4 Term Sheet for Transition Services Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
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EXHIBIT
NUMBER DESCRIPTION
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10.5 Form of Distribution Agreement between Aetna Inc. and Aetna U.S.
Healthcare Inc., incorporated herein by reference to Annex C to
Aetna Inc.'s preliminary proxy statement on Schedule 14A filed on
September 1, 2000.
10.6 Term Sheet for Trademark Assignment between Aetna Inc. and Aetna U.S.
Healthcare Inc.
10.7 Term Sheet for Trademark Licensing Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
10.8 Term Sheet for Software Licensing Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
10.9 Term Sheet for Lease Agreement between Aetna Inc. and Aetna Life
Insurance Company in respect of the property situated at 151
Farmington Avenue, Hartford, Connecticut, 06156.
10.10 Term Sheet for Agreement between Aetna Inc. and Aetna U.S. Healthcare
Inc. in respect of the CityPlace property, situated at 185 Asylum
Avenue, Hartford, Connecticut 06103.
10.11 Aetna U.S. Healthcare Inc. Stock Incentive Plan, incorporated herein
by reference to Annex G to Aetna Inc.'s preliminary proxy statement
on Schedule 14A filed on September 1, 2000.
10.12 Aetna U.S. Healthcare Inc. Annual Incentive Plan, incorporated herein
by reference to Annex H to Aetna Inc.'s preliminary proxy statement
on Schedule 14A filed on September 1, 2000. 10.13 Aetna U.S.
Healthcare Inc. Directors Compensation Plan.*
10.14 Employment Agreement dated as of May 31, 2000 by and between Aetna
Inc. and William H. Donaldson, incorporated herein by reference to
Exhibit 10.2 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.15 Tax Agreement dated as of May 31, 2000 by and between Aetna Inc. and
William H. Donaldson, incorporated herein by reference to Exhibit
10.3 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.16 Bonus Agreement dated as of May 31, 2000 by and between Aetna Inc.
and William H. Donaldson, incorporated herein by reference to
Exhibit 10.4 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.17 Letter Agreement dated as of June 11, 1998 between Aetna Inc. and
Alan J. Weber, incorporated herein by reference to Exhibit 10.2 to
Aetna Inc.'s Form 10-Q filed on April 28, 1999.
10.18 Employment Agreement dated as of March 30, 1996 by and between Arthur
Leibowitz, M.D. and U.S. Healthcare, Inc.
10.19 Letter Agreement dated as of April 13, 1996 between Aetna Life and
Casualty Company and John W. Coyle.*
10.20 Letter Agreement and Restrictive Covenant Agreement, each dated
April 28, 1999 and between Aetna Inc. and L. Edward Shaw, Jr.*
21.1 Subsidiaries of Aetna U.S. Healthcare Inc.*
27.1 Financial Data Schedule (1997).
27.2 Financial Data Schedule (1998).
27.3 Financial Data Schedule (1999).
27.4 Financial Data Schedule (June 30, 1999).
27.5 Financial Data Schedule (June 30, 2000).
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* To be filed by amendment.
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SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
AETNA U.S. HEALTHCARE INC.
Dated: September 1, 2000 By: /s/ Alan M. Bennett
------------------------------
Name: Alan M. Bennett
Title: Controller
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Preliminary Information Statement
(Subject to Completion, Dated September 1, 2000)
AETNA U.S. HEALTHCARE INC. (to be renamed AETNA INC.)
COMMON SHARES
(par value $.01 per share)
The board of directors of Aetna Inc., or Aetna, has approved an agreement
and plan of restructuring and merger and related agreements under which Aetna
will spin off its domestic health care and large case pensions businesses in
the form of Aetna U.S. Healthcare Inc., or New Aetna, to its shareholders and
sell its financial services and international businesses to ING Groep N.V.
At this time, New Aetna is wholly-owned by Aetna. Aetna intends to
distribute, in a spin-off, all of its shares of New Aetna common stock on a pro
rata basis to the holders of Aetna common stock. Each of you, as a holder of
Aetna common stock, will receive one share of New Aetna common stock for each
share of Aetna common stock that you hold at the close of business on the
record date for the spin-off, which is expected to be on or about , 2000.
The transaction will occur in two, effectively simultaneous, steps:
o Aetna will spin off its domestic health care and large case pensions
businesses to its shareholders, and
o Aetna's financial services and international businesses will be sold
to ING. The sale, which we refer to as the merger, will be structured
as a merger of Aetna (which will then own only Aetna's financial
services and international businesses) with a subsidiary of ING.
The spin-off and the merger will each occur only if the other occurs
effectively at the same time. After completion of the spin-off and the merger,
the Aetna Financial Services and Aetna International businesses will be owned
100% by ING.
The record date and the distribution date for the spin-off, as well as the
closing date for the merger, will all be the same day. Immediately after the
spin-off is completed, we will be an independent public company.
This information statement relates to the shares of New Aetna that will be
issued to you in the spin-off if the merger is approved by shareholders of
Aetna. It provides important information about New Aetna. You should read this
information statement carefully. If the merger is approved by Aetna's
shareholders, we expect the spin-off to occur on or about , 2000. On that
date, holders of record of Aetna common stock on the record date will have
credited to a book-entry account established for them by, and maintained at,
First Chicago Trust Company of New York (the registrar and transfer agent for
New Aetna common stock) one share of New Aetna common stock for every share of
Aetna common stock they own on the record date.
If the merger is approved by Aetna's shareholders, no further action on
your part is necessary for you to receive the shares of New Aetna common stock
to which you are entitled in the spin-off. This means that you do not need to
pay any consideration to Aetna or to New Aetna and you do not need to surrender
any shares of Aetna common stock to receive your shares of New Aetna common
stock. However, you are required to surrender your shares of Aetna common stock
to receive the cash consideration to be paid in the merger.
Because Aetna owns all of the New Aetna common stock, there has been no
trading market for New Aetna common stock. We expect that New Aetna common
stock will trade on the New York Stock Exchange under the ticker symbol "AET."
As you review this information statement, you should carefully consider
the matters described in "Risk Factors" beginning on page 9.
-----------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
information statement is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this information statement is , 2000.
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TABLE OF CONTENTS
Page
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Summary........................................................................1
Risk Factors...................................................................9
The Spin-Off..................................................................17
Capitalization of New Aetna...................................................19
Dividend Policy...............................................................19
Selected Consolidated Financial Data..........................................20
Unaudited Pro Forma Condensed Consolidated Financial Statements...............22
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................29
Business of New Aetna.........................................................59
Relationship Among Aetna, New Aetna and ING...................................76
Management....................................................................85
Certain Relationships and Related Transactions................................98
Security Ownership of Aetna and New Aetna.....................................99
Description of New Aetna Capital Stock.......................................100
Liability and Indemnification of Directors and Officers......................107
Where You Can Find More Information..........................................108
Index to the Consolidated Financial Statements ..............................F-1
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SUMMARY
This summary highlights information relating to New Aetna and the New
Aetna common stock being distributed in the spin-off. More detailed discussions
of this information are contained in this information statement. In some places
in this information statement, we have presented pro forma information,
adjusted to reflect the terms of our spin-off from Aetna and the merger. You
should read the entire information statement, including the risk factors and
our consolidated historical and pro forma financial statements and notes to
those statements appearing elsewhere in this information statement.
NEW AETNA
Our Company
New Aetna is the nation's largest health care benefits company, with
approximately 19.4 million health members, 14.6 million dental members and 11.4
million group life and disability insurance members at June 30, 2000. We are
also the nation's second largest provider of dental coverage, based on
membership. At June 30, 2000, we also had approximately 448,000 health care
providers participating in our networks nationwide, including more than 283,000
physicians and more than 3,100 hospitals. We provide a full spectrum of health
and dental products (ranging from managed care to indemnity products), group
insurance products (including life, disability and long-term care insurance
products) and certain specialty health products. These products are offered on
both an insured and employer-funded basis. We do business in all 50 states, and
focus on the commercial customer (ranging from small employer groups to large,
multi-site national accounts). We also have a large case pensions business that
manages a variety of retirement products for qualified defined benefit and
defined contribution plans of large customers.
Our goal is to provide our members with access to quality health care
through an array of health plan options, as well as group insurance products,
designed to meet the changing needs of today's marketplace. We are taking a
number of significant actions to better serve our various constituents, improve
our near-term financial performance and strategically reposition our business
for the future. We believe that our competitive strengths -- broad geographic
reach, strong market positions, large membership base, extensive provider
networks, extensive product offerings, information technology expertise, a
dedicated corps of employees and the quality and recognizability of our Aetna
brand -- position us to fulfill these important objectives.
Recent Developments; Strategic Repositioning of Our Business
Although our businesses are profitable and generate significant cash flow,
our recent financial performance has been disappointing. For the year ended
December 31, 1999, our total revenue was $22,109.7 million, our EBITDA was
$1,403.8 million and our income from continuing operations was $399.4 million.
For the six months ended June 30, 2000, our total revenue was $13,444 million,
our EBITDA was $605.8 million and our income from continuing operations was
$181.1 million. We have experienced a significant increase in medical costs in
the first half of 2000.
We are undertaking a comprehensive review of our health care business
model. We have already implemented a number of strategic and operational
initiatives and are considering a number of additional actions. These
initiatives include, among other things, strengthening management of the
business, improving relations with health care providers, exiting certain
product markets, addressing rising medical costs and improving the efficiency
of our operations.
Strengthening Management. We have made significant changes to our senior
management team since year end 1999 to help lead the strategic repositioning of
our business and the implementation of our other important initiatives. We have
also retained an executive recruiting firm to assist us in the search for a
chief executive officer. We have also taken steps to better empower local,
regional management, to address more quickly and effectively medical cost and
other issues that arise locally, where health care services are ultimately
furnished by providers to our members.
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Improving Relations with Health Care Providers. We intend to improve our
relationships with health care providers, as we believe we must have
constructive, mutually beneficial relations with providers to be successful in
our business. We believe that these relations can coexist with cost-effective
health care for our members and with improved financial performance. For
example, we believe that certain policies and procedures that may be costly to
administer and that may put a strain on provider relations can be eliminated or
simplified without negatively impacting our ability to monitor the quality of
services rendered to our members or to manage health care costs. Toward this
end, in 2000, we announced that we were making changes in certain states to
provide physicians in those states with additional choices in product
participation and financial compensation and to clarify how medical necessity
and coverage decisions are made. We are continuing a state-by-state review of
all of our provider arrangements and may implement additional changes in other
areas.
Exiting Certain Product Markets. We are evaluating the markets for our
products with the goal of either improving their performance to meet
management's strategic and financial goals or exiting those product markets
which do not meet these goals. As a result of this review, on June 29, 2000, we
notified the Health Care Financing Administration of our intent to exit a
number of Medicare service areas affecting approximately 340,000 Medicare
members, or approximately 50 percent of our total current Medicare membership.
The termination of these Medicare+Choice contracts will become effective on
December 31, 2000. We may elect to continue to provide Medicare benefits to
members in these service areas, in accordance with HCFA regulations and
guidelines, if legislative or regulatory changes are made that would increase
payments from HCFA to us within six months following this notification date.
During the remainder of 2000, we will continue to monitor any legislative or
regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. We are also in the process of evaluating region-by-region the markets
for our commercial HMO products to determine whether we should exit or modify
our products in any of these markets.
Addressing Rising Medical Costs. We are taking a number of steps to
address the significant increase in medical costs that we experienced in the
first half of 2000. Among other things, we are:
o implementing premium increases for contracts renewing in the fourth
quarter of 2000 and beyond that more appropriately reflect the rise
in medical costs;
o redesigning product benefit offerings to offer more appropriate
consumer choice and incent appropriate, necessary use of medical
services (i.e., by expanding features such as tiered copays);
o moving patient management responsibility to our regional operations
so that we can improve our focus on geographic developments, which
can vary sharply from one region to another, and more quickly develop
and implement detailed action plans for each region; and
o enhancing our utilization management on-site review program in order
to resolve coverage issues with hospitals and other providers
concurrently with, rather than after, treatment.
Improving the Efficiency of Our Operations. We are reviewing our business
and operational processes with the goal of increasing efficiencies and reducing
operational costs. Our goal is to better leverage our information technology
assets to meet current consumer trends and achieve additional efficiencies. We
intend to use technology to deliver speed, efficiency and accuracy to the
traditionally time-and paper-intensive process of administering employee
benefits for plan sponsors, brokers and members.
Responding to Recent Industry Trends; Anticipating Future Changes
In recent years, we have viewed the traditional gatekeeper HMO model as
our primary health care product. However, as a result of current socio-economic
trends in the United States, consumers are demanding a broader array of health
care products from which to choose. There is an increasing emphasis away from
traditional gatekeeper HMO products toward more open access, flexible products.
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We also believe that in the future members will become more involved in
and informed about health care matters, and will increasingly use the Internet
to access health care information. This could result in increased use of the
Internet and other technology for transmitting health care information among
the member, provider and health care benefits company.
Employers may also move toward a defined contribution model of benefits
whereby employers would contribute a fixed amount of money toward employee
benefits, allowing the employee to choose among a broad array of benefits,
products and companies. Employees would add personal contributions, if
necessary, to help pay for their choices.
Our goal is to transform our business model to one emphasizing more
flexibility and choice to respond to these current and future changes in the
health care marketplace. Among other things, we intend to (i) introduce new
open-access products in early 2001, (ii) emphasize PPO products and
self-insured programs, in addition to our HMO and POS plans, to achieve greater
product portfolio balance, and (iii) expand the use of technology to enhance
the customer relationship. We have also developed a suite of Internet-enabled
utilities which we intend to introduce with the roll-out of our new open-access
products. Combined with our InteliHealth resources, an award-winning health
care website with medical content provided by Harvard Medical School and dental
content provided by The University of Pennsylvania, these Internet-enabled
utilities should empower our members to access a wide variety of health plan
and medical information on-line and perform certain related functions on-line,
such as choosing a primary care physician, checking claims status, and
accessing benefit plan information.
History of Our Company
Prior to 1996, Aetna was one of the nation's largest multiline
insurance/financial services organizations, with operations domestically and
abroad. In 1995, Aetna made the strategic decision to focus its resources on
pursuing growth opportunities in its health care business and to exit other
businesses which were not believed to present the same growth opportunities. As
a result, Aetna sold its property-casualty business in 1996, its domestic
individual life insurance business in 1998, and agreed to sell its domestic
financial services and international businesses in 2000.
During the same period, we grew our health care business, acquiring U.S.
Healthcare in 1996, the health care business of New York Life Insurance Company
in 1998, and the health care business of The Prudential Insurance Company of
America in 1999. We do not currently intend to make additional significant
health care acquisitions. Instead we intend to focus our resources on
integrating our prior acquisitions and improving our underlying operations and
financial results.
-----------------------
We were incorporated in Pennsylvania in December 1982, as United States
Health Care Systems, Inc., and we changed our name to U.S. Healthcare, Inc. in
April 1986. We were acquired by Aetna in July 1996, and we changed our name to
Aetna U.S. Healthcare Inc. in March 1997. In connection with the spin-off, we
will be changing our name to Aetna Inc. References in this information
statement to "New Aetna," "we," "our" and "us" collectively refer to Aetna U.S.
Healthcare Inc. (to be renamed Aetna Inc.) and its consolidated subsidiaries.
Our principal executive offices are located at 151 Farmington Avenue, Hartford,
Connecticut 06156, and our telephone number is (860) 273-0123. We maintain an
Internet site at http://www. . This text is not an active link
and our website and the information contained on that site, or connected to
that site, are not incorporated into this information statement.
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THE SPIN-OFF
The following is a brief summary of the terms of the spin-off.
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Distributing Company................................. Aetna Inc. After the spin-off, Aetna will not own any
shares of our stock.
Spun-Off Company..................................... Aetna U.S. Healthcare Inc., or New Aetna, currently a
wholly-owned subsidiary of Aetna. After the spin-off,
New Aetna will be an independent public company and
will be named "Aetna Inc." We will have two principal
lines of business: health care and large case pensions.
Consideration to Be Received by Aetna
Shareholders in the Spin-Off
and the Merger.................................. The spin-off and the merger will occur effectively
simultaneously. Aetna shareholders will receive
approximately $35 in cash in the merger and one share of
New Aetna common stock in the spin-off for each share of
Aetna common stock they hold at the close of business on
the record date for the spin-off, which is expected to be on
or about , 2000. Aetna shareholders will be
required to surrender their shares of Aetna common stock
to receive the cash consideration in the merger, but no
additional action will be required to receive shares of New
Aetna common stock in the spin-off.
New Aetna Common Stock............................... shares of New Aetna common stock, which is all
of the outstanding shares of New Aetna common stock,
will be distributed in the spin-off. Immediately after the
spin-off, we estimate that about shareholders of
record will hold shares of New Aetna common stock,
although some of the shares may be registered in the name
of a single shareholder who represents a number of
shareholders.
Distribution Ratio................................... One share of New Aetna common stock for each share of
Aetna common stock that you hold at the close of business
on or about , 2000, the record date for the
spin-off.
Book-Entry Shareholding.............................. We will not be mailing New Aetna share certificates to
holders of Aetna common stock. Instead, on the record
date, holders of record of Aetna common stock at that
time will have credited to a book-entry account
established for them by, and maintained at, First Chicago
Trust Company of New York (the registrar and transfer
agent for New Aetna common stock) their proportionate
number of shares of New Aetna common stock.
Record Date/Spin-Off Date............................ On or about , 2000 (close of business).
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Distribution Agent................................... First Chicago Trust Company of New York, which is the
registrar and transfer agent for Aetna common stock and
New Aetna common stock.
New York Stock Exchange Symbol....................... AET
Trading Market....................................... Because Aetna owns all of New Aetna common stock,
there has been no trading market for New Aetna common
stock.
Tax Consequences..................................... The receipt by an Aetna shareholder of cash and shares of
New Aetna common stock will be a taxable transaction for
United States federal income tax purposes. An Aetna
shareholder generally will recognize gain or loss in an
amount equal to the difference between (i) the sum of the
amount of cash and the fair market value, on the date of
the spin-off and the merger, of the shares of New Aetna
common stock received by the Aetna shareholder and (ii)
the Aetna shareholder's tax basis in the shares of Aetna
common stock surrendered. That gain or loss will be a
capital gain or loss if the shares of Aetna common stock
are held as a capital asset by the Aetna shareholder. See
"The Spin-Off-- Material United States Federal Income
Tax Consequences to Aetna Shareholders of the Spin-Off
and the Merger" for a more detailed description of the
federal income tax consequences of the spin-off and the
merger.
Relationship Among Aetna,
New Aetna and ING
After the Spin-Off.............................. We and Aetna will enter into a distribution agreement and
other agreements described in the section entitled
"Relationship Among Aetna, New Aetna and ING." We
and Aetna or ING may enter into additional or modified
agreements, arrangements and transactions, all of which
will be negotiated at arm's length.
Our Management and Management
Compensation.................................... A search for a new chief executive officer is underway.
The compensation, awards and other benefits payable to
selected members of management are described in
"Management."
-----------------------
You should carefully read the "Risk Factors" beginning on page 9.
-----------------------
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If you have any questions relating to the spin-off, you should contact
Georgeson Shareholder Communications Inc. at:
Tel: ( )
E-mail:
After the spin-off, if you are a shareholder of New Aetna and have
questions relating to the spin-off, you can contact us directly. Our contact
information will be:
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Tel: ( )
Fax: ( )
Attention: Corporate Secretary
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data reflect the historical
results of operations and financial position for and as of the end of each
respective period of New Aetna and are derived from the historical consolidated
financial statements included elsewhere in this information statement. Our
results for 1999 and for the six months ended June 30, 2000 also are presented
on a pro forma basis to give effect to the assets and liabilities to be
retained by Aetna in the merger. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements" for additional discussion of these pro forma
amounts. Pro forma as adjusted amounts reflect the projected issuance of short-
and long-term debt to refinance all of the short-term debt expected to be
outstanding at the time of the spin-off and to fund transaction-related
expenses and to be used for general corporate purposes. These pro forma and pro
forma as adjusted amounts may not be indicative of our actual results. You
should not construe this pro forma and pro forma as adjusted information to be
indicative of our results of operations or financial position at the time of
the spin-off and the merger. This pro forma and pro forma as adjusted
information also does not project the results of operations or financial
position for any future period or date.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
----------------------------------------------- -------------------------------------------------------
Pro Forma Pro Forma
As Adjusted Pro Forma As Adjusted Pro Forma
2000 (1) 2000 2000 1999 1999(1) 1999 1999 1998 1997
----------- --------- --------- -------- ----------- --------- --------- --------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenue......... $13,444.0 $13,444.0 $9,522.5 $22,109.7 $22,109.7 $16,589.0 $14,674.4
--------- --------- -------- --------- --------- --------- ---------
Health care costs..... 9,432.9 9,432.9 6,091.6 14,641.0 14,641.0 10,012.9 8,215.5
Current and future
benefits............. 1,101.9 1,101.9 1,160.6 2,231.0 2,231.0 2,296.0 2,396.1
Operating expenses.... 2,376.7 2,383.7 1,642.7 3,903.0 3,917.0 2,918.6 2,723.9
Interest expense...... 53.4 125.1 107.1 62.2 232.7 206.2 213.9
Amortization of
goodwill and other
acquired intangible
assets............... 218.4 218.4 203.8 420.4 420.4 381.3 362.9
Reductions of loss on
discontinued
products............. (146.0) (146.0) (77.2) (77.2) (77.2) (68.0) (172.5)
Severance and
facilities reserve
reductions........... -- -- -- -- -- -- (45.0)
--------- --------- -------- --------- --------- --------- ---------
Total benefits and
expenses............ 13,037.3 13,116.0 9,128.6 21,180.4 21,364.9 15,747.0 13,694.8
--------- --------- -------- --------- --------- --------- ---------
Income from continuing
operations before
income taxes......... 406.7 328.0 393.9 929.3 744.8 842.0 979.6
Income taxes.......... 174.4 146.9 182.5 410.0 345.4 391.6 453.9
--------- --------- -------- --------- --------- --------- ---------
Income from continuing
operations.......... $ 232.3 $ 181.1 $ 211.4 $ 519.3 $399.4 $450.4 $525.7
========= ========= ======== ========= ====== ====== ======
Other Data:
EBITDA (2)............ $ 612.8 $ 605.8 $ 664.7 $ 1,417.8 $1,403.8 $1,484.7 $1,454.3
== ========= ========= ======== ========= ======== ======== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------------------------- ----------------------------------------
Pro Forma
As Adjusted Pro Forma
2000 (1) 2000 2000 1999 1998 1997
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Millions)
Balance Sheet Data:
Total assets........... $48,106.7 $51,051.2 $51,981.4 $53,228.1 $48,544.2
========= ========= ========= ========= =========
Debt:
Short-term............. $ 1,468.5 $ 1,342.6 $ 1,725.0 $ 1,370.1 $ 163.3
Long-term.............. 1.6 2,094.2 2,093.9 1,593.3 1,892.1
--------- --------- --------- --------- ---------
Total debt........ $ 1,470.1 $ 3,436.8 $ 3,818.9 $ 2,963.4 $ 2,055.4
========= ========= ========= ========= =========
Shareholder's equity... $10,286.0 $10,960.1 $10,703.2 $11,429.5 $11,082.0
========= ========= ========= ========= =========
</TABLE>
-------------------
(1) We have assumed a pro forma as adjusted total debt level of approximately
$ billion immediately following the spin-off and the merger. The actual
amount of debt outstanding following the consummation of the spin-off and
the merger may differ from this projected amount and such difference may
be material. We have assumed an annual interest rate of % on the total
debt projected to be outstanding; we cannot assure you, however, that our
actual interest rate will not be higher or lower than this projected rate.
A 1/2% change to the annual interest rate would change interest expense by
about $ million for the six months ended June 30, 2000 and $ million
for the year ended December 31, 1999. Pro forma as adjusted shareholder's
equity has been reduced for the after-tax impact of the
transaction-related expenses funded by increased borrowing referred to
above.
(2) "EBITDA" is defined as income from continuing operations (excluding
reductions of loss on discontinued products and severance and facilities
reserve reductions) before interest expense, taxes, depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in
accordance with generally accepted accounting principles, but is presented
because we believe it is a generally accepted indicator of a company's
ability to incur and service debt. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect funds
available for dividends, reinvestment or other discretionary uses. In
addition, EBITDA as presented in this information statement may not be
comparable to similarly titled measures reported by other companies.
8
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this information statement. Some of the
following risks relate principally to our business. Other risks relate
principally to the securities markets and ownership of our stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual
events, this could have a material adverse effect on our business, financial
condition or results of operations. In that case, the trading price of New
Aetna common stock could decline materially.
Risk Factors Relating to Our Business
We are seeking to improve the performance of our health care business by
implementing a number of initiatives; if these initiatives do not achieve their
objectives, our results could continue to be materially adversely affected
Substantially increasing medical costs have caused our financial results
in 2000 to decline significantly. Due to the disappointing performance of our
health care business, we have initiated a comprehensive review of our health
care business model. We are in the process of implementing a number of
strategic initiatives with the goal of improving the performance of our
business. These initiatives include, among other things, strengthening the
management team of the business, improving relations with health care
providers, exiting certain product markets, addressing rising medical costs and
improving the efficiency of our operations. The future performance of our
business will depend in large part on our ability to design and implement these
strategic initiatives. If these initiatives do not achieve their objectives or
result in increased medical costs, our results could continue to be adversely
affected. Also, we have recently experienced significant changes in our senior
management, and we are currently searching for a new chief executive officer.
Our success will also be dependent, in part, upon attracting and retaining a
chief executive officer and other members of management. See "Business of New
Aetna -- Health Care" for more information.
Our premiums are generally set in one-year contracts and unforeseen increases
in medical costs during the contract term (such as those experienced in the
first half of 2000) may adversely impact our profitability under these
contracts; we have targeted premium increases and cost savings in our health
risk business to improve profitability; however, we cannot assure you that
these increases and savings will be sufficient to offset increases in medical
and other operating costs, or that they will not adversely affect our
membership levels
We experienced significantly higher Medicare and commercial HMO medical
costs in the first half of 2000. We are taking several actions to address this
situation. With respect to our Medicare HMO business, unless legislative or
regulatory changes are made prior to the end of the year to increase payments
under Medicare+Choice contracts, we will exit a significant number of our
Medicare service areas. During the remainder of 2000, we will continue to
monitor any legislative or regulatory changes that might increase payments
under applicable Medicare+Choice contracts and then make a final determination,
as permitted under HCFA regulations, depending on the level of any such
reimbursement increase. With respect to our commercial HMO business, we are
increasing premiums for business renewing in the fourth quarter of 2000 and
beyond. However, premiums in the Health Risk business are generally fixed for
one-year periods and, accordingly, cost levels in excess of those reflected in
pricing, such as those being experienced during 2000, cannot be recovered in
the same year through higher premiums. As a result, earnings in the Health Risk
business for the remainder of 2000 and, to a lesser extent, the first half of
2001 are expected to continue to be materially adversely affected if medical
costs continue to be higher than the cost levels reflected in our pricing.
These anticipated premium increases may reduce membership, or at least moderate
membership growth. If membership declines more than expected or we lose
accounts with favorable medical cost experience while retaining accounts with
unfavorable medical cost experience, our business and results of operations
9
<PAGE>
may be materially adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Health Care -- Outlook" for more information.
Our Prudential health care, or PHC, business is currently less profitable than
the rest of our business; we are working to integrate and improve this
business, but if we are unsuccessful, our results may be materially adversely
affected
In connection with our acquisition of the PHC business from Prudential on
August 6, 1999, Prudential agreed to indemnify us from certain health insurance
risks. This agreement will not cover us after December 31, 2000. Medical loss
ratios for the PHC business are higher than for the rest of our health risk
business; the effect of these higher ratios is currently offset, in part, by
the indemnification agreement with Prudential. We are seeking to improve the
medical loss ratios of the PHC business through underwriting and pricing
discipline and medical cost management initiatives. If we are unable to make
sufficient improvements to the medical loss ratios for the PHC business, our
results of operations for periods following termination of the reinsurance
arrangement may be materially adversely affected.
The administrative costs related to the PHC business and the
administrative services only, or ASO, business (which we are servicing on
behalf of Prudential) are higher than the administrative costs of our other
health business and we expect continued significant declines in the membership
of the acquired PHC business and the Prudential ASO business. We are seeking to
reduce the level of administrative costs related to these businesses. If we are
unable to reduce the level of administrative costs on a timely basis to
correspond with lower membership levels, our results could be materially
adversely affected.
Since the PHC closing, we have been working on integrating that business
into our health care business. Factors that can affect the success of our
integration of this business include, but are not limited to:
o integrating management, products, legal entities, networks and
information systems on a timely basis,
o applying managed care expertise and techniques throughout a broader
membership base, and
o eliminating duplicative administrative and customer service
functions.
Due to the timing of the closing of the PHC acquisition, only a limited number
of PHC members have been migrated to our products to date. Migration and
integration of substantial numbers of PHC members to our products is scheduled
to occur effective January 1, 2001 and January 1, 2002. Our ability to profit
from the PHC acquisition is dependent upon the successful migration and
integration of these members on these dates. If we are unsuccessful in
integrating the PHC business, our results of operations may be materially
adversely affected.
We are party to a substantial amount of litigation; these cases and future
cases may have a material adverse effect on us
We are party to a number of purported class action lawsuits and other
litigation. The majority of these cases relate to the conduct of our health
care business and allege various violations of law. Many of these cases seek
substantial damages (including punitive damages) and far-ranging changes in our
practices. We may also be subject to additional litigation in the future. This
litigation could materially adversely affect us, because of the costs of
defending these cases, costs of settlement or judgments against us, or because
of changes in our operations that could result from this litigation. See
"Business of New Aetna -- Legal Proceedings."
We hold reserves for expected claims and these estimates are highly judgmental;
if actual claims exceed reserve estimates (as they have in prior periods), our
results could be materially adversely affected
For the health risk business, the liability for the health care costs
payable reflects estimates of the ultimate cost of claims that have been
incurred but not yet reported or reported but not yet paid. Consistent with
industry practice,
10
<PAGE>
health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs payable are based on a number of factors,
including those derived from historical claims 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. A worsening of medical cost trend or changes in claim payment patterns
from those assumed in estimating health care costs payable would cause these
estimates to change, and such changes could be material.
Our business activities are highly regulated and there are a number of current
and planned initiatives being considered by federal and state governments;
government regulation limits us in the conduct of our business and also
subjects us to additional costs in complying with the requirements of
governmental authorities; further regulation could also materially adversely
affect our business
Our business is subject to extensive regulation by state and federal
governmental authorities. For example, there are a number of federal and state
requirements restricting operations of health care plans (particularly HMOs).
The federal and many state governments have enacted or are actively considering
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
some of these measures, if enacted, could adversely affect health operations
through:
o affecting premium rates,
o reducing our ability to manage medical costs,
o increasing medical costs and operating expenses,
o increasing our exposure to lawsuits,
o regulating levels and permitted lines of business,
o imposing financial assessments, and
o regulating business practices.
Recently, there has been heightened review by these regulators of the
managed health care industry's business practices, including utilization
management and claim payment practices. As the largest national managed care
organization, we are regularly the subject of such reviews and several such
reviews currently are pending, some of which may be resolved during the
remainder of 2000. These regulatory reviews could result in changes to or
clarifications of our business practices, and could also result in material
fines, penalties or other sanctions. Also, our business 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.
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
that may be caused by this legislation or regulation, or by court and
regulatory decisions.
Also, 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 our administration of health
and related benefit plans. We are currently reviewing the potential impact of
the proposed regulations on our operations, including our information
technology systems. It is reasonably possible that we will incur additional
expenses in connection with, and that our business could otherwise be adversely
affected by, compliance with any final regulations that are adopted.
11
<PAGE>
For more information, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Six Months Ended June 30, 2000
and 1999 -- Health Care -- Outlook" and "Business of New Aetna -- Regulation."
We may need to establish material liabilities related to our strategic
initiatives or the exiting of some of our Medicare service areas and may need
to write down related assets, which could materially adversely affect our
financial results.
We are conducting a comprehensive review of our health care business model
and are in the process of implementing a number of strategic initiatives. We
are also considering various other initiatives. At the time these initiatives
are finally adopted and implemented, we will evaluate the need to establish
liabilities related to these strategic changes and we will evaluate whether any
impairment related to our assets has occurred. It is reasonably possible that,
as a result of the above actions, we will need to establish such liabilities or
write down related assets and that such liabilities and write downs could be
material.
In addition, as described above, unless legislative or regulatory changes
are made prior to the end of the year to increase payments under
Medicare+Choice contracts, we will exit a significant number of our Medicare
service areas. We will evaluate the need to establish liabilities related to
this exit. Also, we will evaluate whether any impairment related to goodwill
still separately identifiable with such Medicare service areas has occurred.
Goodwill associated with these Medicare service areas was approximately $275
million at June 30, 2000. If any of these events occurs, our business and
results of operations may be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Health Risk and PHC --
Exiting Medicare Markets" for more information.
In connection with the spin-off and the merger, we have agreed to be liable
for, and to indemnify ING for, certain Aetna liabilities, including liabilities
not related to our health care business
In connection with the spin-off and the merger, we generally will assume
all liabilities related to Aetna's health care and large case pensions
businesses. In addition, we generally will be responsible for Aetna's
liabilities other than those arising out of Aetna's financial services or
international businesses. These liabilities generally include the
post-retirement pension and other benefits payable to all former Aetna
employees, liabilities arising out of significant litigation to which Aetna is
a party, all liabilities arising out of certain divestiture transactions
consummated by Aetna before the spin-off and tax liabilities relating to, or
resulting from the treatment of, the spin-off. We have agreed to indemnify ING
for all of these liabilities. Although management believes that it has
established reserves and/or obtained insurance sufficient to cover such
liabilities as we consider appropriate, we cannot assure you that these
liabilities will not be materially in excess of these reserves and insurance.
In that case, these liabilities may be materially adverse to our business and
results of operations.
Our business is subject to a variety of other risks
In addition to the risks described above, our business is subject to a
number of other risks, including, but not limited to, those described below:
Adverse publicity regarding managed care can hurt our sales. Adverse
publicity of the kind currently occurring regarding managed care may negatively
influence members' or employers' decisions to select managed care plans
generally or our health plans specifically. This may cause membership to
decline, which could materially adversely affect our business or results of
operations.
Government payors can determine premiums. Although we may withdraw from
certain Medicare markets, as discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Health Care -- Health Risk and PHC -- Exiting Medicare
Markets," we will still have operations in a number of Medicare markets. 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 we
cannot offset these with supplemental premiums
12
<PAGE>
and changes in benefit plans, then we could be materially adversely affected.
In addition, premiums for certain federal government employee groups are
subject to retroactive adjustments by the federal government. These adjustments
could materially adversely affect us.
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 Internet initiatives depends on developing and implementing
new and enhanced systems and processes. Development and implementation of our
Internet 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.
Decreases in ratings could adversely impact our business. Certain of our
businesses would experience some run off of existing business or have the level
of new business negatively impacted if the major ratings agencies do not give a
financial strength rating at the relevant subsidiary in the "A" rating
category.
Significant changes in financial markets could affect our earnings.
Significant changes in financial markets could impact the level of assets under
management and administration in our Large Case Pensions business and, in turn,
our level of asset-based fees in that business. 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.
Risk Factors Relating to Securities Markets and Ownership of New Aetna
Common Stock
After the spin-off, there will be outstanding a large number of employee
options to purchase shares of New Aetna common stock; the existence of these
options could adversely affect the price of New Aetna common stock.
Aetna had approximately 19.3 million employee stock options outstanding at
July 31, 2000 with exercise prices ranging from $14.83 to $112.63 per share. At
August 30, 2000, the closing price per share of Aetna common stock on the NYSE
was $55 15/16. These stock options will become immediately vested upon the
consummation of the spin- off and the merger. Approximately 15.9 million of
these stock options will be converted into options of New Aetna with
adjustments made to both the number of options and the exercise prices to
maintain the intrinsic in-or-out-of- the-money value of the related Aetna
options. The number of New Aetna options issued upon this conversion, the
exercise prices of those New Aetna options, and the resultant initial dilution
to earnings per share of New Aetna depends, among other things, on the initial
price of New Aetna common stock. For example, at an initial New Aetna stock
price of $20 per share, there would be approximately 43.8 million New Aetna
stock options outstanding with exercise prices ranging from $5.39 to $40.96. As
a result, fully diluted earnings per share (calculated using the treasury stock
method of accounting under which all in-the-money stock options are assumed to
be exercised and all proceeds from those exercises are assumed to be used to
purchase New Aetna common stock in the open market) would initially be below
basic earnings per share by approximately 2.0%. At an initial New Aetna stock
price of $50 per share (calculated using the treasury stock method described
above), there would be approximately 27.1 million New Aetna options outstanding
with exercise prices ranging from $8.72 to $66.25. As a result, at this stock
price fully diluted earnings per share would initially be below basic earnings
per share by approximately 3.5%. Although a significant number of these options
are expected to be out-of-the-money at the time of the spin-off, if New Aetna's
stock price increases after the spin-off and the merger are consummated, the
dilution from these options will increase as more of these options become in
the money. These examples are for illustrative purposes only and are not
intended to be projections of the price at which New Aetna common stock will
trade. Moreover, we may issue
13
<PAGE>
additional stock options in the future. We expect to use the net proceeds from
option exercises to repurchase shares in the open market to seek to mitigate
dilution. See "Relationship Among Aetna, New Aetna and ING -- Employee Benefits
Agreement" and "Management" for more information.
Neither our historical financial information nor our pro forma financial
information may be representative of our results as a separate company
The financial information included in this information statement may not
be representative of our results of operations, financial position and cash
flows had we operated as a separate, stand-alone entity during the periods
presented or of our results of operations, financial position and cash flows in
the future. We cannot assure you that the adjustments, allocations and
estimates we have made in preparing our historical and pro forma condensed
consolidated financial statements appropriately reflect our operations during
those periods as if we had in fact operated as a stand-alone entity or what the
actual effect of our spin-off from Aetna will be.
New Aetna's stock price may fluctuate significantly following the spin-off;
shareholders who buy or sell New Aetna common stock may lose all or part of the
value of their New Aetna common stock, depending on the price of New Aetna
common stock from time to time
Before , 2000, there was no public market for New Aetna common stock.
We expect that New Aetna common stock will trade on the New York Stock Exchange
under the symbol "AET".
After the spin-off, trading prices for New Aetna common stock will be
established by the public markets -- we have not established a price for New
Aetna common stock. An active trading market may not develop or be sustained in
the future.
We cannot predict the prices at which our common stock may trade after the
spin-off. The market price of New Aetna common stock may fluctuate
significantly due to a number of factors, some of which may be beyond our
control, including:
o actual or anticipated fluctuations in our operating results;
o changes in earnings estimated by securities analysts or our ability
to meet those estimates;
o the operating and stock price performance of other comparable
companies;
o overall market fluctuations;
o developments in the health care industry; and
o general economic conditions.
In particular, the realization of any of the risks described in these
"Risk Factors" could have a significant and adverse impact on the market price
of New Aetna common stock. In addition, the stock market in general has
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the trading price of New Aetna common stock, regardless of our
actual performance.
14
<PAGE>
Provisions in our charter documents and our rights plan and of Pennsylvania law
may delay or prevent an unsolicited takeover effort to acquire us, which could
inhibit your ability to receive an acquisition premium for your shares of New
Aetna common stock
Provisions of our articles of incorporation, bylaws and rights plan and of
Pennsylvania law may delay or prevent an unsolicited takeover effort to acquire
us on terms that holders of New Aetna common stock may consider to be
favorable. For more detail on these provisions, see "Description of New Aetna
Common Stock -- Certain Antitakeover Provisions."
15
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this information statement,
including in the sections entitled "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," that are based on our management's beliefs and assumptions and on
information currently available to our management. Forward-looking statements
include the information concerning our possible or assumed future results of
operations, business strategies, financing plans, competitive position,
potential growth opportunities, potential operating performance improvements,
benefits resulting from the spin-off and the merger, the effects of competition
and the effects of future legislation or regulations. Forward-looking
statements include all statements that are not historical facts and can be
identified by the use of forward-looking terminology such as the words
"believe," "expect," "plan," "intend," "anticipate," "estimate," "predict,"
"potential," "continue," "may," "will," "should" or the negative of these terms
or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any forward-
looking statements. We do not have any intention or obligation to update
forward-looking statements after we distribute this information statement.
The risk factors discussed in "Risk Factors" could cause our results to
differ materially from those expressed in forward-looking statements. There may
also be other risks that we are unable to predict at this time.
16
<PAGE>
THE SPIN-OFF
General
Aetna will effect the spin-off on or about , 2000 by distributing on
a pro basis all the shares ( shares) of New Aetna common stock to holders
of record of Aetna common stock at the close of business on that date. The
record date and the distribution date for the spin-off will be the same date;
that date will also be the closing date for the merger. The shares of New Aetna
common stock will be validly issued, fully paid and nonassessable, and the
holders of these shares will not be entitled to preemptive rights. See
"Description of New Aetna Capital Stock." Each record holder of Aetna common
stock will receive one share of New Aetna common stock for each share of Aetna
common stock held at the close of business on the record date.
Concurrently with the spin-off, New Aetna will be named "Aetna Inc."
Since New Aetna common stock will be issued as uncertificated shares
registered in book-entry form through the direct registration system, no
certificates representing your shares of New Aetna will be mailed to you in the
ordinary course. Your book-entry shares will be held with the New Aetna
transfer agent and registrar, First Chicago Trust Company of New York, which
serves as the official record keeper for New Aetna common stock. Under the
direct registration system, instead of receiving stock certificates, you will
receive an account statement reflecting your ownership interest in shares of
New Aetna common stock. If at any time you want to receive a physical
certificate evidencing your shares of New Aetna common stock, you may do so by
contacting the New Aetna transfer agent and registrar.
For those holders of Aetna common stock who hold their shares through a
broker, bank or other nominee, First Chicago Trust Company of New York will
credit the shares of New Aetna common stock to the accounts of those nominees
who are registered holders, who, in turn, will credit their customers' accounts
with their proportionate number of the shares of New Aetna common stock. We and
Aetna anticipate that brokers, banks and other nominees will generally credit
their customers' accounts with New Aetna common stock on or shortly after ,
2000.
Material United States Federal Income Tax Consequences to Aetna Shareholders of
the Spin-off and the Merger
In the opinion of Davis Polk & Wardwell, the following discussion
summarizes the material United States federal income tax consequences to Aetna
shareholders of the spin-off and the merger. This discussion is based on the
law as currently in effect. This discussion does not address all of the tax
consequences that may be relevant to an Aetna shareholder in light of its
particular circumstances or to Aetna shareholders subject to special rules,
such as financial institutions, broker-dealers, tax-exempt organizations,
shareholders that hold their shares of Aetna common stock as part of a straddle
or a hedging or conversion transaction and shareholders who acquired their
shares of Aetna common stock through the exercise of an employee stock option
or otherwise as compensation.
Aetna shareholders are urged to consult their own tax advisors as to the
particular tax consequences to them of the spin-off and the merger, including
the effect of United States state and local tax laws or foreign tax laws.
A United States holder refers to:
o a citizen or resident of the United States,
o a corporation or other entity created or organized in the United
States or under the laws of the United States or of any political
subdivision of the United States, or
o an estate or trust, the income of which is includible in gross income
for federal income tax purposes regardless of its source.
17
<PAGE>
A non-United States holder refers to an Aetna shareholder that is not a
United States holder.
United States Holders
The receipt by a United States holder of cash and shares of New Aetna
common stock will be a taxable transaction for United States federal income tax
purposes. An Aetna shareholder that is a United States holder will recognize
gain or loss in an amount equal to the difference between (i) the sum of the
amount of cash and the fair market value, on the date of the spin-off and the
merger, of the shares of New Aetna common stock received by the Aetna
shareholder, and (ii) the Aetna shareholder's tax basis in the shares of Aetna
common stock surrendered. That gain or loss will be a capital gain or loss if
the shares of Aetna common stock are held as a capital asset by the Aetna
shareholder, and will be long-term capital gain or loss if the shares of Aetna
common stock have been held for more than one year.
An Aetna shareholder that is a United States holder may be subject to
backup withholding at a rate of 31% unless, at the time it surrenders shares of
Aetna common stock, it provides its taxpayer identification number and
certifies that the number is correct or properly certifies that it is awaiting
a taxpayer identification number, or unless an exemption is demonstrated to
apply. Backup withholding is not an additional tax. Amounts so withheld can be
refunded or credited against the federal income tax liability of the United
States holder, provided appropriate information is forwarded to the IRS.
Non-United States Holders
An Aetna shareholder that is a non-United States holder will not be
subject to United States federal income tax on any gain realized on the receipt
of cash and shares of New Aetna common stock unless:
o the gain is effectively connected with a trade or business in the
United States of that non-United States holder,
o that non-United States holder is a non-resident alien individual who
holds the shares of Aetna common stock as a capital asset and who is
present in the United States for 183 or more days during the calendar
year in which the transaction is completed, and certain other
conditions are met, or
o that non-United States holder is subject to tax under the provisions
of the Internal Revenue Code of 1986, as amended (which we refer to
as the "Code"), on the taxation of United States expatriates.
Information reporting and backup withholding imposed at a rate of 31% may
apply under specified circumstances unless, at the time the non-United States
holder surrenders shares of Aetna common stock, it certifies as to its foreign
status or otherwise establishes an exemption. Backup withholding is not an
additional tax. Amounts so withheld can be refunded or credited against the
federal income tax liability of the non-United States holder, provided
appropriate information is forwarded to the IRS.
For a description of the agreement under which we and Aetna have provided
for tax sharing and other tax matters, see "Relationship Among Aetna, New Aetna
and ING -- Tax Sharing Agreement."
18
<PAGE>
CAPITALIZATION OF NEW AETNA
The following table sets forth the consolidated debt and capitalization of
New Aetna at June 30, 2000 (1) on a historical basis, (2) on a pro forma basis
to give effect to the spin-off and the merger and (3) on a pro forma as
adjusted basis to reflect the projected issuance of short- and long-term debt
to refinance all of the short-term debt expected to be outstanding at the time
of the spin-off and to fund transaction-related expenses and to be used for
general corporate purposes. You should read this table in conjunction with the
information located under the heading "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the consolidated condensed financial
statements of New Aetna and related notes, included elsewhere in this
information statement. These pro forma and pro forma as adjusted amounts may
not be indicative of our actual results. You should not construe this pro forma
and pro forma as adjusted information to be indicative of our results of
operations or financial position at the time of the spin-off and the merger.
This pro forma and pro forma as adjusted information also does not project the
results of operations or financial position for any future period or date.
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------
Pro Forma
Historical Pro Forma As Adjusted(1)
---------- --------- --------------
(Millions)
<S> <C> <C> <C>
Short-term debt................................... $ 1,342.6 $ 1,468.5
========= =========
Long-term debt.................................... $ 2,094.2 $ 1.6
--------- ---------
Shareholder's equity:
Common stock and additional paid-in capital. 3,735.2 3,852.1
Retained earnings........................... 7,709.1 6,491.2
Accumulated other comprehensive loss........ (484.2) (57.3)
--------- ---------
Total shareholder's equity.................. 10,960.1 10,286.0
--------- ---------
Total capitalization........................ $13,054.3 $10,287.6
========= =========
</TABLE>
-------------------
(1) We have assumed a pro forma as adjusted total debt level of approximately
$ billion immediately following the spin-off and the merger. The actual
amount of debt outstanding following the consummation of the spin-off and
the merger may differ from this projected amount and such difference may
be material. We have assumed an annual interest rate of % on the total
debt projected to be outstanding; we cannot assure you, however, that our
actual interest rate will not be higher or lower than this projected rate.
A 1/2% change to the annual interest rate would change interest expense by
about $ million for the six months ended June 30, 2000 and $ million
for the year ended December 31, 1999. Pro forma as adjusted shareholder's
equity has been reduced for the after-tax impact of the
transaction-related expenses funded by increased borrowing referred to
above.
DIVIDEND POLICY
Our board of directors has not yet determined whether to declare and pay
dividends on New Aetna common stock, but expects to determine a policy before
the spin-off. Our board will be free to change our dividend practices at any
time. The board will base its decisions on, among other things, general
business conditions, our financial results, contractual, legal and regulatory
restrictions regarding dividend payments by our subsidiaries, practices of peer
companies and any other factors the board may consider to be relevant.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been prepared
using the historical basis in the assets and liabilities and historical results
of operations of the businesses that will comprise New Aetna for and as of the
end of each respective period. The historical consolidated statement of income
data set forth below do not reflect many significant changes that will occur in
the operations and capitalization of our company as a result of the spin- off
and the merger. Before the spin-off, we operated as part of Aetna. Because the
data reflect periods during which we did not operate as an independent company,
the data may not reflect the results of operations or the financial condition
which would have resulted if we had operated as a separate, independent company
during the periods shown. In addition, the data may not necessarily be
indicative of our future results of operations or financial position.
The selected consolidated financial data should be read in conjunction
with, and are qualified by reference to, "Summary," "Capitalization,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
included elsewhere in this information statement. The consolidated statement of
income data for each of the years in the three-year period ended December 31,
1999, and the consolidated balance sheet data as of December 31, 1999 and 1998,
are derived from the audited consolidated financial statements included
elsewhere in this information statement, and should be read in conjunction with
those consolidated financial statements and the accompanying notes. The
consolidated statement of income data for the years ended December 31, 1996 and
1995 and the consolidated balance sheet data as of December 31, 1997, 1996 and
1995 are derived from, and qualified by reference to, audited consolidated
financial statements which are not included in this information statement. The
consolidated statement of income data for the six months ended June 30, 2000
and 1999, and the consolidated balance sheet data as of June 30, 2000 and 1999,
are derived from the unaudited consolidated financial statements included
elsewhere in this information statement and should be read in conjunction with
those consolidated financial statements and the accompanying condensed notes,
which, in our opinion, have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of our
financial position and results of operations during those periods and as of
those dates. Results for the six months ended June 30, 2000 are not necessarily
indicative of results that may be expected for the year ended December 31,
2000.
The financial information presented below may not reflect what our results
of operations, financial position and cash flows would have been had we
operated as a separate, stand-alone entity during the periods presented or what
our results of operations, financial position and cash flows will be in the
future.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- ------------------------------------------------------------------
2000 1999 1999 1998 1997 1996(2) 1995
--------- -------- --------- --------- --------- --------- --------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenue......... $13,444.0 $9,522.5 $22,109.7 $16,589.0 $14,674.4 $11,820.8 $9,888.8
========= ======== ========= ========= ========= ========= ========
Income (loss) from
continuing
operations(1)....... $ 181.1 $ 211.4 $ 399.4 $ 450.4 $ 525.7 $ (44.7) $ 225.3
========= ======== ========= ========= ========= ========= ========
</TABLE>
20
<PAGE>
<TABLE>
At June 30, At December 31,
------------------------- ------------------------------------------------------------------
2000 1999 1999 1998 1997 1996(2) 1995
--------- --------- --------- --------- --------- --------- --------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............. $51,051.2 $47,046.1 $51,981.4 $53,228.1 $48,544.2 $53,412.3 $51,162.6
========= ========= ========= ========= ========= ========= =========
Debt:
Short-term............ $ 1,342.6 $ 1,139.3 $ 1,725.0 $ 1,370.1 $ 163.3 $ 244.2 $ 266.8
Long-term............. 2,094.2 1,594.0 2,093.9 1,593.3 1,892.1 1,991.1 794.6
--------- --------- --------- --------- --------- --------- ---------
Total debt......... $ 3,436.8 $ 2,732.9 $ 3,818.9 $ 2,963.4 $ 2,055.4 $ 2,235.3 $ 1,061.4
========= ========= ========= ========= ========= ========= =========
Shareholder's equity..... $10,960.1 $11,312.2 $10,703.2 $11,429.5 $11,082.0 $10,901.6 $ 7,272.8
========= ========= ========= ========= ========= ========= =========
</TABLE>
-------------------
(1) Income (loss) from continuing operations includes an after-tax benefit
from the reduction of loss on discontinued products as follows: six months
ended June 30, 2000 and 1999 ($94.9 million and $50.2 million,
respectively); year ended December 31, 1999, 1998, 1997, 1996 ($50.2
million, $44.2 million, $108.4 million, $131.5 million, respectively) and
a severance and facilities reserve reduction for the year ended December
31, 1997 ($29.3 million).
(2) Loss from continuing operations for the year ended December 31, 1996
includes an after-tax severance and facilities charge of $530.2 million.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statements of
income of New Aetna for the six months ended June 30, 2000 and June 30, 1999
and the twelve months ended December 31, 1999 present results for New Aetna as
if each of the following events (as contemplated by the merger agreement with
ING (the "Agreement")) had occurred as of January 1, 1999. The accompanying
unaudited pro forma condensed consolidated balance sheet for New Aetna as of
June 30, 2000 gives effect to the following events as if they occurred on June
30, 2000.
o The sale of Aetna's financial services and international businesses
(discontinued operations) to ING as set forth in the Agreement.
o The retention of certain long-term debt by Aetna upon the sale of
Aetna to ING;
o Adjustments for the transfers of certain assets and liabilities as
set forth in the Agreement; and
o The retention of the master lease agreement related to the CityPlace
office facility (Hartford, Connecticut) by Aetna upon the sale of
Aetna to ING.
Management believes that the assumptions used provide a reasonable basis
on which to present the pro forma condensed consolidated financial statements.
New Aetna is providing the unaudited pro forma condensed consolidated financial
statements to you for informational purposes only. You should not construe them
to be indicative of New Aetna's results of operations or financial position had
the transactions and events described above been consummated on the dates
assumed. These pro forma condensed consolidated financial statements also do
not project the results of operations or financial position for any future
period or date.
Except as indicated in the notes thereto, the pro forma condensed
consolidated financial statements do not reflect any nonrecurring or unusual
charges that may be incurred as a result of the merger. New Aetna expects that
it will incur certain costs associated with the Agreement and the transactions
contemplated by the Agreement directly related to the consummation of the
spin-off and the merger, including fees for outside financial and legal
advisers and expenses related to the change-in-control of Aetna. The amount of
such costs cannot be reasonably determined at this time; however, such costs
may be material.
These unaudited pro forma condensed consolidated financial statements
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited historical
financial statements and the related notes included elsewhere in this
information statement.
22
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
<S> <C> <C> <C>
(Millions, except per share data)
Revenue:
Health care premiums................................$10,909.0 $ -- $ 10,909.0
Other premiums...................................... 738.3 -- 738.3
Administrative service only fees.................... 980.4 -- 980.4
Net investment income............................... 811.3 -- 811.3
Other income........................................ 46.2 -- 46.2
Net realized capital losses......................... (41.2) -- (41.2)
--------- --------- -----------
Total revenue.......................................... 13,444.0 -- 13,444.0
--------- --------- -----------
Benefits and expenses:
Health care costs................................... 9,432.9 -- 9,432.9
Current and future benefits......................... 1,101.9 -- 1,101.9
Operating expenses:
Salaries and related benefits.................... 1,160.6 -- 1,160.6
Other............................................ 1,223.1 (7.0)(a) 1,216.1
Interest expense.................................... 125.1 (71.7)(b) 53.4
Amortization of goodwill and other acquired
intangible assets................................ 218.4 -- 218.4
Reductions of loss on discontinued products......... (146.0) -- (146.0)
--------- --------- -----------
Total benefits and expenses............................ 13,116.0 (78.7) 13,037.3
--------- --------- -----------
Income from continuing operations before income
taxes............................................... 328.0 78.7 406.7
Income taxes........................................... 146.9 27.5 (c) 174.4
--------- --------- -----------
Income from continuing operations......................$ 181.1 $ 51.2 $ 232.3
========= ========= ===========
Basic income per share from continuing operations...... $ 1.65 (d)
===========
Diluted income per share from continuing operations.... $ 1.63 (d)
===========
Adjusted weighted average number of shares of
common stock outstanding-diluted.................... 142,672,630(d)
===========
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
23
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
<S> <C> <C> <C>
(Millions, except per share data)
Revenue:
Health care premiums...............................$ 7,158.9 $ -- $ 7,158.9
Other premiums..................................... 760.2 -- 760.2
Administrative service only fees................... 728.2 -- 728.2
Net investment income.............................. 796.7 -- 796.7
Other income....................................... 60.3 -- 60.3
Net realized capital gains......................... 18.2 -- 18.2
---------- --------- -----------
Total revenue......................................... 9,522.5 -- 9,522.5
---------- --------- -----------
Benefits and expenses:
Health care costs.................................. 6,091.6 -- 6,091.6
Current and future benefits........................ 1,160.6 -- 1,160.6
Operating expenses:
Salaries and related benefits................... 793.6 -- 793.6
Other........................................... 849.1 (7.6)(a) 841.5
Interest expense................................... 107.1 (82.4)(b) 24.7
Amortization of goodwill and other acquired
intangible assets............................... 203.8 -- 203.8
Reductions of loss on discontinued products........ (77.2) -- (77.2)
---------- --------- -----------
Total benefits and expenses........................... 9,128.6 (90.0) 9,038.6
---------- --------- -----------
Income from continuing operations before income
taxes.............................................. 393.9 90.0 483.9
Income taxes.......................................... 182.5 31.5 (c) 214.0
---------- --------- -----------
Income from continuing operations.....................$ 211.4 $ 58.5 $ 269.9
========== ========= ===========
Basic income per share from continuing operations..... $ 1.91 (d)
===========
Diluted income per share from continuing
operations......................................... $ 1.90 (d)
===========
Adjusted weighted average number of shares of
common stock outstanding-diluted................... 142,318,019 (d)
===========
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
24
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Year Ended December 31, 1999
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
(Millions, except per share data)
<S> <C> <C> <C>
Revenue:
Health care premiums................................$17,145.7 $ -- $ 17,145.7
Other premiums...................................... 1,495.8 -- 1,495.8
Administrative service only fees.................... 1,674.5 -- 1,674.5
Net investment income............................... 1,601.8 -- 1,601.8
Other income........................................ 129.4 -- 129.4
Net realized capital gains.......................... 62.5 -- 62.5
--------- --------- -----------
Total revenue.......................................... 22,109.7 -- 22,109.7
--------- --------- -----------
Benefits and expenses:
Health care costs................................... 14,641.0 -- 14,641.0
Current and future benefits......................... 2,231.0 -- 2,231.0
Operating expenses:
Salaries and related benefits.................... 1,866.2 -- 1,866.2
Other............................................ 2,050.8 (14.0)(a) 2,036.8
Interest expense.................................... 232.7 (170.5)(b) 62.2
Amortization of goodwill and other acquired
intangible assets................................ 420.4 -- 420.4
Reductions of loss on discontinued products......... (77.2) -- (77.2)
--------- --------- -----------
Total benefits and expenses............................ 21,364.9 (184.5) 21,180.4
--------- --------- -----------
Income from continuing operations before income taxes.. 744.8 184.5 929.3
Income taxes........................................... 345.4 64.6 (c) 410.0
--------- --------- -----------
Income from continuing operations......................$ 399.4 $ 119.9 $ 519.3
========= ========= ===========
Basic income per share from continuing operations...... $ 3.60(d)
============
Diluted income per share from continuing operations.... $ 3.57(d)
============
Adjusted weighted average number of shares of common
stock outstanding-diluted........................... 145,328,519(d)
============
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
25
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
1. The following is a summary of the adjustments reflected in the unaudited
pro forma condensed consolidated statements of income:
a. A decrease in operating expenses to exclude expenses related to the
master lease agreement on the CityPlace office facility which is
being retained by Aetna upon the sale of Aetna to ING;
b. A reduction of interest expense related to long-term debt outstanding
for the period, given the retention of
certain long-term debt by Aetna upon the sale of Aetna to ING; and
c. The recognition of income tax impacts on the pro forma adjustments at
the U.S. statutory rate of 35%.
d. Pro forma net income per share is based on pro forma income and an
assumed weighted average number of shares outstanding as a result of
the Agreement, including the spin-off. The number of weighted average
shares outstanding is as follows:
<TABLE>
Six Months Ended June 30,
---------------------------- Year Ended
2000 1999 December 31, 1999
----------- ----------- -----------------
<S> <C> <C> <C>
Weighted average common shares - basic (1)..... 141,128,421 141,140,347 144,118,961
=========== =========== ===========
Weighted average common shares - diluted (2)... 142,672,630 142,318,019 145,328,519
=========== =========== ===========
</TABLE>
-----------------
(1) Based on one share of New Aetna common stock issued for each share of
Aetna common stock.
(2) Excludes adjustments related to the settlement or rollover of stock
options and common stock equivalents for incentive units, as they would
not have materially affected weighted average shares outstanding in any
period.
2. The unaudited pro forma condensed consolidated statements of income do not
give effect to:
o Any one time costs to be incurred to complete the Agreement;
o Any severance costs to be incurred;
o Any other nonrecurring or unusual charges that may be incurred as a
result of the merger;
o Any reduction in operating expenses related to corporate overhead
that may be reduced in the future as a result of the spin-off and the
merger; or
o Any adjustments to interest expense to reflect that, subsequent to
the spin-off and the merger, New Aetna is expected to have a capital
structure different from the capital structure shown in the unaudited
pro forma condensed consolidated balance sheet and accordingly,
interest expense reflected in the unaudited pro forma condensed
consolidated statements of income is not necessarily indicative of
the interest expense that New Aetna would have incurred as a
separate, independent company. Subsequent to the spin-off, it is
anticipated that indebtedness will increase. See "Summary" for more
information.
26
<PAGE>
<TABLE>
New Aetna Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2000
(Unaudited)
New Aetna Less: Sold Sale Related New Aetna
Historical Businesses Adjustments Pro Forma
---------- ---------- ------------ ----------
(Millions, except per share data)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $ 1,812.8 $ -- $ (4.1)(a) $ 1,808.7
Investment securities........................ 15,342.1 -- (3.6)(a) 15,338.5
Other investments............................ 410.5 -- -- 410.5
Premium receivables.......................... 855.9 -- -- 855.9
Other receivables, net....................... 777.8 -- -- 777.8
Accrued investment income.................... 269.8 -- (0.1)(a) 269.7
Investments under securities loan agreement.. 701.5 -- -- 701.5
Deferred income taxes........................ 118.0 -- 6.7 (a/d) 124.7
Other assets................................. 377.0 -- -- 377.0
--------- ---------- --------- ---------
Total current assets............................ 20,665.4 -- (1.1) 20,664.3
--------- ---------- --------- ---------
Long-term investments........................... 377.6 -- -- 377.6
Mortgage loans.................................. 2,040.3 -- -- 2,040.3
Investment real estate.......................... 295.5 -- -- 295.5
Reinsurance recoverables........................ 803.5 -- -- 803.5
Goodwill and other acquired intangible assets, net 8,188.1 -- -- 8,188.1
Property and equipment, net..................... 450.5 -- -- 450.5
Deferred income taxes........................... 295.2 -- -- 295.2
Other assets.................................... 227.1 -- (20.2)(a) 206.9
Separate accounts assets........................ 14,784.8 -- -- 14,784.8
Net assets of discontinued operations........... 2,923.2 (2,923.2) -- --
--------- ---------- --------- ---------
Total assets.................................... $51,051.2 $ (2,923.2) (21.3) $48,106.7
========= ========== ========= =========
Liabilities and shareholder's equity
Current liabilities:
Health care costs payable.................... $ 3,142.8 $ -- $ -- $ 3,142.8
Future policy benefits....................... 997.6 -- -- 997.6
Unpaid claims................................ 455.9 -- -- 455.9
Unearned premiums............................ 397.7 -- -- 397.7
Policyholders' funds......................... 937.4 -- -- 937.4
Payable under securities loan agreement...... 701.5 -- -- 701.5
Short-term debt.............................. 1,342.6 -- 125.9 (b) 1,468.5
Income taxes payable......................... 223.4 -- -- 223.4
Other liabilities............................ 1,627.4 -- -- 1,627.4
--------- ---------- --------- ---------
Total current liabilities....................... 9,826.3 -- 125.9 9,952.2
--------- ---------- --------- ---------
Future policy benefits.......................... 8,238.7 -- -- 8,238.7
Unpaid claims................................... 1,262.4 -- -- 1,262.4
Policyholders' funds............................ 2,993.8 -- -- 2,993.8
Long-term debt.................................. 2,094.2 -- (2,092.6)(b) 1.6
Accrued expenses and other liabilities.......... 890.9 -- (303.7)(a/c/d) 587.2
Separate accounts liabilities................... 14,784.8 -- -- 14,784.8
--------- ---------- --------- ---------
Total liabilities............................... 40,091.1 -- (2,270.4) 37,820.7
--------- ---------- --------- ---------
Shareholder's equity:
Common stock and additional paid-in capital.. 3,735.2 (2,132.2) 2,249.1 (e) 3,852.1
Accumulated other comprehensive loss......... (484.2) 426.9 -- (57.3)
Retained earnings............................ 7,709.1 (1,217.9) 6,491.2
--------- ---------- --------- ---------
Total shareholder's equity...................... 10,960.1 (2,923.2) 2,249.1 10,286.0
--------- ---------- --------- ---------
Total liabilities and shareholder's equity ..... $51,051.2 $ (2,923.2) $ (21.3) $48,106.7
========= ========== ========= =========
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
</TABLE>
27
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
1. The following is a summary of the adjustments reflected in the unaudited
pro forma balance sheets to give effect to:
a. Adjustment for certain assets and liabilities pursuant to the
Agreement as follows:
- Decrease investment securities by $3.6 million for amounts to be
retained by Aetna upon the sale of Aetna to ING;
- Decrease cash and cash equivalents by $4.1 million for funding
of certain employee benefit related plans;
- Decrease accrued investment income by $0.1 million for amounts
related to investment securities to be retained by Aetna upon
the sale of Aetna to ING;
- Decrease deferred income taxes by $11.7 million related to
liabilities to be retained by Aetna upon the sale of Aetna to
ING;
- Decrease other liabilities by $96.0 million for liabilities to
be retained by Aetna upon the sale of Aetna to ING (primarily
accrued interest payable on long-term debt); and
- Decrease other assets by $20.2 million for deferred debt
issuance costs related to the long-term debt to be retained by
Aetna upon the sale of Aetna to ING.
b. A decrease in long-term debt, given the retention of certain
long-term debt by Aetna upon the sale of Aetna to ING, and an
increase in short-term debt, to reflect the retention of
substantially all such debt by New Aetna;
c. A decrease in other liabilities of $260.4 million related to the
master lease agreement on the CityPlace office facility which is
being retained by Aetna upon the sale of Aetna to ING;
d. An increase in other liabilities by $52.7 million (and a related
deferred tax asset of $18.4 million) relating to postretirement
employee benefit liabilities retained by New Aetna pursuant to the
Agreement; and
e. Corresponding adjustments to the net equity of New Aetna.
2. The unaudited pro forma condensed consolidated balance sheet does not give
effect to liabilities that may result due to:
o Any one time costs to be incurred to consummate the Agreement;
o Any severance costs to be incurred;
o Any other nonrecurring or unusual charges that may be incurred as a
result of the merger; or
o Any adjustments to debt outstanding to reflect that, subsequent to
the spin-off and the merger, New Aetna is expected to have a capital
structure different from the capital structure shown in the unaudited
pro forma condensed consolidated balance sheet and accordingly,
interest expense reflected in the unaudited pro forma condensed
consolidated statements of income is not necessarily indicative of
the interest expense that New Aetna would have incurred as a
separate, independent company. As a result of the spin-off, it is
anticipated that indebtedness will increase. See "Summary" for more
information.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with the consolidated financial
statements and other data presented herein, as well as the section entitled
"Risk Factors."
Overview
The consolidated financial information presented herein includes the
accounts of Aetna U.S. Healthcare Inc. and the other operations that will
comprise New Aetna. New Aetna is currently a wholly-owned subsidiary of Aetna.
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its financial services and international businesses to ING
and, in an integrated transaction, that it planned to spin-off New Aetna, a
standalone health company comprised of the Health Care (including the group
life and disability insurance businesses) and the Large Case Pensions
businesses, to its shareholders.
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. Refer
to Note 11 of Condensed Notes to Interim Consolidated Financial Statements and
Note 17 of Notes to Consolidated Financial Statements for further discussion of
discontinued operations.
New Aetna and ING have entered into a number of agreements in connection
with the spin-off. These agreements effect the spin-off and the merger and also
provide a framework for the ongoing relationship with ING, including some
transitional arrangements. See "Relationship Among Aetna, New Aetna and ING."
Health Care provides a full spectrum of health and dental products
(managed care and indemnity) and group insurance products (life, disability and
long-term care) in the United States on both an insured and an employer- funded
basis. Under insured plans, New Aetna 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 New Aetna, assumes all
or a majority of these risks. Health Care consists of (i) Health Risk and PHC
and (ii) Group Insurance and Other Health. New Aetna acquired the Prudential
health care business on August 6, 1999. Refer to "-- Acquisitions and
Dispositions" for further information on this acquisition. Health Risk and PHC
include health and dental plans offered on an employer-funded basis and the
results of servicing Prudential's administrative services only ("ASO")
business. Health plans include health maintenance organization ("HMO"),
point-of-service ("POS"), preferred provider organization ("PPO") and indemnity
products. Group Insurance and Other Health includes group life and disability
insurance and long-term care insurance, offered on both an insured and
employer-funded basis, and all health plans offered on an employer-funded basis
(excluding the Prudential ASO business).
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. The majority of Large Case Pensions' products 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 accounts. In 1993, Large Case Pensions
discontinued its fully guaranteed large case pension products.
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
Health Care and Large Case Pensions businesses that will be spun-off from Aetna
to New Aetna (refer to Note 11 of Condensed Notes to Interim Consolidated
Financial Statements and Note 17 of Notes to Consolidated Financial Statements)
as if New Aetna were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical basis
in the assets and liabilities and historical results of operations related to
the Health Care and Large Case Pensions businesses. Changes in shareholder's
equity represent net income of New Aetna plus net cash transfers to or from
Aetna. Additionally, the consolidated financial statements include allocations
of certain Aetna corporate assets and liabilities (including prepaid pension
assets, debt and benefit obligations, pension and post-retirement benefits) and
29
<PAGE>
expenses relating to both the Health Care and Large Case Pensions businesses
that will be transferred to New Aetna as well as to those businesses presented
as discontinued operations. Management believes these allocations are
reasonable. Refer to Note 2 of Notes to Consolidated Financial Statements for
additional discussion of assumptions used by management and allocations made
for New Aetna consolidated financial statements.
The liabilities of New Aetna include outstanding third party indebtedness.
The amount of the outstanding third party indebtedness and related interest
expense associated with such debt have been allocated to New Aetna as well as
to those businesses presented as discontinued operations based on allocations
which management believes are reasonable.
The costs of services allocated to New Aetna are not necessarily
indicative of the costs that would have been incurred if New Aetna had
performed these functions as a stand-alone entity. Subsequent to the spin-off,
New Aetna will perform these functions using its own resources or purchased
services and will be responsible for the costs and expenses associated with the
management of a public company. Furthermore, New Aetna is expected to have a
capital structure different from the capital structure reflected in the
consolidated financial statements and accordingly, interest expense is not
necessarily indicative of the interest expense that New Aetna would have
incurred as a separate, independent company.
Income tax expense was calculated as if New Aetna filed separate income
tax returns. As Aetna manages its tax position on a consolidated basis, which
takes into account the results of all its businesses, New Aetna's effective tax
rate in the future could vary from its historical effective tax rate. New
Aetna's future effective tax rate will largely depend on its structure and
strategies as a separate, independent company.
Accordingly, the financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, changes in
shareholder's equity and cash flows of New Aetna in the future or what they
would have been had it been a separate, stand-alone entity during the periods
presented.
Acquisitions and Dispositions
Acquisition of Prudential Health Care Business
On August 6, 1999, New Aetna acquired from The Prudential Insurance
Company of America ("Prudential") the Prudential health care business ("PHC")
for approximately $1 billion. Included in the acquisition were PHC's risk HMO,
POS, PPO and Indemnity health lines, as well as its dental risk business. The
transaction was financed by issuing $500 million of three-year senior notes to
Prudential and by using funds made available from the issuance of commercial
paper. Refer to "-- Liquidity and Capital Resources" and Note 2 of Notes to
Consolidated Financial Statements for further discussion regarding the
allocation of Aetna debt to New Aetna. New Aetna also agreed to service
Prudential's ASO business. Since the closing, New Aetna'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. Refer to Note 3 of
Notes to Consolidated Financial Statements for further discussion.
Sale of NYLCare Texas
In connection with the PHC acquisition, New Aetna 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 New Aetna as part of
a 1998 acquisition of New York Life Insurance Company's health care business
("NYLCare"). Pursuant to this agreement, on March 31, 2000, New Aetna completed
the sale of NYLCare Texas to Blue Cross and Blue Shield of Texas ("Blue
Cross"), a division of Health Care Service Corporation ("HCSC"), for
approximately $420 million in cash. The sale included approximately 463,000
Commercial HMO risk members, 52,000 Commercial HMO non-risk members and 5,000
PPO members in the Houston, Austin, San Antonio, Corpus Christi, Beaumont,
Dallas-Fort Worth, San Angelo, Texarkana and Amarillo areas. New Aetna retained
approximately 127,000 NYLCare Medicare members in Texas through a reinsurance
and administrative services agreement. The sale
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<PAGE>
resulted in a capital loss of approximately $35 million after tax, which was
recognized in the fourth quarter of 1999. The results of operations of NYLCare
Texas were not material to New Aetna's consolidated results of operations.
Acquisition of NYLCare Health Care Business
In July 1998, New Aetna acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, New Aetna'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. Refer to Note 3 of Notes to
Consolidated Financial Statements for further discussion.
Six Months Ended June 30, 2000 and 1999
Consolidated Results of Continuing Operations
New Aetna reported income from continuing operations of $181 million for
the six months ended June 30, 2000 and $211 million for the six months ended
June 30, 1999. Income from continuing operations includes Year 2000 costs of
$40 million for the six months ended June 30, 1999. Income from continuing
operations also includes a reduction of the reserve for loss on discontinued
products for Large Case Pensions of $95 million for the six months ended June
30, 2000 and $50 million for the corresponding period in 1999. Net realized
capital losses were $18 million for the six months ended June 30, 2000 and net
realized capital gains were $12 million for the corresponding period in 1999.
Excluding the reduction of the reserve for loss on discontinued products and
net realized capital gains and losses, results from continuing operations would
have been $104 million for the six months ended June 30, 2000 and $149 million
for the corresponding period in 1999.
Health Care
Operating Summary
Six Months Ended
June 30,
-----------------------
2000(1) 1999
--------- --------
(Millions)
Health care premiums........................... $10,909.0 $7,158.9
Other premiums................................. 660.7 702.8
Administrative services only fees.............. 980.4 728.2
Net investment income.......................... 344.8 279.2
Other income................................... 33.6 41.0
Net realized capital losses.................... (45.2) (5.5)
--------- --------
Total revenue............................ 12,883.3 8,904.6
--------- --------
Health care costs.............................. 9,432.9 6,091.6
Current and future benefits.................... 614.3 655.1
Salaries and related benefits.................. 1,122.4 748.4
Other operating expenses....................... 1,187.1 821.6
Amortization of goodwill and other acquired
intangible assets......................... 218.4 203.8
--------- --------
Total benefits and expenses.............. 12,575.1 8,520.5
--------- --------
Income before income taxes..................... 308.2 384.1
Income taxes................................... 138.0 177.5
--------- --------
Net income..................................... $ 170.2 $ 206.6
========= ========
Net realized capital losses, net of tax
(including above)........................ $ (21.0) $ (3.7)
========= ========
-------------------
(1) Results include PHC since August 6, 1999.
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<PAGE>
Results
Health Care's net income decreased $36 million for the six months ended
June 30, 2000 compared to the corresponding period in 1999. Net income includes
Year 2000 costs of $38 million for the six months ended June 30, 1999. Net
realized capital losses for the six months ended June 30, 2000 primarily
reflect New Aetna's rebalancing of its investment portfolio in a rising
interest rate environment. Excluding net realized capital losses, results for
the six months ended June 30, 2000 decreased $19 million, or 9%, compared to
the corresponding period in 1999.
On April 6, 2000, the State of New Jersey enacted the New Jersey Insolvent
Health Maintenance Organization Assistance Fund Act of 2000 (the "Act"). The
Act is designed to reimburse individuals who were covered by and providers that
had contracts with two New Jersey HMOs prior to their insolvency. The total
amount to be assessed to all HMOs in New Jersey is $50 million. The Act
requires that HMOs in the New Jersey market be assessed a charge based on each
HMO's proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. New Aetna recorded an estimate of its share of
this assessment, based on its HMO market share in New Jersey, of $23 million
pretax ($15 million after-tax) in the second quarter of 2000.
In order to provide a comparison that management believes better reflects
the performance of Health Care, the operating earnings discussion that follows
excludes amortization of goodwill and other acquired intangible assets and net
realized capital losses in all periods.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000(1) 1999
--------- --------
(Millions, except PMPM and
Medical Loss Ratio
information)
<S> <C> <C>
Operating earnings:
Health Risk and PHC................. $ 206.6 $ 233.0
Group Insurance and Other Health.... 161.8 142.4
======== ========
Total Health Care......................... $ 368.4 $ 375.4
======== ========
Commercial HMO Premium PMPM............... $ 148.04 $ 139.19
Commercial HMO Medical Cost PMPM.......... 126.27 (2) 114.66
Commercial HMO Medical Loss Ratio......... 85.3%(2) 82.4%
Medicare HMO Premium PMPM................. $ 532.95 $ 487.16
Medicare HMO Medical Cost PMPM............ 510.50 (2) 439.69
Medicare HMO Medical Loss Ratio........... 95.8%(2) 90.3%
</TABLE>
----------
(1) Results include PHC since August 6, 1999.
(2) Does not include net recoveries under a reinsurance agreement with
Prudential, net amortization of the reinsurance premiums paid, or net
amortization of certain fair value amounts established as part of the PHC
purchase accounting. Refer to "PHC Agreement" below.
Health Risk and PHC
Health Risk and PHC operating earnings decreased $26 million for the six
months ended June 30, 2000 compared to the corresponding period of 1999. The
decrease primarily reflects significantly higher medical costs in both
Commercial and Medicare HMO products. Also contributing to the decrease in
results were severance costs, primarily related to PHC, and the New Jersey
assessment discussed above. The decrease in results was partially offset by the
addition of PHC's results, including the benefit of supplemental fees for
servicing Prudential's ASO members and net recoveries under the reinsurance
agreement with Prudential.
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<PAGE>
Health Care Costs Payable. For Health Risk and PHC, the liability for the
health care costs payable reflects estimates of the ultimate cost of claims
that have been incurred but not yet reported or reported but not yet paid.
Health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs 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. A worsening (or improvement) of medical cost trend or changes in claim
payment patterns from those that were assumed in estimating health care costs
payable at June 30, 2000 would cause these estimates to change in the near
term, and such changes could be material.
Commercial HMO. Commercial HMO premium per member per month ("PMPM")
increased 6.4% for the six months ended June 30, 2000 compared to the
corresponding period of 1999. Excluding PHC, the increase would have been 7.3%
for the six months ended June 30, 2000 compared to the corresponding period of
1999. These increases were primarily due to premium rate increases, partially
offset by employers selecting lower premium plans.
Commercial HMO medical cost PMPM increased 10.1% for the six months ended
June 30, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase would have been 10.0% for the six months ended June 30, 2000 compared
to the corresponding period of 1999. These increases reflect higher medical
costs primarily due to higher than anticipated utilization specific to second
quarter dates of service, as well as additional medical costs related to the
first quarter 2000. While the specific factors vary in importance by local
market, the major drivers of the increase in utilization included a significant
increase in inpatient utilization, a higher number of emergency room visits,
increased outpatient surgery procedures, and, to a lesser extent, longer
maternity lengths of stay, more specialist office visits and increased costs
for physician-administered injectables.
The Commercial HMO medical loss ratio was 85.3% for the six months ended
June 30, 2000 compared to 82.4% for the corresponding period of 1999. This
increase was primarily due to the increase in medical costs discussed above as
well as the addition of PHC at a medical loss ratio of 87.2% for the six months
ended June 30, 2000. Excluding PHC, the medical loss ratio would have been
84.5% for the six months ended June 30, 2000.
Medicare HMO. Medicare HMO premium PMPM increased 9.4% for the six months
ended June 30, 2000 compared to the corresponding period of 1999. Excluding
PHC, the increase would have been 9.2% for the six months ended June 30, 2000
compared to the corresponding period of 1999. These increases were primarily
due to increases in supplemental premiums and Health Care Financing
Administration ("HCFA") rate increases.
Medicare HMO medical cost PMPM increased 16.1% for the six months ended
June 30, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase would have been 15.6% for the six months ended June 30, 2000 compared
to the corresponding period of 1999. These increases primarily reflect higher
medical costs resulting from increased inpatient utilization, as well as
additional medical costs related to the first quarter of 2000.
The Medicare HMO medical loss ratio was 95.8% for the six months ended
June 30, 2000 compared to 90.3% for the corresponding period of 1999. Excluding
PHC, the medical loss ratio would have been 95.6% for the six months ended June
30, 2000. These increases were due to the increased medical costs discussed
above outpacing supplemental premiums and HCFA rate increases.
Exiting Medicare Markets. New Aetna's Medicare+Choice contracts with the
federal government are renewed for a one-year period each January 1. On June
29, 2000, New Aetna notified HCFA of its intent to exit a number of Medicare
service areas affecting approximately 340,000 members, or approximately 50
percent of New Aetna's total current Medicare membership. The termination of
these Medicare+Choice contracts will become effective on December 31, 2000. New
Aetna may elect to continue to provide Medicare benefits to members in these
service areas, in accordance with HCFA regulations and guidelines, if
legislative or regulatory changes are made that would increase payments from
HCFA to New Aetna within six months following this notification date.
During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as
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<PAGE>
permitted under HCFA regulations, depending on the level of any such
reimbursement increase. New Aetna will also, at such time, evaluate the need
for the establishment of liabilities related to the withdrawal from applicable
Medicare service areas, including employee termination benefits and related
costs, as well as evaluate any impairment related to goodwill still separately
identifiable with such service areas, which is considered recoverable pending a
final decision to exit. Goodwill associated with such Medicare service areas
was approximately $275 million at June 30, 2000.
PHC Agreement. Effective August 6, 1999, New Aetna and Prudential entered
into a reinsurance agreement for which New Aetna paid a premium. Under the
agreement, Prudential has agreed to indemnify New Aetna from certain health
insurance risks that arise following the closing by reimbursing New Aetna for
75% of medical costs (as calculated under the agreement) of PHC in excess of
certain threshold medical loss ratio levels through 2000 for substantially all
the acquired medical and dental risk business. The medical loss ratio threshold
was 83.5% for August 6, 1999 through December 31, 1999 and is 84% for January
1, 2000 through December 31, 2000. During the six months ended June 30, 2000,
reinsurance recoveries under this agreement were $46 million pretax. Results
were positively impacted by $1 million pretax for the six months ended June 30,
2000 related to the net amortization of: the reinsurance premium paid as part
of the acquisition, the fair value adjustment of the reinsurance agreement and
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business recorded as part of the
acquisition. Such reinsurance recoveries and net amortization were reflected in
health care costs. Refer to Note 3 of Condensed Notes to Interim Consolidated
Financial Statements.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained New Aetna
to service these contracts during the run off period, generally no later than
June 30, 2001. Prudential ASO members will remain Prudential members as long as
the contracts remain in force. New Aetna 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 members to New Aetna, 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 six months ended June 30, 2000, New Aetna recorded total fees for servicing
the Prudential ASO business of approximately $204 million pretax, including
supplemental fees of approximately $84 million pretax for the six month period
ended June 30, 2000. Included in these supplemental fees is amortization for
the six month period ended June 30, 2000 of $11 million pretax, in connection
with the above-market compensation component related to the supplemental fees
under the ASO contracts. The results of servicing this business during the run
off period will depend on, among other things, rate increases that are obtained
from renewing members (most of such rate increases were implemented by
Prudential prior to New Aetna'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 Condensed Notes to Interim Consolidated Financial
Statements.
Group Insurance and Other Health
Group Insurance and Other Health operating earnings increased $19 million
for the six months ended June 30, 2000 compared to the corresponding period of
1999. This increase is primarily due to rate increases and higher nonrisk
health membership levels, partially offset by increased operating expenses.
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<PAGE>
Membership
Health Care's membership at June 30, 2000 and June 30, 1999 was as
follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------------- -------------------------
Risk Nonrisk Total Risk Nonrisk Total
------ ------- ------ ------ ------- ------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (1)............. 7,865 855 8,720 5,434 716 6,150
Medicare................... 648 -- 648 566 -- 566
Medicaid................... 142 77 219 141 39 180
------ ----- ------ ----- ----- ------
Total HMO.................. 8,655 932 9,587 6,141 755 6,896
POS............................ 352 3,435 3,787 212 2,451 2,663
PPO............................ 807 3,031 3,838 884 2,945 3,829
Indemnity...................... 251 1,963 2,214 162 2,058 2,220
------ ----- ------ ----- ----- ------
Total Health Membership.... 10,065 9,361 19,426 7,399 8,209 15,608
====== ===== ====== ===== ===== ======
Dental......................... 14,628 7,861
------ ------
Group Insurance:
Group Life................. 9,155 9,732
Disability................. 2,241 2,522
Long-Term Care............. 112 107
------ ------
</TABLE>
-------------------
(1) Includes 1,958 thousand POS members at June 30, 2000 and 1,507 thousand
POS members at June 30, 1999 who access primary care physicians and
referred care through an HMO network.
Total Health membership as of June 30, 2000 increased by 3.8 million
members, or 25%, when compared to June 30, 1999, due to the acquisition of PHC,
including ASO members that Health Care has agreed to service, partially offset
by the loss of NYLCare Texas members. Excluding the impact of the PHC members,
growth in total HMO membership was offset by declines in Other Health
membership. Total Health membership decreased by approximately 1.6 million
members from year end 1999 primarily due to losses in PHC membership, which
reflects the impact of price increases, as well as the loss of NYLCare Texas
members.
As discussed above, on June 29, 2000, New Aetna notified HCFA of its
intent to exit certain Medicare service areas as of December 31, 2000, which
would affect approximately 340,000 Medicare members, or approximately 50
percent of New Aetna's total current Medicare membership.
Total Revenue and Expense
Revenue, excluding net realized capital losses, increased by $4.0 billion,
or 45%, for the six months ended June 30, 2000 compared to the corresponding
period of 1999. This increase is primarily due to the acquisition of PHC,
increases in premium rates and growth in Commercial HMO membership.
Operating expenses, including salaries and related benefits, increased by
$740 million, or 47%, for the six months ended June 30, 2000 compared to the
corresponding period of 1999. This increase is primarily due to the acquisition
of PHC. Operating expenses also reflect severance costs (primarily related to
PHC) of $42 million for the six months ended June 30, 2000 and increased costs
to support Commercial HMO membership growth. Operating expenses as a percentage
of revenue was 18% for both periods.
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<PAGE>
Outlook
Medical Costs/Pricing and Other Actions. In the latter half of 1999, New
Aetna's medical costs, particularly in the Medicare business, increased
significantly. Going forward for 2000, New Aetna targeted commercial premium
increases that sought to maintain or enhance margins, and also attempted to
improve commercial profitability by increasing premiums and by addressing cost
increases in its contracting with providers and through other cost management
efforts. At the same time, New Aetna increased supplemental premiums and
instituted changes in benefit plans for its Medicare products which, in
addition to premium rate increases set by the federal government for Medicare
risk products, were designed to keep pace with the higher medical cost trend.
Despite these actions, New Aetna experienced significantly higher Medicare
and Commercial HMO medical costs in the first half of 2000. New Aetna is taking
several actions to address this situation. With respect to its Medicare HMO
business, as discussed above, unless legislative or regulatory changes are made
prior to the end of the year to increase payments under Medicare+Choice
contracts, New Aetna will exit a significant number of its Medicare service
areas. During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. With respect to its Commercial HMO business, New Aetna is increasing
premiums for business renewing in the fourth quarter of 2000 and beyond.
However, premiums for insured health plans are generally fixed for one-year
periods and, accordingly, cost levels in excess of those reflected in pricing,
such as those being experienced during 2000, cannot be recovered in the year
through higher premiums. As a result, earnings for the remainder of 2000 and,
to a lesser extent, the first half of 2001 are expected to continue to be
materially adversely affected if medical costs continue to be higher than the
cost levels reflected in New Aetna's pricing. New Aetna is also reviewing
whether to exit certain Commercial HMO markets.
New Aetna also attempts to improve profitability by addressing cost
increases in its contracting with providers and through other cost management
techniques. There can be no assurances, however, that premium increases and
cost savings achieved through recontracting and other cost management
techniques will be sufficient to offset the increases in medical costs as well
as any increases in other operating costs, as governmental action (including
rate decreases or reduction of rate increases), business conditions (including
intensification of competition) and other factors may adversely affect New
Aetna's ability to realize such premium increases and cost savings. These
premium increases may also adversely affect membership levels.
Prudential Acquisition. Medical loss ratios for the PHC business are
higher than for New Aetna's other health risk business. The effect of these
higher ratios is offset, in part, by the reinsurance agreement between
Prudential and New Aetna, which terminates December 31, 2000. New Aetna is
seeking to improve the medical loss ratios of the acquired business through
underwriting and pricing discipline and medical cost management initiatives. If
New Aetna is unable to achieve sufficient improvement in 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 New Aetna agreed to service are higher than
the administrative costs of New Aetna's other health business. New Aetna is
seeking to reduce the level of administrative costs related to this business.
In addition, New Aetna expects a significant decline in the membership of the
acquired PHC business and the ASO business it agreed to service. If New Aetna
is unable to reduce the level of administrative costs to correspond with
expected levels of membership decline, its results could be materially
adversely affected.
Technology/Compliance Expenses. In 2000, New Aetna also expects to
increase its expenditures on Internet (electronic commerce) initiatives. Also,
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 New Aetna's administration of
health and related benefit plans. New Aetna is currently reviewing the
potential impact of the proposed regulations on its operations, including its
information technology systems. It is reasonably possible that New Aetna will
incur additional expenses in connection with, and that our business could
otherwise be adversely affected by, compliance with any final regulations that
are adopted.
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<PAGE>
Potential Charges. As discussed above, New Aetna is conducting a
comprehensive review of Health Care's business model and is in the process of
considering and implementing a number of strategic initiatives in this
business. At such time as these initiatives are finally decided and
implemented, New Aetna will evaluate the need to establish liabilities related
to these strategic changes and New Aetna will evaluate whether any impairment
related to assets of New Aetna has occurred. It is reasonably possible that, as
a result of the above actions, New Aetna will need to establish such
liabilities or write down related assets and that such liabilities and write
downs could be material. At such time as New Aetna decides to exit Medicare
markets, it will evaluate the need to establish liabilities related to this
exit. Also, New Aetna will evaluate whether any impairment related to goodwill
still separately identifiable with such Medicare service areas has occurred.
Group Insurance Business. 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.
Large Case Pensions
Operating Summary
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
2000 1999
--------- ----------
(Millions)
<S> <C> <C>
Other premiums............................................ $ 77.6 $ 57.4
Net investment income..................................... 460.7 514.9
Other income.............................................. 12.6 18.9
Net realized capital gains................................ 7.2 29.5
--------- ---------
Total revenue.................................... 558.1 620.7
--------- ---------
Current and future benefits............................... 487.6 505.5
Salaries and related benefits............................. 8.8 10.0
Other operating expenses.................................. 4.0 6.3
Reductions of loss on discontinued products............... (146.0) (77.2)
--------- ---------
Total benefits and expenses...................... 354.4 444.6
--------- ---------
Income before income taxes................................ 203.7 176.1
Income taxes.............................................. 72.6 62.8
--------- ---------
Net income................................................ $ 131.1 $ 113.3
========= =========
Net realized capital gains, net of tax (included above)... $ 5.2 $ 19.2
========= =========
Deposits (not included in other premiums above):
Fully guaranteed discontinued products................... $ 3.8 $ 7.6
Experience-rated.................................... 40.2 130.6
Nonguaranteed....................................... 283.3 323.1
--------- ---------
Total deposits................................... $ 327.3 $ 461.3
========= =========
Assets under management:(1)
Fully guaranteed discontinued
products.................................................. $ 5,787.4 $ 6,390.1
Experience-rated.................................... 7,419.0 9,079.6
Nonguaranteed....................................... 12,037.4 11,896.0
--------- ---------
Total assets under management.................... $25,243.8 $27,365.7
========= =========
</TABLE>
-------------------
(1) Excludes net unrealized capital losses of $223.1 million at June 30, 2000
and $35.5 million at June 30, 1999.
37
<PAGE>
Results
Large Case Pensions' net income for the six months ended June 30, 2000
increased by $18 million compared with the corresponding period in 1999.
Results include a reduction of the reserve for loss on discontinued products
for Large Case Pensions of $95 million for the six months ended June 30, 2000
primarily as a result of favorable investment performance and favorable
mortality and retirement experience and $50 million for the corresponding
period in 1999 as a result of favorable investment performance. Excluding the
discontinued products reserve releases and net realized capital gains, results
for the six months ended June 30, 2000 decreased $13 million, or 29%, compared
to the corresponding period in 1999, which reflects lower investment income due
to the redeployment of capital supporting this business. Assets under
management at June 30, 2000 were 8% lower than a year earlier. This decrease
primarily resulted from the continuing run off of liabilities underlying the
Large Case Pensions business.
General account assets supporting experience-rated products (where the
contractholder, not New Aetna, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------
2000 1999
------- -------
(Millions)
<S> <C> <C>
Scheduled contract maturities and benefit payments (1)...... $ 451.9 $ 478.5
Contractholder withdrawals other than scheduled contract
maturities and benefit payments............................. 103.4 201.0
Participant directed withdrawals............................ 25.7 43.9
</TABLE>
-------------------
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
Outlook
Large Case Pensions' earnings are expected to significantly decline in
2000 as a result of continuing run off of underlying liabilities.
Discontinued Products
Large Case Pensions discontinued the sale of its fully guaranteed large
case pension products (single-premium annuities ("SPAs") and guaranteed
investment contracts ("GICs")) in 1993. Large Case Pensions 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. New Aetna'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).
38
<PAGE>
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------
2000 1999
------ ------
(Millions)
<S> <C> <C>
Interest deficit (1).......................................... $ (3.8) $(8.6)
Net realized capital gains.................................... 1.9 11.9
Interest earned on receivable from continuing products........ 10.6 11.0
Other, net.................................................... 7.5 5.9
------ -----
Results of discontinued products, after tax................... $ 16.2 $20.2
====== =====
Results of discontinued products, pretax...................... $ 22.0 $30.7
====== =====
Net realized capital gains (losses) from sales of bonds,
after tax (included above).................................. $(35.5) $ 7.8
====== =====
</TABLE>
-------------------
(1) The interest deficit is the difference between earnings on invested assets
and interest credited to contractholders.
Net realized capital gains for the six months ended June 30, 2000
decreased compared to the corresponding period in 1999. This decrease primarily
resulted from realized capital losses on bonds, due to the rising interest rate
environment, offset by capital gains from the sale of equities.
At the time of discontinuance, a receivable from Large Case Pensions'
continuing products equivalent to the net present value of the anticipated cash
flow shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include
a receivable from continuing products of $380 million at June 30, 2000 and $464
million at December 31, 1999, net of related deferred taxes payable.
The reserve for anticipated future losses on discontinued products
represents the present value (at the risk-free rate at the time of
discontinuance, consistent with the duration of the liabilities) of the
difference between the expected cash flows from the assets supporting
discontinued products and the cash flows expected to be required to meet the
obligations of the outstanding contracts. Calculation of the reserve for
anticipated future losses requires projection of both the amount and the timing
of cash flows over approximately the next 30 years, including consideration of,
among other things, future investment results, participant withdrawal and
mortality rates, as well as the cost of asset management and customer service.
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, New Aetna 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.
New Aetna'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.
39
<PAGE>
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, 1999................. $ 1,147.6
Operating income............................. 9.9
Net realized capital gains................... 0.1
Mortality and other.......................... 12.0
Reserve reduction............................ (146.0)
---------
Reserve at June 30, 2000..................... $ 1,023.6
=========
</TABLE>
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, $95 million ($146 million pretax) of the reserve
was released in the second quarter of 2000, primarily due to favorable
performance related to certain equity investments, favorable mortality and
retirement experience and the decrease in size of the overall bond portfolio
which decreased default risk. The current reserve reflects management's best
estimate of anticipated future losses.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------ ------------------
Class Amount Percent Amount Percent
----- -------- ------- -------- -------
(Millions)
<S> <C> <C> <C> <C>
Debt securities available for sale... $4,319.2 76.0% $4,533.0 77.2%
Mortgage loans....................... 806.9 14.2 768.8 13.1
Investment real estate............... 116.9 2.0 112.7 1.9
Equity securities.................... 200.2 3.5 239.7 4.1
Other................................ 242.3 4.3 214.2 3.7
-------- ------- -------- -------
Total................................ $5,685.5 100.0% $5,868.4 100.0%
======== ===== ======== =====
</TABLE>
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------
2000 1999
------ ------
(Millions)
<S> <C> <C>
Scheduled contract maturities, settlements and
benefit payments................................... $499.3 $666.7
Participant directed withdrawals........................ 5.0 8.6
</TABLE>
Cash required to fund these distributions was provided by earnings and
scheduled payments on, and sales of, invested assets.
Refer to Note 7 of Condensed Notes to Interim Consolidated Financial
Statements and "-- Six Months Ended June 30, 2000 and 1999 -- Total
Investments" for additional information.
40
<PAGE>
Corporate
Operating Summary
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
------ ------
(Millions, after tax)
<S> <C> <C>
Interest expense.................. $ 81.3 $ 69.6
====== ======
Salaries and related benefits..... $ 19.1 $ 22.9
Other operating expenses, net..... 17.7 12.3
Net realized capital losses....... 2.1 3.7
------ ------
Total other expense............... $ 38.9 $ 38.9
====== ======
</TABLE>
Corporate represents the allocation of a portion of Aetna's corporate
overhead costs, including interest expense and other expenses that are not
directly related to New Aetna's business segments. "Other operating expense,
net" includes corporate expenses such as staff expenses and advertising and
contributions partially offset by net investment income.
Results
The 2000 increase in interest expense primarily results from additional
debt incurred in connection with the PHC acquisition in August 1999. Net
realized capital losses in the six months ended June 30, 2000 include losses of
$2.8 million on the sale of certain Corporate real estate. Other operating
expenses include Year 2000 costs of $1 million for the six months ended June
30, 1999. Other operating expenses increased $5 million for the six months
ended June 30, 2000, primarily resulting from costs related to Aetna's prior
plan to separate into two independent publicly traded companies.
As discussed above, Aetna has agreed to sell its financial services and
international businesses to ING, and Aetna's goal is to close this transaction
by year end 2000. In connection with closing this transaction, New Aetna will
be incurring various costs, including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna. New Aetna will
evaluate the need to establish liabilities related to this transaction. It is
reasonably possible that New Aetna will need to establish such liabilities and
that such liabilities and costs could be material.
Outlook
See "-- Liquidity and Capital Resources" for a discussion of debt to be
incurred in connection with the spin-off and the merger and changes in interest
expense.
Total Investments
Investments disclosed in this section relate to New Aetna's total
portfolio and consist only of assets supporting continuing operations
(including assets supporting discontinued products and experience-rated
products).
New Aetna's investment objective is to fund policyholder and other
liabilities in a manner that enhances shareholder and contractholder value,
subject to appropriate risk constraints. New Aetna 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. New Aetna regularly projects duration and cash flow
characteristics of its liabilities and makes appropriate adjustments in its
investment portfolios.
41
<PAGE>
Total investments were as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Debt securities available for sale. $15,123.7 $15,811.5
Equity securities.................. 236.1 286.4
Other investment securities........ 94.8 216.4
Mortgage loans..................... 2,207.3 2,377.0
Investment real estate............. 296.3 269.5
Other.............................. 507.8 383.1
--------- ---------
Total investments.................. $18,466.0 $19,343.9
========= =========
</TABLE>
Debt Securities Available for Sale
Debt securities represented 82% of New Aetna's total invested assets at
June 30, 2000 and December 31, 1999 and supported the following types of
products:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Supporting discontinued products..... $ 4,319.2 $ 4,533.0
Supporting experience-rated products. 2,825.3 3,001.3
Supporting remaining products........ 7,979.2 8,277.2
--------- ---------
Total debt securities (1)............ $15,123.7 $15,811.5
========= =========
</TABLE>
-------------------
(1) Total debt securities include "Below Investment Grade" Securities of $1.3
billion at June 30, 2000 and $1.4 billion at December 31, 1999, of which
21% at June 30, 2000 and 27% at December 31, 1999 supported discontinued
and experience-rated products.
Debt securities reflect net unrealized capital losses of $459 million at
June 30, 2000 and $516 million at December 31, 1999. Of the net unrealized
capital losses at June 30, 2000, $102 million relate to assets supporting
discontinued products and $93 million relate to experience-rated pension
contractholders.
Residential Collateralized Mortgage Obligations
Included in New Aetna's debt securities are residential collateralized
mortgage obligations ("CMOs") of $43 million at June 30, 2000 and $59 million
at December 31, 1999. There are various categories of CMOs that are subject to
different degrees of risk from changes in interest rates and, for CMOs that are
not agency backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases in
interest rates, resulting in the repayment of principal from the underlying
mortgages either earlier or later than originally anticipated. At June 30, 2000
and December 31, 1999, New Aetna did not have any CMO holdings that were
invested in CMOs subject to more prepayment and extension risk than traditional
CMOs (such as interest- or principal-only strips).
42
<PAGE>
Mortgage Loans
New Aetna's mortgage loan investments, net of impairment reserves,
supported the following types of products:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Supporting discontinued products..... $ 806.9 $ 768.9
Supporting experience-rated products. 720.6 923.4
Supporting remaining products........ 679.8 684.7
--------- ---------
Total mortgage loans................. $ 2,207.3 $ 2,377.0
========= =========
</TABLE>
During the first six months of 2000, New Aetna managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. The mortgage loan portfolio
balance represented 12% at June 30, 2000 and December 31, 1999 of New Aetna's
total invested assets.
Problem, restructured and potential problem loans included in mortgage
loans were $276 million at June 30, 2000 and $274 million at December 31, 1999,
of which 81% at June 30, 2000 and 82% at December 31, 1999 supported
discontinued and experience-rated products. Specific impairment reserves on
these loans were $32 million at June 30, 2000 and December 31, 1999. Refer to
Note 4 of Condensed Notes to Interim Consolidated Financial Statements for
additional information.
Risk Management and Market-Sensitive Instruments
New Aetna 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,
New Aetna also uses financial instruments whose market value is at least
partially determined by, among other things, levels of or changes in interest
rates (short-term or long-term), duration, prepayment rates, equity markets or
credit ratings/spreads. New Aetna's use of derivatives is generally limited to
hedging purposes and has principally consisted of using interest rate swap
agreements, futures contracts and options to hedge interest rate and equity
price risks. These instruments, viewed separately, subject New Aetna to varying
degrees of interest rate, equity price, 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.
New Aetna regularly evaluates the risk of market-sensitive instruments by
examining, among other things, levels of or changes in interest rates
(short-term or long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. New Aetna also 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 risks associated with investments supporting experience-rated pension,
annuity and life products are assumed by those contractholders and not by New
Aetna (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").
Management also reviews, on a quarterly basis, hypothetical net losses in
New Aetna's consolidated near-term financial position, results of operations
and cash flows under certain assumed market rate changes. 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. The assumptions used were as
follows: an immediate increase of 100 basis points in interest rates which New
Aetna believes represents a moderately adverse scenario and is approximately
equal to the historical annual volatility of interest rate movements
43
<PAGE>
for New Aetna's intermediate-term available-for-sale debt securities and an
immediate decrease of 10% in prices for domestic equity securities.
Based on New Aetna's overall exposure to interest rate risk and equity
price risk, New Aetna 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 New Aetna.
1999, 1998 and 1997
Consolidated Results of Continuing Operations
New Aetna reported income from continuing operations of $399 million in
1999, $450 million in 1998 and $526 million in 1997. Income from continuing
operations 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. Income from continuing operations also includes Year
2000 costs of $59 million in 1999 and $75 million in 1998. A benefit of $29
million primarily related to the reduction of the severance and facilities
reserve is included in 1997 income from continuing operations. Excluding the
reduction of the reserve for loss on discontinued products, net realized
capital gains or losses and the severance and facilities benefit in 1997,
results from continuing operations would have been $328 million in 1999, $217
million in 1998 and $228 million in 1997.
Health Care
Operating Summary
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999(1) 1998(2) 1997
--------- --------- ---------
(Millions)
<S> <C> <C> <C>
Health care premiums............................................. $17,145.7 $11,691.1 $ 9,648.7
Other premiums................................................... 1,376.9 1,315.1 1,195.9
Administrative services only fees................................ 1,674.5 1,270.7 1,322.0
Net investment income............................................ 612.8 537.2 451.2
Other income..................................................... 82.8 170.4 141.9
Net realized capital gains (losses).............................. (4.7) 134.9 141.7
--------- --------- ---------
Total revenue.............................................. 20,888.0 15,119.4 12,901.4
--------- --------- ---------
Health care costs................................................ 14,641.0 10,012.9 8,215.5
Current and future benefits...................................... 1,249.7 1,173.6 1,023.7
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 NYLCare Texas which
New Aetna sold on March 31, 2000.
44
<PAGE>
Results
Health Care'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
resulting from a reduction in the severance and facilities reserve due to
higher attrition than was contemplated in the establishment of the reserve.
Excluding the benefit related to the reduction in the severance and facilities
reserve in 1997 and net realized capital gains or losses in all years, results
increased $117 million in 1999 and decreased $12 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 New
Aetna'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.) The 1999 amount was more than
offset by the recording of the estimated loss on the sale of NYLCare Texas of
$35 million and net realized capital losses from New Aetna'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 care business resources. The earnings of these subsidiaries were not
material to the results of Health Care.
In order to provide a comparison that management believes better reflects
the performance of Health Care, the operating earnings discussion that follows
excludes amortization of goodwill and other acquired intangible assets, the
reduction of the severance and facilities reserve in 1997 and net realized
capital gains and losses in all periods.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999(1) 1998(2) 1997
---------- ---------- ---------
(Millions, except PMPM and Medical
Loss Ratio information)
<S> <C> <C> <C>
Operating earnings:
Health Risk and PHC............. $ 505.0 $ 334.2 $ 312.9
Group Insurance and Other Health 294.2 320.5 340.7
---------- ---------- ----------
Total Health Care..................... $ 799.2 $ 654.7 $ 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 NYLCare Texas which
New Aetna sold on March 31, 2000.
(3) Does not include net recoveries under a reinsurance agreement with
Prudential, net amortization of the reinsurance premiums paid, or net
amortization of certain fair value amounts established as part of the PHC
purchase accounting. Refer to "PHC Agreement" below.
45
<PAGE>
Health Risk and PHC
Health Risk and PHC operating earnings increased $171 million in 1999 and
$21 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 benefit of supplemental fees for servicing Prudential's ASO
members and net recoveries under the reinsurance agreement with Prudential,
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.
Health Care Costs Payable. For Health Risk and PHC, the liability for the
health care costs payable reflects estimates of the ultimate cost of claims
that have been incurred but not yet reported or reported but not yet paid.
Health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs 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. A worsening (or improvement) of medical cost trend or changes in claim
payment patterns from those that were assumed in estimating health care costs
payable at December 31, 1999 would cause these estimates to change in the near
term, and such changes could be material.
Commercial HMO. Commercial HMO premium 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 employers 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 PHC 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 3% in 1999 and 1998.
Excluding PHC, the 1999 increase also would have been 3%. These increases were
due to 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 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.
46
<PAGE>
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.
PHC Agreement. Effective August 6, 1999, New Aetna and Prudential entered
into a reinsurance agreement for which New Aetna paid a premium. See "-- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Health Risk and PHC --
PHC Agreement" for more information. 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 for the year ended December 31,
1999 related to the net amortization of: the reinsurance premium paid as part
of the acquisition, the fair value adjustment of the reinsurance agreement and
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business recorded as part of the
acquisition. Such reinsurance recoveries and net amortization were reflected in
health care costs. Refer to Note 3 of Notes to Consolidated Financial
Statements.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. See "-- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Health Risk and PHC -- PHC Agreement" for more information. New Aetna recorded
total fees for servicing the Prudential ASO business of approximately $230
million pretax for the period August 6, 1999 through December 31, 1999,
including supplemental fees of approximately $106 million pretax for the period
August 6, 1999 through December 31, 1999. Refer to Note 3 of Notes to
Consolidated Financial Statements for further discussion.
Group Insurance and Other Health
Results for 1999, compared to 1998, 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, compared to 1997, 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.
Membership
Health Care's membership at December 31, 1999 and December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
December 31, 1999 (1) December 31, 1998
--------------------------------- --------------------------------
Risk Nonrisk Total Risk Nonrisk Total
------- ------- ------- ------- ------- -------
(Thousands)
<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
====== ====== ====== ===== ===== ======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 (1) December 31, 1998
--------------------------------- --------------------------------
Risk Nonrisk Total Risk Nonrisk Total
------- ------- ------- ------- ------- -------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
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 Health Care 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 membership 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 sold on March 31, 2000.
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 Health Care 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,
New Aetna experienced significant declines in PHC membership during the January
2000 enrollment cycle.
Total Revenue and Expense
Revenue, 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. Revenue 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, Health Care 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.
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.
48
<PAGE>
Large Case Pensions
Operating Summary
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(Millions)
<S> <C> <C> <C>
Other premiums................................................. $ 118.9 $122.7 $155.0
Net investment income.......................................... 982.5 1,152.5 1,408.7
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 other 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 deposits........................................... $ 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.
Results
Large Case Pensions' net income decreased $19 million in 1999 and $64
million in 1998. As further discussed under "Discontinued Products" below,
results include discontinued products reserve releases of $50 million in 1999,
$44 million in 1998 and $108 million in 1997 due to favorable investment
performance. Net income also includes Year 2000 costs of approximately $1
million in 1999 and 1998. Excluding the discontinued products reserve releases
and net realized capital gains, results decreased $3 million in 1999 and $17
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 liabilities underlying the business.
49
<PAGE>
General account assets supporting experience-rated products (where the
contractholder, not New Aetna, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
(Millions)
<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 directed 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.
Discontinued Products
See "-- Six Months Ended June 30, 2000 and 1999 -- Large Case Pensions --
Discontinued Products" for more information.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
------- ------- -------
(Millions)
<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.
50
<PAGE>
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.
See "-- Six Months Ended June 30, 2000 and 1999 -- Large Case Pensions --
Discontinued Products" for more information.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
(Millions)
-----------
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
===========
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. In 1997,
$173 million ($108 million after tax) of the reserve was released 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:
(Millions)
-----------
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
The above table assumes that assets are held until maturity and that the
reserve run off is proportional to the liability run off.
51
<PAGE>
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
------------------------- ------------------------
GIC SPA GIC SPA
---------- ---------- ---------- ----------
(Millions)
<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>
December 31, 1999 December 31, 1998
--------------------- ---------------------
Class Amount Percent Amount Percent
----- ----------- ------- ----------- -------
(Millions)
<S> <C> <C> <C> <C>
Debt securities available for sale........................ $ 4,533.0 77.2% $ 5,890.5 83.0%
Mortgage loans............................................ 768.8 13.1 754.2 10.6
Investment real estate.................................... 112.7 1.9 104.2 1.5
Equity securities......................................... 239.7 4.1 98.5 1.4
Other..................................................... 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 from 1998, 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 New Aetna'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>
Years Ended December 31,
---------------------------------------
1999 1998 1997
-------- -------- --------
(Millions)
<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.
52
<PAGE>
At December 31, 1999, scheduled maturities, future benefit payments and
other expected payments, including future interest, were as follows:
(Millions)
---------
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
Refer to Note 8 of Notes to Consolidated Financial Statements and "--
1999, 1998 and 1997 -- Total Investments" for additional information.
Corporate
Operating Summary
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(Millions, after tax)
Interest expense................. $151.3 $134.1 $138.7
======== ======== ========
Salaries and related benefits.... $28.2 $31.8 $43.6
Other operating expenses, net.... 37.4 48.0 49.8
Net realized capital gains....... (28.0) (63.4) (69.8)
-------- -------- --------
Total other expense.............. $37.6 $16.4 $23.6
======== ======== ========
Corporate represents the allocation of a portion of Aetna's corporate
overhead costs, including interest expense and other expenses that are not
directly related to New Aetna's business segments. "Other operating expense,
net" includes corporate expenses such as staff expenses and advertising and
contributions 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. 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 and $9 million in 1999 and 1998,
respectively. 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 New Aetna's remaining investment in Traveler's Property
Casualty Corporation ("TPCC"). After-tax net realized capital gains in 1997
include gains of $98 million related to sales of portions of New Aetna's
investment in TPCC offset by an after-tax realized capital loss of $29 million
related to the write-down of certain properties that New Aetna had classified
as held for sale.
53
<PAGE>
Total Investments
Investments disclosed in this section relate to New Aetna's total
portfolio and consist only of assets supporting continuing operations
(including assets supporting discontinued products and experience-rated
products).
Total investments were as follows:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Debt securities available for sale....... $15,811.5 $17,584.7
Equity securities........................ 286.4 196.6
Other investment securities.............. 216.4 278.8
Mortgage loans........................... 2,377.0 2,719.7
Investment real estate................... 269.5 192.3
Other.................................... 383.1 327.5
--------- ---------
Total investments........................ $19,343.9 $21,299.6
========= =========
Debt Securities Available for Sale
Debt securities represented 82% of New Aetna's total invested assets at
December 31, 1999 and 83% at December 31, 1998 and supported the following
types of products:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Supporting discontinued products.......... $4,533.0 $5,890.5
Supporting experience-rated products...... 3,001.3 4,069.2
Supporting remaining products............. 8,277.2 7,625.0
--------- ---------
Total debt securities..................... $15,811.5 $17,584.7
========= =========
Debt securities reflect net unrealized capital losses of $516 million at
December 31, 1999 compared with net unrealized capital gains of $724 million at
December 31, 1998. Of the net unrealized capital losses at December 31, 1999,
$122 million relate to assets supporting discontinued products and $104 million
relate to experience-rated pension contractholders. Of the net unrealized
capital gains at December 31, 1998, $362 million relate to assets supporting
discontinued products and $220 million relate to experience-rated pension
contractholders.
The debt securities in New Aetna's portfolio are generally rated by
external rating agencies and, if not externally rated, are rated by New Aetna
on a basis believed to be similar to that used by the rating agencies. New
Aetna's investments in debt securities had an average quality rating of A+ at
December 31, 1999 and 1998 (33% were AAA at December 31, 1999 and 26% were AAA
at December 31, 1998). "Below investment grade" debt securities carry a rating
of below BBB-/Baa3 and represented 9% of the portfolio at December 31, 1999 and
7% of the portfolio at December 31, 1998, of which 27% at December 31, 1999 and
33% 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 New Aetna's debt securities are residential collateralized
mortgage obligations ("CMOs") of $59 million at December 31, 1999 and $52
million 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 59% of New Aetna's
residential CMO holdings were backed by government agencies, such
54
<PAGE>
as GNMA, FNMA and FHLMC at December 31, 1999 and 95% 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 and December 31, 1998, New
Aetna did not have any CMO holdings that were invested in CMOs subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
Mortgage Loans
New Aetna's mortgage loan investments, net of impairment reserves,
supported the following types of products:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Supporting discontinued products........... $768.9 $754.2
Supporting experience-rated products....... 923.4 1,183.3
Supporting remaining products.............. 684.7 782.2
--------- ---------
Total mortgage loans....................... $2,377.0 $2,719.7
========= =========
During 1999 and 1998, New Aetna managed its mortgage loan portfolio to
maintain the balance, relative to invested assets, by selectively pursuing
refinance and new loan opportunities. The mortgage loan portfolio balance
represented 12% at December 31, 1999 and 13% at December 31, 1998 of New
Aetna's total invested assets.
Problem, restructured and potential problem loans included in mortgage
loans were $274 million at December 31, 1999 and $289 million at December 31,
1998, of which 82% at December 31, 1999 and 89% at December 31, 1998 supported
discontinued and experience-rated products. Specific impairment reserves on
these loans were $32 million at December 31, 1999 and $46 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:
(Millions)
---------
2000................................. $ 514.4
2001................................. 35.0
2002................................. 126.5
2003................................. 560.7
2004................................. 173.4
Thereafter........................... 1,012.8
Risk Management and Market-Sensitive Instruments
See "-- Six Months Ended June 30, 2000 and 1999 -- Total Investments --
Risk Management and Market- Sensitive Investments" for more information.
Management reviews, on a quarterly basis, hypothetical net losses in New
Aetna's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes. 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. The assumptions used were as
follows: an immediate increase of 100 basis points in interest rates which New
Aetna believes represents a moderately adverse scenario and is approximately
equal to the historical annual volatility of interest rate movements
55
<PAGE>
for New Aetna's intermediate-term available-for-sale debt securities and an
immediate decrease of 10% in prices for domestic equity securities.
Based on New Aetna's overall exposure to interest rate risk and equity
price risk, New Aetna 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 New Aetna.
Liquidity and Capital Resources
Cash Flows
Generally, New Aetna meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses.
During the first six months of 2000 and 1999, New Aetna used net cash
generated from investing, financing and operating activities to pay
approximately $157 million and $155 million, respectively, of dividends to
Aetna, its sole shareholder.
In 1999, net cash generated from investing, financing and operating
activities was used to make approximately $561 million of investments in core
businesses and acquisitions and pay approximately $635 million of dividends to
Aetna. In 1998, net cash generated by investing, financing and operating
activities was used to make approximately $1.1 billion of investments in core
businesses and pay approximately $520 million of dividends to Aetna.
New Aetna 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 New Aetna's maturing liabilities.
Refer to the "Consolidated Statements of Cash Flows" for additional
information.
Financings and Financing Capacity
New Aetna has significant short-term liquidity supporting its businesses.
New Aetna will use short-term borrowings from time to time to address timing
differences between cash receipts and disbursements. Also, in 1999 and 1998,
New Aetna used these borrowings to finance an increased amount of disbursements
since an increased amount of its other funds were used in connection with
acquisitions. Prior to the spin-off, New Aetna had revolving credit facilities
in an aggregate amount of $2.0 billion. These facilities will not continue
following the spin-off and New Aetna intends to enter into a new revolving
credit facility, providing for an aggregate borrowing capacity of approximately
$2.5 billion. Refer to Note 8 of Condensed Notes to Interim Consolidated
Financial Statements and Note 11 of Notes to Consolidated Financial Statements
for additional information. New Aetna anticipates borrowing under the credit
facility or issuing short-term debt in connection with the spin-off. Refer to
"Summary" for more information.
The acquisition of PHC was financed by issuing $500 million of three-year
senior notes to Prudential and by using funds made available from issuing
commercial paper. The acquisition of NYLCare was financed with funds made
available from issuing commercial paper. New Aetna issued $300 million of debt
in the fourth quarter of 1998. At the time of the acquisition, New Aetna 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 New Aetna expected to
issue fixed-income securities, continued unfavorable market conditions delayed
this issuance from the original probable expected time frame. Accordingly, New
Aetna 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, included in Corporate.
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<PAGE>
New Aetna continually monitors existing and alternative financing sources
to support its capital and liquidity needs, including, but not limited to, debt
issuance, preferred or common stock issuance, intercompany borrowings and
pledging or selling of assets.
New Aetna is currently expected to have a total debt level at the time of
the closing of the ING transaction that exceeds total debt level at June 30,
2000. It also is a condition to closing the ING transaction that New Aetna have
an investment grade debt rating of either at least BBB from Standard & Poor's
or Baa2 from Moody's Investors Service.
New Aetna's capitalization and liquidity will undergo a number of changes
in connection with the spin-off and the merger. See "Summary" and "Unaudited
Pro Forma Condensed Consolidated Financial Statements."
Dividend Policy
Our board of directors has not yet determined whether to declare and pay
dividends on New Aetna common stock, but expects to determine a policy before
the spin-off. Our board will be free to change our dividend practices at any
time. The board will base its decisions on, among other things, general
business conditions, our financial results, contractual, legal and regulatory
restrictions regarding dividend payments by our subsidiaries, practices of peer
companies and any other factors the board may consider to be relevant.
Restrictions on Certain Payments by New Aetna
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 New
Aetna as it is not an HMO or insurance company. The additional regulations
applicable to New Aetna's indirect HMO and insurance company subsidiaries are
not expected to affect the ability of New Aetna to pay dividends, or to service
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 each of New Aetna's life insurance
subsidiaries' adjusted surplus to its required surplus ("RBC ratio"). The RBC
ratio is designed to reflect the risk profile of the life insurance
subsidiaries. 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 New
Aetna'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 New Aetna'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 $8.2 billion at June
30, 2000 and $8.7 billion at December 31, 1999, or approximately 75% and 81% of
consolidated shareholder's equity, respectively. The amortization of goodwill
and other acquired intangible assets was $218 million for the six months ended
June 30, 2000 and $420 million for the year ended December 31, 1999, or
approximately 67% and 56% of pretax income from continuing operations. The
amortization of other acquired intangible assets reflects management's estimate
of
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the useful life of acquired intangible assets (primarily customer lists, health
provider networks, workforce and computer systems), generally over various
periods not exceeding 25 years. Management's estimate of the useful life of
goodwill, which represents the excess of cost over the fair value of net assets
acquired, is 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. New Aetna
regularly evaluates the recoverability of goodwill and other acquired
intangible assets and believes such amounts are currently recoverable. However,
any significant change in the useful lives of goodwill or other acquired
intangible assets, as estimated by management, could have a material adverse
effect on results of operations and financial condition.
Refer to " -- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Health Risk and PHC -- Exiting Medicare Markets" for discussion relating to
goodwill associated with certain Medicare service areas, which New Aetna has
notified HCFA of its intent to exit.
New Accounting Standards
Refer to Note 1 of Condensed Notes to Interim Consolidated Financial
Statements and Note 2 of Notes to Consolidated Financial Statements for a
discussion of recently issued accounting standards.
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BUSINESS OF NEW AETNA
The following is a summary of New Aetna's two operating businesses, Health
Care and Large Case Pensions.
Health Care
Products and Services
Our Health Care business provides a full spectrum of health and dental
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, we assume 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 assumes all or a majority of these
risks.
Health Care consists of Health Risk and PHC and Group Insurance and Other
Health.
Health Risk and PHC includes health and dental plans offered on an insured
basis and the results of servicing Prudential's administrative services only,
or ASO, business.
Group Insurance and Other Health includes group life and disability
insurance, long-term care insurance and all health plans (other than the
Prudential ASO business), offered on an employer-funded basis.
The following table summarizes premiums and fees and other income for
Health Risk and PHC and Group Insurance and Other Health:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
-------------- -------------------------------------------
2000 (1) 1999(1) 1998(2) 1997
-------------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
Health Risk and PHC..................... $11,128.5 $17,467.2 $11,780.8 $9,735.0
Group Insurance and Other Health........ 1,455.2 2,812.7 2,666.5 2,573.5
-------------- ---------- ---------- ----------
Total Health Care....................... $12,583.7 $20,279.9 $14,447.3 $12,308.5
============== ========== ========== ==========
</TABLE>
_________________
(1) Includes results of PHC since August 6, 1999.
(2) Includes results of NYLCare since July 15, 1998.
Under insured plans, we charge a premium and under employer-funded plans,
we charge a fee for administrative and claim services.
The principal commercial health products, offered both on an insured and
employer-funded basis, are described below:
o 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 our HMOs, he or she selects a primary care physician
("PCP") from among the physicians participating in our 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. We offer HMO plans with varying levels of copayments
which result in different levels of premium rates.
o Point-of-Service ("POS") plans blend the characteristics of HMO and
indemnity plans. Members can have comprehensive HMO-style benefits
through participating network providers with minimum out-of-pocket
expense (copayments) and also can go directly, without a referral, to
any provider they choose, subject to,
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<PAGE>
among other things, certain deductibles and coinsurance, with member
cost sharing limited by out-of-pocket maximums.
o 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 participating network
provider. Coverage is subject to copayments or deductibles and
coinsurance, with member cost sharing limited by out-of-pocket
maximums.
o 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.
In addition to commercial health products, in select markets, we also
offer coverage for Medicare beneficiaries and individuals eligible for Medicaid
benefits and subsidized children's health insurance programs. Coverages include
the following:
o Through annual contracts with HCFA, our HMOs offer coverage for
Medicare-eligible individuals in certain geographic areas. Generally,
services must be obtained through participating network providers,
with the exception of emergency and urgent care. Members have
historically received enhanced benefits over standard Medicare
fee-for-service coverage, including vision, hearing and pharmacy
coverage. These Medicare plans are offered on an insured basis.
o In June 2000, we announced our intention to exit additional
unprofitable Medicare markets effective December 31, 2000. Such
markets constitute approximately 50% of our Medicare membership at
June 30, 2000. During the remainder of 2000, we will continue to
monitor any legislative or regulatory changes that might increase
reimbursement under applicable Medicare contracts and then make a
final determination whether to exit these Medicare markets, as
permitted under HCFA regulations, depending on the level of the
reimbursement increase.
o We have contracts with some 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.
We offer a variety of other health care coverages offered as either
supplements to health products or as stand-alone products. Coverages, which are
offered on an insured or employer-funded basis, include indemnity and managed
dental plans, and prescription drug, vision and behavioral health programs. We
are the nation's second largest provider of dental coverage, based on
membership.
Group Insurance consists primarily of the following:
o 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.
o Group Disability Insurance provides coverage for disabled employees'
income replacement benefits for both short-term disability and
long-term disability. We also offer a managed disability product with
additional case management features. Group disability insurance
coverages are offered on both an insured and employer-funded basis.
o 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.
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Provider Networks
General
We provide members of our managed care plans with access to health care
services through networks of independent health care providers. We contract
with providers to participate in our provider networks in order to provide
members with broad access to high quality, cost effective medical care. The
participating providers in our networks are independent contractors and are
neither employees nor agents of New Aetna.
We use 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,
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.
We also have a variety of disease management programs related to specific
chronic diseases such as asthma, diabetes and congestive heart failure.
At June 30, 2000, we had approximately 448,000 health care providers
participating in our networks nationwide, including more than 283,000
physicians and more than 3,100 hospitals.
Contracting
Primary Care Physicians
Current compensation by our HMOs to directly contracted PCPs is
principally on a capitated basis, although we also use fee-for-service
contracts and have eliminated or partially eliminated capitation in some areas.
Under a capitation arrangement, physicians receive a monthly fixed fee for each
HMO member, regardless of the medical services provided to the member. In a
fee-for-service arrangement, network physicians are paid for health care
services provided to the member based upon a fee schedule.
Hospitals
We typically enter into contracts that provide for all-inclusive rates per
diem and per case (including certain hospital-based physician services, such as
radiology, anesthesiology and pathology), with fixed rates for ambulatory
surgery and emergency room services. We have some hospital contracts that pay a
percentage of billed charges.
Our 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 our patient management unit, which confirms
the patient's membership status while obtaining pertinent data. This unit also
coordinates related activities, including the subsequent transition to the home
environment and home care, if necessary. Case management assistance for complex
or "catastrophic" cases is provided by a special case unit.
Specialist and Ancillary Services
Specialist physicians participating in our networks are generally
reimbursed at contracted rates per visit or procedure.
Our HMOs have capitated payment arrangements for most mental health,
substance abuse, laboratory, radiology, diagnostic imaging, podiatric and
physical therapy services.
Integrated Delivery Systems
In some locations, we have developed contractual relationships with
integrated delivery systems ("IDSs") to provide comprehensive medical and
hospital services. Under these arrangements, our HMOs contract with an IDS
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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 our 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, which may include an analysis of
member grievances filed with us, on-site interviews, member surveys and
analysis of drug prescription patterns, and, for HMOs, analysis of utilization
patterns. Committees, composed of a peer group of participating private
physicians, review participating PCPs being considered for recredentialing.
We also offer quality and outcome measurement and improvement programs,
and health care data analysis systems for providers and purchasers of health
care.
We seek accreditation for some of our 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
June 30, 2000 approximately 82% of our HMO members participated in HMOs that
had received 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. We offer a wide array of benefit plans, many of which are available in
all 50 states.
Products offered by Group Insurance and Other Health are available in all
50 states. Depending on the product, we market to a range of customers from
small employer groups to large, multi-site national accounts.
The following table presents Health Care's membership by region and
funding arrangement, at the following dates:
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------------- -------------------------------------------------------------------
2000 (1) 1999 (2) 1998 (3) 1997
--------------------------- --------------------------- --------------------------- -------
Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total Total
------ ------- ------- ------ ------- ------- ------ ------- ------- -------
(Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast........ 1,515 807 2,322 1,535 858 2,393 1,347 708 2,055 1,824
Mid-Atlantic..... 1,992 1,442 3,434 2,140 1,462 3,602 1,759 1,268 3,027 3,023
Capitol.......... 779 996 1,775 900 1,107 2,007 791 984 1,775 1,265
Southeast........ 1,385 1,132 2,517 1,518 1,263 2,781 613 1,009 1,622 1,554
Mid-West......... 1,036 1,904 2,940 1,091 1,995 3,086 710 1,817 2,527 2,311
West Central..... 773 967 1,740 711 998 1,709 208 785 993 1,192
Southwest........ 1,241 1,161 2,402 1,785 1,286 3,071 997 910 1,907 1,126
Pacific Coast.... 1,344 952 2,296 1,359 1,047 2,406 878 881 1,759 1,439
------ ------- ------- ------ ------- ------- ------ ------- ------- -------
Total Health
Membership.... 10,065 9,361 19,426 11,039 10,016 21,055 7,303 8,362 15,665 13,734
====== ======= ======= ====== ======= ======= ====== ======= ======= =======
</TABLE>
__________________
(1) Excludes approximately 520 members of the NYLCare Texas operations that
were sold in the first half of 2000.
(2) Includes 5,093 PHC health care members, of which 1,688 represent ASO
members that we have agreed to service for Prudential.
(3) Includes 1,975 NYLCare members.
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For membership composition of our products by funding arrangement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Membership" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- 1999, 1998 and 1997 -- Health Care -- Membership."
For both Health Risk and PHC and Group Insurance and Other Health,
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. 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 Health Risk and PHC, 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.
Our products are sold primarily through our 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 plan sponsors, 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.
For federally qualified HMOs and for other plans where required by law, we
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, a
plan establishes premium rates based on its revenue requirements for its entire
enrollment in a given community. Under the "community rating by class" method,
a plan 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, a plan establishes premium rates
based in part on its revenue requirements for providing services to the group.
State laws in some of the states in which we operate plans require the filing
with and approval by the state of plan premium rates, and some 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. Our future results could
be affected if the premium rates we request are not approved or are adjusted
downward by state regulators. For non-federally qualified HMOs, "experience"
rating methods are utilized. Premium rates for "experience rated" plans give
consideration to the plan sponsors' historical and anticipated claim
experience.
Under retrospective rating, a 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
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expenses are less than those expected) then a refund may be 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, employer-funded plans which cover more than
300 lives.
We have contracts with HCFA to provide HMO Medicare+Choice 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, most of the
Medicare products offered by us require a supplemental premium to be paid by
the member. Under Medicare risk arrangements, we assume the risk of higher than
expected medical expenses. Medicare contracts generate higher per member per
month revenues, but also generate higher per member per month medical expenses,
than commercial plans.
We also have 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.
We have contracts with some states and local agencies in Maine, New
Jersey, Pennsylvania and Washington to provide fully insured health benefits to
persons eligible for Medicaid and/or subsidized children's health insurance
program benefits. These contracts are generally for a period of one to three
years. We receive 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. We assume the risk of higher than
expected medical expenses.
Contracts with plan sponsors to provide administrative services for
employer-funded plans are generally for a period of one year. Some of our
contracts include 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 plan sponsors will fall within a certain range. With any of these
guarantees, we are 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.
We believe that the most significant factors that distinguish competing
health plans are quality of service, 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 and managed care programs (including NCQA
accreditation status). We believe that we are competitive in each of these
areas. The ability to increase the number of persons covered by our 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 Health Risk and PHC, we compete 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, programs sponsored by the federal or state governments.
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Within the Other Health component of Group Insurance and Other Health, we
compete primarily with other commercial insurance companies and third party
administrators.
For the Group Insurance industry, we believe 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 Health Risk and PHC, the liability for health care costs payable
reflects estimates of the ultimate cost of claims that have been incurred but
not yet reported or reported but not yet paid. Health care costs payable are
estimated periodically, and any resulting adjustments are reflected in
current-period operating results within health care costs. Health care costs
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. A worsening (or
improvement) of medical cost trend or changes in claim payment patterns from
those assumed in estimating health care costs payable would cause these
estimates to change and such change could be material.
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 our 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 our 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
We use reinsurance agreements with nonaffiliated insurers for Group
Insurance products to control our exposure to large losses and certain other
risks. We maintain catastrophic life reinsurance which provides protection
against accidents involving five or more covered lives. For disability
products, 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 disability
products, a quota share treaty for another market segment of disability
products, and facultative treaties on a case by case basis. In addition, we
carry excess medical malpractice professional liability insurance.
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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>
1999 1998 1997
-------- -------- --------
(Millions)
<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.
Large Case Pensions
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, we discontinued our fully guaranteed Large Case Pensions
products. For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Large Case Pensions -- Discontinued Products."
Customers
Premiums and fees from the federal government accounted for 21% of the
Health Care segment's revenue in 1999. Contracts with HCFA accounted for 81% of
these premiums and fees, with the balance from federal employee related benefit
programs. Our Large Case Pensions business is not 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 15 of Notes to Consolidated
Financial Statements regarding segment information.
Trademarks
The trademarks Aetna(R), Aetna U.S. Healthcare(R), and U.S. Healthcare(R),
together with the corresponding design logos, are owned by us. We consider
these trademarks and our other trademarks and trade names important in the
operation of our business. However, our business is not dependent on any
individual trademark or trade name.
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Ratings
Many of our group insurance and large case pensions products are
written out of Aetna Life Insurance Company ("ALIC"), one of our subsidiaries.
Many of our customers may consider ALIC's claims-paying ratings to be
important. ALIC has the following claims-paying ratings:
Claims-Paying Claims-Paying
Rating Rating
Rating Agency (April 26, 2000) (August 3, 2000) (1)
------------- ---------------- --------------------
A.M. Best....................... A A
Fitch (formerly Duff & Phelps).. AA- AA-
Moody's Investors Service....... A1 A1
Standard & Poor's............... A+ A+
_________________
(1) A.M. Best has the ALIC rating under review with developing implications.
Moody's has placed the ALIC rating on review. Standard and Poor's has
placed the ALIC rating on CreditWatch negative. Fitch has placed the ALIC
rating on watch, evolving.
New Aetna has received the following ratings for its senior debt:
Senior Debt
Rating Agency Rating
------------- -----------
Moody's Investors Service....................
Standard & Poor's............................
Employees
We had about 40,000 domestic employees at June 30, 2000.
Properties
Our home office is a building complex located at 151 Farmington Avenue,
Hartford, Connecticut. We and some of our 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. We believe our properties are adequate and suitable for our
business as presently conducted.
The foregoing does not include numerous investment properties held by us
in our general and separate accounts.
Regulation
General
Our operations are subject to comprehensive regulation throughout the
United States. Supervisory agencies, including (depending on the state) state
health, insurance, corporation and securities departments, have broad authority
to grant licenses to transact business and regulate many aspects of the
products and services offered by us, as well as solvency and reserve adequacy.
Many agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. Our 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 we conduct our HMO and
other health operations have adopted laws and regulations that govern our
business activities to varying degrees. These laws and regulations may restrict
how we conduct our businesses and may result in additional burdens and costs to
us. Areas of governmental regulation include licensure, premium rates,
benefits, service areas, quality assurance procedures, plan design and
disclosures, eligibility requirements, provider rates of payment, surcharges on
provider payments, provider contract
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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 we do not
presently operate an HMO, we generally have 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.
Recent Medicare Changes
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 us. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Six Months Ended June 30, 2000 and 1999 -- Health Care
-- Health Risk and PHC -- Exiting Medicare Markets" and "Business of New
Aetna."
HIPAA
The federal government enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") in 1997. The legislation has three main
effects:
o it limits pre-existing condition exclusions that apply to individuals
changing jobs or moving to individual coverage;
o it guarantees that employees in the small group market have available
health coverage; and
o it prevents exclusion of individuals from coverage under group plans
based on health status.
In addition, regulations were recently proposed under HIPAA relating to
the privacy of health information and certain other matters affecting the
administration of health and related plan benefits. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Outlook" for more
information.
ERISA
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 New Aetna and employers
who maintain employee benefit plans subject to ERISA. Some of our
administrative services and other activities 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.
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Other Recent Matters
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. 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.
This legislation or regulation includes, among other things, the
following:
o Assessments, surcharges or taxes on premiums or provider payments to
fund uncompensated care, graduate medical education, high-risk pools,
guaranty funds, or government programs
o Changes to licensure or certification requirements
o Eliminating or reducing the scope of ERISA pre-emption of state
medical and bad faith claims under state law, exposing health plans
to expanded liability to punitive and other extra-contractual damages
o Extension of malpractice and other liability for medical and other
decisions from providers to health plans
o Hearings and limitations on the ability to terminate providers from
networks
o Increased reserve and capital requirements
o Liability for negligent denials or delays in coverage
o Mandatory coverage of experimental procedures and drugs
o Mandatory direct access to specialists for patients with chronic
conditions
o Mandatory direct access to specialists (including OB/GYNs) and
chiropractors
o Mandated expanded consumer disclosures and notices
o Mandatory expanded coverage for emergency services
o Mandated liberalized definitions of medical necessity
o Mandated liberalized internal and external grievance and appeal
procedures (including expedited decision making)
o Mandatory maternity and other lengths of hospital inpatient stay
o Mandatory point-of-service benefits for HMO plans
o Prohibition of so-called "gag" and similar clauses in physician
agreements
o Prohibitions on incentives based on utilization
o Prohibition or limitation of arrangements designed to manage medical
costs and improve quality of care, such as capitated arrangements
with providers or provider financial incentives
o Regulation of and restrictions on utilization management and review
o Regulation of the composition of provider networks, such as any
willing provider and pharmacy laws
o Required payment levels for out-of-network care
o Exempting physicians from the antitrust laws that prohibit price
fixing, group boycotts and other horizontal restraints on competition
o Third-party review of denials of benefits (including denials based on
a lack of medical necessity)
o Restricting or eliminating the use of formularies for prescription
drugs
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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 Care 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.
Texas Agreement
On April 11, 2000, our Texas HMOs entered into an assurance of voluntary
compliance with the Office of the Attorney General of Texas to settle, with
prejudice and without admission, litigation commenced by the Office of the
Attorney General of Texas in December 1998 regarding certain alleged business
practices and to make additional commitments. The agreement provides for, among
other things, allowing directly contracted Texas physicians in small group or
individual practice to choose whether to participate in either or both of our
HMO/HMO-based and PPO/PPO-based product lines; paying directly contracted
capitated primary care physicians with fewer than 100 HMO members on a
fee-for-service basis rather than a capitated basis; expanding independent
external review of coverage denials to include disputes regarding experimental
and investigational coverage, emergency coverage, prescription drug coverage
and standing referrals to specialists; and the creation of an Office of the
Ombudsman that will act as an advocate for members and assist them with appeals
or complaints. The agreement does not include any finding of fault nor does it
include any fines or penalties. We do not expect the agreement to have a
material adverse effect on our financial condition or results of operations,
and the agreement provides for potential relief should such unexpected impact
occur. For information regarding regulation of pricing by our HMOs, refer to
"-- Health Care -- Health Pricing."
Investment and Retirement Products and Services
Operations conducted by large case pensions are subject to regulation by
various government agencies where we conduct 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.
Federal Employee Benefit Regulation
Large case pensions also provides a variety of products and services to
employee benefit plans that are covered by ERISA.
In December 1993, in a case involving an employee benefit plan and an
insurance company, the United States Supreme Court ruled that assets in the
insurance company's general account that were attributable to a portion of a
group pension contract issued to the plan that was not a "guaranteed benefit
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 Supreme 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 occurs before the date that is 18 months after the DOL issues
final regulations required by the Act, except as
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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. We are not currently able to predict how these matters may
ultimately affect our businesses.
HMO and Insurance Holding Company Laws
A number of states, including Pennsylvania and Connecticut, regulate
affiliated groups of HMOs and insurers such as New Aetna 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 New Aetna,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Some of these laws also
regulate changes in control (as do Pennsylvania corporate laws), and other
matters such as transactions with affiliates. See Note 15 of Notes to
Consolidated Financial Statements.
Guaranty Fund Assessments
Under 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.
While we historically have recovered more than half of guaranty fund
assessments through statutorily permitted premium tax offsets, significant
increases in assessments could jeopardize future efforts to recover these
assessments. Some states have similar laws relating to HMOs. There were no
material charges to earnings for guaranty fund obligations during 1999, 1998,
or 1997. On April 6, 2000, the State of New Jersey enacted the New Jersey
Insolvent Health Maintenance Organization Assistance Fund Act of 2000. The act
is designed to reimburse individuals who were covered by and providers that had
contracts with two New Jersey HMOs prior to their insolvency. The total amount
to be assessed to all HMOs in New Jersey is $50 million. The act requires that
HMOs in the New Jersey market be assessed a charge calculated based on each
HMO's proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. We recorded an estimate of our share of this
assessment, based on our HMO market share in New Jersey, of $23 million pre-tax
($15 million after-tax) in the second quarter of 2000.
See Note 1 of Notes to Consolidated Financial Statements for further
discussion of accounting standards related to guaranty fund assessments.
Legal Proceedings
Shareholder Litigation
Class action complaints were filed in the United States District Court for
the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz
and Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J.
Oring. Other class action complaints were filed in the United States District
Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert;
on November 26, 1997 by the Rainbow Fund, Inc.; and on December 24, 1997 by
Terry B. Cohen. The Connecticut actions were transferred to the United States
District Court for the Eastern District of Pennsylvania for consolidated
pretrial proceedings with the cases pending there. The plaintiffs filed a
consolidated and amended complaint seeking, among other remedies, unspecified
damages resulting from defendants' alleged violations of federal securities
laws. The complaint alleged that Aetna 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
Aetna's medical claim reserves. Aetna 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 Aetna, Ronald E. Compton and Richard L. Huber. Aetna
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 Aetna common stock on the market from
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March 6, 1997 through 7:00 a.m. on September 29, 1997. Merits discovery was
completed in early 2000. On January 31, 200, plaintiffs filed expert reports.
On February 3, 2000, defendants filed motions for summary judgment. Also on
February 3, 2000, plaintiffs moved for permission to file a third amended
complaint. On March 20, 2000, the court granted plaintiffs leave to file a
third amended complaint and adopted a revised schedule. Pursuant to the revised
schedule, defendants filed new summary judgment motions in May 2000 and the
parties conducted expert discovery which is scheduled to be completed in the
third quarter of 2000. Trial is scheduled to begin in the fourth quarter of
2000. Defendants are defending the actions vigorously.
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
Health Care Litigation
We are involved in several purported class action lawsuits that are part
of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna 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. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
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 complaint seeks various forms of relief, including unspecified
damages, from us for alleged violations of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The complaint alleges that we do not make
adequate disclosure of provider compensation arrangements in the literature
that we make available to actual or prospective members. We intend to defend
the action vigorously and on November 1, 1999, filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. On
December 15, 1999, the court suspended further proceedings pending the
resolution of the Maio appeal by the United States Court of Appeals for the
Third Circuit.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill. An amended complaint was filed on November 9, 1999 by Jo Ann O'Neill,
Lydia K. Rouse and Danny E. Waldrop. The complaint seeks various forms of
relief, including unspecified damages and treble damages and restitution of
alleged improper profits, from Aetna, us, Richard L. Huber and unnamed members
of the Board of Directors of Aetna for alleged violations of ERISA and RICO.
The complaint alleges that defendants are liable for alleged misrepresentations
and omissions relating to advertising, marketing and member materials directed
to Aetna HMO members. On November 22, 1999, defendants moved to stay, dismiss
or transfer the action to the United States District Court for the Eastern
District of Pennsylvania based on the Conte and Maio complaints filed in that
court. On January 25, 2000, the court suspended further proceedings pending
resolution of a motion in cases involving other defendants to consolidate those
actions in a single court. This litigation is in the preliminary stages.
Defendants intend to defend the action vigorously.
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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 complaint seeks various forms of relief, including injunctive
relief, restitution and disgorgement of amounts allegedly wrongfully acquired,
from Aetna, us, 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 17500 and state common
law in connection with the sale and marketing of health plans in California.
The 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. Plaintiff has moved to remand
the action to state court. Aetna has moved to dismiss the 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. In August 2000, the
court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). 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 complaint seeks various forms of relief,
including injunctive relief, restitution and disgorgement of amounts allegedly
wrongfully acquired, from Aetna, us, 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
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. On May 5, 2000, the court denied
defendants' demurrer but granted in part their motion to strike portions of the
complaint and ordered plaintiffs to file an amended complaint. An amended
complaint was filed on May 15, 2000 and a second amended complaint on June 28,
2000. On August 15, the court denied defendants' demurrer but granted, in part,
their motion to strike portions of the second amended complaint and ordered the
plaintiffs to file a third amended complaint. The third amended complaint was
filed on August 25, 2000. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III. The complaint names as defendant The Prudential Insurance
Company of America, and also names as defendants Aetna and us solely to the
extent that we have assumed liability for the actions of Prudential in
connection with our acquisition of the Prudential health care business. The
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 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, we moved to
stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the fact that the Maio and Conte
Complaints were filed in that court. On January 25, 2000, the court suspended
further proceedings pending resolution of a motion in cases involving other
defendants to consolidate those actions in a single court. This litigation is
in the preliminary stages. We intend 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 complaint seeks various forms of relief, including unspecified damages,
treble damages and restitutionary relief for unjust enrichment, from Aetna and
us for alleged violations of RICO and ERISA. The 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, we
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 August 25, 2000 we moved to
dismiss the action for failure to state a claim. This litigation is in the
preliminary stages. We intend to defend the action vigorously.
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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 complaint seeks various forms of relief, including
unspecified damages, treble damages and punitive damages, from Aetna, us and
Richard L. Huber for alleged violations of RICO. The complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with us. On May 15, 2000, the Judicial Panel on
Multidistrict Litigation issued a conditional order transferring this action to
the United States District Court for the Southern District of Florida for
consolidated pretrial proceedings in the matter known as In re Humana, Inc.
Managed Care Litigation. On May 30, 2000, we filed with the Panel an objection
to that conditional transfer order, but on July 14, 2000, we requested
consolidation of that action with others pending against us (see the discussion
regarding the MDL Application below). This litigation is in the preliminary
stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz. The complaint names as defendants The Prudential Insurance
Company of America and health maintenance organizations that we acquired from
Prudential on August 6, 1999. The complaint seeks various forms of relief from
defendants, including return of certain premiums, disgorgement of allegedly
improper profits and injunctive relief, for alleged contractual breaches and
violations of ERISA. Plaintiffs purport to represent a class including persons
who were Prudential Health Plans subscribers before and/or after our
acquisition of those operations. The complaint alleges that Prudential Health
Plans' administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 we joined in Prudential's motion
to dismiss the complaint for failure to state a claim. This litigation is in
the preliminary stages. We intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero. The complaint names as defendants The Prudential
Insurance Company of America and health maintenance organizations that we
acquired from Prudential on August 6, 1999. The complaint seeks various forms
of relief from defendants, including return of certain premiums, disgorgement
of allegedly improper profits and injunctive relief, for alleged contractual
breaches and violations of ERISA. Plaintiffs purport to represent a class
including persons who were Prudential Health Plan subscribers before and/or
after our acquisition of those operations. The complaint alleges that
Prudential Health Plans' administration and disclosure of policies concerning
medical necessity determinations violated contractual and fiduciary duties owed
to subscribers. On July 24, 2000 the court stayed the action. This litigation
is in the preliminary states. We intend to defend the action vigorously.
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri complaints, as
well as both the Mississippi O'Neill complaint and the Florida O'Neill
complaint. Hearing on the MDL Application is scheduled to take place on
September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop. The complaint names as defendants Aetna and us. The complaint seeks
various forms of relief, including unspecified damages and treble damages and
restitution of alleged improper profits, from Aetna and us for alleged
violations of ERISA and RICO. The complaint alleges that defendants are liable
for alleged misrepresentations and omissions relating to advertising and
marketing materials directed to Aetna HMO members, and alleges that defendants
conspired with other managed care companies not to disclose alleged
industry-wide practices. We sought from the Florida federal court a stay of
further proceedings on the complaint pending a decision on the MDL Application.
On July 27, 2000, the Florida federal court denied that motion. On August 11,
2000, we filed a motion to dismiss the complaint. Briefing on that motion is
scheduled to be completed in early September 2000. Additionally, the court has
scheduled briefing on plaintiffs' class certification motion to be completed by
November 2000. This litigation is in the preliminary stages. Defendants intend
to defend the action vigorously.
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A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher. The complaint seeks various forms of relief, including
unspecified damages, from us for alleged violations of ERISA. The complaint
alleges that we do not make adequate disclosure of the operation of our managed
care plans to actual or prospective members. We intend to defend the action
vigorously. We have notified the Judicial Panel on Multidistrict Litigation of
the complaint for consolidation with the other matters referred to in the MDL
Application.
Other Litigation and Regulatory Proceedings
We are also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of our business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in our health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of ours, 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
Aetna, 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.
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to us, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to our financial condition, although they may adversely affect results of
operations in future periods.
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RELATIONSHIP AMONG AETNA, NEW AETNA AND ING
Aetna and New Aetna, or their respective subsidiaries, will enter into
various agreements in connection with the spin-off that will govern their
ongoing relationships and provide for an orderly transition after completion of
the spin-off and the merger. This section describes the material provisions of
those agreements. This description does not purport to be complete and is
qualified in its entirety by reference to the forms of and term sheets for such
agreements, which are filed as exhibits to the registration statement on Form
10 of which this information statement is a part. Some of these agreements are
also attached as Annexes to the proxy statement. All shareholders are urged to
read these agreements carefully in their entirety.
References in this section to "Aetna" should be read as a reference to
Aetna and its subsidiaries after giving effect to the spin-off and the merger
and references to "New Aetna" should be read as a reference to New Aetna and
its subsidiaries after giving effect to the spin-off.
Distribution Agreement
The Distribution Agreement is the principal document governing the terms
of the spin-off. The material terms and conditions of the Distribution
Agreement that will govern the ongoing relationships of Aetna and New Aetna are
summarized below.
Allocation of Liabilities; Indemnification
Aetna is generally to be responsible for the following liabilities,
whether arising before, at or after the spin-off:
o all liabilities of or relating to Aetna, New Aetna or any subsidiary
of either to the extent arising from the conduct of, in connection
with or relating to Aetna's business (after giving effect to the
spin-off) or to the ownership or use of assets or property in
connection with such business;
o all liabilities of or relating to any Aetna subsidiary (after giving
effect to the spin-off) except to the extent arising from the conduct
of, in connection with or relating to the business or assets of New
Aetna or any of its subsidiaries (after giving effect to the
spin-off);
o certain specified corporate-level and other liabilities;
o the debt to be retained by Aetna in the merger; and
o the tax- and employee benefits-related liabilities allocated to Aetna
in the tax sharing and employee benefits agreements referred to
below.
Except for the liabilities allocated to Aetna and subject to certain other
limited exceptions, New Aetna will be generally responsible for all
liabilities, whether arising before, at or after the spin-off, of or relating
to:
o Aetna, New Aetna or any subsidiary of New Aetna (after giving effect
to the spin-off), including, for example, the legal proceedings
referred to under "Business of New Aetna -- Legal Proceedings";
o Aetna or any subsidiary of Aetna to the extent arising from the
conduct of, in connection with or relating to any of New Aetna's
assets or business or the ownership or use thereof;
o Aetna's former domestic property-casualty operations;
o certain specified contracts, including contracts governing the
disposition by Aetna of its individual life insurance business; and
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o the tax- and employee benefits-related liabilities allocated to New
Aetna in the tax sharing and employee benefits agreements referred to
below.
Aetna and New Aetna will indemnify each other with respect to the
liabilities for which the relevant entity is responsible.
Non-Competition and Non-Solicitation
For a period of three years following the date on which the merger is
completed, and subject to certain exceptions, neither New Aetna nor any of its
affiliates (after giving effect to the spin-off), will engage in the United
States in the following businesses conducted by Aetna immediately prior to the
completion of the merger:
o underwriting and/or issuance of defined contribution group annuities
for pension plans maintained by employer or similar groups pursuant
to Section 401(k), 403(b) or 457 of the Internal Revenue Code;
o underwriting and/or issuance of individual annuities, providing
investment advisory or broker-dealer services; or
o the management of mutual funds.
In addition, New Aetna has agreed that neither it nor any of its affiliates
(after giving effect to the spin-off) will engage in certain specified
businesses in foreign jurisdictions.
For an additional period of 12 months after the three year period, and
subject to certain exceptions, to the extent that New Aetna or any of its
affiliates (after giving effect to the spin-off) engages directly or indirectly
in any of the prohibited businesses described above, it will do so using a
brand other than "Aetna."
Among other activities that are not prohibited by the restrictions
outlined above, New Aetna and its affiliates (after giving effect to the
spin-off) are not prohibited from:
o conducting any of the following activities:
- continuing the existing businesses of New Aetna and its
affiliates (after giving effect to the spin-off) as of the date
of the merger, including:
- providing or administering in the United States individual
or group life insurance coverage or benefit plans and
certain other specified businesses; provided that, to the
extent such activities incorporate a prohibited business,
the prohibited business must be provided by a third party
using a brand other than "Aetna";
- continuing the existing investment advisory activities and
investment management activities of the Aetna Investment
Management Group;
- continuing to serve New Aetna's existing large case
pensions clients;
- continuing the existing activities of Aetna Global
Benefits, provided that to the extent such support or
services incorporate a prohibited business, such prohibited
business must be provided by a third party using a brand
other than "Aetna"; and
- providing certain technical support, consulting,
administration, insurance or reinsurance services for
health insurance, life insurance or other insurance
coverage underwritten by third parties, provided that to
the extent such support or services incorporate a
prohibited business, such prohibited business must be
provided by a third party using a brand other than "Aetna";
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- general financial planning not requiring New Aetna or any
of its affiliates to act as a registered broker-dealer;
- offering financial products of, or services underwritten or
managed by, unaffiliated third parties (which products or
services use a brand other than "Aetna") to customers of,
or in conjunction with the products or services of, New
Aetna; and
- providing information, advice, consulting or other
counseling services to groups or individuals regarding
health, life insurance, retirement savings or other
financial or benefits matters, provided that if such
activities incorporate a prohibited business, such
prohibited business must be provided by a third party using
a brand other than "Aetna";
o engaging in any prohibited business in any jurisdiction if Aetna
ceases to engage in such business in such jurisdiction; or
o owning, acquiring or investing in any entity, provided that if
that entity derives in excess of 10% of its consolidated gross
revenue in the most recently completed four fiscal quarters from
business activities which would be prohibited businesses under
the Distribution Agreement, New Aetna will divest a portion of
that business representing the excess within 12 months of the
acquisition date.
Notwithstanding the limitations noted above, beginning 18 months after the
merger is completed, New Aetna and its affiliates (after giving effect to the
spin-off) may engage in any prohibited business (under the Aetna brand or
otherwise) when, and only when, (x) the engagement in the prohibited business
is in combination with and incidental to engagement in a business which is not
a prohibited business and (y) failure to engage in such prohibited business
would reasonably result in a significant competitive advantage in connection
with the business of New Aetna or its affiliates (after giving effect to the
spin-off) or result in a failure of any such entity to reasonably accommodate
its existing customers.
Aetna and New Aetna have also agreed to restrictions on the solicitation
or employment of employees of the other party.
Trademarks; Tradenames
The Distribution Agreement provides in general that, when the spin-off is
completed, Aetna and its affiliates will not use the name "Aetna," marks or
names derived therefrom or specified other marks and names, except as
specifically permitted by the trademark license agreement referred to below.
New Aetna will not, and will not permit any of its affiliates to, use the
"Aeltus" name or its derivatives, or the Aetna Chinese name rights retained by
Aetna, except as permitted in an agreement relating to the Chinese trademark to
be entered into by Aetna and New Aetna.
Tax Sharing Agreement
The tax sharing agreement describes, among other things, Aetna's and New
Aetna's rights and obligations relating to tax payments and refunds for periods
before completion of the spin-off and related matters such as the filing of tax
returns and the handling of audits and other tax proceedings. The tax sharing
agreement also describes the tax indemnification arrangements among Aetna and
its subsidiaries (which we refer to as the "Aetna tax group"), on the one hand,
and New Aetna and its subsidiaries (which we refer to as the "New Aetna tax
group"), on the other hand.
Return Filing, Tax Payment and Conduct of Tax Proceedings
In general, Aetna will be responsible for filing consolidated federal and
consolidated, combined or unitary state tax returns that include members of the
New Aetna tax group for periods through the completion of the spin-off, and
paying the related taxes to the IRS or other relevant taxing authority. New
Aetna will pay Aetna the portion of those taxes that is allocable to the New
Aetna tax group. In general, the tax sharing agreement allocates U.S.
consolidated
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tax liabilities of a tax group with members from both the Aetna tax group and
the New Aetna tax group (which we refer to as a combined tax group) so that the
New Aetna tax group would be responsible for taxes as though the relevant
members of the New Aetna tax group had filed, in accordance with rules provided
in the tax sharing agreement, their own separate group return, while having
been limited in the use of that separate group's tax assets in a manner that
equitably reflected the combined tax group's actual utilization of those tax
assets.
When the returns of a combined tax group for periods through the
completion of the transaction are prepared, Aetna will decide how tax matters
that predominantly affect the Aetna tax group are handled and New Aetna will
decide how tax matters that predominantly affect the New Aetna tax group are
handled. Aetna and New Aetna will together decide how remaining tax matters are
handled. The tax sharing agreement generally provides comparable rules for
determining which of Aetna and New Aetna controls the conduct of an audit or
other tax proceeding relating to a tax matter of a combined tax group. However,
the tax sharing agreement allows Aetna or New Aetna to control the settlement
of a tax matter, in an audit or other tax proceeding, that could give rise
under the agreement to an indemnification obligation on the part of the Aetna
tax group or the New Aetna tax group, respectively.
Indemnification Arrangements
The tax sharing agreement describes the tax liabilities against which each
of the Aetna tax group and the New Aetna tax group will indemnify the other tax
group. In general, the New Aetna tax group will indemnify the Aetna tax group
against, without duplication:
o tax liabilities attributable to members of the New Aetna tax group
relating to any period,
o specified federal income tax liabilities of members of the Aetna tax
group relating to periods ending on or before 1994 and certain other
described tax liabilities of members of the Aetna tax group,
o any tax indemnity payments required under, or any tax liabilities
relating to or resulting from the treatment of, specified historical
transactions that were undertaken to acquire or dispose of
subsidiaries and/or businesses,
o any tax liabilities relating to, or resulting from the treatment of,
the spin-off, and
o any tax liabilities resulting from a breach by the New Aetna tax
group of the provisions of the tax sharing agreement.
In general, the Aetna tax group will indemnify the New Aetna tax group
against, without duplication:
o tax liabilities attributable to members of the Aetna tax group
relating to any period, except for those liabilities against which
the New Aetna tax group has agreed under the tax sharing agreement to
indemnify the Aetna tax group,
o any tax indemnity payments required under, or any tax liabilities
relating to or resulting from the treatment of, specified historical
transactions that were undertaken to acquire or dispose of
subsidiaries and/or businesses associated with the businesses
conducted by the Aetna tax group, and
o any tax liabilities resulting from a breach by the Aetna tax group of
the provisions of the tax sharing agreement.
Employee Benefits Agreement
Below is a summary of the terms and conditions of the employee benefits
agreement to be entered into between Aetna and New Aetna.
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Treatment of Employees and Plans in General
Under the employee benefits agreement, Aetna will generally retain
responsibility for individuals actively employed by Aetna in connection with
the domestic financial services business at the time of completion of the spin-
off and for all current and former International Business employees (which we
refer to as the "Aetna Employees"). New Aetna will generally be responsible for
individuals actively employed by New Aetna in the United States at the time of
the completion of the spin-off and for all former and retired United States
employees of Aetna or New Aetna (which we refer to as the "New Aetna
Employees").
As of the completion of the spin-off, New Aetna will assume sponsorship
of, and Aetna shall cease to be the sponsor of or a participating employer in,
those employee benefit plans that, prior to the spin-off, covered both Aetna
Employees and New Aetna Employees. During the year following the completion of
the spin-off, Aetna will generally maintain certain benefit plans for the
benefit of the U.S. Aetna Employees that, in the aggregate, are comparable to
the plans provided to such employees before the spin-off.
In connection with the spin-off, New Aetna will cause liabilities and
related assets in respect of Aetna Employees to be transferred from its
tax-qualified savings and retirement plans to similar plans to be adopted by
Aetna.
In addition, Aetna will hire, or be responsible for severance benefits
for, up to 235 information technology, headquarters-related management
services, tax, audit or financial controls employees who, prior to completion
of the spin-off, provided services to the financial services and international
businesses of Aetna.
Equity-Based Compensation
In connection with the spin-off and effective as of the completion of the
spin-off, New Aetna will equitably adjust options granted under the Aetna 1998
and 1996 Stock Incentive Plans as follows: Aetna options held by former
employees of Aetna and New Aetna (or their respective subsidiaries) and by
employees of New Aetna (or its subsidiaries) at the time of the spin-off and
the merger (collectively, "New Aetna Holders") will be equitably converted into
options of New Aetna with adjustments made both to the number of options and
the exercise prices to maintain the intrinsic in-or-out-of-the-money value of
the related Aetna options (the "New Aetna Holder Adjustment"). Aetna options
held by individuals who will be transferred to ING America (or its
subsidiaries) at the time of the spin-off and the merger ("Transferred
Holders") will also be equitably adjusted. Options held by Transferred Holders
that are in-the-money (which we refer to as In-the-Money Options) will be
cancelled in exchange for a cash payment equal to the aggregate in-the-money
amount (which we refer to as the Spread). Options held by Transferred Holders
that are not In the Money Options ("Out-of-the-Money Options") will be
cancelled; provided, however, that if such Out-of-the-Money Options were
initially granted in exchange for the optionee foregoing a cash bonus, such
options will be rescinded for the amount of the foregone bonus.
Aetna will retain responsibility for any accrued liabilities to Aetna
Employees for incentive units granted under the Aetna 1998 and 1996 Stock
Incentive Plans and under the Aetna Performance Excellence Unit Plan.
Transition Services Agreement
The transition services agreement relates to certain transitional services
to be provided by Aetna and New Aetna to each other after completion of the
spin-off. The purpose of the transition services agreement is to ensure that
both Aetna and New Aetna continue to provide each other services that are
required for a limited time to conduct their respective operations.
Terms and Conditions
The services that New Aetna will provide to Aetna include:
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o certain information technology, computing and telecommunications
services, such as production control, application availability,
desktop engineering and support, access control, server management,
network operations and switchboard as well as certain business
applications;
o other transition services, such as employee reimbursement processing
for business, accounts payable, payroll processing, general ledger
support, benefits and field office lease administration, purchasing;
and
o any other services that
- Aetna received in whole or part from New Aetna in the ordinary
course prior to the completion of the spin-off;
- are identified in writing by Aetna to New Aetna within 45
calendar days following the completion of the spin-off; and
- are reasonably needed in order to conduct the operations of
Aetna, as conducted in the ordinary course prior to the
completion of the spin-off, and the reasonable growth thereof;
and
o reasonable additional incidental services as Aetna needs to conduct
its business.
The services that Aetna will provide to New Aetna include:
o services with respect to information technology business applications
and systems;
o any other services that
- the business of New Aetna received in whole or part from Aetna
or its affiliates in the ordinary course prior to the completion
of the spin-off;
- are identified in writing by New Aetna to Aetna within 45
calendar days following the completion of the spin-off; and
- are reasonably needed in order to conduct the operations of the
business of New Aetna, as conducted in the ordinary course prior
to the completion of the spin-off, and the reasonable growth
thereof; and
o reasonable additional incidental services as New Aetna needs to
conduct its business.
Term
Each service will be provided for an initial period not to exceed 12
months after the completion of the spin-off, subject to certain exceptions.
However, the transition period for any service may be modified by mutual
consent of New Aetna and Aetna and may be extended under certain circumstances.
The transition services agreement provides that:
o the service recipient, may, without cause, upon 60 calendar days
written notice terminate the purchase of any or all services;
o New Aetna and Aetna will work in good faith and in a commercially
reasonable fashion to eliminate the service recipient's need to
receive the services from the service provider; and
o the parties will employ reasonable best efforts so that, by the
completion of the spin-off, and in any event not later than 45
calendar days thereafter, New Aetna and Aetna will jointly submit to
an operating committee one or more plans for eliminating the need for
each service.
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Pricing for Services
For each period in which it receives a service, the service recipient will
pay the service provider:
o its actual out-of-pocket cost for such service, including a
proportionate share of its overhead (if applicable), computed in
accordance with internal charge-back methodologies historically used
by the service provider (but excluding profit); or
o to the extent the pricing for such service is specified on a schedule
to the transition services agreement, the amount specified in or
calculated in accordance with the method applicable to such service
in the applicable schedule.
Service Levels; Cures; Remedies Upon Default
Except to the extent otherwise expressly provided in any schedule to the
transition services agreement:
o the service levels for any services will be equivalent to those
provided to the service provider's ongoing operations, or
o if the service provider and service recipient do not have comparable
operations with respect to a service, then the service level shall be
equivalent to the standards provided to the service recipient for the
12 months prior to the completion of the spin-off.
For any service that a schedule to the transition services agreement
identifies as critical to the service recipient's operations, if a breach is
not remedied within a reasonable period of time, then the service recipient may
outsource the provision of such service to a third party and the service
provider shall reimburse the service recipient for any increase in the cost of
such service.
Operating Committee
New Aetna and Aetna each will appoint three employees, at least one of
whom shall be a senior executive, to the "Operating Committee". The Operating
Committee will oversee the implementation and ongoing operation of the
transition services agreement and shall attempt in good faith to resolve
disputes between the parties.
Other Transitional Arrangements and Payments
Additionally, the transition services agreement provides that,
o upon its execution, Aetna shall reimburse New Aetna for all amounts
it has paid for goods or services ordered or received after March 31,
2000 for:
- purchase of information technology equipment, or licensing of
information technology software, primarily for use in the
financial services and international businesses; and
- tenant improvements on properties leased primarily for use in
the financial services and international businesses.
o New Aetna and Aetna will each pay 50% of the costs of physically
separating the premises at 151 Farmington Avenue, Hartford,
Connecticut.
o Upon execution of the transition services agreement, Aetna shall pay
New Aetna the net book value as of completion of the spin-off of the
building improvements in the Tower Building and the tenant
improvements on State House Square and field office properties
primarily used in the financial services and international businesses
of Aetna.
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o Aetna will bear the entire expense (other than New Aetna's internal
costs or any out of pocket expenses or other charges paid to New
Aetna's advisors or representatives, if any) of
- transferring, or obtaining new licenses with respect to,
software used primarily in the financial services and
international businesses of Aetna;
- additional licensing or similar fees paid by New Aetna to third
party vendors by reason of New Aetna providing any transition
service pursuant to the transition services agreement; and
- any other fees or costs associated with terminating, assigning
or transferring to the Aetna business any contract made use of
by the financial services and international businesses of Aetna.
Trademark Assignment
In general, Aetna will assign to New Aetna, effective on the date of the
spin-off, all marks (other than Aetna's Aeltus marks, certain of Aetna's
Chinese marks and certain other marks) as specified in the Distribution
Agreement.
Trademark Licensing Agreement
Grant of License
The trademark licensing agreement will provide that:
o New Aetna will grant to Aetna a non-exclusive, royalty-free right to
use those marks which Aetna uses in its financial services and
international businesses;
o during the three-year term of the trademark licensing agreement,
Aetna and its affiliates will generally be permitted to use the marks
only in connection with the financial services and international
businesses of Aetna;
o during the initial 18 months of the three-year term, ING may use the
marks also in connection with the offering, sale and distribution of
products of the financial services and international businesses of
Aetna together with products of ING and its other affiliates;
o during the remaining 18 months of the three-year term, and with
specified exceptions, Aetna and its affiliates will be permitted to
use the marks solely in association with certain specified ING
trademarks in a combined format;
o except as provided above, no mark can be used
- in connection with any other business of ING or any of its
affiliates, or
- as a composite with another trademark;
o New Aetna will retain the right to use the marks during the term in
connection with any action or activity, subject to restrictions on
competition set forth in the Distribution Agreement and described
above under "Non-Competition and Non-Solicitation"; and
o during the term, New Aetna will not license the marks in a manner
which would conflict with the business of Aetna as such business is
conducted at the time of the completion of the spin-off.
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Use, Ownership and Protection of the Marks
Under the trademark licensing agreement:
o Aetna and its affiliates will use the marks in accordance with all
applicable laws and regulations and in accordance with sound
trademark and trade name usage principles;
o Aetna will not challenge the validity of New Aetna's ownership of the
marks or contest the fact that its rights are only those of a
non-exclusive licensee of the marks;
o Aetna and its affiliates will, after expiration of the three-year
term, not use the marks in any jurisdiction in connection with health
care, financial services or otherwise; and
o Aetna will, during the three-year term, notify New Aetna immediately
of any conflicting uses, infringement or unfair competition arising
in connection with the use of the marks in the financial services and
international businesses of Aetna of which Aetna has actual
knowledge.
Indemnification
Aetna and New Aetna will indemnify one another against specified
liabilities arising in connection with the use and license of the licensed
marks.
Software Licensing Agreement
Pursuant to the software licensing agreement, New Aetna will grant to
Aetna a perpetual, royalty-free, non- exclusive, non-transferable, irrevocable
license to use, reproduce, display, perform, modify and create derivative works
of certain computer software, solely in connection with the business of Aetna.
Aetna will own all modifications created by or for Aetna, subject to New
Aetna's underlying rights.
Lease Agreement
Aetna and New Aetna will enter into a lease agreement, pursuant to which
New Aetna will lease the Tower Building and additional conference and training
annex office space at 151 Farmington Avenue, Hartford, Connecticut, to Aetna.
The lease provides for an initial annual rental payment of approximately $11.1
million, subject to annual escalation under certain circumstances. The initial
term of the lease is seven years with an option to renew the term for a period
expiring not later than June 30, 2009. If Aetna exercises this renewal, then it
will have two consecutive five year renewal options for all of the premises.
However, New Aetna will have the right to terminate each five year renewal
option provided it does so for the purposes of occupying the premises for its
own employees or the employees of its affiliates and subsidiaries.
City Place Agreement
Aetna will enter into a lease with New Aetna that will provide for New
Aetna to lease space in the CityPlace building (located at 185 Asylum Avenue,
Hartford, Connecticut 06103), with a term beginning on April 1, 2004 and ending
on October 31, 2008. The lease provides for an initial annual rental payment of
approximately $5.8 million (adjusted based on annual expense escalations since
1997). New Aetna will have the right to sublet any of these premises with the
consent, not to be unreasonably withheld, of Aetna.
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MANAGEMENT
Directors and Executive Officers of New Aetna
The following table shows information about the executive officers and
proposed directors of New Aetna. With the exception of Mr. Donaldson, who is,
and will continue to be, a director of New Aetna, the proposed directors listed
below are expected to begin serving as directors at the time of the spin-off
and the merger, assuming approval of the merger and related transactions by
Aetna's shareholders. The Chairman is elected and all other executive officers
listed below are appointed by the board of directors and hold office until the
next annual meeting of the board or until their successors are elected or
appointed. None of these officers and proposed directors have family
relationships with any other executive officer or proposed director. All ages
are as of August 31, 2000:
<TABLE>
<CAPTION>
Name Principal Position Age
---- ------------------ ---
<S> <C> <C>
William H. Donaldson..................... Chairman, President and Chief Executive Officer 69
Betsy Z. Cohen........................... Proposed Director 58
Barbara Hackman Franklin................. Proposed Director 60
Jeffrey E. Garten........................ Proposed Director 53
Jerome S. Goodman........................ Proposed Director 66
Earl G. Graves........................... Proposed Director 65
Gerald Greenwald......................... Proposed Director 64
Ellen M. Hancock......................... Proposed Director 57
Michael H. Jordan........................ Proposed Director 64
Jack D. Kuehler.......................... Proposed Director 68
Judith Rodin............................. Proposed Director 55
Frolly M. Boyd........................... Head of Group Insurance 49
John W. Coyle............................ Head of Business Operations 48
Arthur N. Leibowitz...................... Chief Medical Officer 53
L. Edward Shaw, Jr....................... General Counsel 56
Alan J. Weber............................ Chief Financial Officer 51
</TABLE>
William H. Donaldson. Mr. Donaldson became Chairman, President and Chief
Executive Officer of Aetna on February 25, 2000 and became Chairman, President
and Chief Executive Officer of our company on May 30, 2000. Mr. Donaldson has
been a director of Aetna or its affiliates since 1977. He will resign as
Chairman, President, Chief Executive Officer and Director of Aetna upon
completion of the merger and related transactions. In 1959, Mr. Donaldson
co-founded Donaldson, Lufkin & Jenrette, Inc. (investment banking) and more
recently served as Co- Founder and Senior Advisor of that firm from September
1995 until he joined Aetna. He served as Chairman and Chief Executive Officer
and a director of the New York Stock Exchange, Inc. from 1991 to 1995, was
formerly Chairman and Chief Executive Officer of Donaldson, Lufkin & Jenrette,
Inc. and is a co-founder of its former subsidiary, Alliance Capital Management
Corp. (investment management). Mr. Donaldson is Chairman of the Carnegie
Endowment for International Peace and a director of Bright Horizons Family
Solutions, Inc. (family support services) and Mail.com, Inc. (Internet service
provider). The founding Dean and Professor of Management at the Yale School of
Management, he also served as U.S. Under Secretary of State and Counsel to the
Vice President of the United States. Mr. Donaldson is a director of the Lincoln
Center for the Performing Arts and the Foreign Policy Association, is a trustee
of the Aspen Institute, the Marine Corps University Foundation and The New York
City Police Foundation, Inc., and is the Chairman of the Yale School of
Management Advisory Board.
Betsy Z. Cohen. Mrs. Cohen has been a director of Aetna or its affiliates
since 1994 and will resign as a director of Aetna upon completion of the merger
and related transactions. Mrs. Cohen has served as Chairman, Chief Executive
Officer and trustee of Resource Asset Investment Trust (real estate investment
trust) since August 1997. Mrs. Cohen also had served as a director of Hudson
United Bancorp (holding company), the successor to JeffBanks, Inc. where she
had been Chairman and Chief Executive Officer since its inception in 1981 and
also served as Chairman and Chief Executive Officer of its subsidiaries
Jefferson Bank (which she founded in 1974) and Jefferson Bank New Jersey (which
she founded in 1987) prior to JeffBanks merger with Hudson United Bancorp in
December 1999. From 1985 until 1993, Mrs. Cohen was a director of First Union
Corp. of Virginia (bank holding
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company) and its predecessor, Dominion Bankshares, Inc. In 1969, Mrs. Cohen
co-founded a commercial law firm and served as a Senior Partner until 1984.
Mrs. Cohen also is a director of The Maine Merchant Bank, LLC and is a trustee
of Corporate Office Properties Trust.
Barbara Hackman Franklin. Ms. Franklin served as a director of Aetna or
its affiliates from 1979 to February 1992 and since February 1993. She will
resign as a director of Aetna upon completion of the merger and related
transactions. Ms. Franklin is President and Chief Executive Officer of Barbara
Franklin Enterprises (private investment and international trade consulting
firm). From 1992 to 1993, she served as the 29th U.S. Secretary of Commerce.
Before her appointment, Ms. Franklin was President and Chief Executive Officer
of Franklin Associates (management consulting firm), which she founded in 1984.
Ms. Franklin also served four terms on the Advisory Committee for Trade Policy
and Negotiations, as Alternate Representative to the 44th Session of the United
Nations General Assembly, and as a public member of the Board of the American
Institute of Certified Public Accountants and of the Auditing Standards Board
and is the only non-CPA to receive the John J. McCloy award for contributions
to audit excellence. Ms. Franklin has also been a Senior Fellow of The Wharton
School of the University of Pennsylvania, an original Commissioner of the U.S.
Consumer Product Safety Commission and a Staff Assistant to the President of
the United States. Ms. Franklin is a Distinguished Visiting Fellow at the
Heritage Foundation; is active in numerous international organizations; and is
a trustee of the Economic Club of New York. She is a director of The Dow
Chemical Company (chemicals, plastics and agricultural products), MedImmune,
Inc. (biotechnology company), Milacron Inc. (plastics processing technologies
and industrial products for metalworking) and Watson Wyatt & Company (global
human capital consulting firm).
Jeffrey E. Garten. Mr. Garten has been a director of Aetna or its
affiliates since January 2000 and will resign as a director of Aetna upon
completion of the merger and related transactions. Mr. Garten is the Dean of
the Yale School of Management, a position he assumed in 1995. Mr. Garten held
senior posts on the White House Staff and at the U.S. State Department from
1973 to 1979. He joined Shearson Lehman Brothers (investment banking) in 1979
and served as Managing Director from 1984 to 1987. In 1987, Mr. Garten founded
Eliot Group, Inc. (investment banking) and served as President until 1990, when
he became Managing Director of The Blackstone Group (private merchant bank).
From 1992 to 1993, Mr. Garten was Professor of Finance and Economics at
Columbia University's Graduate School of Business. He was appointed U.S. Under
Secretary of Commerce for International Trade in 1993 and served in that
position until 1995. Mr. Garten is a director of Calpine Corporation (power
company) and a director of 37 Warburg Pincus mutual funds. He is the author of
A Cold Peace: America, Japan, Germany and the Struggle for Supremacy and The
Big Ten: Big Emerging Markets and How They Will Change Our Lives, and he writes
a monthly column for Business Week magazine. He also serves on the Board of
Directors of Aetna Foundation, Inc.
Jerome S. Goodman. Mr. Goodman has been a director of Aetna or its
affiliates since 1988 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Goodman retired as Chairman of Travel
One (the nation's eighth-largest travel management company) upon the sale of
that firm to American Express Company on November 15, 1998. He had served as
Chairman of Travel One since 1971 and was the sole shareholder from 1971 to
1994. Mr. Goodman was a member of the New Jersey Sports and Exposition
Authority from 1991 to 1994 and its Chairman from 1992 to 1994. He also served
as Chairman, President and Chief Executive Officer of First Peoples Financial
Corporation (bank holding company) from 1987 to 1992 and President and Chief
Executive Officer of First Peoples Bank of NJ from 1983 to 1987. He was a
member of the Board of Directors of GBC Technologies, Inc. from 1992 to 1995
and a trustee of Resource Asset Investment Trust (real estate investment trust)
from 1997 to 1999. Mr. Goodman is a director of The Maine Merchant Bank, LLC,
and he also is a member of the Board of Trustees of the University of Science
at Philadelphia and served as its Chairman from 1988 to 1991.
Earl G. Graves. Mr. Graves has been a director of Aetna or its affiliates
since 1994 and will resign as a director of Aetna upon completion of the merger
and related transactions. Mr. Graves is Chairman and Chief Executive Officer of
Earl G. Graves, Ltd. (a multifaceted communications company) and is the
Publisher of Black Enterprise magazine, which he founded in 1970. Additionally,
since 1998, Mr. Graves is Managing Director of Black Enterprise/Greenwich
Street Corporate Growth Partners, L.P. Mr. Graves is a director of AMR
Corporation and its subsidiary, American Airlines, Inc., Federated Department
Stores Inc. (retailer) and Rohm and Haas Company (specialty chemicals and
plastics) and serves as a member of the Shareholders' Committee of
DaimlerChrysler AG
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(transportation products and financial and other services). Mr. Graves also is
a trustee of Howard University and is a member of the Executive Board and
Executive Committee of the National Office of the Boy Scouts of America,
serving as Vice President of Relationships and Marketing. He also serves on the
Board of Directors of Aetna Foundation, Inc.
Gerald Greenwald. Mr. Greenwald has been a director of Aetna or its
affiliates since 1993 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Greenwald retired in July 1999 as
Chairman and Chief Executive Officer of UAL Corporation, the parent company of
United Airlines (UAL), having served in that position since July 1994. From
1979 to 1990, Mr. Greenwald held various executive positions with Chrysler
Corporation (automotive manufacturer), serving as Vice Chairman of the Board
from 1989 to May 1990 and as Chairman of Chrysler Motors from 1985 to 1988. In
1990, Mr. Greenwald was selected to serve as Chief Executive Officer of United
Employee Acquisition Corporation in connection with the proposed 1990 employee
acquisition of UAL. From 1991 to 1992, he was a Managing Director of Dillon
Read & Co., Inc. (investment banking) and, from 1992 to 1993, he was President
and Deputy Chief Executive Officer of Olympia & York Developments Ltd.
(Canadian real estate company). Mr. Greenwald then served as Chairman and
Managing Director of Tatra Truck Company (truck manufacturer in the Czech
Republic) from 1993 to 1994. Mr. Greenwald is a director of Time Warner Inc.
(media company). He also is a trustee of the Aspen Institute.
Ellen M. Hancock. Mrs. Hancock has been a director of Aetna or its
affiliates since 1995 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mrs. Hancock is Chairman of the Board and
Chief Executive Officer of Exodus Communications, Inc. (Internet system and
network management services). Mrs. Hancock joined Exodus on March 10, 1998 as
President and served in that position until June 7, 2000 when she was appointed
Chairman of the Board. She has served as Chief Executive Officer of Exodus
since September 10, 1998. Mrs. Hancock held various staff, managerial and
executive positions at International Business Machines Corporation
(information-handling systems, equipment and services) from 1966 to 1995. She
became a Vice President of IBM in 1985 and served as President, Communication
Products Division, from 1986 to 1988, when she was named General Manager,
Networking Systems. Mrs. Hancock was elected an IBM Senior Vice President in
November 1992, and in 1993 was appointed Senior Vice President and Group
Executive, which position she held until February 1995. Mrs. Hancock served as
an Executive Vice President and Chief Operating Officer of National
Semiconductor Corporation (semiconductors) from September 1995 to May 1996 and
served as Executive Vice President for Research and Development and Chief
Technology Officer of Apple Computer, Inc. (personal computers) from July 1996
to July 1997. Mrs. Hancock is a director of Colgate-Palmolive Company (consumer
products).
Michael H. Jordan. Mr. Jordan has been a director of Aetna or its
affiliates since 1992 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Jordan retired on December 31, 1998 as
Chairman and Chief Executive Officer of CBS Corporation (media company), having
assumed that position with CBS (then Westinghouse Electric Corporation) in
1993. Currently, Mr. Jordan is serving as Co-Vice Chairman of Clariti
Telecommunications International Ltd. (international telecommunications), as
Chairman of Luminant Worldwide Corporation (Internet and electronic commerce
services) and as Chairman of the Board and Chief Executive Officer of
eOriginal, Inc. (electronic document services). From 1992 to 1993, he was a
partner with Clayton, Dubilier & Rice, Inc. (private investing firm). Mr.
Jordan retired in July 1992 as Chairman and Chief Executive Officer of the
PepsiCo International Foods and Beverages Division of PepsiCo, Inc. (snack
foods and beverages), having held various positions with PepsiCo since 1974.
Mr. Jordan also is a director of Dell Computer Corporation (personal
computers), MarketWatch.com, Inc. (Web-based provider of business news,
financial programming and analytical tools) and Young & Rubicam Inc. (global
marketing and communications).
Jack D. Kuehler. Mr. Kuehler has been a director of Aetna or its
affiliates since 1990 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Kuehler retired in August 1993 as Vice
Chairman and a director of International Business Machines Corporation
(information-handling systems, equipment and services), having held various
positions with IBM since joining that company in 1958. Prior to his appointment
as Vice Chairman of IBM in January 1993, Mr. Kuehler served as President from
1989 to 1993, as Vice Chairman from 1988 to 1989 and as Executive Vice
President from 1987 to 1988. Mr. Kuehler is a director of Arch Chemicals Inc.
(specialty chemicals), Mail.com, Inc. (Internet service provider) and The
Parsons Corporation (heavy
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construction and engineering services). He also is a member of the National
Academy of Engineering and a fellow of the Institute of Electrical and
Electronics Engineers, Inc.
Judith Rodin. Dr. Rodin has been a director of Aetna or its affiliates
since 1995 and will resign as a director of Aetna upon completion of the merger
and related transactions. Dr. Rodin became President of the University of
Pennsylvania in July 1994. Prior to assuming her current position, Dr. Rodin
had served as Provost of Yale University since 1992. Dr. Rodin joined the Yale
faculty in 1972, and held teaching and research positions of increasing
responsibility in the Department of Psychology. She became a Professor of
Psychology in 1979 and a Professor of Medicine and Psychiatry in 1985, and
served as Chair of the Department of Psychology from 1989 to 1991 and Dean of
the Graduate School of Arts and Sciences from 1991 to 1992 when she became
Provost. Dr. Rodin is a director of AMR Corporation and its subsidiary,
American Airlines, Inc., Electronic Data Systems Corporation (information
technology services) and Young & Rubicam Inc. (global marketing and
communications). She also is a trustee of the Brookings Institution.
Frolly M. Boyd. Ms. Boyd assumed her current position in April 1996. From
1993 to 1996, she served as Vice President, Group Products, for Aetna Health
Plans, and from 1993 to 1994, as Vice President, Small Business Markets and
Insurance Products, for Aetna Health Plans. Prior to moving to the health care
business, Ms. Boyd served as Vice President in the Investment and Financial
Services area from 1987 to 1993.
John W. Coyle. Mr. Coyle assumed his current position in June 2000, having
served as Vice President, International Health, from January to June 2000. From
1994 through the end of 1999, he served as Region Manager for, first, the West
Central Region of Aetna Health Plans and then the West Central Region and
Mid-Atlantic Region of New Aetna. Mr. Coyle joined Aetna in 1990 as Head of
International Health.
Arthur N. Leibowitz. Dr. Leibowitz has served in his current position with
New Aetna and, previously, with U.S. Healthcare, Inc., since 1986.
L. Edward Shaw, Jr. Mr. Shaw assumed his current position with New Aetna
in May 2000, having served Aetna as General Counsel since May 1999. From
January 1998 to May 1999, he served as Chief Corporate Officer for North
America of NatWest Group, from August 1997 to January 1998 as president of
NatWest Markets Group Inc. and from May 1996 to August 1997, he served as its
General Counsel. From 1985 to 1996, Mr. Shaw served as Executive Vice President
and General Counsel of The Chase Manhattan Corporation.
Alan J. Weber. Mr. Weber assumed his current position with New Aetna in
August, 2000, having served Aetna as Chief Financial Officer and head of
Strategy and Finance since August 1998. From July 1994 to July 1998, Mr. Weber
served as Chairman of Citibank International and from October 1988 to July
1994, he served as Executive Vice President, Financial Institutions and
Transaction Services, of Citibank, N.A.
Board of Directors
The New Aetna board of directors currently has four members. Prior to the
spin-off, Aetna will change the size and composition of the New Aetna board of
directors, and committees of the New Aetna board of directors will be
established. At the time of the spin-off, it is expected that all of the
current directors of New Aetna except Mr. Donaldson will resign from the New
Aetna board of directors. At that time, it is also expected that the 10
proposed directors listed above will join the New Aetna board and we will have
11 directors, one of whom, Mr. Donaldson, will be an executive officer and
director of Aetna and an executive officer of New Aetna.
Our board intends to hold six regularly scheduled meetings each year.
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Committees of the Board of Directors
Our board of directors is expected to establish audit, compensation and
organization, executive, investment and nominating and corporate governance
committees. In addition, our board of directors is expected to establish an
executive committee.
The functions and responsibilities of the standing Committees of our board
of directors are expected to be as described below.
o Audit Committee. This committee will be composed entirely of
non-employee directors. The committee will recommend the independent
auditors that the full board nominates for shareholder approval at
the annual meeting, review with the internal and independent auditors
the scope and results of their audits, review the company's financial
statements and other financial disclosures, and monitor developments
in accounting principles and methods used in presenting financial
results. The committee will also regularly meet privately with the
director of the company's internal audit staff and with the company's
independent accountants, and regularly discuss with management the
company's internal accounting control procedures and other internal
compliance programs.
o Committee on Compensation and Organization. This committee will be
composed entirely of non- employee directors. The committee will
administer the company's stock incentive plans and the annual
incentive plan, and review and make recommendations to the board with
respect to the compensation of certain senior executives. The
committee will also review the company's overall compensation policy
and make recommendations with respect thereto. Periodically, the
committee will review senior management succession plans and related
matters.
o Executive Committee. This committee will be authorized to act on
behalf of the full board between regular Board meetings, usually when
timing is critical.
o Investment Committee. This committee will be composed entirely of
non-employee directors and will oversee the management of the
company's investment portfolios and review investment policy and
strategy.
o Nominating and Corporate Governance Committee. The nominating
committee will be composed entirely of non-employee directors. The
nominating committee will review the qualifications of all candidates
for membership on the board and board committees. It will make
recommendations to the full board on director nominees, on the
structure, composition and function of board committees, on director
compensation, on the independence of non-employee directors and on
director retirement policy. It will review conflicts of interest that
may affect directors, as well as substantial changes in any
director's circumstances (e.g., change of employment), and advise the
board on procedures for assessing the performance of the board. The
nominating committee will also advise the board on all other matters
concerning corporate governance to the extent specific matters are
not the responsibility of other committees.
In recommending director nominees to the board, the nominating
committee is expected to solicit candidate recommendations from its
own members, other directors of the company and management. Although
the nominating committee will not specifically solicit suggestions
for possible candidates from shareholders, the nominating committee
is expected to consider candidates meeting the criteria described
below. (Suggestions, together with a description of the proposed
nominee's qualifications, other relevant biographical information and
an indication of the willingness of the proposed nominee to serve,
should be sent to the nominating committee in care of the Corporate
Secretary, Aetna U.S. Healthcare, Inc., 151 Farmington Avenue,
Hartford, Connecticut 06156.)
Nominees will be selected through a process based on criteria set
with the concurrence of the full board and reevaluated periodically.
The criteria include: the relevance of the candidate's experience to
the
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business of the company and its affiliates, enhancing diversity,
independence from conflict or direct economic relationship with the
company, and the ability of the candidate to attend meetings
regularly and devote an appropriate amount of effort in preparation
for those meetings.
Our board of directors may, from time to time, establish other committees
to facilitate the management of New Aetna.
It is anticipated that our audit committee will hold four regularly
scheduled meetings each year. Our board will establish meeting schedules for
other committees of the board.
Compensation of Directors
The cash and equity-based compensation of our non-employee directors has
not yet been determined.
Each non-employee director is expected to be eligible to participate in
our Director Charitable Award Program. The program will be funded by life
insurance on the lives of participating directors. Upon completing the spin-off
and the merger, each nominee will be fully vested in the program and each new
participating director will be fully vested in the program upon completion of
five years of service as a director (including years of service prior to
adoption of the program) or upon death or disability. Under the program, we
intend to make a charitable contribution of $1 million in ten equal annual
installments, with the first installment made following each participating
director's retirement from the board, allocated among up to five charitable
organizations recommended by the director. Beneficiary organizations
recommended by directors must be, among other things, tax exempt under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended. Donations we
ultimately make are expected to be deductible from taxable income for purposes
of U.S. federal and other income taxes payable by us. Directors derive no
personal financial or tax benefit from the program since all insurance proceeds
and charitable deductions accrue solely to us. The program will not result in a
material cost to us.
We expect to provide $150,000 of group life insurance for our non-employee
directors. Optional medical, dental and long-term care coverage for
non-employee directors and their eligible dependents is expected to be
available to directors at a cost similar to that charged to our employees.
Stock Ownership of Directors and Executive Officers
All of the New Aetna stock is currently owned by Aetna and thus none of
our executive officers, directors or director nominees will own any New Aetna
common stock prior to the spin-off. To the extent directors, executive officers
or director nominees of New Aetna own shares of Aetna common stock at the time
of the spin-off, they will participate in the spin-off on the same terms as
other holders of Aetna common stock, receiving one share of stock in New Aetna
for each share of stock they own in Aetna. Options held by New Aetna Holders
under the Aetna 1998 and 1996 Stock Incentive Plans will be equitably converted
into options of New Aetna with adjustments made both to the number of options
and the exercise prices to maintain the intrinsic in-or-out-of-the-money value
of the related Aetna options ("Adjusted Options").
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The following table shows how much stock of Aetna each director, director
nominee and named executive officer of New Aetna beneficially owned as of June
30, 2000. No director, director nominee or executive officer of New Aetna
beneficially owned 1% or more of Aetna's total outstanding common stock, nor do
the directors, director nominees and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
---------------------------------------------
Common
Common Stock
Name of Beneficial Owner Shares Percent Equivalents (1)
------------------------ -------- ------- --------------
<S> <C> <C> <C> <C>
William H. Donaldson........................................ 100,750 (2) * 3,300
Betsy Z. Cohen.............................................. 1,571 * 3,730
Barbara Hackman Franklin.................................... 3,455 * 3,650
Jeffrey E. Garten........................................... * 1,850
Jerome S. Goodman........................................... 23,708 (3) * 5,646
Earl G. Graves.............................................. 500 * 5,587
Gerald Greenwald............................................ 3,000 (4) * 8,133
Ellen M. Hancock............................................ 2,000 (5) * 6,735
Michael H. Jordan........................................... 3,000 * 6,803
Jack D. Kuehler............................................. 12,000 (6) * 9,054
Judith Rodin................................................ 101 * 7,404
John W. Coyle............................................... 29,002 (7) * --
Arthur N. Leibowitz......................................... 28,042 (8) * --
L. Edward Shaw, Jr.......................................... 59,482 (9) * --
Alan J. Weber............................................... 261,143 (10) * --
Directors and executive officers as a group (16 persons).... 586,804 (11) * 61,892
</TABLE>
________________
* Less than 1%.
Unless otherwise noted in the footnotes, each person currently has sole voting
and investment powers over the shares set forth above.
Notes to Beneficial Ownership Table
(1) Represents stock units issued under the Aetna Director Plan or its
predecessor plan, accrued stock units resulting from deferral of retainer
and attendance fees and stock units credited to certain directors in 1996
in connection with the elimination of the director retirement plan. Stock
units, which do not have voting rights, track the value of Aetna's common
stock and earn dividend equivalents that may be reinvested.
(2) Includes 100,000 shares of restricted stock that vest on March 1, 2001.
(3) Includes 18,734 shares held by Wellington Limited Partnership, of which
Mr. Goodman is a general partner. Excludes 50 shares held by his spouse,
as to which Mr. Goodman disclaims beneficial ownership.
(4) Represents shares held by his spouse, as to which Mr. Greenwald has no
voting or investment power.
(5) Held jointly with her spouse, as to which Mrs. Hancock shares voting and
investment powers.
(6) Held jointly with his spouse, as to which Mr. Kuehler shares voting and
investment powers.
(7) Include 25,708 shares that Mr. Coyle has the right to acquire within 60
days of June 30, 2000 upon exercise of stock options.
(8) Includes 27,252 shares that Dr. Leibowitz has the right to acquire within
60 days of June 30, 2000 upon exercise of stock options.
(9) Includes 57,482 shares that Mr. Shaw has the right to acquire within 60
days of June 30, 2000 upon exercise of stock options. Also includes 2,000
shares that Mr. Shaw held jointly with his spouse, as to which Mr. Shaw
shares voting and investment power.
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(10) Includes 10,000 shares of restricted stock that vest in equal installments
on August 1, 2000 and August 1, 2001. Also includes 233,586 shares that
Mr. Weber has the right to acquire within 60 days of June 30, 2000 upon
exercise of stock options.
(11) Directors and executive officers as a group have sole voting and
investment powers over 164,931 shares and share voting and investment
powers with respect to 16,000 shares. Included in the number of shares
shown in the table are 3,641 shares held under Aetna's Incentive Savings
Plan and beneficially owned by executive officers, and 399,232 shares that
directors and executive officers have the right to acquire within 60 days
of June 30, 2000 upon the exercise of stock options.
Executive Compensation
The following table shows projected annual salary and target bonus
information for our five most highly compensated executive officers as of
August 31, 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Year Salary($) Target Bonus($)(1)
---- ----------- ------------------
<S> <C> <C> <C>
William H. Donaldson, Chairman, President and Chief
Executive Officer......................................... 2000 $1,000,000 $1,000,000
Alan J. Weber, Chief Financial Officer..................... 2000 750,000 750,000
L. Edward Shaw, Jr., General Counsel....................... 2000 525,000 420,000
Arthur N. Leibowitz, Chief Medical Officer................. 2000 453,443 362,754
John W. Coyle, Head of Business Operations................. 2000 450,000 360,000
</TABLE>
_________________
(1) Upon consummation of the merger and transactions, it is anticipated that
bonus payments to the named executive officers will be paid at least at
target levels.
Stock Incentive Plan
We intend to implement the New Aetna Stock Incentive Plan (which we refer
to as the "Stock Plan"), the purposes of which are to promote the interests of
New Aetna and its shareholders, and to further align the interests of employees
of New Aetna and its subsidiaries and affiliates (which we refer to
collectively as "Eligible Employees") with New Aetna shareholders. In
conjunction with the adoption of the Stock Plan, New Aetna will continue to
implement the stock ownership guidelines for senior executives established by
Aetna. These guidelines will encourage and ensure that senior executives
acquire and maintain significant levels of stock ownership. Such stock
ownership aligns changes in shareholder value with meaningful changes in a
senior executive's financial situation. Options held by New Aetna Holders under
the Aetna 1998 and 1996 Stock Incentive Plans will be equitably converted into
options of New Aetna with adjustments made both to the number of options and
the exercise prices to maintain the intrinsic in-or-out-of-the-money value of
the related Aetna options.
Principal Features of the Stock Plan
Awards which may be granted under the Stock Plan include options, stock
appreciation rights (which we refer to as "SARs"), incentive stock and
incentive units and other stock-based awards (which we refer to collectively as
"Awards"). In addition, Awards under the Stock Plan may be granted as payment
in lieu of other compensation payable by New Aetna to an eligible employee.
Administration of Incentive Plan
A committee (which we refer to as the "Compensation Committee") consisting
of at least two directors of New Aetna chosen by the New Aetna Board of
Directors, each of whom is a "disinterested person" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934 (which we refer to in this
booklet as the "1934 Act") and an
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"outside director" within the meaning of Section 162 (m) of the Code will,
among other things, administer the Stock Plan, and will determine which
eligible employees will receive Awards and the terms and conditions of such
Awards. Directors who are not employees of New Aetna are not eligible to
receive Awards under the Stock Plan. The number of eligible employees who may
receive Awards under the Stock Plan will likely vary from year to year.
Shares Available for Issuance
Except as otherwise described in this paragraph and under "Adjustments"
below, the maximum number of shares of New Aetna common stock that may be
delivered under the Stock Plan is 7,000,000 plus (i) the number of shares of
New Aetna common stock to be delivered upon exercise of the Adjusted Options
and (ii) the number of shares required to satisfy any outstanding incentive
unit awards under the Existing Plan. In addition, the number of shares of New
Aetna common stock delivered under the Stock Plan with respect to (i) incentive
stock options (which we refer to in this booklet as "ISOs") shall not exceed
5,000,000 shares, (ii) incentive stock or incentive units shall not exceed
2,235,000 shares or (iii) other stock-based awards shall not exceed 1,000,000
shares. It is expected that the shares delivered under the Stock Plan will be
authorized but unissued shares of New Aetna. Shares of New Aetna common stock
subject to Awards that are forfeited, terminated, canceled or settled without
the delivery of New Aetna common stock under the Stock Plan will again be
available for Awards under the Stock Plan. Also, (x) shares tendered to New
Aetna in satisfaction or partial satisfaction of the exercise price of any
Award under either the Stock Plan and (y) remittances from option exercises
used to repurchase shares of New Aetna common stock on the open market will
increase the number of shares available for delivery pursuant to Awards granted
under the Incentive Plan. In addition, any shares of New Aetna common stock
underlying Awards granted in assumption of, or in substitution for, outstanding
awards previously granted by a company acquired by New Aetna, or with which New
Aetna combines (which we refer to in this booklet as "Substitute Awards") shall
not, except in the case of shares with respect to which Substitute Awards are
granted to Section 16 insiders as defined by Section 16 of the 1934 Act, be
counted against the shares available for delivery under the Stock Plan.
Adjustments
If a fundamental corporate event occurs, the Compensation Committee may,
as it deems appropriate, adjust the number and kind of shares that may be
delivered under the Stock Plan in the future and the number and kind of shares
and the grant, exercise or conversion price, if applicable, under all
outstanding Awards to preserve, or to prevent the enlargement of, the benefits
made available under the Stock Plan. Cash payments may also be made.
Grants Under the Stock Plan
Stock Options. The Compensation Committee may grant nonstatutory stock
options (which we refer to in this booklet as "NSOs") and ISOs. These options
may contain any terms that the Compensation Committee determines, except that
no eligible employee may be granted options for more than 800,000 shares of New
Aetna common stock in respect of any year in which the Stock Plan is in effect
(subject to adjustment as described above). Except in the case of Substitute
Awards or options granted in lieu of payment for compensation earned by an
eligible employee of New Aetna outside of the Stock Plan, the exercise price
shall not be less than 100% of the fair market value on the date of grant. The
Compensation Committee shall have the discretion to determine the terms and
conditions upon which options shall be exercisable.
SARs. SARs may be granted to eligible employees in addition to, or in
tandem with, an option or unrelated to an option. A SAR permits an eligible
employee to receive cash, shares or a combination of cash and shares, generally
based on the excess of the fair market value at the time of exercise over the
exercise price, which exercise price shall equal the fair market value on the
date the SAR was granted, provided that if an SAR is granted retroactively in
tandem with or in substitution for an option, the exercise price may be the
exercise price of such option. The term of each SAR will be fixed by the
Compensation Committee but may not exceed ten years from the date of the grant.
The Compensation Committee will have the discretion to determine all other
terms and conditions applicable to SARs, including when SARs shall be
exercisable.
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Incentive Units and Incentive Stock. The Compensation Committee may grant
an eligible employee incentive units which provide a contractual right to
receive shares of common stock or cash based on the fair market value of the
related shares at the end of a restricted period determined by the Compensation
Committee, which restricted period is generally expected to be three years or
more. The Compensation Committee also may grant shares of incentive stock that
are nontransferable and subject to substantial risk of forfeiture during the
applicable restricted period. The Compensation Committee shall have the
discretion to provide that Awards of incentive stock and incentive units will
vest, if at all, upon the (i) employee's continued employment during the
relevant restricted period as determined by the Compensation Committee and/or
(ii) attainment or partial attainment of performance objectives determined by
the Compensation Committee. In general, an employee who has been granted
incentive stock, the vesting restrictions of which relate solely to the passage
of time and continued employment, will from the date of grant have the benefits
of ownership in respect of such shares, including the right to receive
dividends and other distributions thereon, subject to the restrictions set
forth in the Stock Plan and in the instrument evidencing such Award. With
respect to any performance period, no executive officer may be granted Awards
of incentive stock or incentive units which vest upon the achievement of
performance objectives in respect of more than 500,000 shares of New Aetna
common stock or, if such Awards are settled in cash, the fair market value
thereof determined at the time of payment (each subject to adjustment as
described above).
With respect to any award of incentive stock or incentive units made to an
executive officer of New Aetna that the Compensation Committee determines will
vest based on the achievement of performance objectives, such performance
objectives shall relate to at least one of the following criteria, which may be
determined solely by reference to the performance of New Aetna, a subsidiary or
an affiliate (or any business unit thereof) or based on comparative performance
relative to other companies: (i) net income; (ii) earnings before income taxes;
(iii) earnings per share; (iv) return on shareholders' equity; (v) expense
management; (vi) profitability of an identifiable business unit or product;
(vii) ratio of claims to revenues; (viii) revenue growth; (ix) earnings growth;
(x) total shareholder return; (xi) cash flow; (xii) return on assets; (xiii)
pretax operating income; (xiv) net economic profit (operating earnings minus a
charge for capital); (xv) customer satisfaction; (xvi) provider satisfaction;
(xvii) employee satisfaction; (xviii) quality of networks; (xix) strategic
innovation; or (xx) any combination of the foregoing.
Other Stock-Based Awards. The Stock Plan also authorizes the Compensation
Committee to grant other stock- based awards to eligible employees and to grant
executive officers New Aetna common stock in lieu of cash payable as salary or
under any other bonus or incentive compensation plan of New Aetna.
Dividends and Dividend Equivalents. The Compensation Committee may provide
that any Award shall include dividends or dividend equivalents, payable in
cash, New Aetna common stock, securities or other property on a current or
deferred basis.
Effect on Awards of Termination of Employment
The Compensation Committee has broad discretion as to the specific terms
and conditions of each Award and any rules applicable thereto, including but
not limited to the effect thereon of the death, retirement or other termination
of employment of the eligible employee or the effect, if any, of a change in
control of New Aetna.
General
Award Agreement. The terms of each Award are to be evidenced by a written
instrument delivered to the eligible employee.
Withholding. The Awards are subject to applicable tax withholding by New
Aetna which may, to the extent permitted by the Compensation Committee, be
satisfied by the withholding of shares deliverable under the Stock Plan.
Transferability. Unless the Compensation Committee expressly permits
transfers for the benefit of members of the eligible employee's immediate
family or trust or similar vehicle for their benefit, Awards under the Stock
Plan may not be assigned or transferred except by will, the laws of descent and
distribution.
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Deferral. The Compensation Committee will have the discretion to determine
whether, to what extent, and under what circumstances cash, New Aetna common
stock, other securities, other Awards, other property, and other amounts
payable with respect to an Award will be deferred either automatically or at
the election of the holder thereof or of the Compensation Committee.
Amendment or Termination. The Board of Directors or the Compensation
Committee may terminate or suspend the Stock Plan at any time, but the
termination or suspension will not adversely affect any vested Awards then
outstanding under the Stock Plan. Unless terminated by action of the Board or
the Compensation Committee, no Award may be granted under the Stock Plan after
December 31, 2010. The Stock Plan may be amended or terminated at any time by
the Board of Directors, except that no amendment may be made without
shareholder approval if the Compensation Committee determines that such
approval is necessary to comply with any tax or regulatory requirement,
including any approval requirement which is a prerequisite for exemptive relief
from Section 16 of the 1934 Act, for which or with which the Compensation
Committee determines that it is desirable to qualify or comply; and, provided
further, that any amendment or action to reduce the exercise price of options
previously granted under the Stock Plan shall be subject to the approval of New
Aetna's shareholders (other than any such increase, modification or reduction
that may result from adjustments in connection with a fundamental corporate
event). The Compensation Committee may amend the term of any Award granted,
retroactively or prospectively, but no amendment may adversely affect any
vested Award without the holder's consent.
Effect on Other Compensation Programs
Nothing contained in the Stock Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements which may, but need
not, provide for the grant of options, incentive stock, and other types of
Awards provided for hereunder.
New Plan Benefits
In connection with the spin-off and the merger, Aetna options held by New
Aetna Holders will be converted into New Aetna options in accordance with the
New Aetna Holder Adjustment. It is not possible to determine the number of
Adjusted Options prior to the spin-off and the merger. Other Awards to be
granted under the Stock Plan have not yet been determined.
Certain Federal Income Tax Consequences
The options described above are intended to comply with the requirements
of the Code regarding the deductibility of certain performance based
compensation.
Under currently applicable federal income tax law, an eligible employee
will receive no taxable income upon the grant of an NSO or an ISO. When an
eligible employee exercises an NSO, the excess of the fair market value of the
shares on the date of exercise over the exercise price paid will be ordinary
income to the eligible employee and his or her employer will be allowed a
federal income tax deduction in the same amount. When an eligible employee
exercises an ISO while employed or within three months after termination of
employment (one year for disability), no income will be recognized upon
exercise of the ISO. If the eligible employee holds shares acquired for at
least one year after exercise and two years after the grant of the ISO, the
excess of the amount realized upon disposition of the shares over the exercise
price paid is treated as long-term capital gain for the eligible employee and
the eligible employee's employer is not allowed a federal income tax deduction.
A sale or other exchange of the underlying stock before the end of either of
the required holding periods will be a "disqualifying disposition" which will
generally result in the eligible employee being taxed on the gain derived from
an ISO as though it were an NSO and the eligible employee's employer will be
allowed a federal income tax deduction in the same amount. Special rules apply
if the exercise price is paid in shares.
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Annual Incentive Plan
We intend to implement the New Aetna Annual Incentive Plan (which we refer
to as the "Annual Plan"), the terms of which are summarized below.
Eligible Employees
All executive officers as described in Rule 3b-7 of the 1934 Act are
eligible to be named by the Board of Directors as participants for any fiscal
year. The Board of Directors shall select the executive officers (six people
expected as of the spin-off and the merger) who will participate in the Annual
Plan with respect to any fiscal year.
Performance Criteria
On or before March 31 of each fiscal year, the Compensation Committee
shall establish the performance objectives that must be attained in order for
the New Aetna to pay bonuses under the Annual Plan. Unless the Compensation
Committee determines at the time of grant not to qualify the award as
performance-based compensation under Section 162(m), the performance objectives
for awards made under the Annual Plan will be based upon one or more of the
following criteria, which may be determined solely by reference to the
performance of New Aetna, a subsidiary or an affiliate (or any business unit
thereof) or based on comparative performance relative to other companies: (i)
net income; (ii) earnings before income taxes; (iii) earnings per share; (iv)
return on shareholders equity; (v) expense management; (vi) profitability of an
identifiable business unit or product; (vii) ratio of claims to revenues;
(viii) revenue growth; (ix) earnings growth; (x) total shareholder return; (xi)
cash flow; (xii) return on assets; (xiii) pretax operating income, (xiv) net
economic profit (operating earnings minus a charge for capital); (xv) customer
satisfaction; (xvi) provider satisfaction; (xvii) employee satisfaction;
(xviii) quality of networks; (xix) strategic innovation; or (xx) any
combination of the foregoing.
Individual Limit
The maximum amount that can be paid to any participant under the Annual
Plan with respect to any fiscal year is $3,000,000. The Compensation Committee
has the discretion to pay amounts which are less than this maximum amount based
on individual performance or such other criteria as the Compensation Committee
shall deem relevant.
Administration
The Compensation Committee, to the extent necessary to comply with Section
162(m) of the Code and Section 16 of the 1934 Act, shall at all times be
comprised of at least two directors, each of whom is an "outside director" for
purposes of Section 162(m) and a "disinterested person" for purposes of Section
16, and shall administer and interpret the Annual Plan. Prior to making any
payment under the Annual Plan, the Compensation Committee shall certify in
writing that the performance objectives have been attained.
Amendment and Termination
The Compensation Committee may at any time amend, terminate or suspend the
Annual Plan. No adverse changes will be made retroactively, but may apply to
subsequent performance periods. The Annual Plan will not be effective with
respect to the calendar years ending after December 31, 2010 (except as to
awards earned prior to such date which are subsequently paid), unless otherwise
extended by action of the Compensation Committee.
Effect on Other Compensation Programs
Nothing contained in the Annual Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements.
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New Plan Award Table
Because the Annual Plan will not be effective until January 1, 2001,
awards under the Annual Plan have not yet been determined.
Certain Agreements
The obligations of Aetna under the agreements described below will be
assumed by New Aetna upon the completion of the spin-off and the merger.
Aetna has agreed to provide Mr. Donaldson with a salary of $1,000,000,
annual bonus opportunity of up to $2,000,000 for calendar year 2000 under the
Aetna Annual Incentive Plan and an additional bonus as determined by the Board
Committee on Compensation and Organization. On February 29, 2000, Mr. Donaldson
was granted a stock option for 500,000 shares of Aetna common stock. The
exercise price per share is $41.125 for 300,000 shares, $55.00 for 100,000
shares and $65.00 for 100,000 shares. Mr. Donaldson was also granted 100,000
shares of restricted Aetna common stock. The option and restricted common stock
will vest on March 1, 2001, subject to earlier vesting upon completion of the
spin-off and the merger or certain terminations of employment. If Mr. Donaldson
ceases to be Chairman and Chief Executive Officer of New Aetna following
completion of the spin-off and the merger, he will be entitled to payment of an
annual bonus for 2000, if not previously paid, of at least $1,500,000, and, if
such termination occurs after December 31, 2000, a pro rata annual bonus for
the year of termination. Aetna has agreed generally to reimburse Mr. Donaldson
for applicable excise taxes (including tax gross-up) incurred as a result of
payments made under his employment arrangement.
Mr. Weber has entered into an agreement with Aetna that provides that if
his employment is terminated by Aetna without cause, in lieu of participation
in Aetna's severance plan, he will be entitled to not less than 52 weeks of
cash compensation (calculated as annual base salary (currently $750,000) and
target annual bonus amount (currently $750,000)). Following a change-in-control
of Aetna prior to March 1, 2002, Mr. Weber will receive not less than 156 weeks
of cash compensation in the event of certain terminations of employment. Mr.
Weber's pension benefits are vested under Aetna's pension plan. Aetna has
agreed to make certain minimum contributions to Mr. Weber's cash balance
pension account, which Aetna believes are not greater than the value of the
pension benefits forgone by Mr. Weber as a result of his departure from his
previous employer. Aetna has agreed generally to reimburse Mr. Weber for
applicable excise taxes (including tax gross-up) incurred as a result of
payments made under the agreement.
Mr. Leibowitz has entered into an agreement with Aetna that provides that
if his employment is terminated by Aetna other than for "cause" or "disability"
or by him for "good reason," he will be entitled to receive the following
payments and benefits: (i) a payment in cash equal to three times the sum of
(A) the higher of his base salary as in effect immediately prior to the event
or circumstance upon which termination of employment is based and his annual
base salary (including amounts deferred for the applicable year and any
interest accrued thereon) in effect immediately prior to a specified date, and
(B) the then-current annual target bonus, 50% of such payment to be paid in a
lump sum on the date of termination and, subject to compliance with the
noncompetition provisions of the agreement, the remaining 50% to be paid in a
lump sum on the first anniversary of the date of termination of employment;
(ii) a pro rata portion, to the date of termination, of the higher of the
actual or target value of any contingent annual bonus award made to him for any
then uncompleted fiscal year under any bonus plan; (iii) for 36 months
immediately following the date of such termination, the continuation of
substantially the same welfare and pension benefits as he is receiving
immediately prior to termination of employment, subject to offset by any such
benefits received without cost during such 36-month period; and (iv) if he
would have become entitled to benefits under Aetna's postretirement health care
or life insurance plans during the 36-month period following the date of
termination of employment, the provision of such postretirement benefits
beginning on the later of (A) the date he would have become eligible for such
benefits and (B) the date on which the welfare benefits described in the
immediately preceding clause will terminate. The agreement also provides that,
in the event of such a termination, all outstanding equity-based awards granted
under Aetna's incentive plans will continue to vest for one year following the
date of termination of his employment and will remain exercisable through the
90-day period following such one-year period. In the event that his employment
under the agreement is terminated by reason of death or
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"disability," the agreement provides that he (or his estate or legal
representative) will continue to receive his base salary and annual bonus for
the one-year period following such termination. Aetna has agreed generally to
reimburse Mr. Leibowitz for applicable excise taxes (including tax gross-up)
incurred as a result of payments made under the agreement.
Mr. Coyle has entered into an agreement with Aetna that provides that if
his employment is terminated under circumstances that would call for benefits
under Aetna's severance plan, in lieu of participation in the severance plan,
he will be entitled to not less than 52 weeks of severance (calculated based on
annual base salary).
Mr. Shaw has entered into an agreement with Aetna that provides that if
his employment is terminated under circumstances that would call for benefits
under Aetna's severance plan, in lieu of participation in the severance plan,
he will be entitled to not less than 52 weeks of severance (calculated based on
annual base salary). In the event that Mr. Shaw's employment is terminated
under circumstances that would call for severance pay after a change-in-
control of Aetna, he is eligible to receive 156 weeks of salary continuation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through June 30, 2000, Aetna and its subsidiaries had paid approximately
$220 million for physician hospital services in the ordinary course of business
and a total of approximately $374,000 under four grants to the University of
Pennsylvania Health System, which includes the University of Pennsylvania
Medical Center and other hospitals and affiliates. Dr. Judith Rodin, a director
of Aetna and a proposed director of New Aetna, is the President of the
University of Pennsylvania, the owner and operator of the University of
Pennsylvania Health System.
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SECURITY OWNERSHIP OF AETNA AND NEW AETNA
Aetna beneficially and of record holds, and will hold before the spin-off,
all of the outstanding shares of New Aetna common stock. Holders of Aetna
common stock, including our directors and executive officers (see "Management
-- Stock Ownership of Directors and Executive Officers"), will receive one
share of New Aetna common stock for each share of Aetna common stock they hold
as of the close of business on or about , 2000. Except as otherwise noted,
the persons named in the table below has sole voting and investment power with
respect to all shares shown as beneficially owned by them. After giving effect
to the spin-off, to our knowledge, no person is expected to beneficially own 5%
or more of New Aetna common stock, except as set forth below:
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address of Beneficial Owner Ownership (1) Percent (1)
------------------------------------ ----------------- -----------
<S> <C> <C> <C>
Sanford C. Bernstein & Co., Inc. 12,523,694 (2) 8.87%
767 Fifth Avenue
New York, New York 10153
Southeastern Asset Management, Inc. 8,469,800 (3) 6.00%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
</TABLE>
__________________
(1) Based on the number of shares of Aetna common stock held by such person as
of June 30, 2000. The information was obtained from information supplied
by the shareholders on Schedules 13D and 13G.
(2) Of the reported shares, Sanford C. Bernstein & Co., Inc. reports that it
has sole voting power with respect to 6,554,526 shares, that it shares
voting power with respect to 1,394,863 shares and that it has sole
dispositive power with respect to all of the reported shares.
(3) Of the reported shares, Southeastern Asset Management, Inc. reports that
it has sole voting power with respect to 5,577,100 shares, that it shares
voting power with respect to 1,768,400 shares, that it has sole
dispositive power with respect to 6,701,400 shares and that it shares
dispositive power with respect to 1,768,400 shares.
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DESCRIPTION OF NEW AETNA CAPITAL STOCK
The following description of New Aetna capital stock is a summary of the
material terms thereof and is qualified in its entirety by reference to the
provisions of the New Aetna Amended and Restated Articles of Incorporation (the
"New Aetna Articles"), the New Aetna bylaws and the New Aetna rights agreement,
copies of which are filed as exhibits to the registration statement of which
this information statement is a part.
Authorized Capital Stock
Under the New Aetna Articles, the total number of shares of all classes of
shares that New Aetna has authority to issue is 825,000,000, having a par value
of $.01 each. The Articles establish 7,500,000 shares as Class A voting
preferred shares (the "Class A voting preferred stock") and 750,000,000 shares
as common shares ("New Aetna common stock"). The New Aetna Articles provide
that the New Aetna board of directors has the power to divide the remaining
67,500,000 shares into such classes and series, with such voting rights,
designations, preferences, limitations and special rights as the board shall
then fix and determine. No shares of New Aetna preferred stock are being issued
in connection with the spin-off. Approximately shares of New Aetna common
stock are expected to be distributed in the spin-off, based on the number of
shares of Aetna common stock outstanding on , 2000. All New Aetna common
stock received in the spin-off will be fully paid and non-assessable.
New Aetna Common Stock
The holders of New Aetna common stock are entitled to one vote per share
on all matters voted on by shareholders, including elections of directors.
Except as otherwise required by law, or by the provisions of the Class A voting
preferred stock, or provided in any resolution adopted by the New Aetna board
with respect to any subsequently created class or series of New Aetna shares,
the holders of the New Aetna common stock exclusively possess all voting power.
The Articles preclude cumulative voting in the election of directors. Subject
to any rights of any outstanding series of New Aetna preferred stock, the
holders of New Aetna common stock (i) are entitled to such dividends as may be
declared from time to time by the New Aetna board from funds available therefor
and (ii) upon liquidation are entitled to receive pro rata all assets of New
Aetna available for distribution to such holders.
The transfer agent and registrar for the New Aetna common stock will be
First Chicago Trust Company of New York.
Additional New Aetna Stock, including Preferred Stock
The New Aetna board is authorized to provide for the issuance of New Aetna
shares in one or more classes and series, including shares of preferred stock,
to establish the number of shares in each class and series, and to fix the
designations, powers, preferences and rights of each such class and series and
the qualifications, limitations or restrictions thereof. The Articles
authorize, and the New Aetna board has reserved for issuance, 7,500,000 shares
of the Class A voting preferred stock for issuance upon exercise of the
preferred share purchase rights of New Aetna (the "New Aetna Rights"). See "--
New Aetna Rights."
New Aetna Rights
The New Aetna board has determined that a dividend of one New Aetna Right
will be paid in respect of each share of New Aetna common stock to the holder
of record thereof at the time of the spin-off. Pursuant to the rights agreement
relating thereto, upon the occurrence of certain events, each New Aetna Right
entitles the registered holder to purchase from New Aetna one one-hundredth of
a share of Class A voting preferred stock at a price of $ per share (the
"Purchase Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the then
outstanding shares of New Aetna common stock or (ii) 10 business days (or such
later date as may be determined by action of the New Aetna board prior to such
time as any person or group becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation
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of which would result in the beneficial ownership by a person or group of 15%
or more of the outstanding shares of New Aetna common stock (the earlier of
such dates being called the "Distribution Date"), the New Aetna Rights will be
evidenced by the Ownership Statement with respect to book-entry New Aetna
common stock, or if a certificate representing New Aetna common stock has been
requested and issued, then such certificate. The rights agreement provides
that, until the Distribution Date (or the earlier redemption or expiration of
the New Aetna Rights), (i) the New Aetna Rights will be transferred with and
only with the shares of New Aetna common stock, (ii) Ownership Statements and
certificates representing shares of New Aetna common stock will contain a
notation incorporating the terms of the New Aetna Rights by reference, and
(iii) transfer of any shares of New Aetna common stock will also constitute the
transfer of the New Aetna Rights associated with the shares of New Aetna common
stock so transferred. As soon as practicable following the Distribution Date,
separate certificates evidencing the New Aetna Rights ("Rights certificates")
will be mailed to holders of record of the New Aetna common stock as of the
close of business on the Distribution Date and such separate Rights
certificates alone will evidence the New Aetna Rights.
The Purchase Price payable, and the number of shares of Class A voting
preferred stock or other securities or property issuable, upon exercise of the
New Aetna Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Class A voting preferred stock, (ii) upon the grant
to holders of the Class A voting preferred stock of certain rights or warrants
to subscribe for or purchase shares of Class A voting preferred stock at a
price, or securities convertible into Class A voting preferred stock with a
conversion price, less than the then-current market price of the shares of
Class A voting preferred stock, or (iii) upon the distribution to holders of
the shares of Class A voting preferred stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in shares of Class A voting preferred
stock) or of subscription rights or warrants (other than those referred to
above). The number of outstanding New Aetna Rights and the number of hundredths
of a share of Class A voting preferred stock issuable upon exercise of each New
Aetna Right are also subject to adjustment in the event of a split of the New
Aetna common stock or a dividend on the New Aetna common stock payable in
shares of New Aetna common stock, or subdivisions, consolidations or
combinations of the New Aetna common stock occurring, in any such case, prior
to the Distribution Date.
Shares of Class A voting preferred stock that may be purchased upon
exercise of the New Aetna Rights will not be redeemable. Each share of Class A
voting preferred stock will be entitled to a minimum preferential cumulative
quarterly dividend payment of 100 times the dividend declared per share of New
Aetna common stock whenever such dividend is declared. In the event of
liquidation, the holders of the Class A voting preferred stock will be entitled
to a minimum preferential liquidation payment equal to 100 times the payment
made per share of New Aetna common stock plus an amount equal to all accrued
and unpaid dividends and distributions thereon. Each share of Class A voting
preferred stock will have 100 votes, voting together with the New Aetna common
stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of New Aetna common stock are exchanged, each share of Class A
voting preferred stock will be entitled to receive an amount equal to 100 times
the amount received per share of New Aetna common stock.
Because of the nature of the dividend, liquidation and voting rights of
the Class A voting preferred stock, the value of the one one-hundredth interest
in a share of Class A voting preferred stock that may be purchased upon
exercise of each New Aetna Right should approximate the value of one share of
New Aetna common stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a New
Aetna Right, other than New Aetna Rights beneficially owned by the Acquiring
Person (which will become void after such person becomes an Acquiring Person),
will, after such person becomes an Acquiring Person, have the right to receive
upon exercise, in lieu of Class A voting preferred stock, that number of shares
of New Aetna common stock having a market value of two times the exercise price
of the New Aetna Right (such right being referred to as a "Flip-in Right"). In
the event that, at any time on or after the date that any person has become an
Acquiring Person, New Aetna is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold, proper provision will be made so that each holder of a New Aetna
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the New Aetna Right, that number of shares
of common stock of the acquiring company
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which at the time of such transaction has a market value of two times the
exercise price of the New Aetna Right (such right being referred to as
"Flip-over Right").
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the then outstanding shares of New Aetna common stock,
the New Aetna board may exchange the New Aetna Rights (other than New Aetna
Rights owned by such person or group, which will have become void after such
person became an Acquiring Person) for New Aetna common stock or Class A voting
preferred stock, in whole or in part, at an exchange ratio of one share of New
Aetna common stock, or one one-hundredth of a share of Class A voting preferred
stock (or of a share of another series of New Aetna preferred stock having
equivalent rights, preferences and privileges), per New Aetna Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1%. No
fractional shares of Class A voting preferred stock will be issued (other than
fractions which are integral multiples of one one-hundredth of a share of Class
A voting preferred stock, which may, at the election of New Aetna, be evidenced
by depositary receipts) and, in lieu thereof, an adjustment in cash will be
made based on the market price of the Class A voting preferred stock on the
last trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the then
outstanding shares of New Aetna common stock (the "Relevant Date"), the New
Aetna board may redeem the New Aetna Rights in whole, but not in part, at a
price of $.01 per New Aetna Right (the "Redemption Price"). The redemption of
the New Aetna Rights may be made effective at such time, on such basis and with
such conditions as the New Aetna board may determine, in its sole discretion.
Immediately upon any redemption of the New Aetna Rights, the right to exercise
the New Aetna Rights will terminate and the only right of the holders of New
Aetna Rights will be to receive the Redemption Price. After the Relevant Date,
the New Aetna Rights will no longer be redeemable.
For so long as the New Aetna Rights are redeemable, the Rights Agreement
between New Aetna and First Chicago Trust Company of New York, as Rights Agent
(the "Rights Agreement"), which is the agreement pursuant to which the New
Aetna Rights are to be issued, may be amended by the New Aetna board without
the consent of the holders of the New Aetna Rights, including an amendment to
lower (i) the threshold at which a person becomes an Acquiring Person, and (ii)
the percentage of shares of New Aetna common stock proposed to be acquired in a
tender or exchange offer that would cause the Distribution Date to occur. At
any time when the New Aetna Rights are no longer redeemable, the Rights
Agreement may be amended by the New Aetna board without the consent of the
holders of the New Aetna Rights except that no such amendment may (i) adversely
affect New Aetna Rights holders (other than the Acquiring Person and certain
affiliated persons), (ii) cause the Rights Agreement to become amendable other
than in accordance with this sentence or (iii) cause the New Aetna Rights again
to become redeemable.
The New Aetna Rights will not be exercisable until the Distribution Date.
The New Aetna Rights will expire on the close of business on the 10th
anniversary of the time of the spin-off unless extended or unless the New Aetna
Rights are earlier redeemed or exchanged by New Aetna. The Rights Agreement
provides that at least once every three years a committee of the board composed
of non-management directors will consider whether a continuation of the New
Aetna Rights remains in the best interests of New Aetna, its shareholders and
other relevant constituencies and, thereafter, report its conclusions to the
full board of New Aetna.
Until a New Aetna Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of New Aetna, including, without limitation,
the right to vote or to receive dividends.
The distribution of the New Aetna Rights should not be taxable under the
Internal Revenue Code of 1986, as amended (the "Code") to New Aetna or its
shareholders. However, depending upon the circumstances, shareholders of New
Aetna may recognize taxable income under the Code in the event that the New
Aetna Rights become exercisable.
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Preemptive Rights
No holder of any shares of New Aetna of any class authorized at the time
of the spin-off will have any preemptive right to subscribe to any securities
of New Aetna of any kind or class.
Book Entry Shareholding
Certificates representing the New Aetna common stock will not be issued
unless requested in writing as set forth below. Holders of record of New Aetna
common stock will have credited to a book-entry account established for them
by, and maintained at, First Chicago Trust Company of New York (the registrar
and transfer agent for New Aetna common stock) the number of shares of New
Aetna common stock owned by them. Each holder of record will receive an
Ownership Statement from the registrar reflecting the opening balance in his or
her account promptly following the spin-off and, thereafter, promptly following
each transfer to or from such account. Shareholders may request the issuance of
a certificate representing the shares of New Aetna common stock owned of record
by them by writing to the New Aetna registrar and transfer agent.
Certain Antitakeover Provisions
The New Aetna Articles, the New Aetna bylaws and the rights agreement
contain certain provisions that could delay or make more difficult the
acquisition of New Aetna by means of a tender offer, a proxy contest or
otherwise. These provisions have been implemented to enable New Aetna to
develop its business in a manner that will foster its long-term growth without
disruption caused by the threat of a takeover not deemed by the New Aetna board
to be in the best interests of New Aetna and its shareholders.
New Aetna Rights
As described above, the New Aetna Rights will have certain anti-takeover
effects. The New Aetna Rights will cause substantial dilution to a person or
group that attempts to acquire New Aetna on terms not approved by the New Aetna
board, except pursuant to an offer conditioned on a substantial number of New
Aetna Rights being acquired. The New Aetna Rights should not interfere with any
merger or business combination approved by the New Aetna board, since the New
Aetna Rights may be redeemed by New Aetna at the Redemption Price prior to the
time that a person or group has become an Acquiring Person.
No Shareholder Action by Written Consent; Special Meetings
The New Aetna Articles provide that shareholder action may only be taken
at an annual or special meeting of shareholders and may not be taken by written
consent in lieu of a meeting. Under the Pennsylvania Business Corporation Law,
shareholders of New Aetna are not permitted to call, or to require that the
Chairman, the President or the New Aetna board or any other person call, a
special meeting of shareholders. The New Aetna bylaws provide that, subject to
the rights of holders of any series of New Aetna preferred stock to elect
additional directors under specified circumstances, special meetings of
shareholders can be called only by the Chairman or the President or by the New
Aetna board. Moreover, the business permitted to be conducted at any special
meeting of shareholders is limited to the business brought before the meeting
pursuant to the notice of meeting given by New Aetna.
The inability of the New Aetna shareholders to act by written consent,
together with provisions prohibiting shareholders from calling shareholder
meetings, may have the effect of delaying consideration of a shareholder
proposal until the next annual meeting. These provisions would also prevent the
holders of a majority of the voting power of the voting shares from
unilaterally using the written consent procedure to take shareholder action.
Moreover, a shareholder could not force shareholder consideration of a proposal
over the opposition of the Chairman, the President and the New Aetna board by
calling a special meeting of shareholders prior to the time the Chairman, the
President or a majority of the board believes such consideration to be
appropriate.
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Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals
The New Aetna bylaws establish an advance notice procedure for
shareholders to nominate candidates for election as directors or to bring other
business before annual meetings of shareholders of New Aetna (the "Shareholder
Notice Procedure").
Nominations for election to the New Aetna board may be made at an annual
meeting, or at a special meeting at which directors are to be elected, only by
or at the New Aetna board's direction or by a shareholder who has complied with
the Shareholder Notice Procedure. The New Aetna bylaws require that notice of a
shareholder nomination set forth certain information with respect to each
proposed nominee and the shareholder giving notice.
The New Aetna bylaws provide that at an annual meeting only such business
may be conducted as has been brought before the meeting by, or at the direction
of, the Chairman, the President or the New Aetna board or by a shareholder who
has given timely written notice to the Corporate Secretary of New Aetna of such
shareholder's intention to bring such business before such meeting in
compliance with the Shareholder Notice Procedure. The New Aetna bylaws provide
that only such business may be conducted at a special meeting as is specified
in the notice of meeting. Under the Shareholder Notice Procedure, a
shareholder's notice relating to the conduct of business at an annual meeting
must contain specified information about such business and about the proposing
shareholder.
The Shareholder Notice Procedure requires that notice of nominations or
proposals for substantive business must be received by New Aetna not later than
the 90th day before such meeting is to be held, or if later, the 10th day after
public announcement of the date of such meeting is made.
If the Chairman or other officer presiding at a meeting determines that an
individual was not nominated, or other business was not brought before the
meeting, in accordance with the Shareholder Notice Procedure, such individual
will not be eligible for election as a director, or such business will not be
conducted at such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the
Shareholder Notice Procedure will afford the New Aetna board an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the New Aetna board, to inform shareholders about
such qualifications. By requiring advance notice of other proposed business,
the Shareholder Notice Procedure will provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the New Aetna board, will provide the New Aetna board with an
opportunity to inform shareholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with the New Aetna board's
position regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the New Aetna bylaws do not give the New Aetna board any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
New Aetna and its shareholders.
Potential Issuances of New Aetna Preferred Stock
The New Aetna Articles authorize the New Aetna board to establish, from
the 67,500,000 shares undesignated as to class or series, one or more classes
and series of New Aetna stock, including preferred stock, and to determine,
with respect to any class or series of New Aetna stock, the terms and rights of
such class or series, including, for example, (i) the designation of the class
or series; (ii) the number of shares of the class or series, which number the
New Aetna board may thereafter (except where otherwise provided in the
designation of any subsequently authorized class or series) increase or
decrease (but not below the number of shares thereof then outstanding); (iii)
whether
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dividends, if any, will be cumulative or noncumulative and the dividend rate of
the class or series; (iv) the dates on which dividends, if any, will be
payable; (v) the redemption rights and price or prices, if any, for shares of
the class or series; (vi) the terms and amounts of any sinking fund provided
for the purchase or redemption of shares of the class or series; (vii) the
amounts payable on shares of the class or series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of New
Aetna; (viii) whether the shares of the class or series will be convertible
into shares of any other class or series, or any other security, of New Aetna
or any other corporation, and, if so, the specification of such other class or
series or such other security, the conversion price or prices or rate or rates,
any adjustments thereof, the date or dates as of which such shares shall be
convertible and all other terms and conditions upon which such conversion may
be made; (ix) restrictions on the issuance of shares of the same class or
series or of any other class or series; and (x) the voting rights, if any, of
the holders of such class or series.
The authorized shares of New Aetna, including shares of preferred stock
and common stock, will be available for issuance without further action by New
Aetna's shareholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which New Aetna's
securities may be listed or traded. If the approval of New Aetna's shareholders
is not so required, the New Aetna board does not intend to seek shareholder
approval.
Although the New Aetna board has no intention at the present time of doing
so, it could issue a class or series of New Aetna preferred stock that could,
depending on the terms of such class or series, impede the completion of a
merger, tender offer or other takeover attempt that some, or a majority, of New
Aetna's shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their Shares over the then-current
market price of such shares.
Potential Issuances of Rights to Purchase Securities
The New Aetna Articles grant the New Aetna board exclusive authority to
create and issue rights entitling the holders thereof to purchase from New
Aetna shares of capital stock or other securities and to elect to repurchase,
redeem, terminate or amend any such rights. The times at which and terms upon
which such rights are to be issued, repurchased, redeemed, terminated or
amended are to be determined exclusively by the New Aetna board and set forth
in the contracts or instruments that evidence such rights. The authority of the
New Aetna board with respect to such rights includes, but is not limited to,
determining (i) the purchase price of the capital stock or other securities or
property to be purchased upon exercise of such rights; (ii) provisions relating
to the times at which and the circumstances under which such rights may be
exercised or sold or otherwise transferred, either together with or separately
from any other shares or other securities of New Aetna; (iii) provisions which
adjust the number or exercise price of such rights or the amount or nature of
the shares, other securities or other property receivable upon exercise of such
rights in the event of a combination, split or recapitalization of any shares
of New Aetna, a change in ownership of New Aetna's shares or other securities
or a reorganization, merger, consolidation, sale of assets or other occurrence
relating to New Aetna or any shares of New Aetna, and provisions restricting
the ability of New Aetna to enter into any such transaction absent an
assumption by the other party or parties thereto of the obligations of New
Aetna under such rights; (iv) provisions which deny the holder of a specified
percentage of the outstanding securities of New Aetna the right to exercise
such rights and/or cause such rights held by such holder to become void; (v)
provisions which permit New Aetna to redeem or exchange such rights; and (vi)
the appointment of the rights agent with respect to such rights. This provision
is intended to confirm the New Aetna board's exclusive authority to issue,
repurchase, redeem, terminate or amend share purchase rights or other rights to
purchase shares or securities of New Aetna or any other corporation. See "--
New Aetna Rights."
Provisions Relating to Amendments to the New Aetna Articles and the New Aetna
Bylaws
Under the Pennsylvania Business Corporation Law, shareholders have the
right to adopt, amend or repeal the articles of incorporation and bylaws of a
corporation. However, the Business Corporation Law requires that any amendment
to the Articles also be approved by the board of directors. In addition, the
bylaws may be amended by the board of directors with respect to all matters not
exclusively reserved by law to the shareholders. Certain provisions of the New
Aetna bylaws, including the provision relating to the calling of special
meetings of shareholders and the advance notice provision for shareholder
nominations and shareholder proposals, may be
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amended or repealed by shareholders only with the approval of at least 80% of
the outstanding voting power of New Aetna.
Pennsylvania Anti-Takeover Statutes
Under Section 1715 of the Pennsylvania Business Corporation Law, which is
applicable to New Aetna, directors stand in a fiduciary relation to their
corporation and, as such, are required to perform their duties in good faith,
in a manner they reasonably believe to be in the best interests of the
corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In discharging their duties, directors may, in considering the
best interests of their corporation, consider, among other things, to the
extent they deem appropriate: (a) the effects of any action upon any or all
groups affected by the action, including shareholders, employees, suppliers,
customers and creditors of the corporation, and upon communities in which
offices or other establishments of the corporation are located; (b) the
short-term and long-term interests of the corporation; (c) the resources,
intent and conduct (past, stated and potential) of any person seeking to
acquire control of the corporation; and (d) all other pertinent factors. In
considering the best interests of the corporation or the effects of any action,
directors are not required to regard the interests of the shareholders, or any
other group affected by the action, as dominant or controlling. Absent a breach
of fiduciary duty, a lack of good faith or self-dealing, any act of the board
of directors, a committee thereof or an individual director is presumed to be
in the best interests of the corporation. The Pennsylvania Business Corporation
Law expressly provides that the fiduciary duty of directors does not require
them to (i) redeem or otherwise render inapplicable outstanding rights such as
the New Aetna Rights; (ii) render inapplicable specified statutory
anti-takeover provisions, including Subchapter F of Chapter 25, which is
applicable to New Aetna; or (iii) take any action solely because of the effect
it may have on a proposed acquisition or the consideration to be received by
shareholders in such a transaction.
Commentary associated with Section 1715, and accepted by courts applying
the provisions of that Section to the facts of specific takeover attempts,
makes it clear that a purpose of Section 1715 is to legislatively overrule
certain judicial decisions in other jurisdictions named in the commentary which
have had the effect of limiting the flexibility of incumbent management in
contested takeovers. The provisions of Section 1715, and its construction by
the courts, could aid the New Aetna board in resisting a proposed acquisition
transaction which it believed not to be in the best interests of any one of the
corporate constituencies identified in the statute or otherwise not in the best
interests of New Aetna under any of the criteria identified in the statute that
the board believes are appropriate to consider.
New Aetna is subject to Subchapter F of Chapter 25 of the Pennsylvania
Business Corporation Law. Subchapter F applies to a transaction between a
publicly traded corporation and an interested shareholder (defined generally to
be any beneficial owner of 20% or more of the corporation's voting stock).
Subchapter F of Chapter 25 prohibits such a corporation from engaging in a
"business combination" (as defined in the Business Corporation Law) with an
interested shareholder unless (i) the board of directors of such corporation
gives approval to the proposed transaction or gives approval to the interested
shareholder's acquisition of 20% of the shares entitled to vote in an election
of directors of such corporation, in either case prior to the date on which the
shareholder first becomes an interested shareholder (the "Share Acquisition
Date"), (ii) the interested shareholder owns at least 80% of the stock of such
corporation entitled to vote in an election of directors and, no earlier than
three months after such interested shareholder reaches such 80% level, the
majority of the remaining shareholders approve the proposed transaction and
shareholders receive a minimum "fair price" for their shares (as set forth in
the Business Corporation Law) in the transaction and the other conditions of
Subchapter F of Chapter 25 of the Business Corporation Law are met, (iii)
holders of all outstanding shares of common stock approve the transaction, (iv)
no earlier than five years after the Share Acquisition Date, a majority of the
remaining shares entitled to vote in an election of directors approve the
transaction, or (v) no earlier than five years after the Share Acquisition
Date, a majority of all the shares approve the transaction, all shareholders
receive a minimum "fair price" for their shares (as set forth in the Business
Corporation Law) and the other conditions of Subchapter F of Chapter 25 of the
Business Corporation Law are met.
Under certain circumstances, Subchapter F of the Business Corporation Law
makes it more difficult for an interested shareholder to effect various
business combinations with a corporation for a five-year period following a
Share Acquisition Date. The provisions of Subchapter F should encourage persons
interested in acquiring New
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Aetna to negotiate in advance with the New Aetna board, since the higher
shareholder voting requirements would not be invoked if such person, prior to
acquiring 20% of New Aetna's Voting Shares, obtains the approval of the New
Aetna board for such acquisition or for the proposed business combination
transaction (unless such person acquires 80% or more of New Aetna's voting
shares in such transaction, excluding certain shares as described above).
Subchapter F of the Business Corporation Law will not prevent a hostile
takeover of New Aetna. It may, however, make more difficult or discourage a
takeover of New Aetna or the acquisition of control of New Aetna by a
significant shareholder and thus the removal of incumbent management. Any such
effect will be enhanced by the issuance of the New Aetna Rights. Some
shareholders may find this disadvantageous in that they may not be afforded the
opportunity to participate in takeovers that are not approved as required by
Subchapter F of the Business Corporation Law but in which shareholders might
receive, for at least some of their shares, a substantial premium above the
market price at the time of a tender offer or other acquisition transaction.
Section 2538 of Subchapter D of the Business Corporation Law imposes a
higher vote on certain transactions between an "interested shareholder" (as
defined in Section 2538(d) of the Business Corporation Law) and a publicly
traded corporation unless certain procedural requirements are satisfied.
Subchapter E of Chapter 25 of the Business Corporation Law requires a person
who acquires 20% or more of the shares of a publicly traded corporation to
offer to purchase the shares of any other shareholder at "fair value"
(determined as provided in Section 2547). Subchapter G of Chapter 25 of the
Business Corporation Law also contains certain provisions applicable to a
registered corporation which, under certain circumstances, permit such a
corporation to redeem "control shares" (as defined in the Business Corporation
Law) and remove the voting rights of control shares. Additionally, Subchapter H
of Chapter 25 of the Business Corporation Law requires the disgorgement of
profits by a "controlling person" (as defined in the Business Corporation Law).
The New Aetna Articles provide that Section 2538 of Subchapter D of the
Business Corporation Law, and Subchapters E, G and H of Chapter 25 of the
Business Corporation Law are not applicable to New Aetna.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitations on Liability
The New Aetna Articles provide that a director will not be personally
liable for monetary damages except to the extent such liability may not by law
be so limited. The Pennsylvania Business Corporation Law precludes a limitation
on liability (i) for any breach or failure to perform such director's duties
under law, which breach constituted self-dealing, willful misconduct or
recklessness; (ii) for responsibility or liability of a director under any
criminal statute; or (iii) for a director's liability for the payment of taxes
under any federal, state or local law. The New Aetna Articles contain a
limitation on an officer's liability to the same effect.
While the New Aetna Articles provide directors and officers with
protection against awards for monetary damages for breaches of their statutory
obligations, they do not eliminate such obligations. Accordingly, the New Aetna
Articles will have no effect on the availability of equitable remedies such as
an injunction or rescission based on a director's or officers' breach of his or
her statutory obligations.
Indemnification of Directors and Officers
The Pennsylvania Business Corporation Law provides, in general, that a
corporation may indemnify any person, including its directors, officers and
employees, who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than actions by or in the right of the
corporation) by reason of the fact that he or she is or was a representative
of, or was serving at the request of the corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, employee
benefit plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with the action or proceeding unless the
court determines that the act or failure to act giving rise to the claim for
indemnification constituted willful misconduct or recklessness. The Business
Corporation Law permits similar
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indemnification in the case of actions by or in the right of the corporation.
In any case, to the extent that a representative of the corporation has been
successful on the merits or otherwise in defense of any claim, issue or matter,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith. The
Business Corporation Law also provides that the indemnification permitted or
required by the law is not exclusive of any other rights to which a person
seeking indemnification may be entitled, provided that indemnification may not
be made in any case where the act is determined by a court to have constituted
willful misconduct or recklessness. The Business Corporation Law also provides
that a corporation may pay expenses (including attorneys' fees), incurred by a
party in an action subject to indemnification in advance of the final
disposition of the action upon receipt of an undertaking by the party on whose
behalf such expenses are paid to repay all amounts to the corporation in the
event it is ultimately determined that the party is not entitled to be
indemnified. New Aetna's Articles require indemnification of its directors and
officers, and the advancement of expenses, to the fullest extent permitted by
the Business Corporation Law (except with respect to the claims against the
corporation commenced by such a party) and permit, by action of the Board,
indemnification of, and advancement of expenses to, employees and agents of New
Aetna as determined by the Board of Directors in a particular case.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form 10 with the SEC with
respect to the shares of our common stock that Aetna shareholders will receive
in the spin-off. This information statement is a part of that registration
statement and, as allowed by SEC rules, does not include all of the information
you can find in the registration statement or the exhibits to the registration
statement. For additional information relating to us and the spin-off,
reference is made to the registration statement and the exhibits to the
registration statement. Statements contained in this information statement as
to the contents of any contract or document referred to are not necessarily
complete and in each instance, if the contract or document is filed as an
exhibit to the registration statement, reference is made to the copy of the
contract or other document filed as an exhibit to the registration statement.
Each statement is qualified in all respects by the relevant reference. We have
also filed a proxy statement on Schedule 14A with the SEC. The proxy statement
describes the transaction that is to voted on by Aetna's shareholders. We urge
you to read that proxy statement.
After the spin-off, we will file annual, quarterly and special reports,
proxy statements and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. The registration statement
is, and any of these future filings with the SEC will be, available to the
public over the Internet at the SEC's website at http://www.sec.gov. You may
read and copy any filed document at the SEC's public reference rooms in
Washington, D.C. at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the SEC's regional offices in New York at 7 World Trade Center,
13th Floor, New York, NY 10048, and in Chicago at Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 W. Madison Street, Chicago, IL 60661. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms.
We maintain an Internet site at http://www. . This text is not
an active link and our website and the information contained on that site, or
connected to that site, is not incorporated into this information statement or
the registration statement.
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NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
------
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income -- Six Months Ended June 30, 2000 and 1999............................... F-2
Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999......................................... F-3
Consolidated Statements of Shareholder's Equity -- Six Months Ended June 30, 2000 and 1999................. F-4
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2000 and 1999........................... F-5
Condensed Notes to Interim Consolidated Financial Statements............................................... F-6
Audited Consolidated Financial Statements
Independent Auditors' Report............................................................................... F-24
Consolidated Statements of Income -- Years Ended December 31, 1999, 1998 and 1997.......................... F-25
Consolidated Balance Sheets -- December 31, 1999 and 1998.................................................. F-26
Consolidated Statements of Shareholder's Equity -- Years Ended December 31, 1999, 1998
and 1997............................................................................................... F-27
Consolidated Statements of Cash Flows -- Years Ended December 31, 1999, 1998 and 1997...................... F-28
Notes to Consolidated Financial Statements................................................................. F-29
Quarterly Data (Unaudited)................................................................................. F-77
</TABLE>
F-1
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---------- ---------
(Millions)
<S> <C> <C>
Revenue:
Health care premiums.......................................... $10,909.0 $7,158.9
Other premiums................................................ 738.3 760.2
Administrative services only fees............................. 980.4 728.2
Net investment income......................................... 811.3 796.7
Other income.................................................. 46.2 60.3
Net realized capital gains (losses)........................... (41.2) 18.2
--------- --------
Total revenue.................................................. 13,444.0 9,522.5
--------- --------
Benefits and expenses:
Health care costs............................................. 9,432.9 6,091.6
Current and future benefits................................... 1,101.9 1,160.6
Operating expenses:
Salaries and related benefits............................... 1,160.6 793.6
Other....................................................... 1,223.1 849.1
Interest expense.............................................. 125.1 107.1
Amortization of goodwill and other acquired intangible assets. 218.4 203.8
Reductions of loss on discontinued products................... (146.0) (77.2)
--------- --------
Total benefits and expenses.................................... 13,116.0 9,128.6
--------- --------
Income from continuing operations before income taxes ......... 328.0 393.9
Income taxes:
Current....................................................... 125.7 163.5
Deferred...................................................... 21.2 19.0
--------- --------
Total income taxes............................................. 146.9 182.5
--------- --------
Income from continuing operations.............................. 181.1 211.4
Income from discontinued operations, net of tax................ 175.5 175.2
--------- --------
Net income..................................................... $ 356.6 $ 386.6
========= ========
</TABLE>
See Condensed Notes to Interim Consolidated Financial Statements.
F-2
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(Millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 1,812.8 $ 1,628.7
Investment securities......................................... 15,342.1 16,179.1
Other investments............................................. 410.5 509.0
Premiums receivable, net...................................... 855.9 916.3
Other receivables, net........................................ 777.8 746.4
Accrued investment income..................................... 269.8 267.4
Investments under securities loan agreement................... 701.5 805.0
Deferred income taxes......................................... 118.0 157.6
Other assets.................................................. 377.0 284.4
--------- ---------
Total current assets........................................... 20,665.4 21,493.9
--------- ---------
Long-term investments ......................................... 377.6 513.9
Mortgage loans................................................. 2,040.3 1,877.2
Investment real estate......................................... 295.5 264.7
Reinsurance recoverables....................................... 803.5 788.2
Goodwill and other acquired intangible assets, net............. 8,188.1 8,655.0
Property and equipment, net.................................... 450.5 473.0
Deferred income taxes.......................................... 295.2 268.6
Other assets................................................... 227.1 217.9
Separate accounts assets....................................... 14,784.8 14,639.5
Net assets of discontinued operations.......................... 2,923.2 2,789.5
--------- ---------
Total assets................................................... $51,051.2 $51,981.4
========= =========
Liabilities and shareholder's equity
Current liabilities:
Health care costs payable..................................... $3,142.8 $3,238.7
Future policy benefits........................................ 997.6 1,106.0
Unpaid claims................................................. 455.9 442.0
Unearned premiums............................................. 397.7 473.6
Policyholders' funds.......................................... 937.4 963.7
Payable under securities loan agreement....................... 701.5 805.0
Short-term debt............................................... 1,342.6 1,725.0
Income taxes payable.......................................... 223.4 200.6
Accrued expenses and other liabilities........................ 1,627.4 1,489.1
--------- ---------
Total current liabilities...................................... 9,826.3 10,443.7
--------- ---------
Future policy benefits......................................... 8,238.7 8,447.1
Unpaid claims.................................................. 1,262.4 1,268.6
Policyholders' funds........................................... 2,993.8 3,467.4
Long-term debt................................................. 2,094.2 2,093.9
Other liabilities.............................................. 890.9 918.0
Separate accounts liabilities.................................. 14,784.8 14,639.5
--------- ---------
Total liabilities.............................................. 40,091.1 41,278.2
--------- ---------
Commitments and contingent liabilities (Notes 3 and 10)
Shareholder's equity:
Common stock and additional paid-in capital................... 3,735.2 3,719.3
Accumulated other comprehensive loss.......................... (484.2) (655.6)
Retained earnings............................................. 7,709.1 7,639.5
--------- ---------
Total shareholder's equity..................................... 10,960.1 10,703.2
--------- ---------
Total liabilities and shareholder's equity..................... $51,051.2 $51,981.4
========= =========
See Condensed Notes to Interim Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
----------------------------
Common Stock
and Additional
Paid-in Gains (Losses) Foreign Retained
Six Months Ended June 30, 2000 Total Capital (1) on Securities Currency Earnings
------------------------------------- --------- -------------- -------------- -------- --------
(Millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999......... $10,703.2 $3,719.3 $(206.1) $(449.5) $7,639.5
Comprehensive income:
Net income........................... 356.6 356.6
Other comprehensive income,
net of tax:
Unrealized gains on securities
($81.4 pretax) (2)............... 52.9 52.9
Foreign currency
($136.8 pretax).................. 118.5 118.5
---------
Other comprehensive income........... 171.4
---------
Total comprehensive income............ 528.0
=========
Capital contributions from Aetna...... 15.9 15.9
Dividends to Aetna.................... (287.0) (287.0)
--------- -------- ------- ------- --------
Balances at June 30, 2000............. $10,960.1 $3,735.2 $(153.2) $(331.0) $7,709.1
========= ======== ======= ======= ========
Six Months Ended June 30, 1999
--------------------------------------
Balances at December 31, 1998......... $11,429.5 $3,674.0 $ 382.5 $(204.7) $7,577.7
Comprehensive loss:
Net income........................... 386.6 386.6
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(503.4) pretax) (2)............ (327.2) (327.2)
Foreign currency
($(121.0) pretax)................ (78.8) (78.8)
---------
Other comprehensive loss............. (406.0)
---------
Total comprehensive loss.............. (19.4)
---------
Capital contributions from Aetna...... 7.1 7.1
Dividends to Aetna.................... (105.0) (105.0)
--------- -------- ------- ------- --------
Balances at June 30, 1999............. $11,312.2 $3,681.1 $ 55.3 $(283.5) $7,859.3
========= ======== ======= ======= ========
</TABLE>
----------
(1) There were 250 million shares of Aetna Services, Inc. common stock, par
value $.01, and 275 million shares of Aetna U.S. Healthcare Inc. common
stock, par value $.005, authorized at June 30, 2000. All outstanding
common stock of Aetna Services, Inc. and Aetna U.S. Healthcare Inc. was
owned by Aetna Inc. at June 30, 2000 and December 31, 1999.
(2) Net of reclassification adjustments.
See Condensed Notes to Interim Consolidated Financial Statements.
F-4
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
(Millions)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 356.6 $ 386.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations......................... (175.5) (175.2)
Depreciation and amortization (including investment
discounts and premiums)................................... 279.9 217.4
Net realized capital (gains) losses......................... 41.2 (18.2)
Changes in assets and liabilities:
(Increase) decrease in accrued investment income.......... (3.6) 57.3
(Increase) decrease in premiums due and other
receivables.......................................... (38.8) 16.9
Increase (decrease) in income taxes....................... (8.9) 0.7
Net (increase) decrease in other assets and other
liabilities.......................................... (211.7) 248.6
Decrease in health care and insurance liabilities ........ (454.8) (651.9)
Other, net................................................ 35.2 8.9
Discontinued operations, net................................... 665.3 200.6
-------- --------
Net cash provided by operating activities...................... 484.9 291.7
-------- --------
Cash flows from investing activities:
Proceeds from sales and investment maturities of:
Debt securities available for sale.......................... 6,952.1 6,995.7
Equity securities........................................... 264.3 71.9
Mortgage loans.............................................. 392.1 189.5
Investment real estate...................................... 12.0 31.2
Other investments........................................... 8,680.5 5,232.9
NYLCare Texas............................................... 420.0 --
Cost of investments in:
Debt securities available for sale.......................... (6,459.6) (6,220.1)
Equity securities........................................... (110.1) (64.7)
Mortgage loans.............................................. (211.1) (29.2)
Investment real estate...................................... (7.9) (29.4)
Other investments........................................... (8,498.0) (4,997.5)
Acquisition of NYLCare health care business................... -- (48.8)
Increase in property and equipment............................ (38.3) 17.7
Other, net.................................................... (109.0) (42.7)
Discontinued operations, net................................... 719.5 (495.9)
-------- --------
Net cash provided by investing activities...................... 2,006.5 610.6
-------- --------
Cash flows from financing activities:
Deposits and interest credited for investment contracts....... 134.1 199.3
Withdrawals of investment contracts........................... (525.5) (845.6)
Repayment of long-term debt................................... -- (29.7)
Net decrease in short-term debt............................... (403.5) (195.6)
Capital contributions from Aetna.............................. 15.9 7.1
Dividends paid to Aetna....................................... (157.0) (155.0)
Other, net.................................................... 13.5 (312.7)
Discontinued operations, net................................... (366.2) 554.1
-------- --------
Net cash used for financing activities......................... (1,288.7) (778.1)
-------- --------
Net increase in cash and cash equivalents of discontinued
operations................................................ (1,018.6) (258.8)
-------- --------
Net increase (decrease) in cash and cash equivalents........... 184.1 (134.6)
Cash and cash equivalents, beginning of period................. 1,628.7 1,101.0
-------- --------
Cash and cash equivalents, end of period....................... $1,812.8 $ 966.4
======== ========
Supplemental cash flow information:
Interest paid................................................. $ 136.9 $ 96.2
Income taxes paid............................................. 140.3 374.5
</TABLE>
See Condensed Notes to Interim Consolidated Financial Statements.
F-5
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
The accompanying consolidated financial statements included the accounts of
Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") and its subsidiaries as of
, 2000 ("New Aetna"). New Aetna is a wholly-owned subsidiary
of Aetna Inc. ("Aetna").
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING Groep N.V. ("ING") and, in an integrated transaction, that it
planned to spin-off New Aetna, a standalone health company comprised of the
Health Care (including its group life and disability insurance business) and
Large Case Pensions businesses, to its shareholders. On ,
2000, Aetna's shareholders are expected to approve the sale of Aetna's
Financial Services and International businesses to ING. Following the sale, New
Aetna will be named Aetna Inc. (Refer to Note 11.)
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. The
accompanying disclosures have been updated to reflect the transactions
described above.
Basis of Presentation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. All
significant intercompany balances have been eliminated. Certain
reclassifications have been made to the 1999 financial information to conform
to the 2000 presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion of
management, all adjustments necessary for a fair statement of results for the
interim periods have been made. All such adjustments are of a normal, recurring
nature. The accompanying consolidated financial statements should be read in
conjunction with our audited historical financial statements and the related
notes included elsewhere in this information statement. Certain financial
information that is normally included in annual financial statements prepared
in accordance with generally accepted accounting principles, but that is not
required for interim reporting purposes, has been condensed or omitted.
The accompanying consolidated financial statements reflect the accounts of
New Aetna as a subsidiary of Aetna (refer to Note 11), subject to corporate
general and administrative expense allocations as described in Note 2 to the
1999 Consolidated Financial Statements contained elsewhere in this document.
Such information does not necessarily reflect the financial position or results
of operations of New Aetna as a separate, standalone entity.
New Accounting Standard
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk
On January 1, 2000, New Aetna adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified Public
Accountants. This statement provides guidance on how to account for all
insurance and reinsurance contracts that do not transfer insurance risk, except
for long-duration life and health insurance contracts. The adoption of this
standard did not have a material effect on New Aetna's financial position or
results of operations.
F-6
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Accounting Standard
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, further guidance related to
accounting for derivative instruments and hedging activities was provided when
the FASB issued FAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133. This
standard, as amended, 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, these standards are
effective for New Aetna's financial statements beginning January 1, 2001, with
early adoption permitted. The impact of FAS No. 133, as amended, on New Aetna's
financial statements will vary based on certain factors including future
interpretive guidance from the FASB, the extent of New Aetna's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. New Aetna is evaluating the impact of the adoption of this
standard and currently does not believe that this standard will have a material
effect on New Aetna's financial position or results of operations.
2. Recent Developments
New Aetna's Medicare+Choice contracts with the federal government are
renewed for a one-year period each January 1. On June 29, 2000, New Aetna
notified the Health Care Financing Administration ("HCFA") of its intent to
exit a number of Medicare service areas affecting approximately 340,000
members, or approximately 50 percent of New Aetna's total current Medicare
membership. The termination of these Medicare+Choice contracts will become
effective on December 31, 2000. New Aetna may elect to continue to provide
Medicare benefits to members in these service areas, in accordance with HCFA
regulations and guidelines, if legislative or regulatory changes are made that
would increase payments from HCFA to New Aetna within six months following this
notification date.
During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. New Aetna will also, at such time, evaluate the need for the
establishment of liabilities related to the withdrawal from applicable Medicare
service areas, including employee termination benefits and related costs, as
well as evaluate any impairment related to goodwill still separately
identifiable with such service areas, which is considered recoverable pending a
final decision to exit. Goodwill associated with such Medicare service areas
was approximately $275 million at June 30, 2000.
F-7
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions
On August 6, 1999, New Aetna acquired from The Prudential Insurance
Company of America ("Prudential") the Prudential health care business ("PHC")
for approximately $1 billion. The acquisition was accounted for as a purchase.
In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included: (1) an asset of
$130 million, representing the fair value adjustment of a reinsurance agreement
(discussed below), primarily reflecting the net benefits to be received from
Prudential over the life of the agreement; (2) a liability of $129 million,
representing a fair value adjustment for the unfavorable component of the
contracts underlying the acquired medical risk business and (3) an asset of $21
million, representing the above- market compensation component related to
supplemental fees to be received under New Aetna's agreement to service
Prudential's administrative services only ("ASO") contracts (discussed below).
During the first quarter 2000, a liability of $15 million was recorded as
part of the purchase price allocation related to New Aetna's plan to exit
certain leased facilities of the acquired PHC businesses, currently expected to
be completed by March 31, 2001. The purchase price does not reflect any
employee termination benefits for positions that may be eliminated. Such
amounts, which currently are not reasonably estimable, will be expensed as
incurred.
For the six months ended June 30, 2000, New Aetna recorded asset
amortization of $13 million pretax, related to the fair value adjustment of the
reinsurance agreement; liability amortization of $22 million pretax, related to
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business and asset amortization of $11
million pretax, related to the above-market compensation component related to
the supplemental fees under the ASO contracts.
New Aetna and Prudential entered into a reinsurance agreement for which
New Aetna paid a premium. Premium expense recognized for the six months ended
June 30, 2000 was $7 million pretax. Under the agreement, Prudential has agreed
to indemnify New Aetna from certain health insurance risks that arise following
the closing by reimbursing New Aetna for 75% of medical costs (as calculated
under the agreement) of PHC in excess of certain threshold medical loss ratio
levels through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold was 83.5% for August 6, 1999 through
December 31, 1999 and is 84% for January 1, 2000 through December 31, 2000.
During the six months ended June 30, 2000, reinsurance recoveries under this
agreement (reflected as a reduction of current and future benefits) were $46
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 New Aetna for unanticipated increases in medical claims payable
existing at the acquisition date for a period of up to nine months following
the closing.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained New Aetna
to service these contracts during the run off period, but generally no later
than June 30, 2001. In exchange for servicing the ASO business, Prudential is
remitting fees received from its ASO members to New Aetna, 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 six
months ended June 30, 2000, New Aetna recorded total fees for servicing the
Prudential ASO business of approximately $204 million pretax, including
supplemental fees of approximately $84 million pretax, which was net of the
asset amortization related to the above-market compensation component related
to the supplemental fees under the ASO contracts described above.
In connection with the PHC acquisition, New Aetna 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 New Aetna as part of
the 1998 acquisition of New York Life Insurance Company's health care business.
Pursuant to this agreement, on March 31, 2000, New Aetna completed the sale of
NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of Health Care
Service Corporation, for approximately $420 million in cash. The sale resulted
in an after-tax capital loss of $35 million which was previously recognized in
the fourth quarter of 1999. The after-tax loss included operating losses from
October 1, 1999 through closing. The results of operations of NYLCare Texas
were not material to the Health Care segment or to New Aetna's consolidated
results of operations.
F-8
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
During the first quarter 2000, New Aetna acquired the remaining minority
ownership interest in InteliHealth Inc., which distributes health care
information principally through its Internet web site and sells health products
to consumers. The aggregate purchase price was not material.
4. Investments
Investment securities at June 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(Millions)
<S> <C> <C>
Debt securities available for sale (amortized
cost $15,582.5 and $16,327.2)........................... $15,123.7 $15,811.5
Equity securities (cost $171.1 and $216.4)................... 123.6 151.2
Other investment securities.................................. 94.8 216.4
--------- ---------
Total investment securities.................................. $15,342.1 $16,179.1
========= =========
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $154 and $185 million for the six months ended June 30, 2000
and 1999, respectively. Interest credited to contractholders is included in
current and future benefits.
Net realized capital gains (losses) allocable to experience-rated
contractholders of $(29) million and $14 million for the six months ended June
30, 2000 and 1999, respectively, were deducted from net realized capital gains
(losses) as reflected on the Consolidated Statements of Income, and an
offsetting amount is reflected on the Consolidated Balance Sheets in
policyholders' funds.
As of June 30, 2000 and December 31, 1999, 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>
June 30, 2000 December 31, 1999
------------------------- --------------------------
Total Recorded Specific Total Recorded Specific
Investment Reserves Investment Reserves
-------------- -------- --------------- --------
(Millions)
<S> <C> <C> <C> <C>
Supporting discontinued products..... $157.5 $22.2 $158.9 $22.2
Supporting experience-rated products. 66.1 8.5 66.9 8.8
Supporting remaining products........ 52.1 1.1 48.4 1.1
------ ----- ------ ------
Total impaired loans................. $275.7(1) $31.8 $274.2(1) $32.1
====== ===== ====== =====
</TABLE>
----------
(1) Includes impaired loans of $113.5 million and $109.0 million at June 30,
2000 and December 31, 1999, respectively, for which no specific reserves
are considered necessary.
F-9
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
The activity in the specific and general reserves for the six months ended
June 30, 2000 and 1999 is summarized below:
<TABLE>
<CAPTION>
Supporting Supporting Supporting
Discontinued Experience- Remaining
Products Rated Products Products Total
------------ -------------- ---------- -----
(Millions)
<S> <C> <C> <C> <C>
Balance at December 31, 1999.............. $28.9 $15.6 $1.4 $45.9
Credited to net realized capital losses... -- (0.3) (0.1) (0.4)
----- ----- ---- -----
Balance at June 30, 2000.................. $28.9 $15.3 $1.3 $45.5 (1)
===== ===== ==== =====
Balance at December 31, 1998.............. $29.5 $29.6 $4.5 $63.6
Principal write-offs ..................... (0.6) (4.4) 0.4 (4.6)
----- ----- ---- -----
Balance at June 30, 1999.................. $28.9 $25.2 $4.9 $59.0 (1)
===== ===== ==== =====
</TABLE>
----------
(1) Total reserves at June 30, 2000 and 1999 include $31.8 million and $41.5
million of specific reserves, respectively, and $13.7 million and $17.5
million of general reserves, respectively.
Income earned (pretax) and cash received on the average recorded
investment in impaired loans was as follows:
<TABLE>
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
-------------------------------------- --------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
Loans Earned Received Loans Earned Received
-------- ------ -------- -------- ------ --------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products...... $157.9 $ 5.2 $ 5.2 $159.4 $ 6.0 $ 6.0
Supporting experience-rated products.. 71.9 3.3 3.3 93.9 4.3 4.2
Supporting remaining products......... 42.6 5.1 5.6 29.8 2.8 2.8
------ ----- ----- ------ ----- -----
Total................................. $272.4 $13.6 $14.1 $283.1 $13.1 $13.0
====== ===== ===== ====== ===== =====
</TABLE>
5. Supplemental Cash Flow Information
Significant noncash investing and financing activities included
acquisition of real estate through foreclosures of mortgage loans amounting to
$4 million for the six months ended June 30, 1999. There were no foreclosures
of mortgage loans for the six months ended June 30, 2000.
F-10
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Additional Information -- Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
<TABLE>
Six Months Ended June 30,
-------------------------
2000 1999
------ -------
(Millions)
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1)... $48.5 $(270.1)
Less: reclassification adjustment for gains (losses) and other
items included in net income (2)............................. (4.4) 57.1
----- -------
Net unrealized gains (losses) on securities....................... $52.9 $(327.2)
===== =======
</TABLE>
----------
(1) Pretax unrealized holding gains (losses) arising during the period were
$74.6 million and $(415.6) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $(6.8) million and $87.8 million for 2000 and 1999,
respectively.
7. Discontinued Products
New Aetna discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under New Aetna'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 New Aetna's results of operations. New Aetna's results of operations
would be adversely affected to the extent that future losses on the products
are greater than anticipated and positively affected to the extent that future
losses are less than anticipated. The current reserve reflects management's
best estimate of anticipated future losses.
The factors contributing to changes in the reserve for anticipated future
losses are: operating income or loss, realized capital gains or losses and
mortality gains or losses. Operating income or loss is equal to revenue less
expenses. Realized capital gains or losses reflect the excess (deficit) of
sales price over (below) the carrying value of assets sold. Mortality gains or
losses reflect the mortality and retirement experience related to SPAs. A
mortality gain (loss) occurs when an annuitant or a beneficiary dies sooner
(later) than expected. A retirement gain will occur on some contracts if an
annuitant retires later than expected (a loss if an annuitant retires earlier
than expected).
At the time of discontinuance, a receivable from Large Case Pensions'
continuing products equivalent to the net present value of the anticipated cash
flow shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. The offsetting payable, on which interest is similarly accrued, is
reflected in continuing products. Interest on the payable generally offsets the
investment income on the assets available to fund the shortfall. At June 30,
2000, the receivable from continuing products, net of related deferred taxes
payable of $72 million on the accrued interest income, was $380 million. At
December 31, 1999, the receivable from continuing products, net of related
deferred taxes payable of $67 million on accrued interest income, was $464
million. These amounts were eliminated in consolidation.
F-11
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax, in millions):
Charged
(Credited) to
Reserve for
Six months ended June 30, 2000 Results Future Losses Net(1)
------------------------------------------ ------- ------------- ------
Net investment income..................... $223.9 $ -- $223.9
Net realized capital gains................ 0.1 (0.1) --
Interest earned on receivable from
continuing products.................. 16.3 -- 16.3
Other income.............................. 18.3 -- 18.3
------ ------- ------
Total revenue............................ 258.6 (0.1) 258.5
------ ------- ------
Current and future benefits............... 229.7 21.9 251.6
Operating expenses........................ 6.9 -- 6.9
------ ------- ------
Total benefits and expenses.............. 236.6 21.9 258.5
------ ------- ------
Results of discontinued products.......... $ 22.0 $ (22.0) $ --
====== ======= ======
Charged
(Credited) to
Reserve for
Six months ended June 30, 1999 Results Future Losses Net(1)
------------------------------------------ ------- ------------- ------
Net investment income..................... $ 243.8 $ -- $243.8
Net realized capital gains................ 18.3 (18.3) --
Interest earned on receivable from
continuing products.................. 16.9 -- 16.9
Other income.............................. 15.3 -- 15.3
------- ------- ------
Total revenue............................ 294.3 (18.3) 276.0
------- ------- ------
Current and future benefits............... 257.1 12.4 269.5
Operating expenses........................ 6.5 -- 6.5
------- ------- ------
Total benefits and expenses.............. 263.6 12.4 276.0
------- ------- ------
Results of discontinued products.......... $ 30.7 $ (30.7) $ --
======= ======= ======
---------------
(1) Amounts are reflected in the June 30, 2000 and 1999 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which was eliminated in consolidation.
F-12
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
Assets and liabilities supporting discontinued products at June 30, 2000
and December 31, 1999 were as follows (1):
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
Assets:
Debt securities available for sale........... $4,319.2 $4,533.0
Mortgage loans............................... 806.9 768.8
Investment real estate ...................... 116.9 112.7
Other investment securities.................. 442.5 453.9
-------- --------
Total investments............................. 5,685.5 5,868.4
Investments under securities loan agreement.. 131.0 243.8
Current and deferred income taxes............ 69.6 134.1
Receivable from continuing products (2)...... 452.0 530.6
Other........................................ 20.8 82.6
-------- --------
Total assets.................................. $6,358.9 $6,859.5
======== ========
Liabilities:
Future policy benefits....................... $4,517.1 $4,566.0
Policyholders' funds......................... 687.2 902.1
Reserve for anticipated future losses on
discontinued products.................... 1,023.6 1,147.6
Payable under securities loan agreement...... 131.0 243.8
-------- --------
Total liabilities............................. $6,358.9 $6,859.5
======== ========
---------------
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products was eliminated in consolidation.
At June 30, 2000 and December 31, 1999, net unrealized capital losses on
available-for-sale debt securities are included above in other assets and are
not reflected in consolidated shareholder's 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.
F-13
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
The previous years' actual participant withdrawal experience is used for
the current year assumption. Prior to 1995, New Aetna 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.
New Aetna's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liabilities have run off.
The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 2000 was as follows (pretax):
(Millions)
----------
Reserve at December 31, 1999.............. $1,147.6
Operating income.......................... 9.9
Net realized capital gains................ 0.1
Mortality and other....................... 12.0
Reserve reduction......................... (146.0)
--------
Reserve at June 30, 2000.................. $1,023.6
========
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, $95 million ($146 million pretax) of the reserve
was released in the second quarter of 2000 primarily due to favorable
performance related to certain equity investments, favorable mortality and
retirement experience and the decrease in size of the overall bond portfolio
which decreased default risk. A similar review in the second quarter of 1999
resulted in New Aetna's release of $50 million ($77 million pretax) of the
discontinued products reserve. The current reserve reflects management's best
estimate of anticipated future losses.
8. Debt and Guarantee of Debt Securities
During the periods presented, New Aetna had a revolving credit facility in
an aggregate amount of $1.5 billion with a worldwide group of banks. This
facility will not continue following the spin-off. Various interest rate
options were available under this facility and any borrowings matured on the
expiration date of the applicable credit commitment. New Aetna paid facility
fees ranging from 0.065% to 0.2% per annum, depending upon its long-term senior
unsecured debt rating. The facility fee at June 30, 2000 was at an annual rate
of 0.08%. There were no borrowings under this facility as of June 30, 2000.
This facility also supported New Aetna's commercial paper borrowing program.
Under this credit facility, New Aetna was required to maintain shareholder's
equity, excluding net unrealized capital gains and losses (accumulated other
comprehensive income (loss)), of at least $7.5 billion.
During the periods presented, New Aetna also had an additional revolving
credit facility in an aggregate amount of $500 million with a worldwide group
of banks. This facility will not continue following the spin-off. Various
interest rate options were available under this facility and any borrowings
matured on the expiration date of the applicable credit commitment. New Aetna
paid facility fees ranging from 0.07% to 0.25% per annum, depending upon its
long-term senior unsecured debt rating. The facility fee at June 30, 2000 was
at an annual rate of 0.08%. There were no borrowings under this facility as of
June 30, 2000. This facility also supported New Aetna's commercial paper
borrowing program. Under this credit facility, New Aetna was required to
maintain shareholder's equity, excluding net unrealized capital gains and
losses (accumulated other comprehensive income (loss)), of at least $7.5
billion.
The amount of dividends paid to New Aetna by its domestic insurance and
HMO subsidiaries at June 30, 2000 without prior approval by state regulatory
authorities was limited to approximately $452 million in the aggregate.
F-14
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Segment Information
Summarized financial information for New Aetna's principal operations for
the six months ended June 30, was as follows:
<TABLE>
Large Case Corporate Discontinued
Six Months Ended June 30, 2000 Health Care Pensions and Other (1) Operations Total
---------------------------------------------- ----------- ---------- ------------- ------------ ---------
(Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.............. $12,583.7 $ 90.2 $ -- $ -- $12,673.9
Net investment income......................... 344.8 460.7 5.8 -- 811.3
--------- ------ ------- ------ ---------
Total revenue excluding realized capital gains
(losses)................................... $12,928.5 $550.9 $5.8 $ -- $13,485.2
========= ====== ======= ====== =========
Operating earnings (losses) (2)............... $ 205.8 $ 31.0 $(118.1) $ -- $ 118.7
Other items (3)............................... (14.6) 94.9 -- -- 80.3
Realized capital gains (losses), net of tax... (21.0) 5.2 (2.1) -- (17.9)
--------- ------ ------- ------ ---------
Income (loss) from continuing operations...... 170.2 131.1 (120.2) -- 181.1
Income from discontinued operations, net of
tax........................................ -- -- -- 175.5 175.5
--------- ------ ------- ------ ---------
Net income (loss)............................. $ 170.2 $131.1 $(120.2) $175.5 $ 356.6
========= ====== ======= ====== =========
</TABLE>
<TABLE>
Large Case Corporate Discontinued
Six Months Ended June 30, 1999 Health Care Pensions and Other (1) Operations Total
---------------------------------------------- ----------- ---------- ------------- ------------ -----
(Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.............. $8,630.9 $ 76.3 $ 0.4 $ -- $ 8,707.6
Net investment income......................... 279.2 514.9 2.6 -- 796.7
--------- ------ ------- ------ ---------
Total revenue excluding realized capital gains
(losses)................................... $8,910.1 $591.2 $ 3.0 $ -- $ 9,504.3
========= ====== ======= ====== =========
Operating earnings (losses) (2)............... $ 210.3 $ 43.9 $(104.8) $ -- $ 149.4
Other item (3)................................ -- 50.2 -- -- 50.2
Realized capital gains (losses), net of tax... (3.7) 19.2 (3.7) -- 11.8
--------- ------ ------- ------ ---------
Income (loss) from continuing operations...... 206.6 113.3 (108.5) -- 211.4
Income from discontinued operations, net of
tax........................................ -- -- -- 175.2 175.2
--------- ------ ------- ------ ---------
Net income (loss)............................. $ 206.6 $113.3 $(108.5) $175.2 $ 386.6
========= ====== ======= ====== =========
</TABLE>
----------
(1) Corporate and other includes interest, staff area expenses, advertising,
contributions, net investment income and other general expenses, as well
as consolidating adjustments.
(2) Operating earnings is comprised of net income (loss) excluding realized
capital gains and losses and any other items. While operating earnings is
the measure of profit or loss used by New Aetna's management when
assessing performance or making operating decisions, it does not replace
operating income or net income as a measure of profitability.
(3) Other items include an after-tax charge of $14.6 million related to the
New Jersey insolvency assessment in the Health Care segment in 2000 and an
after-tax benefit of $94.9 million and $50.2 million from reductions of
the reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 2000 and 1999, respectively.
F-15
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities
Commitments
In connection with the sale of its property-casualty operations in 1996,
New Aetna vacated, and the purchaser subleased, at market rates for a period of
eight years, the space that New Aetna occupied in the CityPlace office facility
in Hartford. In 1996, New Aetna 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 New Aetna under the lease and future
rentals expected to be received by New Aetna. Lease payments are charged to
this facilities reserve as they are made and will continue to be charged to
this reserve over the remaining lease term. At June 30, 2000 and December 31,
1999, the balance in this facilities reserve was $260 million and $269 million,
respectively.
Litigation
Shareholder Litigation
Class Action Complaints were filed in the United States District Court for
the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz
and Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J.
Oring. Other Class Action Complaints were filed in the United States District
Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert;
on November 26, 1997 by the Rainbow Fund, Inc.; and on December 24, 1997 by
Terry B. Cohen. The Connecticut actions were transferred to the United States
District Court for the Eastern District of Pennsylvania (the "Court") for
consolidated pretrial proceedings with the cases pending there. The plaintiffs
filed a Consolidated and Amended Complaint (the "Complaint") seeking, among
other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that Aetna 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 Aetna's medical claim
reserves. Aetna 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
Aetna, Ronald E. Compton and Richard L. Huber. Aetna 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 Aetna
common stock on the market from March 6, 1997 through 7:00 a.m. on September
29, 1997. Merits discovery was completed in early 2000. On January 31, 2000
plaintiffs filed expert reports. On February 3, 2000, defendants filed motions
for summary judgment. Also on February 3, 2000, plaintiffs moved for permission
to file a third amended complaint. On March 20, 2000, the Court granted
plaintiffs leave to file a third amended complaint and adopted a revised
schedule. Pursuant to the revised schedule, defendants filed new summary
judgment motions in May 2000 and the parties conducted expert discovery which
is scheduled to be completed in the third quarter of 2000. Trial is scheduled
to begin in the fourth quarter of 2000. Defendants are defending the actions
vigorously.
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
Court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
F-16
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation
New Aetna is involved in several purported class action lawsuits that are
part of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna 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. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
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 New Aetna for alleged violations of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The Conte
Complaint alleges that New Aetna does not make adequate disclosure of provider
compensation arrangements in the literature that it makes available to actual
or prospective members. New Aetna intends to defend the action vigorously and
on November 1, 1999, filed a motion to dismiss the litigation for failure to
state a claim upon which relief can be granted. On December 15, 1999, the Court
suspended further proceedings pending the resolution of the Maio appeal by the
United States Court of Appeals for the Third Circuit.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill (the "Mississippi 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
Mississippi O'Neill Complaint seeks various forms of relief, including
unspecified damages and treble damages and restitution of alleged improper
profits, from Aetna, New Aetna, Richard L. Huber and unnamed members of the
Board of Directors of Aetna for alleged violations of ERISA and RICO. The
Mississippi O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
F-17
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna, New Aetna, 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 17500 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. Plaintiff has moved to remand the action
to state court. Aetna has 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. In August 2000, the
Court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). 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, New Aetna,
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. On
May 5, 2000 the Court denied defendants' demurer but granted in part their
motion to strike portions of the Ross Complaint and ordered plaintiffs to file
an amended complaint. The amended complaint was filed on May 15, 2000 and a
second amended complaint on June 28, 2000. On August 15, the Court denied
defendants' demurrer but granted, in part, their motion to strike portions of
the second amended complaint and ordered the plaintiffs to file a third amended
complaint. The third amended complaint was filed on August 25, 2000. Defendants
intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III (the "Williamson Complaint"). The Williamson Complaint names
as defendant The Prudential Insurance Company of America, and also names as
defendants Aetna and New Aetna solely to the extent that New Aetna has assumed
liability for the actions of Prudential in connection with New Aetna'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, New Aetna
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte Complaints were filed in that court. On January 25, 2000, the Court
suspended further proceedings pending resolution of a motion in cases involving
other defendants to consolidate those actions in a single court. This
litigation is in the preliminary stages. New Aetna intends to defend the action
vigorously.
F-18
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on December 3, 1999 by Michael V. Amorosi
(the "Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna and New Aetna 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, New Aetna 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 August 25, 2000 New Aetna moved to dismiss the
action for failure to state a claim. This litigation is in the preliminary
stages. New Aetna 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, New Aetna 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 New Aetna. On May 15, 2000 the Judicial Panel on Multidistrict Litigation
issued a conditional order transferring the Mangieri Complaint to the United
States District Court for the Southern District of Florida for consolidated
pretrial proceedings in the matter known as In re Humana, Inc. Managed Care
Litigation. On May 30, 2000 New Aetna filed with the Panel an objection to that
conditional transfer order, but on July 14, 2000, New Aetna requested
consolidation of that action with others pending against New Aetna (see the
discussion regarding the MDL Application below). This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz (the "McCarron Complaint"). The McCarron Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
McCarron Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plans subscribers before and/or after New Aetna's acquisition of those
operations. The McCarron Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 New Aetna joined in Prudential's
motion to dismiss the complaint for failure to state a claim. This litigation
is in the preliminary stages. New Aetna intends to defend the action
vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero (the "Romero Complaint"). The Romero Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
Romero Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plan subscribers before and/or after New Aetna's acquisition of those
operations. The Romero Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
On July 24, 2000 the Court stayed the action. This litigation is in the
preliminary stages. New Aetna intends to defend the action vigorously.
F-19
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri Complaints as
well as both the Mississippi O'Neill Complaint and the Florida O'Neill
Complaint (as defined below). Hearing on the MDL Application is scheduled to
take place on September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop (the "Florida O'Neill Complaint"). The Florida O'Neill Complaint
names as defendants Aetna and Aetna U.S. Healthcare The Florida O'Neill
Complaint seeks various forms of relief, including unspecified damages and
treble damages and restitution of alleged improper profits, from Aetna and
Aetna U.S. Healthcare for alleged violations of ERISA and RICO. The Florida
O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising and marketing
materials directed to Aetna HMO members, and alleges that defendants conspired
with other managed care companies not to disclose alleged industry-wide
practices. New Aetna sought from the Florida federal court a stay of further
proceedings on the Florida O'Neill Complaint pending a decision on the MDL
Application. On July 27, 2000, the Florida federal court denied that motion. On
August 11, 2000, New Aetna filed a motion to dismiss the Florida O'Neill
Complaint. Briefing on that motion is scheduled to be completed in early
September 2000. Additionally, the Court has scheduled briefing on plaintiffs'
class certification motion to be completed by November 2000. This litigation is
in the preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher (the "O'Brien Complaint"). The O'Brien Complaint seeks
various forms of relief, including unspecified damages, from New Aetna for
alleged violations of ERISA. The O'Brien Complaint alleges that New Aetna does
not make adequate disclosure of the operation of its managed care plans to
actual or prospective members. New Aetna intends to defend the action
vigorously. New Aetna has notified the Judicial Panel on Multidistrict
Litigation of the O'Brien Complaint for consolidation with the other matters
referred to in the MDL Application.
Other Litigation and Regulatory Proceedings
New Aetna is involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of New Aetna, 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
Aetna, 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.
F-20
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Other Litigation and Regulatory Proceedings (Continued)
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to New Aetna, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to the financial condition of New Aetna, although they may adversely affect
results of operations in future periods.
11. Agreement and Plan of Restructuring and Merger
On July 20, 2000, Aetna announced that it reached a definitive agreement
to sell its Aetna Financial Services and Aetna International businesses to ING
in a transaction valued at approximately $7.7 billion. Under the terms of the
agreement and in an integrated transaction, Aetna will spin off to its
shareholders the shares of a standalone health company that will be comprised
primarily of the Health Care and Large Case Pensions businesses.
Simultaneously, Aetna, which then will be comprised of Aetna Financial Services
and Aetna International, will merge with a newly formed subsidiary of ING. In
exchange for each Aetna share, Aetna shareholders will receive one share in the
standalone health company, which will be named Aetna Inc., and approximately
$35 per share in cash. When ING acquires Aetna, that entity is expected to have
approximately $2.7 billion in long-term debt.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year end 2000. Aetna expects that it will incur
certain costs associated with the definitive agreement with ING related to the
consummation of the transaction (including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna) and such costs
may be material.
In connection with its spin-off from Aetna, New Aetna generally will
assume all liabilities related to the Health Care and Large Case Pensions
businesses. In addition, New Aetna generally will be responsible for Aetna's
liabilities other than those arising out of the Aetna Financial Services and
Aetna International businesses being sold to ING. These liabilities include the
post-retirement pension and other benefits payable to all former employees of
Aetna, liabilities arising out of health litigation and certain corporate-level
litigation to which Aetna is a party, and generally all liabilities arising out
of certain past divestiture transactions which have been consummated by Aetna
prior to the closing of New Aetna's spin-off from Aetna.
F-21
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Agreement and Plan of Restructuring and Merger (Continued)
The account balances and activities of Aetna Financial Services and Aetna
International have been segregated and reported as discontinued operations.
Operating results of the discontinued operations were as follows:
<TABLE>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
(Millions)
<S> <C> <C>
Revenue:
Premiums........................................... $1,505.7 $1,104.1
Total net investment income........................ 714.4 686.6
Fees and other income.............................. 386.5 315.3
Net realized capital gains (losses)................ (12.4) 8.7
-------- --------
Total revenue....................................... 2,594.2 2,114.7
-------- --------
Benefits and expenses:
Current and future benefits........................ 1,625.7 1,248.2
Operating expenses:
Salaries and related benefits.................... 216.4 178.8
Other............................................ 322.3 308.0
Interest expense................................... 25.6 21.6
Amortization of goodwill and other acquired
intangible assets.............................. 15.5 9.6
Amortization of deferred policy acquisition costs.. 116.8 101.5
-------- --------
Total benefits and expenses......................... 2,322.3 1,867.7
-------- --------
Income before taxes (benefits)...................... 271.9 247.0
Income taxes (benefits):
Current............................................ 65.1 (10.7)
Deferred........................................... 31.3 82.5
-------- --------
Total income taxes.................................. 96.4 71.8
-------- --------
Net income.......................................... $ 175.5 $ 175.2
======== ========
</TABLE>
F-22
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Agreement and Plan of Restructuring and Merger (Continued)
Assets, liabilities and shareholder's equity of the discontinued
operations were as follows:
June 30, December 31,
2000 1999
--------- ------------
(Millions)
Assets:
Investments:
Debt securities available for sale, at fair value.. $15,610.4 $12,854.0
Debt securities held to maturity, at
amortized cost................................. 149.9 --
Equity securities, at fair value................... 475.0 504.7
Short-term investments............................. 518.7 565.1
Commercial loans................................... 1,104.2 --
Mortgage loans..................................... 961.3 861.2
Real Estate........................................ 200.3 92.3
Policy loans....................................... 831.2 533.0
Other.............................................. 1,202.9 1,020.2
--------- ---------
Total investments................................... 21,053.9 16,430.5
--------- ---------
Cash and cash equivalents.......................... 1,889.5 870.9
Short-term investments under securities loan
agreement...................................... 644.9 232.5
Accrued investment income.......................... 251.9 199.1
Premiums due and other receivables................. 701.7 739.7
Reinsurance recoverables........................... 3,030.6 3,012.3
Deferred policy acquisition costs.................. 2,454.7 2,056.2
Goodwill and other acquired intangible assets...... 771.1 680.4
Other assets....................................... 996.9 388.2
Separate accounts assets........................... 40,361.0 38,692.7
--------- ---------
Total assets........................................ $72,156.2 $63,302.5
========= =========
Liabilities:
Insurance liabilities:
Future policy benefits............................. $14,123.5 $7,828.1
Unpaid claims...................................... 240.0 129.2
Unearned premiums.................................. 52.7 49.6
Policyholders' funds............................... 11,003.5 11,123.0
--------- ---------
Total insurance liabilities......................... 25,419.7 19,129.9
--------- ---------
Short-term debt.................................... 130.8 162.7
Long-term debt..................................... 579.7 613.0
Payables under securities loan agreement........... 644.9 232.5
Current income taxes............................... 42.8 114.2
Deferred income taxes.............................. 98.4 77.3
Other liabilities.................................. 1,799.9 1,381.7
Minority and participating policyholder's interest. 155.8 109.0
Separate accounts liabilities...................... 40,361.0 38,692.7
--------- ---------
Total liabilities................................... 69,233.0 60,513.0
--------- ---------
Total shareholder's equity (including accumulated
other comprehensive loss of
$429.2 and $503.0)............................. 2,923.2 2,789.5
--------- ---------
Total liabilities and shareholder's equity.......... $72,156.2 $63,302.5
========= =========
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
When the transactions referred to in Note 17 of the Notes to Consolidated
Financial Statements have received shareholder approval, New Aetna will have
reached a measurement date as contemplated under Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. At that time, we will be in a
position to render the following report:
/s/ KPMG LLP
We have audited the accompanying consolidated balance sheets of Aetna U.S.
Healthcare Inc. and Subsidiaries ("New Aetna") as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's 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
New Aetna'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 New Aetna 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.
Hartford, Connecticut
, 2000
F-24
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
For the Years Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
(Millions)
Revenue:
Health care premiums............................... $17,145.7 $11,691.1 $ 9,648.7
Other premiums..................................... 1,495.8 1,437.8 1,350.9
Administrative services only fees.................. 1,674.5 1,270.7 1,322.0
Net investment income.............................. 1,601.8 1,696.6 1,878.1
Other income....................................... 129.4 202.9 194.8
Net realized capital gains......................... 62.5 289.9 279.9
--------- --------- ---------
Total revenue....................................... 22,109.7 16,589.0 14,674.4
--------- --------- ---------
Benefits and expenses:
Health care costs.................................. 14,641.0 10,012.9 8,215.5
Current and future benefits........................ 2,231.0 2,296.0 2,396.1
Operating expenses:
Salaries and related benefits.................... 1,866.2 1,320.0 1,343.5
Other............................................ 2,050.8 1,598.6 1,380.4
Interest expense................................... 232.7 206.2 213.9
Amortization of goodwill and other acquired
intangible assets.............................. 420.4 381.3 362.9
Reductions of loss on discontinued products........ (77.2) (68.0) (172.5)
Severance and facilities reserve reductions........ -- -- (45.0)
--------- --------- ---------
Total benefits and expenses......................... 21,364.9 15,747.0 13,694.8
--------- --------- ---------
Income from continuing operations before income
taxes.......................................... 744.8 842.0 979.6
Income taxes:
Current............................................ 268.5 379.2 327.2
Deferred........................................... 76.9 12.4 126.7
--------- --------- ---------
Total income taxes.................................. 345.4 391.6 453.9
--------- --------- ---------
Income from continuing operations................... 399.4 450.4 525.7
Income from discontinued operations, net of tax..... 317.1 396.4 373.8
--------- --------- ---------
Net income.......................................... $ 716.5 $ 846.8 $ 899.5
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-25
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
(Millions)
Assets
Current assets:
Cash and cash equivalents.......................... $ 1,628.7 $ 1,101.0
Investment securities.............................. 16,179.1 17,994.3
Other investments.................................. 509.0 314.6
Premiums receivable, net........................... 916.3 729.6
Other receivables, net............................. 746.4 602.1
Accrued investment income.......................... 267.4 339.4
Investments under securities loan agreement........ 805.0 476.3
Deferred income taxes.............................. 157.6 5.0
Other assets....................................... 284.4 151.7
--------- ---------
Total current assets................................ 21,493.9 21,714.0
--------- ---------
Long-term investments .............................. 513.9 384.4
Mortgage loans...................................... 1,877.2 2,414.0
Investment real estate.............................. 264.7 192.3
Reinsurance recoverables............................ 788.2 577.1
Goodwill and other acquired intangible assets, net.. 8,655.0 8,593.5
Property and equipment, net......................... 473.0 413.1
Deferred income taxes............................... 268.6 302.4
Other assets........................................ 217.9 207.7
Separate accounts assets............................ 14,639.5 15,492.4
Net assets of discontinued operations.............. 2,789.5 2,937.2
--------- ---------
Total assets........................................ $51,981.4 $53,228.1
========= =========
Liabilities, redeemable preferred securities and
shareholder's equity
Current liabilities:
Health care costs payable.......................... $ 3,238.7 $ 2,269.2
Future policy benefits............................. 1,106.0 1,063.0
Unpaid claims...................................... 442.0 385.8
Unearned premiums.................................. 473.6 312.3
Policyholders' funds............................... 963.7 1,626.9
Payable under securities loan agreement............ 805.0 476.3
Short-term debt.................................... 1,725.0 1,370.1
Income taxes payable............................... 200.6 162.3
Deferred income taxes.............................. -- 17.9
Accrued expenses and other liabilities............. 1,489.1 1,044.1
--------- ---------
Total current liabilities........................... 10,443.7 8,727.9
--------- ---------
Future policy benefits.............................. 8,447.1 9,069.2
Unpaid claims....................................... 1,268.6 1,293.7
Policyholders' funds................................ 3,467.4 4,462.7
Long-term debt...................................... 2,093.9 1,593.3
Other liabilities................................... 918.0 884.4
Separate accounts liabilities....................... 14,639.5 15,492.4
--------- ---------
Total liabilities................................... 41,278.2 41,523.6
--------- ---------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary company holding
primarily debentures........................... -- 275.0
--------- ---------
Commitments and contingent liabilities
(Notes 3, 5 and 16)
Shareholder's equity:
Common stock and additional paid-in capital........ 3,719.3 3,674.0
Accumulated other comprehensive income (loss)...... (655.6) 177.8
Retained earnings.................................. 7,639.5 7,577.7
--------- ---------
Total shareholder's equity.......................... 10,703.2 11,429.5
--------- ---------
Total liabilities, redeemable preferred securities
and shareholder's equity....................... $51,981.4 $53,228.1
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income (Loss)
Common Stock ----------------------------
and Additional Unrealized
Paid-in Gains (Losses) Foreign
Total Capital(1) on Securities Currency Retained Earnings
--------- -------------- -------------- -------- -----------------
(Millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996.......... $10,901.6 $3,253.0 $ 440.7 $(100.7) $7,308.6
Comprehensive income:
Net income............................ 899.5 899.5
Other comprehensive loss, net of tax:
Unrealized gains on securities
($66.5 pretax) (2)................ 43.2 43.2
Foreign currency ($(117.1) pretax).. (76.1) (76.1)
---------
Other comprehensive loss.............. (32.9)
---------
Total comprehensive income............. 866.6
=========
Capital contributions from Aetna....... 421.0 421.0
Dividends to Aetna..................... (1,107.2) (1,107.2)
--------- -------- ------- ------- --------
Balances at December 31, 1997.......... 11,082.0 3,674.0 483.9 (176.8) 7,100.9
--------- -------- ------- ------- --------
Comprehensive income:
Net income............................ 846.8 846.8
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(156.0) pretax) (2)............. (101.4) (101.4)
Foreign currency ($(43.3) pretax)... (27.9) (27.9)
---------
Other comprehensive loss.............. (129.3)
---------
Total comprehensive income............. 717.5
=========
Dividends to Aetna..................... (370.0) (370.0)
--------- -------- ------- ------- --------
Balances at December 31, 1998.......... 11,429.5 3,674.0 382.5 (204.7) 7,577.7
--------- -------- ------- ------- --------
Comprehensive loss:
Net income............................ 716.5 716.5
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(905.6) pretax) (2)............. (588.6) (588.6)
Foreign currency ($(132.5) pretax).. (244.8) (244.8)
---------
Other comprehensive loss.............. (833.4)
---------
Total comprehensive loss............... (116.9)
=========
Capital contributions from Aetna ...... 45.3 45.3
Dividends to Aetna..................... (654.7) (654.7)
--------- -------- ------- ------- --------
Balances at December 31, 1999.......... $10,703.2 $3,719.3 $(206.1) $(449.5) $7,639.5
========= ======== ======= ======= ========
</TABLE>
----------
(1) There were 250 million shares of Aetna Services, Inc. common stock, par
value $.01, and 275 million shares of Aetna U.S. Healthcare Inc. common
stock, par value, $.005 authorized at December 31, 1999. All outstanding
common stock of Aetna Services, Inc. and Aetna U.S. Healthcare Inc. was
owned by Aetna Inc. at December 31, 1999 and 1998.
(2) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements.
F-27
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
--------- --------- ----------
(Millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 716.5 $ 846.8 $ 899.5
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations............................................ (317.1) (396.4) (373.8)
Depreciation and amortization (including investment discounts and premiums).... 474.8 466.9 400.6
Net realized capital gains..................................................... (62.5) (289.9) (279.9)
Changes in assets and liabilities:
(Increase) decrease in accrued investment income............................. 79.7 (9.3) (59.6)
(Increase) decrease in premiums due and other receivables.................... (49.1) 11.9 (126.1)
Increase (decrease) in income taxes.......................................... 101.7 (167.8) 331.4
Net (increase) decrease in other assets and other liabilities................ 520.1 (214.7) 388.8
Increase (decrease) in health care and insurance liabilities................. (250.1) (226.8) 655.1
Other, net................................................................... 9.2 (8.9) 85.8
Discontinued operations, net...................................................... 442.8 795.6 (647.7)
--------- --------- ---------
Net cash provided by operating activities......................................... 1,666.0 807.4 1,274.1
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale............................................. 11,707.8 12,455.5 10,299.9
Equity securities.............................................................. 177.2 444.3 473.8
Mortgage loans................................................................. 20.9 1.4 913.2
Investment real estate......................................................... 33.7 116.4 564.2
Other investments.............................................................. 18,701.5 17,084.5 17,004.1
Investment maturities and repayments of:
Debt securities available for sale............................................. 2,429.0 1,867.1 2,615.9
Mortgage loans................................................................. 459.9 883.1 1,636.8
Cost of investments in:
Debt securities available for sale............................................. (13,360.4) (14,010.0) (13,636.5)
Equity securities.............................................................. (145.5) (90.2) (89.5)
Mortgage loans................................................................. (157.1) (2.6) (110.4)
Investment real estate......................................................... (33.5) (25.5) (27.6)
Other investments.............................................................. (17,981.9) (17,012.5) (17,356.8)
Acquisitions:
NYLCare health care business................................................... (48.8) (1,080.6) --
Prudential health care business................................................ (512.5) -- --
Increase in property and equipment............................................... (58.1) (85.9) (51.7)
Other, net....................................................................... (147.5) (307.9) 62.2
Discontinued operations, net...................................................... (1,239.8) (367.3) (936.9)
--------- --------- ---------
Net cash (used for) provided by investing activities.............................. (155.1) (130.2) 1,360.7
--------- --------- ---------
Cash flows from financing activities:
Deposits and interest credited for investment contracts.......................... 332.4 474.8 237.8
Withdrawals of investment contracts.............................................. (1,607.2) (1,720.2) (3,082.2)
Repayment of long-term debt...................................................... (26.7) (128.7) (32.0)
Net increase (decrease) in short-term debt....................................... 528.4 1,119.5 (32.0)
Redemption of mandatorily redeemable preferred securities........................ (275.0) -- --
Capital contributions from Aetna................................................. 45.3 -- 421.0
Dividends paid to Aetna.......................................................... (634.7) (520.0) (907.2)
Other, net....................................................................... (404.3) 498.1 (616.8)
Discontinued operations, net...................................................... 831.9 (350.5) 1,729.3
--------- --------- ---------
Net cash used for financing activities............................................ (1,209.9) (627.0) (2,282.1)
--------- --------- ---------
Net increase in cash and cash equivalents of discontinued operations.............. (34.9) (77.8) (144.7)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 266.1 (27.6) 208.0
Cash acquired from the NYLCare health care business............................... -- 108.8 --
Cash acquired from the Prudential health care business............................ 261.6 -- --
Cash and cash equivalents, beginning of year...................................... 1,101.0 1,019.8 811.8
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 1,628.7 $ 1,101.0 $ 1,019.8
========= ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
F-28
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The accompanying consolidated financial statements included the accounts
of Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") and its subsidiaries as
of , 2000 ("New Aetna"). New Aetna is a wholly-owned
subsidiary of Aetna Inc. ("Aetna").
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING Groep N.V. ("ING") and, in an integrated transaction, that it
planned to spin-off New Aetna, a standalone health company comprised of the
Health Care (including its group life and disability insurance business) and
Large Case Pensions businesses, to its shareholders. On ,
2000, Aetna's shareholders are expected to approve the sale of Aetna's
Financial Services and Aetna International businesses to ING. Following the
sale, New Aetna will be named Aetna Inc. (Refer to Note 17.)
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. The
accompanying disclosures have been updated to reflect the transactions
described above.
New Aetna, through its subsidiaries, provides health care benefits and
related services, group life and disability insurance and retirement benefits.
As of December 31, 1999, New Aetna had two reportable segments: Health Care
(formerly Aetna U.S. Healthcare) and Large Case Pensions. Health Care provides
a full spectrum of health plans which include health maintenance organizations
("HMOs"), point-of-service ("POS") plans, preferred provider organizations
("PPOs") and traditional indemnity plans. Such plans are generally offered on
both an insured and an employer-funded basis. Health Care also provides group
life and disability insurance, long-term care insurance and dental products, as
well as various specialty products and services including pharmacy, vision and
behavioral health. Large Case Pensions manages a variety of retirement products
for defined benefit and defined contribution plans. The Large Case Pensions
business includes certain discontinued products. (Refer to Note 8.)
The two 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. New Aetna
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 and reduction of the
reserve for anticipated future losses on discontinued products).
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. All significant intercompany
balances have been eliminated. Certain reclassifications have been made to 1998
and 1997 financial information to conform to the 1999 presentation.
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
continuing New Aetna businesses that will be spun-off from Aetna to New Aetna
(refer to Note 17), as if New Aetna were a separate entity for all periods
presented. The consolidated financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations related to the Health Care and Large Case Pensions businesses.
Changes in shareholder's equity represent net income of New Aetna plus net cash
transfers to or from Aetna. Additionally, the consolidated financial statements
include allocations of certain Aetna assets and liabilities (including prepaid
pension assets, debt and benefit obligations, pension and post-retirement
benefits) and expenses relating to the Health Care and Large Case Pensions
businesses of New Aetna, as well as to those businesses presented as
discontinued operations. Management believes these allocations are reasonable.
F-29
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Principles of Consolidation (Continued)
The liabilities of the New Aetna include outstanding third party
indebtedness. The amount of the outstanding third party indebtedness and
related interest expense has been allocated to New Aetna, as well as to those
businesses presented as discontinued operations, based on allocations which
management believes are reasonable.
Also, the costs of services allocated to New Aetna are not necessarily
indicative of the costs that would have been incurred if New Aetna had
performed these functions as a standalone entity. Subsequent to the spin-off,
New Aetna will perform these functions using its own resources or purchased
services and will be responsible for the costs and expenses associated with the
management of a public company. Further, New Aetna is expected to have a
capital structure different from the capital structure in the consolidated
financial statements and accordingly, interest expense is not necessarily
indicative of the interest expense that New Aetna would have incurred during
the periods presented or in the future had it been a separate, independent
company.
Income tax expense was calculated as if New Aetna filed separate income
tax returns. As Aetna manages its tax position on a consolidated basis, which
takes into account the results of all its businesses, New Aetna's effective tax
rate in the future could vary from its historical effective tax rate. New
Aetna's future effective tax rate will depend largely on its structure and
strategies as a separate, independent company.
Accordingly, the financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, changes in
shareholder's equity and cash flows of New Aetna in the future or what they
would have been had it been a separate, standalone entity during the periods
presented.
New Accounting Standard
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
As of January 1, 1999, New Aetna 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 New Aetna's
financial position or results of operations, as New Aetna had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
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 New Aetna's
financial statements beginning January 1, 2000, with early adoption permitted.
New Aetna does not expect the adoption of this standard to have a material
effect on New Aetna's financial position or results of operations.
F-30
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard requires companies to record
all derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are to
record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for New Aetna's financial
statements beginning January 1, 2001, with early adoption permitted. The impact
of FAS No. 133 on New Aetna's financial statements will vary based on certain
factors including future interpretative guidance from the FASB, the extent of
New Aetna's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. New Aetna 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. The
carrying value of cash and cash equivalents approximates fair value due to the
short-term maturity of these instruments.
Investments
Investment Securities
Investment securities consist primarily of U.S. Treasury and agency
securities, mortgage-backed securities, corporate and foreign bonds, restricted
assets and other debt and equity securities. Restricted assets, which consist
of debt securities on deposit as required by various regulatory authorities,
were $629 million and $577 million at December 31, 1999 and 1998, respectively.
New Aetna has determined that its investment securities, other than restricted
assets, are marketable and available for use in current operations and
accordingly, has classified such securities as current without regard to
contractual maturity dates.
Long-Term Investments
Long-term investments consist primarily of equity securities subject to
restrictions on disposition and limited partnerships. Limited partnerships are
carried on an equity basis.
F-31
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Fair Value of Investments
New Aetna classifies its investments as available for sale and carries
them at fair value. Fair values for such securities are based on quoted market
prices or dealer quotes. Where quoted market prices or dealer quotes 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. New Aetna does not accrue
interest on problem debt securities when management believes the collection of
interest is unlikely.
Securities Lending
New Aetna 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 an
independent lending agent, and retained and invested by the lending agent
according to New Aetna'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
Mortgage loans are carried at unpaid principal balances, net of impairment
reserves. A mortgage loan is considered impaired when it is probable that New
Aetna 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). New Aetna 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.
New Aetna applies this loan impairment policy individually to all loans in the
portfolio and does not aggregate loans for the purpose of applying such
provisions. New Aetna 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. New Aetna does not accrue interest
on impaired loans when management believes the collection of interest is
unlikely. The portion of mortgage loans with a maturity date of less than 12
months is reported in other investments in the Consolidated Balance Sheets.
F-32
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Investment Real Estate
Investment real estate, which New Aetna 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.
Depreciation is generally calculated using the straight-line method based on
the estimated useful life of each asset. 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 by New Aetna's investment
management group. At the time of the sale, the difference between the sales
price and the carrying value is recorded as a realized capital gain or loss.
Investment real estate not under agreement to sell is classified as non-current
in the Consolidated Balance Sheets.
Net Investment Income and Realized Capital Gains and Losses
Net investment income and realized capital gains and losses on investments
supporting Health Care's liabilities and Large Case Pensions
non-experience-rated products are reflected in New Aetna's results of
operations. Realized capital gains and losses are determined on a specific
identification basis. Unrealized capital gains and losses related to
investments supporting health care liabilities are computed on the basis of
specific identification and are reflected in shareholder's 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 investment real estate
are recorded on the closing date.
Realized and unrealized capital gains and losses on investments supporting
experience-rated products in New Aetna's Large Case Pensions business are
reflected in policyholders' funds and are determined on a specific
identification basis. Experience-rated products are products in New Aetna's
Large Case Pensions business where the customer, not New Aetna, assumes
investment (including realized capital gains and losses) and other risks,
subject to, among other things, minimum guarantees provided by New Aetna in
some instances. The effect of 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 New
Aetna's results of operations.
When New Aetna discontinued the sale of its fully guaranteed Large Case
Pensions 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 are
credited/charged to the reserve and, therefore, do not impact New Aetna's
results of operations. Unrealized capital gains or losses on this separate
portfolio are reflected in other current assets or other current liabilities in
the Consolidated Balance Sheets.
Derivative Instruments
New Aetna utilizes futures contracts, interest rate swap agreements and
options for other than trading purposes in order to hedge interest rate and
price risk (collectively, market risk). (Refer to Note 5.)
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.
F-33
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Derivative Instruments (Continued)
Interest rate 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.
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 net realized capital gains or losses.
Hedge designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying the
hedge, and that 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. New Aetna 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 net realized capital gain or loss.
Goodwill and Other Acquired Intangible Assets
Goodwill (which represents the excess of cost over the fair value of net
assets acquired) and other acquired intangibles are amortized using the
straight-line method over the estimated useful life of the related asset. New
Aetna regularly evaluates the recoverability of goodwill and other acquired
intangible assets and the related amortization periods. If it is probable that
undiscounted projected operating income (before amortization of goodwill and
other acquired intangible assets) will not be sufficient to recover the
carrying value of the asset, the carrying value is written down through results
of operations and, if necessary, the amortization period is adjusted. Operating
income considered in such an analysis is either that of the entity acquired, if
separately identifiable, or the business segment that acquired the entity.
Goodwill and other acquired intangible assets at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
-------- ------------ ----------- ------------
(Millions) (Years)
<S> <C> <C> <C> <C>
Goodwill.................................... $8,231.7 $ 751.5 $7,480.2 40
======== ======= ========
Other acquired intangible assets:
Customer lists............................. $ 933.0 $ 474.7 $ 458.3 5-7
Provider networks.......................... 683.0 86.2 596.8 20-25
Workforce.................................. 92.0 34.7 57.3 3-6
Computer systems........................... 79.1 43.8 35.3 3-5
Other...................................... 57.3 30.2 27.1 4-5
-------- ------- --------
Total other acquired intangible assets...... $1,844.4 $ 669.6 $1,174.8
======== ======= ========
</TABLE>
F-34
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Goodwill and Other Acquired Intangible Assets (Continued)
Goodwill and other acquired intangible assets at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
-------- ------------ ----------- ------------
(Millions) (Years)
<S> <C> <C> <C> <C>
Goodwill.................................... $7,975.0 $ 552.3 $7,422.7 40
======== ======= ========
Other acquired intangible assets:
Customer lists............................. $ 835.0 $ 329.2 $ 505.8 6-7
Provider networks.......................... 625.0 59.4 565.6 20-25
Workforce.................................. 50.0 21.1 28.9 3-5
Computer systems........................... 60.0 29.4 30.6 3-5
Other...................................... 56.2 16.3 39.9 4-5
-------- ------- --------
Total other acquired intangible assets...... $1,626.2 $ 455.4 $1,170.8
======== ======= ========
</TABLE>
Reinsurance
New Aetna utilizes reinsurance agreements primarily to reduce exposure to
large losses in certain aspects of its business. These reinsurance contracts
permit recovery of a portion of losses from reinsurers, although they do not
discharge the primary liability of New Aetna as direct insurer of the risks
reinsured. Only those reinsurance recoverables deemed probable of recovery are
reflected as assets. In the normal course of business, New Aetna enters into
agreements with other insurance companies to assume reinsurance, primarily
related to its health and group life businesses. (Refer to Notes 3 and 14.)
Property and Equipment
Property and equipment are reported at historical cost net of accumulated
depreciation. At December 31, 1999 and 1998, historical cost was $1.3 billion
and $1.1 billion, respectively, and the related accumulated depreciation was
$840 million and $689 million, respectively. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to 40 years.
New Aetna regularly evaluates whether events or changes in circumstances
indicate that the carrying amount of property and equipment may not be
recoverable. If it is determined that an asset may not be recovered, New Aetna
estimates the future undiscounted cash flows (grouped at the company-wide
level) expected to result from future use of the asset and its eventual
disposition. If the sum of the expected undiscounted future cash flows is less
than the carrying amount of the asset, an impairment loss will be recognized
for the amount by which the carrying amount of the asset exceeds its fair
value.
Separate Accounts
Separate accounts assets and liabilities in the Large Case Pensions
business generally represent funds maintained to meet specific investment
objectives of contractholders who bear the investment risk. 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 New Aetna. 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 other income.
F-35
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Health Care and Insurance Liabilities
Health care costs payable consist principally of unpaid health care claims
and other amounts due to health care providers pursuant to risk-sharing
arrangements related to Health Care's HMO, POS, PPO and indemnity plans. Unpaid
health care claims include estimates of payments to be made on claims reported
but not yet paid and health care services rendered but not yet reported to New
Aetna as of the balance sheet date. Also included in these estimates is the
cost of services that will continue to be rendered after the balance sheet date
if New Aetna is obligated to pay for such services in accordance with
contractual or regulatory requirements. Such estimates are developed using
actuarial principles and assumptions which consider, among other things,
contractual requirements, historical utilization trends and payment patterns,
medical inflation, product mix, seasonality and other relevant factors. Changes
in estimates are recorded in health care costs in the Consolidated Statements
of Income in the period they are determined. Capitation costs represent
contractual monthly fees paid to participating physicians and other medical
providers for providing medical care. Amounts due under risk-sharing
arrangements are based on the terms of the underlying contracts with the
providers which consider experience under the contracts through the balance
sheet date.
Unpaid claims consist primarily of reserves associated with certain
short-duration group disability and term life insurance contracts, including an
estimate for claims incurred but not reported as of the balance sheet date.
Such reserves are based upon the present value of future benefits which is
based on assumed investment yields and assumptions regarding mortality,
morbidity and recoveries from government programs. Reserves for claims incurred
but not reported are developed using actuarial principles and assumptions which
consider, among other things, contractual requirements, historical payment
patterns, seasonality and other relevant factors. New Aetna 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 and ranged from
2.5% to 6.8% as of December 31, 1999 (except for experience-rated contracts
where the discount rates are set at contractually specified levels). The
estimates of unpaid claims are subject to change due to changes in the
underlying experience of the contracts, changes in investment yields or other
factors and these changes are recorded in current and future benefits in the
Consolidated Statements of Income in the period they are determined.
Future policy benefits consist primarily of reserves for limited payment
pension and annuity contracts in the Large Case Pensions business and
long-duration group paid-up and supplemental life and long-term care insurance
contracts in the Health Care business. Reserves for limited payment contracts
are computed on the basis of assumed investment yield, mortality and expenses.
Such assumptions generally vary by plan, year of issue and policy duration.
Reserve interest rates averaged 6.25% in 1999. Investment yield is based on New
Aetna's experience. Mortality assumptions are based on New Aetna's experience
and are periodically reviewed against both industry standards and experience.
Reserves for group paid-up and supplemental life and long-term care contracts
represent the present value of future benefits to be paid to or on behalf of
policyholders less the present value of future net premiums. The present value
of future benefits is based upon mortality, morbidity and interest assumptions.
Policyholders' funds consist primarily of reserves for pension and annuity
investment contracts in the Large Case Pensions business and customer funds
associated with group life and health contracts in Health Care business.
Reserves on such contracts are equal to cumulative deposits less charges plus
credited interest thereon (rates averaged 11.76% in 1999), net of adjustments
for investment experience that New Aetna is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating reflect
the rights of policyholders, plan participants and New Aetna.
F-36
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Health Care and Insurance Liabilities (Continued)
The methods used in developing the above estimates and establishing the
related liabilities are continually reviewed with any necessary adjustments
reflected during the current period in results of operations. While the
ultimate amount of claims and related expenses are dependent on future
developments, it is management's opinion that the liabilities that have been
established are adequate to cover such costs. The health care and insurance
liabilities that are expected to be paid within one year are classified as
current liabilities in the Consolidated Balance Sheets.
Premium Deficiency
New Aetna evaluates its health and insurance contracts to determine if it
is probable that a loss will be incurred. A premium deficiency loss is
recognized when it is probable that expected future claims, including
maintenance costs, will exceed anticipated future premiums and reinsurance
recoveries on existing contracts. Anticipated investment income is considered
in the calculation of premium deficiency losses. For purposes of determining
premium deficiency losses, contracts are grouped in a manner consistent with
New Aetna's method of acquiring, servicing and measuring the profitability of
such contracts.
Revenue Recognition
Health care premiums associated with New Aetna's prepaid and other health
care plans are recognized as income in the month in which the enrollee is
entitled to receive health care services. Health care premiums are reported net
of an allowance for expected terminations and uncollectible amounts. Other
premium revenue for group life and disability products is recognized as income,
net of allowances for uncollectible accounts, over the term of the coverage.
Premiums related to unexpired contractual coverage periods are reported as
unearned premiums in the Consolidated Balance Sheets.
Some group contracts allow for premiums to be adjusted to reflect actual
experience. Such premium adjustments 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 claim costs as the experience
emerges.
Administrative services only ("ASO") fees in the Health Care business are
received in exchange for performing certain claims processing and member
services for self-insured health and disability members and are recognized as
revenue over the period the service is provided.
Other income includes charges assessed against policyholders' funds for
contract fees, participant fees and asset charges, related to pension and
annuity products in the Large Case Pensions business. Other amounts received
for these contracts are reflected as deposits and are not recorded as revenue.
When annuities with life contingencies are purchased under contracts that were
initially investment contracts, the accumulated balance related to the purchase
is treated as a single premium and reflected as an offsetting amount in both
other premiums and current and future benefits in the Consolidated Statements
of Income.
The balance of the allowance for expected terminations and uncollectible
accounts was $216 million and $71 million at December 31, 1999 and 1998,
respectively, and is included in premiums receivable in the Consolidated
Balance Sheets.
F-37
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Allocation of Expenses
Aetna allocates centrally incurred costs associated with specific internal
goods or services provided to New Aetna, such as employee services, technology
services and rent, to the business segments based on a reasonable method for
each specific cost (such as usage, headcount, compensation or square footage
occupied). Interest expense on third-party borrowings is not allocated to the
reporting segments since it is not used as a basis for measuring the operating
performance of the segment.
Income Taxes
New Aetna is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. New Aetna will be
included in the consolidated federal income tax return of Aetna until the date
of the spin-off on or about , 2000. The consolidated group is
segregated into subgroups of life insurance companies and non-life insurance and
other companies. Consolidation of these subgroups for tax purposes is subject to
statutory restrictions on the percentage of eligible non-life insurance and
other companies' tax losses that can be applied to offset life insurance company
taxable income.
Deferred income tax assets and liabilities are recognized for the
differences between the financial and income tax reporting basis of assets and
liabilities based on enacted tax rates and laws. Deferred income tax expense or
benefit reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax results of
revenues and expenses currently taxable or deductible.
3. Acquisitions and Dispositions
On August 6, 1999, New Aetna 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. As part of the purchase price, Aetna issued one million
stock appreciation rights ("SARs") for Aetna's common stock, valued at
approximately $32 million. Included in the acquisition are PHC's risk HMO, POS,
PPO and Indemnity health lines, as well as its dental risk business. The
acquisition was accounted for as a purchase.
In addition to recording the assets and liabilities acquired at fair
value, the purchase price allocation at the acquisition date included the
following:
o 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 is being amortized to expense
in proportion to the benefits expected to be recognized under the
reinsurance agreement over its term;
F-38
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
o 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 is being
amortized over the period from the acquisition date to the renewal
dates of the underlying contracts;
o An asset of $21 million, representing the above-market compensation
component related to supplemental fees to be received under New
Aetna's agreement to service Prudential's administrative services
only contracts (discussed below). This asset is being 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. New Aetna's consolidated results of
operations include PHC from August 6, 1999. The purchase price does not reflect
New Aetna's plan to exit certain activities of the acquired PHC business and
provide employee termination benefits for positions that will be eliminated.
New Aetna'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.
New Aetna and Prudential entered into a reinsurance agreement for which
New Aetna paid a premium. Under the agreement, Prudential has agreed to
indemnify New Aetna from certain health insurance risks that arise following
the closing by reimbursing New Aetna 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 New Aetna for unanticipated increases in medical claims
payable existing at the acquisition date for a period of up to nine months
following the close.
New Aetna also agreed to service Prudential's ASO contracts. Prudential is
terminating its ASO business and has retained New Aetna to service these
contracts during the run off period, but generally no later than June 30, 2001.
Prudential ASO members will remain Prudential members as long as the contracts
remain in force. New Aetna 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 members to New Aetna, 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, New Aetna recorded total fees for
servicing the Prudential ASO business of approximately $230 million pretax,
including supplemental fees of approximately $106 million pretax.
F-39
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
In connection with the PHC acquisition, New Aetna 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 New Aetna 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, New
Aetna 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. New Aetna expects to retain approximately 112,000 NYLCare
Medicare members in Texas through a reinsurance and administrative services
agreement.
Pursuant to this agreement, on March 31, 2000, New Aetna completed the
sale of NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of
Health Care Service Corporation, for approximately $420 million in cash. The
sale resulted in an after-tax capital loss of $35 million which was recognized
in the fourth quarter of 1999. The after-tax loss included operating losses
from October 1, 1999 through closing. The results of NYLCare Texas were not
material to the Health Care segment or to New Aetna's consolidated results of
operations.
On July 15, 1998, New Aetna 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, New Aetna
and NYL agreed to resolve all purchase price adjustments and obligations under
the Earnout, and New Aetna 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 New Aetna'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. New Aetna's
consolidated results of operations include NYLCare from July 15, 1998.
F-40
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
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 New Aetna'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.
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.
Pro Forma
For the Years Ended December 31,
(Unaudited)
--------------------------------
1999 1998
--------- ---------
(Millions)
Revenue................................ $26,426.5 $25,061.8
Income from continuing operations...... 245.7 141.0
During 1997, New Aetna's health care 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"), New Aetna 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, New Aetna
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 New Aetna 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.
F-41
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments
Investment securities at December 31 were as follows:
1999 1998
--------- ---------
(Millions)
Debt securities available for sale....... $15,811.5 $17,584.7
Equity securities........................ 151.2 130.8
Other investment securities.............. 216.4 278.8
--------- ---------
Total investment securities.............. $16,179.1 $17,994.3
========= =========
Debt securities available for sale at December 31 were as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
1999
Bonds:
U.S. government and government agencies and
authorities..................................... $ 1,262.6 $ 9.2 $ 33.3 $ 1,238.5
States, municipalities and political subdivisions. 778.0 3.5 12.8 768.7
U.S. corporate securities:........................
Utilities....................................... 1,796.8 19.5 69.3 1,747.0
Financial....................................... 2,299.7 8.5 114.4 2,193.8
Transportation/capital goods.................... 1,470.7 42.8 51.8 1,461.7
Health care/consumer products .................. 1,860.5 14.8 95.6 1,779.7
Other corporate securities...................... 680.5 5.0 43.1 642.4
--------- ------ ------ ---------
Total U.S. corporate securities............... 8,108.2 90.6 374.2 7,824.6
--------- ------ ------ ---------
Foreign:
Government, including political
subdivisions.................................. 941.3 26.4 29.2 938.5
Utilities....................................... 189.1 3.4 10.0 182.5
Other........................................... 1,120.3 24.6 42.6 1,102.3
--------- ------ ------ ---------
Total foreign securities...................... 2,250.7 54.4 81.8 2,223.3
--------- ------ ------ ---------
Residential mortgage-backed securities:
Pass-throughs................................... 1,891.1 1.0 66.8 1,825.3
Collateralized mortgage obligations ............ 54.0 0.5 0.6 53.9
--------- ------ ------ ---------
Total residential mortgage-backed securities.. 1,945.1 1.5 67.4 1,879.2
--------- ------ ------ ---------
Commercial/multifamily mortgage-backed
securities (1)................................ 1,589.6 1.3 94.9 1,496.0
Other asset-backed securities (2)............... 253.7 0.8 3.6 250.9
--------- ------ ------ ---------
Total bonds......................................... 16,187.9 161.3 668.0 15,681.2
Redeemable preferred stocks......................... 139.3 -- 9.0 130.3
--------- ------ ------ ---------
Total debt securities............................... $16,327.2 $161.3 $677.0 $15,811.5
========= ====== ====== =========
</TABLE>
F-42
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
<TABLE>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
1998
Bonds:
U.S. government and government agencies and
authorities.................................... $ 1,135.2 $ 75.9 $1.5 $ 1,209.6
States, municipalities and political subdivisions 531.5 18.6 0.3 549.8
U.S. corporate securities:
Utilities...................................... 1,838.6 105.8 8.2 1,936.2
Financial...................................... 2,452.4 119.2 3.2 2,568.4
Transportation/capital goods................... 1,732.8 160.8 4.4 1,889.2
Health care/consumer products ................. 1,167.0 97.7 1.7 1,263.0
Natural resources.............................. 1,239.8 66.0 14.1 1,291.7
Other corporate securities..................... 1,017.5 78.8 37.3 1,059.0
--------- ------ ------ ---------
Total U.S. corporate securities.............. 9,448.1 628.3 68.9 10,007.5
--------- ------ ------ ---------
Foreign:
Government, including political subdivisions... 1,001.0 49.5 23.9 1,026.6
Utilities...................................... 216.4 15.9 5.1 227.2
Other.......................................... 1,508.4 54.2 46.6 1,516.0
--------- ------ ------ ---------
Total foreign securities..................... 2,725.8 119.6 75.6 2,769.8
--------- ------ ------ ---------
Residential mortgage-backed securities:
Pass-throughs.................................. 1,576.6 40.3 2.0 1,614.9
Collateralized mortgage obligations ........... 49.6 2.7 -- 52.3
--------- ------ ------ ---------
Total residential mortgage-backed securities. 1,626.2 43.0 2.0 1,667.2
--------- ------ ------ ---------
Commercial/multifamily mortgage-backed
securities (1)................................. 1,006.3 13.5 33.1 986.7
Other asset-backed securities (2)................ 235.6 3.5 0.5 238.6
--------- ------ ------ ---------
Total bonds........................................ 16,708.7 902.4 181.9 17,429.2
Redeemable preferred stocks............................ 152.0 4.4 0.9 155.5
--------- ------ ------ ---------
Total debt securities.................................. $16,860.7 $906.8 $182.8 $17,584.7
========= ====== ====== =========
</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 New Aetna.
(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 New Aetna.
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 $(104)
million and $220 million, respectively, related to experience-rated contracts,
which were not reflected in shareholder's equity.
F-43
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
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.
1999 Amortized Cost Fair Value
-------------- ----------
(Millions)
Due to mature:
One year or less ............................ $ 1,225.5 $ 1,251.2
After one year through five years ........... 3,241.8 3,222.1
After five years through ten years .......... 3,820.1 3,689.7
After ten years ............................. 4,251.4 4,022.4
Mortgage-backed securities .................. 3,534.7 3,375.2
Other asset-backed securities ............... 253.7 250.9
----------- -----------
Total ......................................... $ 16,327.2 $ 15,811.5
=========== ===========
Investments in equity securities at December 31 were as follows:
1999 1998
----------- -----------
(Millions)
Cost .......................................... $ 216.4 $ 141.9
Gross unrealized capital gains ................ 83.9 60.0
Gross unrealized capital losses ............... (13.9) (5.3)
----------- -----------
Fair value .................................... 286.4 196.6
Less: amounts included in long-term investments 135.2 65.8
----------- -----------
Equity securities (included in investment
securities) ................................. $ 151.2 $ 130.8
=========== ===========
Investment real estate holdings at December 31 were as follows:
1999 1998
----------- -----------
(Millions)
Properties held for sale....................... $ 200.7 $ 174.0
Investment real estate......................... 161.9 107.4
----------- -----------
362.6 281.4
Valuation reserve.............................. (93.1) (89.1)
----------- -----------
Net carrying value of real estate.............. 269.5 192.3
Less: amounts included in other investments.... 4.8 --
----------- -----------
Investment real estate......................... $ 264.7 $ 192.3
=========== ===========
Accumulated depreciation for investment real estate was $58 million and
$57 million at December 31, 1999 and 1998, respectively.
Total real estate write-downs included in the net carrying value of New
Aetna'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).
F-44
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
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>
1999 1998
------------------------ ------------------------
Total Recorded Specific Total Recorded Specific
Investment Reserves Investment Reserves
-------------- -------- -------------- --------
(Millions)
<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 ......... 48.4 1.1 31.7 1.7
-------- ------- -------- -------
Total impaired loans .................. $ 274.2 (1) $ 32.1 $ 289.3 (1) $ 46.3
======== ======= ======== =======
</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.
The activity in the specific and general mortgage loan impairment reserves
for the periods indicated is summarized below:
<TABLE>
Supporting Supporting Supporting
Discontinued Experience- Remaining
Products Rated Products Products Total
------------ -------------- ---------- -------
(Millions)
<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) -- (39.0)
Principal write-offs................... (2.2) -- (1.7) (3.9)
------ ------ ------ ------
Balance at December 31, 1998 (2)....... 29.5 29.6 4.5 63.6
Principal write-offs................... (0.6) (14.0) (3.1) (17.7)
------ ------ ------ ------
Balance at December 31, 1999 (2)....... $ 28.9 $ 15.6 $ 1.4 $ 45.9
====== ====== ====== ======
</TABLE>
---------
(1) Reflects adjustments to reserves related to assets supporting
experience-rated products and discontinued products, which do not affect
New Aetna's results of operations.
(2) Total reserves at December 31, 1999 and 1998 include $32.1 million and
$46.3 million, respectively, of specific reserves and $13.8 million and
$17.3 million, respectively, of general reserves.
F-45
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
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>
1999 1998
------------------------------ ------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
Loans Earned Received Loans Earned Received
-------- ------ -------- -------- ------ --------
(Millions)
<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 43.1 2.7 3.0
------ ----- ----- ------ ----- -----
Total................................. $281.0 $27.7 $27.4 $320.0 $26.1 $26.9
====== ===== ===== ====== ===== =====
</TABLE>
Significant noncash investing and financing activities include the
acquisition of real estate through foreclosures of mortgage loans amounting to
$24 million in 1999 and none in 1998.
At December 31, 1999 and 1998, New Aetna's mortgage loan balances net of
specific impairment reserves by geographic region and property type were as
follows:
<TABLE>
1999 1998 1999 1998
--------- --------- --------- ---------
(Millions) (Millions)
<S> <C> <C> <C> <C>
South Atlantic.................. $ 468.2 $ 551.9 Office.......................... $ 1,301.6 $ 1,441.0
Middle Atlantic................. 786.7 759.0 Retail.......................... 492.7 572.4
New England..................... 280.0 294.3 Apartment....................... 91.6 113.3
South Central................... 32.0 92.5 Hotel/Motel..................... 137.7 182.6
North Central................... 253.6 410.3 Industrial...................... 202.8 227.4
Pacific and Mountain............ 569.6 628.3 Mixed Use....................... 158.8 187.7
Non-U.S......................... 0.7 0.7 Other........................... 5.6 12.6
--------- --------- --------- ---------
Total........................... 2,390.8 2,737.0 Total........................... 2,390.8 2,737.0
Less: general impairment Less: general impairment
reserve......................... 13.8 17.3 reserve......................... 13.8 17.3
--------- --------- --------- ---------
Net mortgage loan balance....... 2,377.0 2,719.7 Net mortgage loan balance....... 2,377.0 2,719.7
Less: amount included in other Less: amount included in other
investments................... 499.8 305.7 investments................... 499.8 305.7
--------- --------- --------- ---------
Mortgage loans.................. $ 1,877.2 $ 2,414.0 Mortgage loans.................. $ 1,877.2 $ 2,414.0
========= ========= ========= =========
</TABLE>
F-46
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of New Aetna's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
1999 1998
------------------------------- -------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- -------------- -------------- --------------
(Millions)
Assets:
<S> <C> <C> <C> <C>
Mortgage loans................ $2,377.0 $2,391.0 $2,719.7 $2,738.8
Liabilities:
Investment contract liabilities:
With a fixed maturity........ 2,579.0 2,596.8 3,461.7 3,587.2
Without a fixed maturity..... 986.2 853.0 1,503.5 1,445.4
Long-term debt................ 2,093.9 2,012.7 1,593.3 1,643.5
</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 New Aetna'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 New Aetna's management of
interest rate, equity price and liquidity 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 New Aetna 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.
Estimated Fair Value
Investment contract liabilities (included in policyholders' funds):
o With a fixed maturity: Fair value is estimated by discounting cash
flows at interest rates currently being offered by, or available to,
New Aetna for similar contracts.
o Without a fixed maturity: Fair value is estimated as the amount
payable to the contractholder upon demand. However, New Aetna 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 New Aetna for debt of similar terms
and remaining maturities.
F-47
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
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 New
Aetna's off-balance-sheet and other financial instruments at December 31 were
as follows:
<TABLE>
1999 1998
------------------------------------- -------------------------------------
Carrying Carrying
Notional Value Asset Estimated Notional Value Asset Estimated
Amount (Liability) Fair Value Amount (Liability) Fair Value
-------- ----------- ---------- -------- ----------- ----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
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 3.6 652.0 11.3 11.3
Interest rate swaps...................... 43.0 -- 3.7 43.0 -- 8.5
Warrants to purchase securities.......... 30.0 0.1 0.1 25.0 0.1 0.1
Written options.......................... -- -- -- 50.0 0.1 0.1
</TABLE>
The notional amounts of these instruments do not represent New Aetna'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 New Aetna would have to pay or would receive if the contracts were
terminated.
New Aetna engages in hedging activities to manage interest rate and equity
price 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. New Aetna 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. New
Aetna generally does not require collateral or other security to support the
financial instruments discussed below. However, New Aetna 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.
Futures Contracts
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk.
Interest Rate Swaps
New Aetna utilizes interest rate swaps to manage certain exposures related
to changes in interest rates primarily by exchanging variable-rate returns for
fixed-rate returns.
Warrants
Warrants are instruments giving New Aetna the right, but not the
obligation, to buy a security at a given price during a specified period.
F-48
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Net Investment Income
Sources of net investment income were as follows:
1999 1998 1997
---------- ---------- ----------
(Millions)
Debt securities ..................... $ 1,253.1 $ 1,253.0 $ 1,170.9
Equity securities ................... 4.0 5.2 8.6
Other investment securities ......... 33.1 50.6 38.3
Mortgage loans ...................... 242.9 292.4 538.7
Investment real estate .............. 63.2 69.5 159.4
Other ............................... 121.7 194.4 80.4
Cash equivalents .................... 13.7 18.3 34.5
---------- ---------- ----------
Gross investment income ............. 1,731.7 1,883.4 2,030.8
Less: investment expenses ........... 129.9 186.8 152.7
---------- ---------- ----------
Net investment income (1)(2) ........ $ 1,601.8 $ 1,696.6 $ 1,878.1
========== ========== ==========
---------
(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 $350.4
million, $418.5 million and $516.4 million during 1999, 1998 and 1997,
respectively. Interest credited to contractholders is included in current
and future benefits.
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:
1999 1998 1997
---------- ---------- ----------
(Millions)
Debt securities........................... $(43.7) $ 46.8 $ 25.7
Equity securities (1)..................... 32.5 191.4 204.0
Mortgage loans............................ 0.4 19.8 16.4
Investment real estate.................... 3.0 1.5 13.2
Sales of subsidiaries (2)................. 36.0 60.0 82.3
Other (3)................................. 34.3 (29.6) (61.7)
------ ------ ------
Pretax realized capital gains............. $ 62.5 $289.9 $279.9
====== ====== ======
After-tax realized capital gains (losses). $ 21.4 $189.0 $160.5
====== ====== ======
---------
(1) Includes pretax realized capital gains of $114.6 million and $151.0
million in 1998 and 1997, respectively, related to sale of New Aetna's
investment in Travelers Property Casualty Corporation.
(2) Includes 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 $44.0
million in 1997 related to the write-down of certain properties that New
Aetna had classified as held for sale.
F-49
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Capital Gains and Losses on Investment Operations and Other (Continued)
Net realized capital gains (losses) of $(11) million, $122 million and
$125 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.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1999 1998 1997
----------- ----------- -----------
(Millions)
Proceeds on sales ............. $ 11,707.8 $ 12,455.5 $ 10,299.9
Gross gains ................... 97.6 120.4 62.4
Gross losses .................. 141.3 73.6 36.7
Changes in shareholder's 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:
1999 1998 1997
----------- --------- ----------
(Millions)
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)
========== ======== ========
Shareholder's 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:
1999 1998
-------- --------
(Millions)
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
======== ========
F-50
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Capital Gains and Losses on Investment Operations and Other (Continued)
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:
1999 1998 1997
-------- -------- --------
(Millions)
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
======== ======== ========
---------
(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
New Aetna discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under New Aetna'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 New Aetna's results of operations. New Aetna'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).
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.
F-51
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax):
<TABLE>
Charged
(Credited) to
Reserve for
Results Future Losses Net (1)
--------- ------------- ------
(Millions)
<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.
F-52
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
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.
Assets and liabilities supporting discontinued products at December 31
were as follows: (1)
1999 1998
---------- ----------
(Millions)
Assets:
Debt securities available for sale ................. $ 4,533.0 $ 5,890.5
Mortgage loans ..................................... 768.8 754.2
Investment real estate ............................. 112.7 104.2
Other investment securities ........................ 453.9 350.7
---------- ----------
Total investments ................................... 5,868.4 7,099.6
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 ............................... 902.1 1,546.0
Reserve for anticipated future losses on
discontinued products ............................. 1,147.6 1,214.1
Payable under securities loan agreement ............ 243.8 143.9
Other .............................................. -- 421.5
---------- ----------
Total liabilities ................................... $ 6,859.5 $ 7,979.0
========== ==========
---------
(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 shareholder's 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.
F-53
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
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, New Aetna 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.
New Aetna'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):
(Millions)
----------
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
========
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 New Aetna'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.
F-54
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
The anticipated run off of the December 31, 1999 reserve balance was as
follows:
(Millions)
----------
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
The above table assumes that assets are held until maturity and that the
reserve run off is proportional to the liability run off.
The expected (as of December 31, 1993) and actual liability balances for
the GIC and SPA liabilities at December 31 were as follows:
Expected Actual
------------------------- -------------------------
GIC SPA GIC SPA
---------- ---------- ---------- ----------
(Millions)
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
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.
F-55
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes
Income taxes (benefits) consist of the following:
1999 1998 1997
------ ------ ------
(Millions)
Current taxes:
Federal......................... $238.9 $340.6 $292.0
State........................... 29.6 38.6 35.2
------ ------ ------
268.5 379.2 327.2
------ ------ ------
Deferred taxes (benefits):
Federal......................... 79.6 12.6 122.3
State........................... (2.7) (0.2) 4.4
------ ------ ------
76.9 12.4 126.7
------ ------ ------
Total................................ $345.4 $391.6 $453.9
====== ====== ======
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes as follows:
1999 1998 1997
------ ------ ------
(Millions)
Income from continuing operations
before income taxes................. $744.8 $842.0 $979.6
Tax rate............................. 35% 35% 35%
------ ------ ------
Application of the tax rate.......... 260.7 294.7 342.9
Tax effect of:
Tax-exempt interest................. (6.7) (4.0) (2.5)
Goodwill amortization............... 66.3 64.1 62.6
State income taxes.................. 17.4 25.0 25.8
Sale of subsidiaries................ 19.5 -- 13.7
Other, net.......................... (11.8) 11.8 11.4
------ ------ ------
Income taxes......................... $345.4 $391.6 $453.9
====== ====== ======
F-56
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
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:
1999 1998
-------- ---------
(Millions)
Deferred tax assets:
Reserve for anticipated future losses on
discontinued products ........................... $401.7 $407.0
Other postretirement benefits .................... 155.1 169.5
Reserve for severance and facilities charges ..... 109.0 123.9
Deferred compensation and other .................. 77.5 67.1
Insurance reserves ............................... 44.0 --
Deferred policy acquisition costs ................ 39.4 48.5
Impairment reserves .............................. 16.4 27.5
Net operating loss carryforward .................. 16.4 21.2
Accumulated other comprehensive loss ............. 15.9 --
Other ............................................ 20.7 15.0
------ ------
Total gross assets ................................ 896.1 879.7
Less: valuation allowance ......................... 15.6 17.3
------ ------
Assets, net of valuation allowance ................ 880.5 862.4
------ ------
Deferred tax liabilities:
Acquired intangibles other than goodwill ......... 313.5 389.1
Market discount .................................. 43.4 43.6
Insurance reserves ............................... -- 85.8
Accumulated other comprehensive income ........... -- 0.9
Other ............................................ 97.4 53.5
------ ------
Total gross liabilities ........................... 454.3 572.9
------ ------
Net deferred tax asset............................. $426.2 (1) $289.5 (2)
====== ======
---------
(1) Includes $157.6 million classified as a current asset and $268.6 million
classified as a noncurrent asset.
(2) Includes $5.0 million classified as a current asset, $302.4 million
classified as a noncurrent asset and $17.9 million classified as a current
liability.
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 net operating losses.
Management believes that it is more likely than not that New Aetna will
realize the benefit of the net deferred tax asset of $426 million. New Aetna
expects sufficient taxable income in the future to realize the net deferred tax
asset because of New Aetna's long-term history of having taxable income, which
is projected to continue.
F-57
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
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 $918
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.
New Aetna paid net income taxes of $218 million, $482 million and $213
million in 1999, 1998 and 1997, respectively.
10. Benefit Plans
At the effective date of the Restructuring and Merger (refer to Note 17),
New Aetna will generally be responsible for pension and post-retirement
benefits for individuals actively employed by New Aetna in the United States
and all former United States employees of New Aetna or Aetna. Aetna's accrued
pension cost has been allocated to its subsidiaries, including New Aetna, under
an allocation based on eligible salaries. Data on a separate company basis
regarding the proportionate share of the projected benefit obligation and plan
assets for pension and post-retirement plans is not available.
Aetna's noncontributory defined benefit pension plans cover substantially
all employees. Effective January 1, 1999, New Aetna, in conjunction with Aetna,
changed the formula 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 1, 2006, which allows certain employees
to receive vested benefits at the higher of the final average pay or cash
balance formula. The changing of this formula did not have a material effect on
New Aetna's results of operations, liquidity or financial condition.
Components of the net periodic benefit cost of the
noncontributory defined benefit pension plan of Aetna were as follows:
1999 1998 1997
------ ------ ------
(Millions)
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)
====== ====== ======
F-58
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
Allocated pretax (charges) benefit to operations for the pension plan
(based on New Aetna's total salary cost as a percentage of Aetna's total salary
cost) were approximately $(14) million, $15 million and $(39) million for the
years ended December 31, 1999, 1998 and 1997, respectively.
As of the measurement date (September 30), the status of the Aetna defined
benefit pension plans was as follows:
1999 1998
----------- ------------
(Millions)
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 (0.2)
----------- -----------
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%
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.
Aetna 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 Aetna plan. Pretax charges for this defined contribution pension plan were
$16 million in 1998 and 1997.
F-59
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
In addition to providing pension benefits, Aetna 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. New Aetna 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 New Aetna 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 of the
postretirement benefit plans of Aetna were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Millions)
<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>
The costs to New Aetna associated with the Aetna postretirement plans for
1999, 1998 and 1997 were approximately $(8) million, $(7) million and $(7)
million, respectively.
As of the measurement date (September 30), the status of the Aetna
postretirement benefit plans (other than pensions) was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Millions)
<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>
F-60
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
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.
A one-percentage-point change (increase or decrease) in assumed health
care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
Increase Decrease
-------- --------
(Millions)
<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 Aetna'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 New Aetna's employees are
eligible to participate in a savings plan under which designated contributions,
which may be invested in common stock of Aetna or certain other investments,
are matched, up to 5% of compensation, by Aetna. The U.S. Healthcare savings
plan provided for a match of up to 2% of compensation in common stock of Aetna.
Effective January 1, 1999, contributions to the U.S. Healthcare plan ceased and
such employees became eligible to participate in Aetna's Incentive Savings
Plan. The costs to New Aetna associated with these plans were $53 million, $34
million and $33 million for 1999, 1998 and 1997, respectively.
Stock Plans -- Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to employees. Executive, middle management and non-management
employees may be granted options to purchase common stock of Aetna 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. Aetna 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. In addition, executives may, from time to time, be granted incentive
units which are rights to receive common stock or an equivalent value in cash.
The incentive units may vest within a range from 0% to 175% at the end of a
four year period based on the attainment of performance goals. The costs to New
Aetna associated with the Aetna stock plans for 1999, 1998 and 1997, were $5
million, $13 million and $14 million, respectively.
F-61
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Debt and Guarantee of Debt Securities
As discussed in Note 2, New Aetna's consolidated financial statements
include an allocation of Aetna's consolidated debt and the related interest
expense. The allocation was based on a capital allocation methodology in
support of New Aetna's businesses.
1999 1998
-------- --------
(Millions)
Long-term debt:
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
Debentures, 7.625% due 2026....................... 446.3 446.1
Debentures, 6.97% due 2036 (puttable at par in 2004).. 300.0 300.0
-------- --------
Total................................................... $2,093.9 $1,593.3
======== ========
Aggregate maturities of long-term debt and sinking fund requirements for
2001 through 2004 are approximately $300 million, $500 million, $200 million
and $300 million, respectively, and $794 million, thereafter.
On November 18, 1998, New Aetna 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 New Aetna was
required to repurchase the PURS in full on November 29, 1999. In 1998, the PURS
were included in short-term debt on New Aetna's Consolidated Balance Sheets.
At December 31, 1999, $1.7 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, New
Aetna had 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 were available under the facility and any borrowings matured on
the expiration date of the applicable credit commitment. New Aetna paid
facility fees ranging from 0.065% to 0.2% per annum, depending upon its
long-term senior unsecured debt rating. The facility fee at December 31, 1999
was at an annual rate of 0.08%. The facility also supported New Aetna's
commercial paper borrowing program. Under this credit facility, New Aetna was
required to maintain shareholder's equity, excluding net unrealized capital
gains and losses (accumulated other comprehensive income (loss)), of at least
$7.5 billion. Aetna had fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt.
On April 1, 1999, New Aetna entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of
banks. This credit facility terminated on March 26, 2000. Various interest rate
options were available under this facility and any borrowings matured on the
expiration date of the applicable credit commitment. New Aetna paid facility
fees ranging from 0.065% to 0.25% per annum, depending upon its long-term
senior unsecured debt rating. The facility fee at December 31, 1999 was at an
annual rate of 0.08%. This facility also supported New Aetna's commercial paper
borrowing program. Under this credit facility, New Aetna was required to
maintain shareholder's equity, excluding net unrealized capital gains and
losses (accumulated other comprehensive income (loss)), of at least $7.5
billion.
Total interest paid by New Aetna was $178 million, $167 million and $217
million in 1999, 1998 and 1997, respectively.
F-62
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. 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 New Aetna, 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 New Aetna's 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.
13. Dividend Restrictions and Shareholder's Equity
New Aetna's business operations are conducted through subsidiaries that
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 New Aetna. The
additional regulations applicable to New Aetna's indirect HMO and insurance
company subsidiaries are not expected to affect the ability of New Aetna to pay
dividends, or the ability of any of New Aetna's subsidiaries to service their
outstanding debt.
The amount of dividends paid to New Aetna by its domestic insurance and
HMO subsidiaries at December 31, 1999 without prior approval by state
regulatory authorities was limited to approximately $560 million in the
aggregate. There were no such restrictions on distributions from New Aetna to
Aetna.
The combined statutory net income for the years ended and statutory
surplus as of December 31 for the domestic insurance and HMO subsidiaries of
New Aetna, reflecting intercompany eliminations, were as follows:
1999 1998
---- ----
(Millions)
Statutory net income............. $492.4 $477.2
Statutory surplus................ 2,658.6 2,224.5
As of December 31, 1999, New Aetna 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.
F-63
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Reinsurance
New Aetna utilizes reinsurance agreements primarily to reduce its exposure
to large losses in certain aspects of its business. These reinsurance
agreements permit recovery of a portion of losses from reinsurers, although
they do not discharge the primary liability of New Aetna as direct insurer of
the risks reinsured. New Aetna 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
Direct Other from Other Assumed
Amount Companies Companies Net Amount to Net
---------- --------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C> <C>
1999 (1)
Life insurance.................... $1,128.6 $8.5 $74.4 $1,194.5 6.2%
Accident and health insurance..... 16,260.7 39.1 1,225.4 17,447.0 7.0%
---------- --------- ---------- ----------
Total premiums.............. $17,389.3 $47.6 $1,299.8 $18,641.5 7.0%
========== ========= ========== ==========
1998 (1)
Life insurance.................... $1,082.6 $13.5 $64.1 $1,133.2 5.7%
Accident and health insurance..... 11,746.1 25.2 274.8 11,995.7 2.3%
---------- --------- ---------- ----------
Total premiums.............. $12,828.7 $38.7 $338.9 $13,128.9 2.6%
========== ========= ========== ==========
1997 (1)
Life insurance.................... $993.7 $15.7 $21.1 $999.1 2.1%
Accident and health insurance..... 10,008.5 9.4 1.4 10,000.5 --%
---------- --------- ---------- ----------
Total premiums.............. $11,002.2 $25.1 $22.5 $10,999.6 0.2%
========== ========= ========== ==========
</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 $52 million,
$48 million and $47 million in 1999, 1998 and 1997, respectively.
Effective November 1, 1999, Health Care 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 Health Care remains directly obligated to policyholders.
Assets related to and supporting these policies were transferred to the
assuming company and Health Care 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.
F-64
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information
Summarized financial information for New Aetna's principal
operations was as follows:
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1999 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $20,279.9 $165.1 $0.4 $-- $20,445.4
Net investment income....................... 612.8 982.5 6.5 -- 1,601.8
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $20,892.7 $1,147.6 $6.9 $-- $22,047.2
=========== ========== ============= ============ =========
Interest expense............................ $-- $-- $232.7 $-- $232.7
----------- ---------- ------------- ------------ ---------
Amortization................................ $420.4 $-- $-- $-- $420.4
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $365.1 $85.4 $(105.1) $-- $345.4
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $459.7 $85.0 $(216.9) $-- $327.8
Other item (4).............................. -- 50.2 -- -- 50.2
Realized capital gains (losses), net of tax. (22.4) 15.8 28.0 -- 21.4
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 437.3 151.0 (188.9) -- 399.4
Income from discontinued operations,
net of tax................................ -- -- -- 317.1 317.1
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $437.3 $151.0 $(188.9) $317.1 $716.5
=========== ========== ============= ============ =========
Segment assets (5).......................... $21,284.7 $27,362.3 $544.9 $2,789.5 $51,981.4
Expenditures for long-lived assets.......... $16.0 $-- $-- $-- $16.0
</TABLE>
______________
(1) Corporate and Other includes interest, staff area expenses, advertising,
contributions, net investment income and other general expenses, as well
as consolidating adjustments. Realized capital gains (losses) reflect
$13.7 million of previously deferred hedge gains related to an anticipated
debt issuance.
(2) Revenues from external customers include revenues earned from one major
customer amounting to 18.9% 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 New Aetna'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 item excluded from operating earnings is comprised of a $50.2
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 $6.1 billion attributable to
discontinued products.
F-65
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information (Continued)
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1998 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $14,447.3 $153.9 $1.3 $-- $14,602.5
Net investment income....................... 537.2 1,152.5 6.9 -- 1,696.6
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $14,984.5 $1,306.4 $8.2 $-- $16,299.1
=========== ========== ============= ============ =========
Interest expense............................ $-- $-- $206.2 $-- $206.2
----------- ---------- ------------- ------------ ---------
Amortization................................ $381.3 $-- $-- $-- $381.3
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $368.0 $102.5 $(78.9) $-- $391.6
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $342.8 $88.3 $(213.9) $-- $217.2
Other item (4).............................. -- 44.2 -- -- 44.2
Realized capital gains (losses), net of tax. 88.2 37.4 63.4 -- 189.0
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 431.0 169.9 (150.5) -- 450.4
Income from discontinued operations,
net of tax................................ -- -- -- 396.4 396.4
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $431.0 $169.9 $(150.5) $396.4 $846.8
=========== ========== ============= ============ =========
Segment assets (5).......................... $18,749.0 $30,774.9 $767.0 $2,937.2 $53,228.1
Expenditures for long-lived assets.......... $9.6 $0.2 $-- $-- $9.8
</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 include revenues earned from one major
customer amounting to 18.7% 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 New Aetna'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 item excluded from operating earnings is comprised of 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.
F-66
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information (Continued)
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1997 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $12,308.5 $195.6 $12.3 $-- $12,516.4
Net investment income....................... 451.2 1,408.7 18.2 -- 1,878.1
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $12,759.7 $1,604.3 $30.5 $-- $14,394.5
=========== ========== ============= ============ =========
Interest expense............................ $0.6 $-- $213.3 $-- $213.9
----------- ---------- ------------- ------------ ---------
Amortization................................ $362.9 $-- $-- $-- $362.9
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $391.0 $153.6 $(90.7) $-- $453.9
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $354.6 $105.0 $(232.1) $-- $227.5
Other item (4).............................. 29.3 108.4 -- -- 137.7
Realized capital gains (losses), net of tax. 69.9 20.8 69.8 -- 160.5
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 453.8 234.2 (162.3) -- 525.7
Income from discontinued operations,
net of tax................................ -- -- -- 373.8 373.8
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $453.8 $234.2 $(162.3) $373.8 $899.5
=========== ========== ============= ============ =========
</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 include revenues earned from one major
customer amounting to 16.6% 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 New Aetna'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 are comprised of a $29.3
million after-tax benefit from the reduction of the severance and
facilities reserve in the Health Care 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.
Revenues from external customers (all within the United States) by product
were as follows:
1999 1998 1997
--------- --------- ---------
(Millions)
Health risk........................... $17,467.2 $11,780.8 $9,735.0
Group insurance and other health...... 2,812.7 2,666.5 2,573.5
Large case pensions................... 165.1 153.9 195.6
Other................................. 0.4 1.3 12.3
--------- --------- ---------
Total revenue from external customers. $20,445.4 $14,602.5 $12,516.4
========= ======== =========
Long-lived assets, all within the United States, were $841 million and
$810 million at December 31, 1999 and 1998, respectively.
F-67
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities
Leases
New Aetna has entered into operating leases for office space and certain
computer and other equipment. Rental expenses for these items were $220
million, $211 million and $181 million for 1999, 1998 and 1997, respectively.
The future net minimum payments under noncancelable leases for 2000 through
2004 are estimated to be $245 million, $184 million, $142 million, $108 million
and $96 million, respectively, and $330 million, thereafter.
In connection with the property-casualty sale, New Aetna vacated, and the
purchaser subleased, at market rates for a period of eight years, the space
that New Aetna occupied in the CityPlace office facility in Hartford. In 1996,
New Aetna 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 New Aetna under the lease and future rentals expected to be received
by New Aetna. 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.
Litigation
Shareholder Litigation
Class Action Complaints were filed in the United States District Court for
the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz
and Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J.
Oring. Other Class Action Complaints were filed in the United States District
Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert;
on November 26, 1997 by the Rainbow Fund, Inc.; and on December 24, 1997 by
Terry B. Cohen. The Connecticut actions were transferred to the United States
District Court for the Eastern District of Pennsylvania (the "Court") for
consolidated pretrial proceedings with the cases pending there. The plaintiffs
filed a Consolidated and Amended Complaint (the "Complaint") seeking, among
other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that Aetna 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 Aetna's medical claim
reserves. Aetna 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
Aetna, Ronald E. Compton and Richard L. Huber. Aetna 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 Aetna
common stock on the market from March 6, 1997 through 7:00 a.m. on September
29, 1997. Merits discovery was completed in early 2000. On January 31, 2000
plaintiffs filed expert reports. On February 3, 2000, defendants filed motions
for summary judgment. Also on February 3, 2000, plaintiffs moved for permission
to file a third amended complaint. On March 20, 2000, the Court granted
plaintiffs leave to file a third amended complaint and adopted a revised
schedule. Pursuant to the revised schedule, defendants filed new summary
judgment motions in May 2000 and the parties conducted expert discovery which
is scheduled to be completed in the third quarter of 2000. Trial is scheduled
to begin in the fourth quarter of 2000. Defendants are defending the actions
vigorously.
F-68
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Shareholder Litigation (Continued)
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
Court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
Health Care Litigation
New Aetna is involved in several purported class action lawsuits that are
part of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna 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. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
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 New Aetna for alleged violations of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The Conte
Complaint alleges that New Aetna does not make adequate disclosure of provider
compensation arrangements in the literature that it makes available to actual
or prospective members. New Aetna intends to defend the action vigorously and
on November 1, 1999, filed a motion to dismiss the litigation for failure to
state a claim upon which relief can be granted. On December 15, 1999, the Court
suspended further proceedings pending the resolution of the Maio appeal by the
United States Court of Appeals for the Third Circuit.
F-69
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care 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 "Mississippi 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
Mississippi O'Neill Complaint seeks various forms of relief, including
unspecified damages and treble damages and restitution of alleged improper
profits, from Aetna, New Aetna, Richard L. Huber and unnamed members of the
Board of Directors of Aetna for alleged violations of ERISA and RICO. The
Mississippi O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna, New Aetna, 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 17500 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. Plaintiff has moved to remand the action
to state court. Aetna has 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. In August 2000, the
Court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). 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, New Aetna,
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. On
May 5, 2000 the Court denied defendants' demurer but granted in part their
motion to strike portions of the Ross Complaint and ordered plaintiffs to file
an amended complaint. The amended complaint was filed on May 15, 2000 and a
second amended complaint on June 28, 2000. On August 15, the Court denied
defendants' demurrer but granted, in part, their motion to strike portions of
the second amended complaint and ordered the plaintiffs to file a third amended
complaint. The third amended complaint was filed on August 25, 2000. Defendants
intend to defend the action vigorously.
F-70
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care 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 and New Aetna solely to the extent that New Aetna has assumed
liability for the actions of Prudential in connection with New Aetna'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, New Aetna
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte Complaints were filed in that court. On January 25, 2000, the Court
suspended further proceedings pending resolution of a motion in cases involving
other defendants to consolidate those actions in a single court. This
litigation is in the preliminary stages. New Aetna 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 and New Aetna 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, New Aetna 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 August 25, 2000 New Aetna moved to dismiss the
action for failure to state a claim. This litigation is in the preliminary
stages. New Aetna 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, New Aetna 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 New Aetna. On May 15, 2000 the Judicial Panel on Multidistrict Litigation
issued a conditional order transferring the Mangieri Complaint to the United
States District Court for the Southern District of Florida for consolidated
pretrial proceedings in the matter known as In re Humana, Inc. Managed Care
Litigation. On May 30, 2000 New Aetna filed with the Panel an objection to that
conditional transfer order, but on July 14, 2000, New Aetna requested
consolidation of that action with others pending against New Aetna (see the
discussion regarding the MDL Application below). This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
F-71
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz (the "McCarron Complaint"). The McCarron Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
McCarron Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plans subscribers before and/or after New Aetna's acquisition of those
operations. The McCarron Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 New Aetna joined in Prudential's
motion to dismiss the complaint for failure to state a claim. This litigation
is in the preliminary stages. New Aetna intends to defend the action
vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero (the "Romero Complaint"). The Romero Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
Romero Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plan subscribers before and/or after New Aetna's acquisition of those
operations. The Romero Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
On July 24, 2000 the Court stayed the action. This litigation is in the
preliminary stages. New Aetna intends to defend the action vigorously.
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri Complaints as
well as both the Mississippi O'Neill Complaint and the Florida O'Neill
Complaint (as defined below). Hearing on the MDL Application is scheduled to
take place on September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop (the "Florida O'Neill Complaint"). The Florida O'Neill Complaint
names as defendants Aetna and Aetna U.S. Healthcare The Florida O'Neill
Complaint seeks various forms of relief, including unspecified damages and
treble damages and restitution of alleged improper profits, from Aetna and
Aetna U.S. Healthcare for alleged violations of ERISA and RICO. The Florida
O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising and marketing
materials directed to Aetna HMO members, and alleges that defendants conspired
with other managed care companies not to disclose alleged industry-wide
practices. New Aetna sought from the Florida federal court a stay of further
proceedings on the Florida O'Neill Complaint pending a decision on the MDL
Application. On July 27, 2000, the Florida federal court denied that motion. On
August 11, 2000, New Aetna filed a motion to dismiss the Florida O'Neill
Complaint. Briefing on that motion is scheduled to be completed in early
September 2000. Additionally, the Court has scheduled briefing on plaintiffs'
class certification motion to be completed by November 2000. This litigation is
in the preliminary stages. Defendants intend to defend the action vigorously.
F-72
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher (the "O'Brien Complaint"). The O'Brien Complaint seeks
various forms of relief, including unspecified damages, from New Aetna for
alleged violations of ERISA. The O'Brien Complaint alleges that New Aetna does
not make adequate disclosure of the operation of its managed care plans to
actual or prospective members. New Aetna intends to defend the action
vigorously. New Aetna has notified the Judicial Panel on Multidistrict
Litigation of the O'Brien Complaint for consolidation with the other matters
referred to in the MDL Application.
Other Litigation and Regulatory Proceedings
New Aetna is involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of New Aetna, 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
Aetna, 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.
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to New Aetna, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to the financial condition of New Aetna, although they may adversely affect
results of operations in future periods.
F-73
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger
On July 20, 2000, Aetna announced that it reached a definitive agreement
to sell its Aetna Financial Services and Aetna International businesses to ING
in a transaction valued at approximately $7.7 billion. Under the terms of the
agreement and in an integrated transaction, Aetna will spin off to its
shareholders the shares of a standalone health company that will be comprised
primarily of the Health Care and Large Case Pensions businesses.
Simultaneously, Aetna, which then will be comprised of Aetna Financial Services
and Aetna International, will merge with a newly formed subsidiary of ING. In
exchange for each Aetna share, Aetna shareholders will receive one share in the
standalone health company, which will be named Aetna Inc., and approximately
$35 per share in cash. When ING acquires Aetna, that entity is expected to have
approximately $2.7 billion in long-term debt.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year end 2000. Aetna expects that it will incur
certain costs associated with the definitive agreement with ING related to the
consummation of the transaction (including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna) and such costs
may be material.
In connection with its spin-off from Aetna, New Aetna generally will
assume all liabilities related to the Health Care and Large Case Pensions
businesses. In addition, New Aetna generally will be responsible for Aetna's
liabilities other than those arising out of the Aetna Financial Services and
Aetna International businesses being sold to ING. These liabilities include the
post-retirement pension and other benefits payable to all former employees of
Aetna, liabilities arising out of health litigation and certain corporate-level
litigation to which Aetna is a party, and generally all liabilities arising out
of certain past divestiture transactions which have been consummated by Aetna
prior to the closing of New Aetna's spin-off from Aetna.
F-74
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger (Continued)
The account balances and activities of Aetna Financial Services and Aetna
International have been segregated and reported as discontinued operations.
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1999 1998 1997
-------- -------- --------
(Millions)
<S> <C> <C> <C>
Revenue:
Premiums................................................... $2,259.8 $1,710.4 $1,592.6
Total net investment income................................ 1,362.2 1,522.0 1,514.3
Fees and other income...................................... 709.7 836.6 716.8
Net realized capital gains (losses)........................ 9.4 (18.1) 54.3
-------- -------- --------
Total revenue.................................................... 4,341.1 4,050.9 3,878.0
-------- -------- --------
Benefits and expenses:
Current and future benefits................................ 2,596.7 2,254.8 2,240.4
Operating expenses:
Salaries and related benefits............................ 395.8 387.3 356.1
Other.................................................... 603.7 564.7 516.1
Interest expense........................................... 46.6 44.7 21.9
Amortization of goodwill & other acquired intangible assets 17.0 18.8 17.1
Amortization of deferred policy acquisition costs.......... 204.0 214.7 197.2
Severance and facilities charge............................ -- 1.5 --
-------- -------- --------
Total benefits and expenses...................................... 3,863.8 3,486.5 3,348.8
-------- -------- --------
Income before taxes (benefits)................................... 477.3 564.4 529.2
Income taxes (benefits):
Current.................................................... 46.8 282.3 141.7
Deferred................................................... 113.4 (114.3) 13.7
-------- -------- --------
Total income taxes............................................... 160.2 168.0 155.4
-------- -------- --------
Net income....................................................... $317.1 $396.4 $373.8
======== ======== ========
</TABLE>
F-75
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger (Continued)
Assets, liabilities and shareholder's equity of the discontinued
businesses were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1999 1998
--------- ---------
(Millions)
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value................................... $12,854.0 $14,594.6
Equity securities, at fair value.................................................... 504.7 603.9
Short-term investments.............................................................. 565.1 660.4
Mortgage loans...................................................................... 861.2 833.4
Real Estate......................................................................... 92.3 78.0
Policy loans........................................................................ 533.0 449.9
Other............................................................................... 1,020.2 981.6
--------- ---------
Total investments.................................................................... 16,430.5 18,201.8
--------- ---------
Cash and cash equivalents........................................................... 870.9 836.0
Short-term investments under securities loan agreement.............................. 232.5 277.3
Accrued investment income........................................................... 199.1 208.4
Premiums due and other receivables.................................................. 739.7 165.4
Reinsurance recoverables............................................................ 3,012.3 3,300.0
Deferred policy acquisition costs................................................... 2,056.2 1,765.0
Goodwill and other acquired intangible assets....................................... 680.4 550.0
Other assets........................................................................ 388.2 227.1
Separate Account assets............................................................. 38,692.7 29,443.6
--------- ---------
Total assets......................................................................... $63,302.5 $54,974.6
========= =========
Liabilities:
Insurance liabilities:
Future policy benefits.............................................................. $7,828.1 $8,242.1
Unpaid claims....................................................................... 129.2 128.5
Unearned premiums................................................................... 49.6 123.7
Policyholders' funds................................................................ 11,123.0 11,613.9
--------- ---------
Total insurance liabilities.......................................................... 19,129.9 20,108.2
--------- ---------
Short-term debt..................................................................... 162.7 --
Long-term debt...................................................................... 613.0 654.2
Payables under securities loan agreement............................................ 232.5 277.3
Current income taxes................................................................ 114.2 245.8
Deferred income taxes............................................................... 77.3 245.0
Other liabilities................................................................... 1,381.7 923.6
Minority and participating policyholder's interest.................................. 109.0 139.7
Separate Accounts liabilities....................................................... 38,692.7 29,443.6
--------- ---------
Total liabilities.................................................................... 60,513.0 52,037.4
--------- ---------
Total shareholder's equity (including accumulated other comprehensive loss of
$503.0 and $130.0).................................................................. 2,789.5 2,937.2
--------- ---------
Total liabilities and shareholder's equity........................................... $63,302.5 $54,974.6
========= =========
</TABLE>
F-76
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
QUARTERLY DATA
(Unaudited)
<TABLE>
<CAPTION>
First Second(1) Third Fourth
--------- --------- --------- ---------
1999 (Millions)
<S> <C> <C> <C> <C>
Total revenue................................... $4,747.9 $4,774.6 $5,920.8 $6,666.4
--------- --------- --------- ---------
Income before income taxes...................... 167.4 226.5 242.0 108.9
Income taxes.................................... 83.0 99.5 104.8 58.1
--------- --------- --------- ---------
Net income from continuing operations........... $84.4 $127.0 $137.2 $50.8
========= ========= ========= =========
Net income from discontinued operations......... $85.0 $90.2 $58.3 $83.6
========= ========= ========= =========
</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.
<TABLE>
<CAPTION>
First Second Third(1) Fourth
--------- --------- --------- ---------
1998 (Millions)
<S> <C> <C> <C> <C>
Total revenue................................... $3,702.1 $3,818.0 $4,431.1 $4,637.8
--------- --------- --------- ---------
Income before income taxes...................... 160.1 265.0 209.8 207.1
Income taxes.................................... 77.5 117.6 101.0 95.5
--------- --------- --------- ---------
Net income from continuing operations........... $82.6 $147.4 $108.8 $111.6
========= ========= ========= =========
Net income from discontinued operations......... $76.9 $106.2 $93.5 $119.8
========= ========= ========= =========
</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.
F-77
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- -----------------
3.1 Form of Amended and Restated Articles of Incorporation of Aetna
Inc. (formerly Aetna U.S. Healthcare Inc.)*
3.2 Form of Amended and Restated Bylaws of Aetna Inc. (formerly Aetna
U.S. Healthcare Inc.)*
4.1 Form of Aetna Inc. (formerly Aetna U.S. Healthcare Inc.) Common
Share certificate.*
4.2 Form of Rights Agreement between Aetna Inc. (formerly Aetna U.S.
Healthcare Inc.) and First Chicago Trust Company of New York, as
Rights Agent.*
10.1 Agreement and Plan of Restructuring and Merger dated as of July 19,
2000 among ING America Insurance Holdings, Inc., ANB Acquisition
Corp., Aetna Inc. and, for limited purposes only, ING Groep N.V.,
incorporated herein by reference to Exhibit 2.1 to Aetna Inc.'s Form
10- Q filed on August 4, 2000.
10.2 Form of Tax Sharing Agreement among Aetna Inc., Aetna U.S. Healthcare
Inc. and ING America Insurance Holdings, Inc.
10.3 Form of Employee Benefits Agreement between Aetna Inc. and Aetna U.S.
Healthcare Inc.
10.4 Term Sheet for Transition Services Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
10.5 Form of Distribution Agreement between Aetna Inc. and Aetna U.S.
Healthcare Inc., incorporated herein by reference to Annex C to
Aetna Inc.'s preliminary proxy statement on Schedule 14A filed on
September 1, 2000.
10.6 Term Sheet for Trademark Assignment between Aetna Inc. and Aetna U.S.
Healthcare Inc.
10.7 Term Sheet for Trademark Licensing Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
10.8 Term Sheet for Software Licensing Agreement between Aetna Inc. and
Aetna U.S. Healthcare Inc.
10.9 Term Sheet for Lease Agreement between Aetna Inc. and Aetna Life
Insurance Company in respect of the property situated at 151
Farmington Avenue, Hartford, Connecticut, 06156.
10.10 Term Sheet for Agreement between Aetna Inc. and Aetna U.S. Healthcare
Inc. in respect of the CityPlace property, situated at 185 Asylum
Avenue, Hartford, Connecticut 06103.
10.11 Aetna U.S. Healthcare Inc. Stock Incentive Plan, incorporated herein
by reference to Annex G to Aetna Inc.'s preliminary proxy statement
on Schedule 14A filed on September 1, 2000.
10.12 Aetna U.S. Healthcare Inc. Annual Incentive Plan, incorporated herein
by reference to Annex H to Aetna Inc.'s preliminary proxy statement
on Schedule 14A filed on September 1, 2000. 10.13 Aetna U.S.
Healthcare Inc. Directors Compensation Plan.*
10.14 Employment Agreement dated as of May 31, 2000 by and between Aetna
Inc. and William H. Donaldson, incorporated herein by reference to
Exhibit 10.2 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.15 Tax Agreement dated as of May 31, 2000 by and between Aetna Inc. and
William H. Donaldson, incorporated herein by reference to Exhibit
10.3 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.16 Bonus Agreement dated as of May 31, 2000 by and between Aetna Inc.
and William H. Donaldson, incorporated herein by reference to
Exhibit 10.4 to Aetna Inc.'s Form 10-Q filed on August 4, 2000.
10.17 Letter Agreement dated as of June 11, 1998 between Aetna Inc. and
Alan J. Weber, incorporated herein by reference to Exhibit 10.2 to
Aetna Inc.'s Form 10-Q filed on April 28, 1999.
10.18 Employment Agreement dated as of March 30, 1996 by and between Arthur
Leibowitz, M.D. and U.S. Healthcare, Inc.
10.19 Letter Agreement dated as of April 13, 1996 between Aetna Life and
Casualty Company and John W. Coyle.*
10.20 Letter Agreement and Restrictive Covenant Agreement, each dated
April 28, 1999 and between Aetna Inc. and L. Edward Shaw, Jr.*
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------------
21.1 Subsidiaries of Aetna U.S. Healthcare Inc.*
27.1 Financial Data Schedule (1997).
27.2 Financial Data Schedule (1998).
27.3 Financial Data Schedule (1999).
27.4 Financial Data Schedule (June 30, 1999).
27.5 Financial Data Schedule (June 30, 2000).
---------------
* To be filed by amendment.
