<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1994
________________
Commission file number 1-5704
________
Aetna Life and Casualty Company
_______________________________________________________________________
(Exact name of registrant as specified in its charter)
Connecticut 06-0843808
_______________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
_______________________________________________________________________
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (203) 273-0123
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _____
_____
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at April 30, 1994
________________ __________________
Common Capital Stock 112,540,744
without par value
<PAGE> 2
TABLE OF CONTENTS
_________________
Page
____
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Condensed Notes to Financial Statements 8
Independent Accountants' Review Report 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 38
Item 5. Other Information. 38
Item 6. Exhibits and Reports on Form 8-K. 40
Signatures 41
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
3 Months Ended
March 31
____________________________
(Millions, except share data) 1994 1993
____ ____
<S> <C> <C>
Revenue:
Premiums................................. $ 2,742.3 $ 2,622.3
Net investment income.................... 1,126.5 1,249.9
Fees and other income.................... 450.7 411.5
Net realized capital gains (losses)...... (5.9) 36.2
___________ ___________
Total revenue........................ 4,313.6 4,319.9
___________ ___________
Benefits and expenses:
Current and future benefits.............. 3,117.6 3,045.0
Operating expenses....................... 955.0 898.3
Amortization of deferred policy
acquisition costs....................... 184.6 185.3
___________ ___________
Total benefits and expenses.......... 4,257.2 4,128.6
___________ ___________
Income from continuing operations before
income taxes and cumulative effect
adjustments............................... 56.4 191.3
Federal and foreign income taxes (benefits):
Current.................................. 2.3 70.2
Deferred................................. 8.4 (18.2)
___________ ___________
Total federal and foreign
income taxes........................ 10.7 52.0
___________ ___________
Income from continuing operations before
cumulative effect adjustments............. 45.7 139.3
Discontinued operations, net of tax........ - 27.0
___________ ___________
Income before cumulative effect
adjustments......................... 45.7 166.3
Cumulative effect adjustments, net of tax.. - 227.8
___________ ___________
Net income........................... $ 45.7 $ 394.1
___________ ___________
___________ ___________
Results per common share:
Income from continuing operations before
cumulative effect adjustments........... $ .40 $ 1.26
Discontinued operations, net of tax...... - .25
___________ ___________
Income before cumulative effect
adjustments......................... .40 1.51
Cumulative effect adjustments, net of tax - 2.06
___________ ___________
Net income........................... $ .40 $ 3.57
___________ ___________
___________ ___________
Dividends declared....................... $ .69 $ .69
___________ ___________
___________ ___________
Weighted average common shares outstanding. 113,129,560 110,309,888
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1994 1993
____________ ____________
<S> <C> <C>
Assets:
Investments:
Debt Securities:
Held for investment, at amortized
cost (fair value $2,428.1 and
$2,704.2)....................... $ 2,326.3 $ 2,557.8
Available for sale, at fair value
(amortized cost $37,531.2 and
$36,933.6)...................... 37,516.4 38,868.9
Trading securities, at fair value
(amortized cost $73.9 and $119.0) 72.0 117.8
Equity securities, at fair value
(cost $1,306.5 and $1,238.1)....... 1,635.5 1,658.9
Short-term investments.............. 529.9 669.9
Mortgage loans...................... 14,208.2 14,839.2
Real estate......................... 1,334.3 1,315.8
Policy loans........................ 495.3 490.7
Other............................... 1,152.8 936.8
__________ __________
Total investments............... 59,270.7 61,455.8
Cash and cash equivalents............. 1,541.0 1,557.8
Reinsurance recoverables and
receivables.......................... 4,903.8 4,840.7
Accrued investment income............. 743.9 782.6
Premiums due and other receivables.... 1,592.7 1,664.9
Federal and foreign income taxes:
Current............................. 58.9 124.0
Deferred............................ 1,528.5 1,282.9
Deferred policy acquisition costs..... 1,878.2 1,867.0
Other assets.......................... 2,127.8 1,756.3
Separate Accounts assets.............. 24,492.1 24,704.7
__________ __________
Total assets.................... $ 98,137.6 $100,036.7
__________ __________
__________ __________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 5
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
March 31, December 31,
(Millions, except share data) 1994 1993
____________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits.................. $ 16,975.8 $ 17,597.6
Unpaid claims and claim expenses........ 17,724.6 17,112.2
Unearned premiums....................... 1,521.4 1,502.2
Policyholders' funds left with the
company................................ 26,612.2 27,592.2
__________ __________
Total insurance reserve liabilities. 62,834.0 63,804.2
Dividends payable to shareholders....... 77.7 77.4
Short-term debt......................... 101.0 35.7
Long-term debt.......................... 1,134.7 1,160.0
Other liabilities....................... 3,022.7 3,162.1
Minority and participating
policyholders' interests............... 156.4 172.5
Separate Accounts liabilities........... 24,372.8 24,581.7
__________ __________
Total liabilities................... 91,699.3 92,993.6
__________ __________
Shareholders' Equity:
Class A Voting Preferred Stock (no par
value; 10,000,000 shares authorized;
no shares issued or outstanding)....... - -
Class B Voting Preferred Stock (no par
value; 15,000,000 shares authorized;
no shares issued or outstanding)....... - -
Class C Non-Voting Preferred Stock (no
par value; 15,000,000 shares authorized;
no shares issued or outstanding)....... - -
Common Capital Stock (no par value;
250,000,000 shares authorized;
114,939,275 issued, and 112,536,044
and 112,200,567 outstanding)........... 1,420.0 1,422.0
Net unrealized capital gains............ 59.5 648.2
Retained earnings....................... 5,071.1 5,103.3
Treasury stock, at cost (2,403,231 and
2,738,708 shares)...................... (112.3) (130.4)
__________ __________
Total shareholders' equity.......... 6,438.3 7,043.1
__________ __________
Total liabilities and
shareholders' equity............... $ 98,137.6 $100,036.7
__________ __________
__________ __________
Shareholders' equity per common share... $ 57.21 $ 62.77
__________ __________
__________ __________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 6
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Millions, except share data)
Net
Common Unrealized
Capital Capital Retained Treasury
Three Months Ended March 31, 1994 Total Stock Gains Earnings Stock
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $7,043.1 $1,422.0 $ 648.2 $5,103.3 $ (130.4)
______________________________________________________________________________________________________
Net income............................ 45.7 45.7
Net change in unrealized capital gains
and losses.......................... (588.7) (588.7)
Common stock issued for benefit plans
(335,477 shares).................... 18.1 18.1
Loss on issuance of treasury stock.... (2.0) (2.0)
Common stock dividends declared....... (77.9) (77.9)
________________________________________________________________
Balances at March 31, 1994 $6,438.3 $1,420.0 $ 59.5 $5,071.1 $ (112.3)
______________________________________________________________________________________________________
______________________________________________________________________________________________________
Three Months Ended March 31, 1993
______________________________________________________________________________________________________
Balances at December 31, 1992 $7,238.3 $1,417.7 $ 259.6 $5,777.9 $ (216.9)
______________________________________________________________________________________________________
Net income............................ 394.1 394.1
Net change in unrealized capital gains
and losses.......................... 186.7 186.7
Common stock issued for benefit plans
(58,152 shares)..................... 2.3 2.3
Loss on issuance of treasury stock.... (.4) (.4)
Common stock dividends declared....... (76.2) (76.2)
________________________________________________________________
Balances at March 31, 1993 $7,744.8 $1,417.3 $ 446.3 $6,095.8 $ (214.6)
______________________________________________________________________________________________________
______________________________________________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
3 Months Ended
March 31,
___________________
(Millions) 1994 1993
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 45.7 $ 394.1
Adjustments to reconcile net income to net
cash used for operating activities:
Cumulative effect adjustments.................................. - (227.8)
Decrease (increase) in accrued investment income............... 36.8 (17.2)
Decrease (increase) in premiums due and other receivables...... 98.3 (372.6)
Increase in reinsurance recoverables and receivables........... (61.3) (330.6)
Increase in deferred policy acquisition costs.................. (36.1) (25.4)
Depreciation and amortization.................................. 46.9 53.3
Decrease (increase) in federal and foreign income taxes........ (177.6) 144.1
Net (decrease) increase in other assets and other liabilities.. (524.6) 378.1
(Decrease) increase in insurance reserve liabilities........... (583.8) 545.2
Net sales (purchases) of debt trading securities............... 52.3 (1,665.9)
Increase in minority interest.................................. (13.5) (3.9)
Gain on sale of subsidiary..................................... - (27.0)
Net realized capital losses (gains)............................ 5.9 (36.2)
Amortization of net investment discount........................ (27.7) (23.8)
Other, net..................................................... 16.1 (159.7)
_________ _________
Net cash used for operating activities....................... (1,122.6) (1,375.3)
_________ _________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 6,945.0 941.0
Debt securities held for investment............................ 5.6 -
Equity securities.............................................. 270.7 205.3
Mortgage loans................................................. 36.4 -
Real estate.................................................... 99.4 64.7
Short-term investments......................................... 15,972.4 17,100.7
Investment repayments of:
Debt securities available for sale............................. 1,285.4 1,142.2
Debt securities held for investment............................ 214.4 -
Mortgage loans................................................. 525.7 443.2
Cost of investments in:
Debt securities available for sale............................. (7,649.5) (2,387.8)
Debt securities held for investment............................ (.1) -
Equity securities.............................................. (316.5) (194.8)
Mortgage loans................................................. (91.3) (47.1)
Real estate.................................................... (10.7) (29.4)
Short-term investments......................................... (15,862.2) (16,474.4)
Proceeds from disposal of subsidiary.............................. - 73.4
Increase in property, plant & equipment........................... (25.9) (28.3)
Net decrease (increase) in Separate Accounts...................... 3.7 (5.5)
Other, net........................................................ (2.6) (5.4)
_________ _________
Net cash provided by investing activities....................... 1,399.9 797.8
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 985.7 944.5
Withdrawals of investment contracts............................... (1,257.1) (1,274.1)
Issuance of long-term debt........................................ 68.2 7.1
Stock issued under benefit plans.................................. 16.1 1.9
Repayment of long-term debt....................................... (91.3) (1.3)
Net increase in short-term debt................................... 64.6 66.4
Dividends paid to shareholders.................................... (77.9) (76.2)
_________ _________
Net cash used for financing activities.......................... (291.7) (331.7)
_________ _________
Effect of exchange rate changes on cash and cash
equivalents....................................................... (2.4) (5.1)
_________ _________
Net decrease in cash and cash equivalents............................ (16.8) (914.3)
Cash and cash equivalents, beginning of period....................... 1,557.8 2,415.0
_________ _________
Cash and cash equivalents, end of period............................. $ 1,541.0 $ 1,500.7
_________ _________
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 35.9 $ 16.3
_________ _________
_________ _________
Income taxes paid................................................. $ 71.1 $ 7.6
_________ _________
_________ _________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 8
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include Aetna Life and
Casualty Company and its majority-owned subsidiaries
(collectively, the "company"). Less than majority-owned
entities in which the company has at least a 20% interest are
reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1993 financial information
to conform to 1994 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.
(2) Accounting Changes
Under certain insurance contracts with deductible features, the
company is obligated to pay the claimant for the full amount of
a claim. The company is subsequently reimbursed from the
policyholder for the deductible. Prior to March 31, 1994,
unpaid claim reserves were reported net of such deductibles. On
March 31, 1994, the company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 39, Offsetting of
Amounts Related to Certain Contracts, which requires that unpaid
claims under certain insurance contracts be reported on a gross
basis. Deductible amounts recoverable from policyholders of
$330.7 million are included in other assets at March 31, 1994.
On December 31, 1993, the company adopted Financial Accounting
Standard ("FAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, which requires the classification of
debt securities into three categories: held for investment,
which are carried at amortized cost; available for sale, which
are carried at fair value with changes in fair value, net of
taxes, recognized as a component of shareholders' equity; and
trading, which are carried at fair value with immediate
recognition in income of changes in fair value. FAS No. 115
also requires the classification of equity securities into two
categories: available for sale and trading, which are accounted
for as described above. Initial adoption of this standard
resulted in a net increase of $313.5 million, net of taxes of
$168.8 million, to net unrealized capital gains in shareholders'
equity as of December 31, 1993. This amount excludes gains and
losses allocable to discontinued products and to experience
rated contractholders. Adoption of FAS No. 115 did not have a
material effect on deferred policy acquisition costs.
In 1993, the company adopted, retroactive to January 1, 1993,
FAS No. 112, Employers' Accounting for Postemployment Benefits,
which requires that employers accrue the cost and recognize the
liability for providing certain benefits (primarily long-term
disability) to former or inactive employees after employment but
before retirement. A cumulative effect charge of $48.5 million
($.44 per common share), net of taxes of $26.1 million, related
to the adoption of this standard is reflected in the
Consolidated Statement of Income for the three months ended
March 31, 1993. Adoption of FAS No. 112 had no impact on income
from continuing operations before cumulative effect adjustments
for the three months ended March 31, 1993.
<PAGE> 9
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Accounting Changes (Continued)
During 1993, the company elected to change its accounting policy
for reporting reserves for current and expected workers'
compensation life table indemnity claims to a discounted basis.
These reserves are discounted at 5% for voluntary business and
3.5% for involuntary business, with mortality assumptions that
reflect current company and industry experience. Management
believes that this change more appropriately reflects the economic
value of its obligations and improves the matching of revenues and
expenses (i.e., investment earnings from underlying assets are
matched with the accretion of the liability as those amounts occur
over time). The company implemented discounting of reserves for
workers' compensation life table indemnity claims retroactive to
January 1, 1993, and reported a cumulative effect benefit of
$250.0 million ($2.26 per common share), net of taxes of $134.7
million, in the Consolidated Statement of Income for the three
months ended March 31, 1993. The change in accounting for
workers' compensation life table indemnity reserves had no impact
on income from continuing operations before cumulative effect
adjustments for the three months ended March 31, 1993. The
company's reserves for workers' compensation life table indemnity
claims at March 31, 1994 were 19% of its total workers'
compensation reserves for unpaid claims and claim adjustment
expenses.
During 1993, the Emerging Issues Task Force of the FASB reached a
consensus on a recommended method of accounting for
retrospectively rated reinsurance contracts. The company changed
its method of accounting for such contracts to conform to the
consensus. Accordingly, the company reported a cumulative effect
adjustment, retroactive to January 1, 1993, to recognize an asset
for the amounts due from reinsurers related to the experience
through January 1, 1993 under retrospectively rated reinsurance
contracts. These contracts provided for amounts to be returned to
the company based on favorable cumulative loss experience. The
company reported a cumulative effect benefit related to the change
in accounting for retrospectively rated reinsurance contracts of
$26.3 million ($.24 per common share), net of taxes of $8.6
million, in the Consolidated Statement of Income for the three
months ended March 31, 1993. The change in accounting for
retrospectively rated reinsurance contracts had no impact on
income from continuing operations before cumulative effect
adjustments for the three months ended March 31, 1993.
(3) Future Application of Accounting Standards
In May 1993, the FASB issued FAS No. 114, Accounting by Creditors
for Impairment of a Loan. This statement requires that loans be
impaired when it is probable that a creditor will be unable to
collect all amounts (i.e., principal and interest) contractually
due, and the impairment be measured based on the present value of
expected future cash flows discounted at the loan's original
effective interest rate. The statement also allows impairments to
be measured based on the loan's market price or the fair value of
the collateral if the loan is collateral dependent. This
statement will be effective for 1995 financial statements,
although early adoption is permissible. The company has not yet
determined the timing or impact of adoption of this statement.
<PAGE> 10
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Discontinued Products
In January 1994, the company announced its decision to
discontinue the sale of its fully guaranteed large case
pension products, which include guaranteed investment
contracts ("GICs") and single-premium annuities ("SPAs")
sold to large case pension customers. A reserve
representing management's best estimate of anticipated
future losses was established at December 31, 1993.
Accordingly, results of discontinued products for the three
months ended March 31, 1994 were charged against the reserve
for discontinued products and did not impact the net income
of the company.
Results of discontinued products for the three months ended
March 31, 1994 were as follows:
<TABLE>
<CAPTION>
Charged to
Guaranteed Single- Reserve for
Investment Premium Future
(Millions) Contracts Annuities Total Losses Net*
______________________________________________________________________________________________________
<S> <C> <C> <C>
Premiums $ - $ 39.2 $ 39.2 $ - $ 39.2
Net investment income 171.0 108.9 279.9 - 279.9
Net realized capital losses (25.5) (15.5) (41.0) 41.0 -
Interest earned on receivable
from continuing business 4.7 6.9 11.6 - 11.6
Other income 2.9 2.8 5.7 - 5.7
__________________________________________________________________
Total revenue 153.1 142.3 295.4 41.0 336.4
__________________________________________________________________
Current and future benefits 202.6 151.3 353.9 (20.6) 333.3
Operating expenses 1.9 1.2 3.1 - 3.1
__________________________________________________________________
Total benefits and expenses 204.5 152.5 357.0 (20.6) 336.4
__________________________________________________________________
Results of discontinued products $ (51.4) $ (10.2) $ (61.6) $ 61.6 $ -
______________________________________________________________________________________________________
__________________________________________________________________
<FN>
* Amounts are reflected in the Consolidated Statement of Income, except for interest of $11.6 million
earned on the receivable from continuing business which is eliminated in consolidation.
</TABLE>
During the first quarter of 1994, deposits of $136.9 million
were received under GIC contracts. In accordance with FAS
No. 97, such deposits are not included in premiums or
revenue.
<PAGE> 11
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Discontinued Products (Continued)
Assets and liabilities of discontinued products included in
the Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
(Millions) March 31, 1994 December 31, 1993
__________________________________________________________________________________________________________
Guaranteed Single- Guaranteed Single-
Investment Premium Investment Premium
Contracts Annuities Total Contracts Annuities Total
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Debt securities available for sale $ 4,344.5 $ 3,435.0 $ 7,779.5 $ 4,690.9 $ 3,578.1 $ 8,269.0
Mortgage loans 3,279.6 1,844.8 5,124.4 3,468.2 1,950.9 5,419.1
Real estate 531.4 21.1 552.5 534.5 - 534.5
Short-term and other investments 319.4 126.4 445.8 399.7 72.8 472.5
______________________________________________________________________
Total investments 8,474.9 5,427.3 13,902.2 9,093.3 5,601.8 14,695.1
Current and deferred income taxes 319.5 152.2 471.7 253.7 26.2 279.9
Receivable from continuing
business 394.7 441.9 836.6 390.0 435.0 825.0
Other 137.0 5.1 142.1 7.6 1.3 8.9
______________________________________________________________________
Total assets $ 9,326.1 $ 6,026.5 $15,352.6 $ 9,744.6 $ 6,064.3 $15,808.9
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
Future policy benefits $ - $ 5,096.2 $ 5,096.2 $ - $ 5,079.1 $ 5,079.1
Policyholders' funds left with
the company 8,670.0 - 8,670.0 8,976.6 - 8,976.6
Reserve for future losses on
discontinued products 548.6 659.8 1,208.4 600.0 670.0 1,270.0
Other 107.5 270.5 378.0 168.0 315.2 483.2
______________________________________________________________________
Total liabilities $ 9,326.1 $ 6,026.5 $15,352.6 $ 9,744.6 $ 6,064.3 $15,808.9
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
</TABLE>
Net unrealized capital gains on available for sale debt
securities of discontinued products are included in other
liabilities of discontinued products and are not reflected
in consolidated shareholders' equity. The reserve for
future losses on GICs is included in policyholders' funds
left with the company and the reserve for future losses on
SPAs is included in future policy benefits in the
Consolidated Balance Sheets.
The reserve for future losses on discontinued products
represents the present value of the difference between (a)
the expected cash flows from the assets supporting
discontinued products, and (b) the cash flows expected to be
required to meet the obligations of the outstanding
contracts. Calculation of the reserve for future losses on
discontinued products required projection of both the amount
and the timing of cash flows over approximately the next 30
years, including consideration of, among other things, asset
defaults and prepayments, changes in real estate values,
participant withdrawal and mortality rates and cost of asset
management and customer service. The amounts of cash flows
on the assets of the discontinued products projected to
occur in each period are risk-adjusted such that the present
value (at the risk free rate at December 31, 1993,
consistent with the duration of the liabilities) of those
cash flows approximates the current fair value of the
assets.
<PAGE> 12
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Discontinued Products (Continued)
The activity in the reserve for future losses on discontinued
products for the three months ended March 31, 1994 was as follows:
<TABLE>
<CAPTION>
Guaranteed Single-
Investment Premium
(Millions) Contracts Annuities Total
_____________________________________________________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1993 $ 600.0 $ 670.0 $ 1,270.0
Loss on discontinued products (51.4) (10.2) (61.6)
______________________________________________
Reserve at March 31, 1994 $ 548.6 $ 659.8 $ 1,208.4
_____________________________________________________________________________________
______________________________________________
</TABLE>
The average contractual yields guaranteed on the contracts
relating to the discontinued products exceed the average
historical and expected future yields on assets supporting the
products. The resulting anticipated negative cash flows will
be funded from the cash flows of the company's continuing
business.
Receivables of $836.6 million and $825.0 million for these
negative cash flows (which accrue interest at the rates used to
measure the loss for the two products) are included in the
discontinued products' assets at March 31, 1994 and December
31, 1993, respectively. These receivables are fully offset by
payables from the company's continuing business. These amounts
are eliminated in consolidation and are therefore not reflected
on the Consolidated Balance Sheets. The activity in the
receivable from continuing business for the three months ended
March 31, 1994 was as follows:
<TABLE>
<CAPTION>
Guaranteed Single-
Investment Premium
(Millions) Contracts Annuities Total
_____________________________________________________________________________________
<S> <C> <C> <C>
Receivable at December 31, 1993 $ 390.0 $ 435.0 $ 825.0
Interest earned 4.7 6.9 11.6
______________________________________________
Receivable at March 31, 1994 $ 394.7 $ 441.9 $ 836.6
_____________________________________________________________________________________
______________________________________________
</TABLE>
Pursuant to a segmentation plan approved in 1983 by the New York
Insurance Department, the combined assets supporting discontinued
products were segregated coincident with the receipt of premiums
and deposits on the discontinued products. Assets of the
discontinued products were distinguished, physically,
operationally and for financial reporting purposes, from the
remaining assets of the company.
Management believes the timing and amount of cash flows with
respect to the discontinued products have been estimated with
reasonable accuracy, and the financial statements reflect
management's best estimate of the most likely cash flows that will
occur. However, future periods may include a charge or benefit
equal to the present value of the differences, if any, between
future projected cash flows and current estimates.
<PAGE> 13
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Investments
Net investment income includes amounts allocable to experience
rated contractholders of $190 million and $230 million for the
three months ended March 31, 1994 and 1993, respectively.
Interest credited to contractholders is included in current and
future benefits.
Net realized capital gains and losses include losses allocable to
experience rated contractholders of $52 million and $30 million
for the three months ended March 31, 1994 and 1993, respectively.
Realized capital gains and losses allocable to experience rated
contractholders are deducted from net realized capital gains and
losses reflected in the income statement and an offsetting amount
is reflected on the balance sheet in policyholder funds left with
the company.
During the first quarter of 1994, the company sold a held for
investment debt security with a carrying value of $7 million due
to significant deterioration in the issuer's creditworthiness.
The sale resulted in an after-tax loss of $1 million.
(6) Federal and Foreign Income Taxes
In August 1993, the Omnibus Budget Reconciliation Act of
1993 was enacted which resulted in an increase in the
federal corporate tax rate from 34% to 35%, retroactive to
January 1, 1993. First quarter 1993 results were not
restated for the effects of this change.
(7) Reinsurance
For the three months ended March 31, 1994 and 1993, ceded earned
premiums were $.3 billion and ceded current and future benefits
were $.4 billion and $.6 billion, respectively.
(8) Sale of Subsidiary
As part of the 1992 sale of American Re-Insurance Company,
formerly a wholly-owned subsidiary, the company received 70,000
shares of American Re Corporation's (the new holding company)
Junior Cumulative Redeemable Exchangeable Preferred Stock which
were redeemed in the first quarter of 1993 resulting in an after-
tax gain of $27 million.
(9) Supplemental Cash Flow Information
Significant non-cash investing and financing activities include
acquisition of real estate through foreclosures of mortgage loans
amounting to $102 million and $127 million for the three months
ended March 31, 1994 and 1993, respectively.
<PAGE> 14
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Earnings Per Share
Earnings per share are computed using net income divided by the
weighted average number of common shares outstanding. There is
not a significant difference between primary and fully diluted
earnings per share.
(11) Commitments and Contingent Liabilities: Asbestos and
Environmental-Related Claims
Reserving for asbestos and environmental-related claims is subject
to significant uncertainties. Because of these significant
uncertainties and the likelihood that they will not be resolved in
the near future, management is unable to make a reasonable
estimate as to the ultimate amount of losses for all asbestos and
environmental-related claims and related litigation expenses and
is unable to determine whether the adverse effect of such losses
will be material to the company's future results, liquidity and/or
capital resources. Reserves for asbestos and environmental
liabilities are evaluated by management regularly, and, subject to
the significant uncertainties mentioned above, adjustments are
made to such reserves as developing loss patterns and other
information appear to warrant. Reserves for asbestos and
environmental related claims, as reflected on the Consolidated
Balance Sheets, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1994 1993
______________________________________________________________________
<S> <C> <C>
Environmental Liability $ 277 $ 234
Asbestos Bodily Injury 271 248
Asbestos Property Damage 34 29
_______________________________
Total Asbestos and
Environmental Related Reserves $ 582 $ 511
______________________________________________________________________
_______________________________
</TABLE>
(12) Litigation
Beginning in 1988, the attorneys general of 20 states each filed
separate antitrust suits against The Aetna Casualty and Surety
Company ("Aetna") and over 30 other insurers, reinsurers, trade
associations and brokers. The suits are on behalf of the states
themselves and, in most cases, alleged classes of their political
subdivisions. Additionally, 20 class actions were filed in
various courts on behalf of private plaintiffs. The attorneys
general suits and the private plaintiff actions all were
consolidated for pretrial proceedings in the United States
District Court for the Northern District of California ("U.S.
District Court").
All of the suits allege that the defendants violated various
federal or state antitrust laws (or laws related to business trade
practices) by, among other things, conspiring to restrict the
terms and coverages of commercial general liability insurance and
also reinsurance. The state suits seek civil penalties,
unspecified damages and extensive injunctive relief. The private
suits seek unspecified treble damages and broad injunctive relief.
<PAGE> 15
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(12) Litigation (Continued)
In September 1989, the U.S. District Court entered an order granting
the motions of the defendants (including Aetna), dismissing with
prejudice all federal antitrust claims in all of the complaints
before it. The U.S. District Court declined to exercise jurisdiction
over the state claims in the attorneys general complaints.
After unsuccessfully attempting to have the federal claims reinstated
before the U.S. District Court, the 20 states and most of the private
plaintiffs then appealed the U.S. District Court's decision
dismissing the federal claims to the United States Court of Appeals
for the Ninth Circuit ("Court of Appeals"). In June 1991, the Court
of Appeals reversed the U.S. District Court's decision dismissing the
federal antitrust claims and remanded those claims to the U.S.
District Court for trial. The defendants subsequently filed a motion
for rehearing; in October 1991, the Court of Appeals denied this
motion. In January 1992, Aetna and several other defendants filed a
petition for a writ of certiorari with the Supreme Court of the
United States ("Supreme Court"), seeking review of the Court of
Appeals' decision. On October 5, 1992, the Supreme Court granted the
defendants' petition.
On June 28, 1993, the Supreme Court issued its decision returning the
suit to the Court of Appeals for further proceedings consistent with
the standards articulated by the Supreme Court. The Supreme Court
held unanimously that Aetna and the other defendant insurers did not
forfeit their otherwise available McCarran-Ferguson Act immunity when
they acted with reinsurers to produce acceptable policy terms. The
Supreme Court also held that Aetna and the other defendant insurers
could lose their immunity under the "boycott" exception to the
McCarran exemption only if the plaintiffs could prove that the
defendant insurers attempted to coerce acceptance of insurance policy
terms by means of refusals to deal in separate and unrelated
transactions. On October 7, 1993, the Court of Appeals remanded the
case to the U.S. District Court for further proceedings. On March
23, 1994, the Court issued an order directing the parties to commence
discovery on the remaining issues in the case.
Aetna is continuously involved in numerous other lawsuits arising,
for the most part, in the ordinary course of its business operations
either as a liability insurer defending third-party claims brought
against its insureds or as an insurer defending coverage claims
brought against itself, including lawsuits related to issues of
policy coverage and judicial interpretation. One such area of
coverage litigation involves legal liability for asbestos and
environmental-related claims. These lawsuits and other factors make
reserving for asbestos and environmental-related claims subject to
significant uncertainties.
While the ultimate outcome of the litigation described herein cannot
be determined at this time, management does not believe it likely
that such litigation, net of reserves established therefor and giving
effect to reinsurance, will result in judgments for amounts material
to the financial condition of the company, although it may affect
results of operations in future periods. Litigation related to
asbestos and environmental claims is subject to significant
uncertainties; therefore management is unable to determine whether
the effects on operations in future periods will be material.
<PAGE> 16
Independent Accountants' Review Report
The Board of Directors
Aetna Life and Casualty Company:
We have reviewed the accompanying condensed consolidated
balance sheet of Aetna Life and Casualty Company and
Subsidiaries as of March 31, 1994, and the related condensed
consolidated statements of income for the three-month
periods ended March 31, 1994 and 1993, and the related
condensed consolidated statements of shareholders' equity
and cash flows for the three-month periods ended March 31,
1994 and 1993. These condensed consolidated financial
statements are the responsibility of the company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical review
procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
condensed consolidated financial statements for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
of Aetna Life and Casualty Company and Subsidiaries as of
December 31, 1993, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated
February 8, 1994, we expressed an unqualified opinion on
those consolidated financial statements. Our report
referred to changes in 1993 in the company's accounting for
certain investments in debt and equity securities,
reinsurance of short-duration and long-duration contracts,
postemployment benefits, workers' compensation life table
indemnity reserves and retrospectively rated reinsurance
contracts. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of
December 31, 1993, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Hartford, Connecticut
April 28, 1994
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<TABLE>
<CAPTION>
Consolidated Results of Operations
__________________________________
Operating Summary
(Millions, except per share data) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................. $ 2,742.3 $ 2,622.3 4.6%
Net investment income................ 1,126.5 1,249.9 (9.9)
Fees and other income................ 450.7 411.5 9.5
Net realized capital gains (losses).. (5.9) 36.2 -
_________ _________
Total revenue.................... 4,313.6 4,319.9 (.1)
Current and future benefits.......... 3,117.6 3,045.0 2.4
Operating expenses................... 955.0 898.3 6.3
Amortization of deferred policy
acquisition costs................... 184.6 185.3 (.4)
_________ _________
Total benefits and expenses...... 4,257.2 4,128.6 3.1
_________ _________
Income from continuing operations
before income taxes and cumulative
effect adjustments.................. 56.4 191.3 (70.5)
Income taxes......................... 10.7 52.0 (79.4)
_________ _________
Income from continuing operations
before cumulative effect adjustments 45.7 139.3 (67.2)
Discontinued operations, net of tax.. - 27.0 (100.0)
_________ _________
Income before cumulative effect
adjustments......................... 45.7 166.3 (72.5)
Cumulative effect adjustments,
net of tax.......................... - 227.8 (100.0)
_________ _________
Net income....................... $ 45.7 $ 394.1 (88.4)
_________ _________
_________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (7.5) $ 22.3 -
_________ _________
_________ _________
Results per common share:
Income from continuing operations
before cumulative effect adjustments $ .40 $ 1.26 (68.3)
Discontinued operations, net of tax.. - .25 (100.0)
_________ _________
Income before cumulative effect
adjustments......................... .40 1.51 (73.5)
Cumulative effect adjustments,
net of tax.......................... - 2.06 (100.0)
_________ _________
Net income....................... $ .40 $ 3.57 (88.8)
_________ _________
_________ _________
</TABLE>
Overview
________
Income from continuing operations before cumulative effect adjustments
was $46 million for the three months ended March 31, 1994, compared with
$139 million for the same period a year ago. First quarter 1994 results
included after-tax catastrophe losses of $124 million, related primarily
to the Los Angeles earthquake and the severe winter weather occurring in
January and February. Catastrophe losses in the first quarter of 1993
were $31 million, approximately $25 million of which was attributable to
Storm Josh. Net realized capital losses were $8 million for the three
months ended March 31, 1994, compared with net realized capital gains of
$22 million for the same period a year ago. Excluding the effects of
catastrophe losses and net realized capital gains and losses, income
from continuing operations in the first quarter of 1994 increased by $29
million, or 19 percent, compared with the first quarter of 1993.
<PAGE> 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Net realized after-tax capital gains and losses included in the
results of continuing operations for the three months ended
March 31 were as follows (in millions):
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Net realized capital gains from sales........ $ 15.2 $ 93.7
Realized capital losses from additions to
reserves for mortgage loans and real estate (22.2) (70.3)
Realized capital losses from additions to
reserves for debt and equity securities.... (0.5) (1.1)
_______ _______
Net realized capital gains (losses).......... $ (7.5) $ 22.3
_______ _______
_______ _______
Net realized capital losses allocable to
experience rated pension contractholders
(excluded above)........................... $ (33.9) $ (19.9)
_______ _______
_______ _______
Net realized capital losses on assets
supporting discontinued products
(excluded above)........................... $ (26.7)* **
_______ _______
_______ _______
<FN>
* Net realized capital losses of $26.7 million in the first quarter of
1994 on assets supporting discontinued products were charged to the
reserve for future losses on discontinued products. (Please see
"Financial Services - Discontinued Products" on page 23.)
** Net realized capital gains of $19.4 million in the first quarter of
1993 on assets supporting discontinued products are included in the
$22.3 million of capital gains shown above.
</TABLE>
Net realized capital gains from sales in the first quarter of
1994, as presented above, includes a $14 million gain resulting
from the sale of a portion of an unconsolidated subsidiary. Net
realized capital gains from sales in the 1993 first quarter were
primarily attributable to bond sales.
Net income was $46 million for the three months ended March 31,
1994, compared with $394 million in the first quarter of 1993.
First quarter 1993 results were restated to reflect a net
cumulative effect benefit of $228 million relating to changes in
accounting for (i) discounting workers' compensation life table
indemnity reserves ($250 million after-tax benefit), (ii)
postemployment benefits ($48 million after-tax charge), and (iii)
retrospectively rated reinsurance contracts ($26 million after-tax
benefit). Net income in the first quarter of 1993 also includes a
gain from discontinued operations of $27 million realized on the
redemption of preferred stock received in connection with the 1992
sale of American Re-Insurance Company.
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
In January 1994, the company announced the planned elimination
of approximately 4,000 positions and the planned abandonment of
certain facilities. A related $308 million reserve ($200
million after-tax charge to 1993 earnings) was established.
During the first quarter of 1994, the company charged costs of
$20 million related to the cost reduction actions to the
severance and facilities reserve. The remaining actions are
expected to be substantially completed in 1994 and are expected
to produce annual after-tax savings of approximately $200
million by 1995, including savings resulting from a
modification of the company's postretirement health care plan.
The total estimated savings of approximately $200 million are
expected to benefit individual segments by 1995 as follows:
benefit to Health and Life Insurance and Services of $80
million; benefit to Financial Services of $5 million; benefit
to Commercial Property Casualty Insurance and Services of $90
million; and benefit to Personal Property Casualty of $25
million. The cost reduction measures are not expected to
significantly impact cash flows in 1994.
Actions associated with the 1992 restructuring charge have been
implemented as planned and the expected savings have been
achieved.
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Health and Life Insurance and Services
______________________________________
Operating Summary
(Millions) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................ $ 1,350.1 $ 1,186.1 13.8%
Net investment income............... 143.7 150.9 (4.8)
Fees and other income............... 335.3 288.3 16.3
Net realized capital gains (losses). (20.6) .8 -
_________ _________
Total revenue.................... 1,808.5 1,626.1 11.2
Current and future benefits......... 1,173.5 1,089.7 7.7
Operating expenses.................. 497.9 415.9 19.7
Amortization of deferred policy
acquisition costs.................. 7.8 2.8 178.6
_________ _________
Total benefits and expenses...... 1,679.2 1,508.4 11.3
_________ _________
Income before income taxes.......... 129.3 117.7 9.9
Income taxes........................ 48.5 41.8 16.0
_________ _________
Income before cumulative
effect adjustments.............. $ 80.8 $ 75.9 6.5
_________ _________
_________ _________
Net realized capital losses,
net of tax (included above)........ $ (14.0) $ (2.2) -
_________ _________
_________ _________
</TABLE>
Health and Life Insurance and Services reported income before
cumulative effect adjustments of $81 million in the first
quarter of 1994, compared with $76 million in the 1993 first
quarter. Excluding net realized capital losses, results for
the quarter increased $17 million as compared with the same
period a year ago. First quarter 1994 results reflected
increased premium and fee revenue due to growth in managed care
members, partially offset by an increase in managed care-
related operating expenses to meet both current and future
needs. First quarter 1994 results also included $8 million of
non-recurring benefits from the settlement of a lawsuit and the
termination of an HMO management contract.
The number of members covered under health care arrangements
was 15.2 million and 15.0 million at March 31, 1994 and
December 31, 1993, respectively.
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Financial Services
__________________
Operating Summary
(Millions) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums........................... $ 69.7 $ 49.4 41.1%
Net investment income.............. 689.1 778.2 (11.4)
Fees and other income.............. 63.9 52.3 22.2
Net realized capital gains (losses) (3.3) 21.4 -
_________ _________
Total revenue................... 819.4 901.3 (9.1)
Current and future benefits........ 710.0 758.2 (6.4)
Operating expenses................. 82.5 97.3 (15.2)
Amortization of deferred policy
acquisition costs................ 6.3 3.6 75.0
_________ _________
Total benefits and expenses..... 798.8 859.1 (7.0)
_________ _________
Income before income taxes......... 20.6 42.2 (51.2)
Income taxes....................... 3.8 11.2 (66.1)
_________ _________
Income before cumulative
effect adjustments............. $ 16.8 $ 31.0 (45.8)
_________ _________
_________ _________
Deposits not included in premiums
above (a)........................ $ 1,431.1 $ 1,251.6 14.3
_________ _________
_________ _________
Net realized capital gains (losses),
net of tax (included above)...... $ (3.5) $ 12.7 -
_________ _________
_________ _________
Net realized capital losses, net of
tax, allocable to experience
rated pension contractholders
(excluded above)................. $ (34.0) $ (17.6) (93.2)
_________ _________
_________ _________
Net realized capital losses, net
of tax, on assets supporting
discontinued products
(excluded above)................. $ (26.7)(b) (c) -
_________ _________
_________ _________
<FN>
(a) Under Financial Accounting Standard No. 97, certain deposits are
not included in premiums or revenue.
(b) Net realized capital losses of $26.7 million in the first quarter of
1994 on assets supporting discontinued products were charged to the
reserve for future losses on discontinued products.
(c) Net realized capital gains of $19.4 million in the first quarter of
1993 on assets supporting discontinued products are included in the
$12.7 million of capital gains shown above.
</TABLE>
Total Segment Results
Financial Services reported income before cumulative effect adjustments
of $17 million for the three months ended March 31, 1994, compared with
income of $31 million for the same period a year ago. Excluding net
realized capital gains and losses, results for the three months ended
March 31, 1994 were $2 million higher than in the 1993 first quarter.
Excluding the effects of net realized capital gains and losses, total
segment results for the first quarter of 1994 reflected improved results
in the continuing large case pension business and in the annuity and
small case pension businesses. First quarter 1993 results included
earnings on discontinued products of $7 million, which included $14
million of gains on futures contracts (which are not expected to recur).
First quarter 1994 results of discontinued products were charged against
the reserve for future losses and did not impact the net income of the
segment. (Please see page 23 for a discussion of the results of
discontinued products.)
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Pension and annuity assets under management at March 31, 1994
were $67 billion, compared with $65 billion at March 31, 1993.
The growth in assets under management was principally
attributable to non-guaranteed lines of business.
Continuing Product Lines
Pursuant to the terms of the company's experience rated pension
and annuity contracts, realized capital gains and losses
related to assets supporting such contracts are passed through
to contractholders, subject, among other things, to certain
minimum guarantees, and the effect of such realized capital
gains and losses does not impact the company's results. A
number of factors, such as customer withdrawal activity, future
losses on investments, including mortgage loans, experience
rated contract modifications, if any, and significant increases
in interest rates could reduce the company's capacity to pass
through future investment losses to contractholders (or
investment losses currently considered allocable to
contractholders) either as a result of triggering minimum
guarantee provisions or through exercise of management
judgment, thereby adversely affecting the company's future
results.
Large case experience rated pension contractholder and
participant directed withdrawals were as follows (excluding
transfers to other company products) for the three month
periods ended March 31 (in millions):
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Scheduled contract maturities
and benefit payments: (1)......... $ 240.3 $ 276.8
________ ________
________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments (2).......... $ 159.7 $ 397.7
________ ________
________ ________
Participant directed withdrawals... $ 61.7 $ 53.3
________ ________
________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
(2) Includes withdrawals made in 1993 in connection with the fourth
quarter 1992 conversion offer.
</TABLE>
The level of contractholder withdrawals is affected by such
factors as returns available from other comparable investments,
declines in contractholder confidence resulting from, among
other things, ratings downgrades or perceived financial
difficulties in the industry, and contractholder
diversification of exposure to investment managers.
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Discontinued Products
In January 1994, the company announced its decision to discontinue
the sale of its fully guaranteed large case pension products which
include guaranteed investment contracts ("GICs") and single-
premium annuities ("SPAs"). As a result of the decision to
discontinue the sale of GICs and SPAs to large case pension
customers, the company established a reserve of $1,270 million at
December 31, 1993 for anticipated future losses on these products.
The first quarter 1994 losses on discontinued products, as shown
below, were charged to the reserve and did not affect the
company's results of operations. Results of discontinued products
for the three months ended March 31 were as follows (in millions):
<TABLE>
<CAPTION>
1994 1993
________________________________ _____
GICs SPAs Total Total
____ ____ _____ _____
<S> <C> <C> <C> <C>
Negative interest margin (a)............. $ (20.5) $ (2.1) $ (22.6) $ (17.7)
Net realized capital gains (losses)...... (16.6) (10.1) (26.7) 19.4
Interest earned on receivable from
continuing operations.................. 3.1 4.5 7.6 -
Non-recurring gains on futures contracts. - - - 13.9
Other, net............................... 0.6 1.1 1.7 11.1
________ ________ ________ ________
Results of discontinued products,
after-tax.............................. $ (33.4) $ (6.6) $ (40.0) $ 26.7
________ ________ ________ ________
________ ________ ________ ________
Results of discontinued products, pretax. $ (51.4) $ (10.2) $ (61.6) $ 40.5
________ ________ ________ ________
________ ________ ________ ________
<FN>
(a) Represents the amount by which interest credited to holders of fully guaranteed large
case pension contracts exceeds interest earned on invested assets supporting such contracts.
</TABLE>
The activity in the reserve for anticipated future losses on
discontinued products for the three months ended March 31, 1994
was as follows (pretax, in millions):
<TABLE>
<CAPTION>
GICs SPAs Total
____ ____ _____
<S> <C> <C> <C>
Reserve at December 31, 1993...... $ 600.0 $ 670.0 $1,270.0
Loss on discontinued products..... (51.4) (10.2) (61.6)
________ ________ ________
Reserve at March 31, 1994......... $ 548.6 $ 659.8 $1,208.4
________ ________ ________
________ ________ ________
</TABLE>
The reserve for anticipated future losses on discontinued products
represents the present value of anticipated net cash flow
shortfalls as the liabilities on these products are run off. Such
net cash flow shortfalls include losses from anticipated negative
interest margins, future capital losses, and operating expenses and
other costs expected to be incurred as the liabilities are run off.
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
At March 31, 1994 and December 31, 1993, assets under
management supporting GICs were $8.5 billion and $9.1 billion,
respectively. Assets under management supporting SPAs at March
31, 1994 and December 31, 1993 were $5.4 billion and $5.6
billion, respectively.
Benefit payments (including maturities) on GICs and SPAs were
$563 million and $132 million, respectively, for the three
months ended March 31, 1994. Cash required to meet these
payments was provided by earnings on, sales of, and normal
amortization of invested assets. Benefit payments (including
maturities) on discontinued products in total were $605 million
for the three months ended March 31, 1993.
(Please see "General Account Investments" on page 29 for a
discussion of investments supporting discontinued products.)
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Commercial Property-Casualty Insurance and Services
___________________________________________________
Operating Summary
(Millions) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................ $ 773.5 $ 803.9 (3.8)
Net investment income............... 174.3 194.5 (10.4)
Fees and other income............... 29.4 42.2 (30.3)
Net realized capital gains.......... 15.7 18.8 (16.5)
_________ _________
Total revenue.................... 992.9 1,059.4 (6.3)
Current and future benefits......... 746.7 688.6 8.4
Operating expenses.................. 233.4 230.8 1.1
Amortization of deferred policy
acquisition costs.................. 88.0 93.9 (6.3)
_________ _________
Total benefits and expenses...... 1,068.1 1,013.3 5.4
_________ _________
Income (loss) before income taxes... (75.2) 46.1 -
Income tax (benefits) expenses...... (35.8) 5.8 -
_________ _________
Income (loss) before cumulative
effect adjustments.............. $ (39.4) $ 40.3 -
_________ _________
_________ _________
Net realized capital gains,
net of tax (included above)......... $ 10.2 $ 14.1 (27.7)
_________ _________
_________ _________
Statutory combined loss and
expense ratio...................... 133.0% 116.6% -
_________ _________
_________ _________
GAAP combined loss and expense ratio 132.9% 116.2% -
_________ _________
_________ _________
Catastrophe loss ratio
(included in combined ratios above) 16.9% 2.3% -
_________ _________
_________ _________
</TABLE>
Commercial Property-Casualty Insurance and Services reported
a net loss before cumulative effect adjustments of $39
million for the three months ended March 31, 1994, compared
with income before cumulative effect adjustments of $40
million for the same period a year ago. Excluding net
realized capital gains, first quarter 1994 results were $76
million lower than in the 1993 first quarter, due primarily
to increased catastrophe losses. Catastrophe losses for the
three months ended March 31, 1994 were $84 million, compared
with $12 million in the 1993 first quarter. Catastrophe
losses in the first quarter of 1994 included $80 million
($220 million pretax and before reinsurance) from the Los
Angeles earthquake and the severe winter weather occurring
in January and February of 1994.
Excluding the effects of catastrophes, results for the first
quarter of 1994 reflected a modest improvement in loss
experience, despite increased charges to loss and loss
expense reserves for prior accident years. Additions (net
of reinsurance) to prior year loss reserves were $23 million
higher in the first quarter of 1994 than in the 1993 first
quarter and were primarily for environmental related claim
reserves. During the first quarter of 1994, $60 million
($32 million, net of reinsurance recoverables) was added to
environmental claims reserves for estimated indemnity-
related liabilities and litigation expenses. First quarter
1994 results also reflected lower investment income and
lower workers' compensation servicing carrier fees than in
the same period a year ago.
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Commercial Property-Casualty Insurance and Services (Continued)
___________________________________________________
The company continues to gather and analyze legal and factual
information on known environmental-related claims and to reassess
its reserving techniques in order to determine whether it can
reasonably estimate its liability for such claims. The estimation
of reserves for reported environmental claims is difficult and
likely to change as additional information emerges. Future
results of the company are expected to be affected adversely by
losses for environmental-related claims and related litigation
expenses. Management is unable to determine whether such effect
will be material to the company's future results, liquidity and/or
capital resources.
Premium revenue was 4 percent lower in the first quarter of 1994
than in the first quarter of 1993, due primarily to reduced
workers' compensation exposure in certain states where that
business does not offer the potential to achieve acceptable
financial returns.
Property-Casualty Reserves: Asbestos and Environmental Related Claims
______________________________________________________________________
For a complete discussion of asbestos and environmental related
claims, please see the company's 1993 Annual Report to
Shareholders and 1993 Form 10-K. The following information is
provided to supplement those discussions.
The Company had open asbestos bodily injury claims involving
approximately 287 policyholders and 239 policyholders at December
31, 1993 and 1992, respectively. The Company had open asbestos
property damage claims involving approximately 102 policyholders
and 60 policyholders at December 31, 1993 and 1992, respectively.
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Personal Property-Casualty
__________________________
Operating Summary
(Millions) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................ $ 344.4 $ 372.0 (7.4)%
Net investment income............... 42.1 52.1 (19.2)
Fees and other income............... .6 1.5 (60.0)
Net realized capital losses......... (4.4) (2.5) (76.0)
_________ _________
Total revenue.................... 382.7 423.1 (9.5)
Current and future benefits......... 298.0 311.9 (4.5)
Operating expenses.................. 52.0 56.8 (8.5)
Amortization of deferred policy
acquisition costs.................. 70.9 70.6 .4
_________ _________
Total benefits and expenses...... 420.9 439.3 (4.2)
_________ _________
Loss before income taxes............ (38.2) (16.2) (135.8)
Income tax benefits................. (14.4) (8.1) 77.8
_________ _________
Loss before cumulative
effect adjustments.............. $ (23.8) $ (8.1) (193.8)
_________ _________
_________ _________
Net realized capital losses,
net of tax (included above)........ $ (3.2) $ (1.4) (128.6)
_________ _________
_________ _________
Statutory combined loss and
expense ratio...................... 125.6% 122.5% -
_________ _________
_________ _________
GAAP combined loss and expense ratio 125.8% 121.9% -
_________ _________
_________ _________
Catastrophe loss ratio
(included in combined ratios above) 13.9% 7.7% -
_________ _________
_________ _________
</TABLE>
Personal Property-Casualty reported a loss before cumulative
effect adjustments of $24 million for the three months ended March
31, 1994, compared with a loss before cumulative effect
adjustments of $8 million for the same period a year ago.
Excluding net realized capital losses, results for the three
months ended March 31, 1994 decreased $14 million over the same
period a year ago. The decrease in results over the prior year
related primarily to an increase in catastrophe losses in the
homeowners business due to the Los Angeles earthquake and the
severe winter weather occurring in January and February of 1994.
Catastrophe losses in the first quarter of 1994 were $40 million
($65 million pretax and before reinsurance), compared with $19
million in the 1993 first quarter. Catastrophe losses in the
first quarter of 1993 were primarily attributable to Storm Josh.
Excluding catastrophe losses, first quarter 1994 results improved
as compared with the 1993 first quarter, reflecting improved
underwriting in the personal auto business.
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
International
_____________
Operating Summary
(Millions) 3 Months Ended
March 31
______________________
1994 1993 % Change
____ ____ ________
<S> <C> <C> <C>
Premiums............................ $ 204.6 $ 210.9 (3.0)%
Net investment income............... 77.3 74.2 4.2
Fees and other income............... 21.5 27.2 (21.0)
Net realized capital gains (losses). 6.7 (2.3) -
_________ _________
Total revenue.................... 310.1 310.0 -
Current and future benefits......... 189.4 196.6 (3.7)
Operating expenses.................. 89.2 97.5 (8.5)
Amortization of deferred policy
acquisition costs.................. 11.6 14.4 (19.4)
_________ _________
Total benefits and expenses...... 290.2 308.5 (5.9)
_________ _________
Income before income taxes.......... 19.9 1.5 -
Income taxes........................ 8.6 1.3 -
_________ _________
Income before cumulative
effect adjustments.............. $ 11.3 $ .2 -
_________ _________
_________ _________
Net realized capital gains (losses),
net of tax (included above)........ $ 3.0 $ (.9) -
_________ _________
_________ _________
</TABLE>
International reported income before cumulative effect adjustments
of $11 million for the three months ended March 31, 1994, compared
with breakeven results in the 1993 first quarter. Excluding net
realized capital gains and losses, results for the three months
ended March 31, 1994 increased $7 million compared with the same
period a year ago. The improvement in first quarter results
reflected increased earnings in the Pacific Rim and from the
company's increased investment in a Mexican insurance operation.
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
Debt Securities
As of March 31, 1994 and December 31, 1993, the company's investments
in debt securities represented 67% and 68%, respectively, of total
general account invested assets and were as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
___________________________
<S> <C> <C>
Supporting discontinued products $ 7,779.5 $ 8,269.0
Supporting experience rated products 11,652.2 11,763.8
Supporting remaining products 20,483.0 21,511.7
___________________________
Total $39,914.7 $41,544.5
___________________________
___________________________
</TABLE>
The decrease in debt securities from December 31, 1993 to March 31,
1994 was due to changes in unrealized capital gains and losses
included in the above balances. Debt securities included unrealized
capital gains of $1.9 billion at December 31, 1993, compared with
unrealized capital losses of $151 million at March 31, 1994.
Included in the company's total debt security balances at March 31,
1994 and December 31, 1993 were the following categories of debt
securities (in millions):
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
___________________________________ ___________________________________
Supporting Experience Rated Supporting Experience Rated
Pension and Annuity Contracts Pension and Annuity Contracts
_____________________________ _____________________________
Total Amount % of Total Total Amount % of Total
_____ ______ __________ _____ ______ __________
<S> <C> <C> <C> <C> <C> <C>
"Below investment grade"
debt securities $ 2,012.4 $ 399.8 19.9% $ 1,970.1 $ 449.6 22.8%
Problem debt securities 168.0 19.4 11.5 196.1 26.6 13.6
Potential problem debt
securities 153.0 54.5 35.6 191.0 65.1 34.1
</TABLE>
Impairment reserves on debt securities are established to provide
for 1) probable estimated losses on specific debt securities and
2) losses that management believes are likely to arise from the
overall portfolio excluding that portion of the portfolio
supporting experience rated pension and annuity contracts
("general reserve"). Impairment reserves related to debt
securities were as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
__________________________
<S> <C> <C>
Allocable to discontinued products $ 40.5 $ 37.9
Allocable to contractholders 17.1 15.0
Allocable to remaining products 51.1 49.9
__________________________
Total $ 108.7 $ 102.8
__________________________
__________________________
</TABLE>
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
After-tax impairment expense related to debt securities was as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
___________________
1994 1993
_______ _______
<S> <C> <C>
Allocable to discontinued products $ 1.7* $ (0.4)
Allocable to contractholders** $ 1.7 $ 0.1
Allocable to remaining products $ 0.5 $ 1.4
<FN>
* Impairment expense allocable to discontinued products
for the three months ended March 31, 1994 does not affect
the company's results of operations.
** Impairment expense allocable to contractholders does not
affect the company's results of operations.
</TABLE>
Management defines problem debt securities to be securities for
which payment is in default, securities of issuers which are
currently in bankruptcy or in out-of-court reorganizations, or
securities of issuers for which bankruptcy or reorganization
within six months is considered likely.
"Potential problem debt securities" are currently performing debt
securities for which neither payment default nor debt
restructuring is anticipated within six months, but whose issuers
are experiencing major financial difficulties. Identifying such
potential problem debt securities requires significant judgment as
to likely future market conditions and developments specific to
individual debt securities. Provision for losses that are likely
to arise from potential problem debt securities, excluding those
potential problem debt securities supporting experience rated
pension and annuity contracts, is included in the general reserve.
The company does not accrue interest on problem debt securities
when management believes the likelihood of collection of interest
is doubtful. Had such interest been accrued, pretax net
investment income would have been higher by approximately $3
million and $4 million for the three months ended March 31, 1994
and 1993, respectively. Of such amounts, $1 million would have
been related to investments supporting experience rated pension
contracts and $1 million would have been related to investments
supporting discontinued products for each of the three month
periods ended March 31, 1994 and 1993.
At March 31, 1994 and December 31, 1993, the carrying value of
collateralized mortgage obligations ("CMOs") was $5.6 billion and
$6.3 billion, respectively. The principal risks inherent in
holding CMOs are prepayment and extension risks related to
dramatic decreases and increases in interest rates whereby the
CMOs would be subject to repayment of principal earlier or later
than originally anticipated. At March 31, 1994 and December 31,
1993, approximately 91% of the company's CMO holdings consisted of
sequential and planned amortization class bonds that are subject
to less prepayment and extension risk than other CMO instruments.
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Mortgage Loan Investments
As of March 31, 1994 and December 31, 1993, the company's
mortgage loan investments, net of impairment reserves,
supported the following types of business (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
__________________________
<S> <C> <C>
Supporting discontinued products $ 5,124.4 $ 5,419.1
Supporting experience rated products 4,475.8 4,732.7
Supporting remaining products 4,608.0 4,687.4
__________________________
Total $14,208.2 $14,839.2
__________________________
__________________________
</TABLE>
The mortgage loan portfolio is monitored closely through the
review of loan and property information such as debt service
coverage, annual operating statements and property inspection
reports. This information is evaluated in light of current
economic conditions and other factors such as geographic and
property-type loan concentrations. Evaluation of individual
mortgage loans, including identification of currently performing
loans that, for a variety of reasons, management believes warrant
closer monitoring, is part of the company's regular review process
designed, among other things, to help determine whether
adjustments to mortgage loan impairment reserves appear warranted.
Mortgage loan impairment reserves are established to provide for
1) probable estimated losses on specific loans (i.e., "specific
reserves") and 2) losses that management believes are likely to
arise from the overall portfolio excluding that portion of the
portfolio supporting experience rated pension contracts (i.e.,
"general reserve"). As of the dates shown below, the mortgage
loan impairment reserves were as follows (in millions):
<TABLE>
<CAPTION>
Balances at March 31, 1994 Balances at December 31, 1993
______________________________ ______________________________
Specific General Specific General
Reserves Reserve Total Reserves Reserve Total
________ _______ _____ ________ _______ _____
<S> <C> <C> <C> <C> <C> <C>
Allocable to the company*... $ 643.7 $ 375.0 $1,018.7 $ 639.8 $ 400.0 $1,039.8
Allocable to contractholders 300.8 ** 300.8 268.5 ** 268.5
________ ________ ________ ________ ________ ________
Total..................... $ 944.5 $ 375.0 $1,319.5 $ 908.3 $ 400.0 $1,308.3
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
<FN>
* Includes total reserves of $630.5 million ($386.1 million of specific reserves and $244.4 million
of general reserves) allocated to discontinued products at March 31, 1994 and total reserves
of $647.2 million ($406.0 million of specific reserves and $241.2 million of general reserves)
allocated to discontinued products at December 31, 1993.
** The general reserve at March 31, 1994 and December 31, 1993 excluded reserves for losses of
$192.0 million and $217.0 million, respectively, that management believes are likely to arise
from that portion of the overall portfolio supporting experience rated pension contracts.
</TABLE>
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
For the periods shown below, after-tax mortgage loan impairment
expense was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
___________________
1994 1993
____ ____
<S> <C> <C>
Allocable to discontinued products $ 21.6* $ 24.3
Allocable to contractholders** $ 36.7 $ 24.4
Allocable to remaining products $ 23.8 $ 30.1
<FN>
* Impairment expense allocable to discontinued products
for the three months ended March 31, 1994 does not affect
the company's results of operations.
** Impairment expense allocable to contractholders does not
affect the company's results of operations.
</TABLE>
Included in the company's total mortgage loan balances at March
31, 1994 and December 31, 1993 were the following categories of
mortgage loans (in millions):
<TABLE>
<CAPTION> Balances at March 31, 1994
_____________________________________________________________
Supporting Experience Supporting
Rated Pension Contracts Discontinued Products
_______________________ ______________________
Total Amount % of Total Amount % of Total
_____ ______ __________ ______ __________
<S> <C> <C> <C> <C> <C>
Problem loans........... $1,203.2 $ 403.7 33.6% $ 364.9 30.3%
Restructured loans...... 1,904.6 478.6 25.1 978.8 51.4
Potential problem and
restructured loans..... 1,389.5 547.6 39.4 477.5 34.4
________
Total................ $4,497.3
________
________
Impairment reserves..... $1,319.5
________
________
Impairment reserves as a
percentage of total.... 29.3%
________
________
Balances at December 31, 1993
_____________________________________________________________
Supporting Experience Supporting
Rated Pension Contracts Discontinued Products
_______________________ ______________________
Total Amount % of Total Amount % of Total
_____ ______ __________ ______ __________
<S> <C> <C> <C> <C> <C>
Problem loans........... $1,116.0 $ 387.8 34.7% $ 410.8 36.8%
Restructured loans...... 1,858.8 481.1 25.9 957.4 51.5
Potential problem and
restructured loans..... 1,575.6 602.0 38.2 523.8 33.2
________
Total................ $4,550.4
________
________
Impairment reserves..... $1,308.3
________
________
Impairment reserves as a
percentage of total.... 28.8%
________
________
</TABLE>
Problem mortgage loans are defined to be loans with payments
over 60 days past due, loans on properties in the process of
foreclosure ($486 million and $399 million at March 31, 1994
and December 31, 1993, respectively), loans on properties
involved in bankruptcy proceedings and loans on properties
subject to redemption.
Restructured loans are loans whose original contract terms have
been modified to payment terms less than market at the time of
restructure and are currently performing pursuant to such
modified terms.
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Currently performing loans which management believes are likely
to become classified as problem or restructured loans in the
next twelve months or so are identified through the portfolio
review process on the basis of known information about the
ability of borrowers to comply with present loan repayment
terms. Identifying such "potential problem and restructured
loans" requires significant judgment as to likely future market
conditions, developments specific to individual properties and
borrowers, and the timing of potential defaults. Provision for
losses that are likely to arise from such potential problem and
restructured loans, excluding those potential problem and
restructured loans supporting experience rated pension
contracts, is included in the general reserve.
The company does not accrue interest on problem loans or
restructured loans when management believes the collection of
interest is unlikely. The amount of pretax investment income
required by the original terms of such non-accruing problem and
restructured loans outstanding at March 31 and the portion
thereof actually recorded as income for the three months ended
March 31 were as follows (in millions):
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Income which would have been recorded
under original terms of loans.......... $73.9 $71.5
Income recorded......................... 34.1 29.1
_____ _____
Lost investment income.................. $39.8 $42.4
_____ _____
_____ _____
Lost investment income allocated to
investments supporting discontinued
products (included above).............. $16.7 $21.1
_____ _____
_____ _____
Lost investment income allocated to
investments supporting experience rated
pension contracts (included above)..... $12.8 $12.3
_____ _____
_____ _____
</TABLE>
Real Estate Investments
At March 31, 1994 and December 31, 1993, Aetna's equity real
estate balances, net of write-downs and reserves, were as follows:
<TABLE>
<CAPTION> Balances at March 31, 1994
_____________________________________________________________
Supporting Experience Supporting
Rated Pension Contracts Discontinued Products
_______________________ ______________________
Total Amount % of Total Amount % of Total
_____ ______ __________ ______ __________
<S> <C> <C> <C> <C> <C>
Investment real estate.... $ 419.6 $ 37.5 8.9% $ 98.3 23.4%
Properties held for sale.. 914.7 243.7 26.6 454.2 49.7
________ ________ ________
Total equity real estate.. $1,334.3 $ 281.2 21.1 $ 552.5 41.4
________ ________ ________
________ ________ ________
Balances at December 31, 1993
_____________________________________________________________
Supporting Experience Supporting
Rated Pension Contracts Discontinued Products
_______________________ ______________________
Total Amount % of Total Amount % of Total
_____ ______ __________ ______ __________
<S> <C> <C> <C> <C> <C>
Investment real estate.... $ 434.9 $ 36.7 8.4% $ 98.5 22.6%
Properties held for sale.. 880.9 243.7 27.7 436.0 49.5
________ ________ ________
Total equity real estate.. $1,315.8 $ 280.4 21.3 $ 534.5 40.6
________ ________ ________
________ ________ ________
</TABLE>
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
The company's investment real estate is held for the production
of income and is generally carried at depreciated cost.
Property valuations are reviewed regularly by investment
management. The carrying value is based upon various factors,
including a review of market conditions and the company's long-
range strategy for the property. The carrying value of
investment real estate is reduced through a valuation reserve
to reflect other than temporary declines in market value. The
fair value of assets acquired through foreclosure is
established as the cost basis at the time of foreclosure.
Subsequent to foreclosure, properties held for sale are carried
at the lower of cost or fair value less selling costs.
Beginning in 1992, adjustments to the carrying value, as a
result of changes in fair value subsequent to foreclosure, are
recorded in a valuation reserve. Prior to 1992, such changes
in carrying value of both investment real estate and properties
held for sale were recorded as write-downs. Capital additions
and asset improvements increase the carrying value and
depreciation reduces the carrying value of both properties held
for sale and investment real estate.
Total real estate write-downs and valuation reserves on
properties included in the company's equity real estate
balances were as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
__________________________
<S> <C> <C>
Allocable to discontinued products $324.0 $298.3
Allocable to contractholders 227.3 228.3
Allocable to remaining products 257.2 242.9
__________________________
Total $808.5 $769.5
__________________________
__________________________
</TABLE>
For the periods shown below, total after-tax net realized capital
losses from real estate write-downs and increases (decreases) in
the valuation reserves were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________
1994 1993
____ ____
<S> <C> <C>
Allocable to discontinued products $ 12.6* $ 14.2
Allocable to contractholders** $ .1 $ 4.0
Allocable to remaining products $ (1.6) $ 1.7
<FN>
* Write-downs and impairment expense allocable to discontinued products
for the three months ended March 31, 1994 do not affect the company's
results of operations.
** Write-downs and impairment expense allocable to contractholders
do not affect the company's results of operations.
</TABLE>
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Outlook
Management intends that general account investments in new
mortgage loans for the foreseeable future will be restricted
largely to extending and refinancing existing mortgages as they
mature. The company has reduced the mortgage loan and equity
real estate portfolios, after reserves and write-downs, by $6.6
billion since the end of 1991, bringing mortgage loans and real
estate as a percentage of general account invested assets from
38% in 1991 to 26% at March 31, 1994. It is management's
continuing objective, real estate and capital market conditions
permitting, to reduce over the next several years the size of
the mortgage loan and real estate portfolios relative to total
invested general account assets. Although extensions and
refinancings of existing mortgage loans may delay achieving
this objective, management intends to aggressively pursue plans
to maximize returns and reduce portfolio levels through loan
restructurings and sales of foreclosed real estate.
Although the pace of recovery in the commercial real estate
market is open to debate, management is beginning to see
improvement in the office sector. While additional losses may
emerge in the company's mortgage loan and real estate
portfolios, and may increase to the extent any recovery in
those markets is delayed, management believes that the
improvement in the office sector will favorably impact real
estate values.
The reserve for discontinued products reflects all anticipated
future losses on discontinued products, including capital
losses related to the $5.7 billion of mortgage loans and real
estate supporting such products. Therefore, additional losses
on the portion of the portfolio supporting discontinued
products are not expected to impact the company's results of
operations, although there can be no assurances that such
losses will not materially impact such results.
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
_______________________________
Cash and cash equivalents at March 31, 1994 and December 31,
1993 were $1.5 billion and $1.6 billion, respectively. For the
three months ended March 31, 1994, net cash used for operating
activities was $1.1 billion. Net cash used for operating
activities of $1.4 billion during the first three months of
1993 included $1.7 billion of cash used for net purchases of
fixed maturity trading securities.
For the first three months of 1994, net cash provided by
investing activities was $1.4 billion and included a decrease
of $110 million in short-term investments. Net cash provided
by investing activities of $798 million for the three months
ended March 31, 1993 included $626 million provided by a
decrease in short-term investments.
Short-term borrowings are used from time to time to provide for
timing differences between receipts and disbursements in
various portfolios. The maximum amount of domestic short-term
borrowings outstanding during the first three months of 1994
was $185 million.
As a result of adverse conditions in real estate markets and
tight lending practices by banks and other financial
institutions over the past several years, the company has
extended the maturity of, and adjusted interest rates to
current market on, certain maturing mortgage loans where the
borrower was unable to obtain financing elsewhere. Of the $730
million of mortgage loans scheduled to mature during the first
three months of 1994, $633 million were not paid as scheduled,
a substantial portion of which supported large case pension
liabilities. Of the loans not paid as scheduled, $48 million
were extended at interest rates at least equal to current
market (average rate of 8% over an average extension period of
4 years), $218 million were under forbearance (continuing to
make payments under original loan terms) and $367 million were
under discussion with borrowers at March 31, 1994. Of the $367
million of loans under discussion with borrowers, $177 million
were classified as problem or restructured loans at March 31,
1994. Absent significant improvement in commercial real estate
markets or in the availability of refinancing by other
financial institutions, there will continue to be a similar
need to extend or refinance maturing loans.
Please refer to "Financial Services" on pages 22 through 24 for
a discussion of the liquidity requirements specific to the
large case pension business.
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
___________________________________________
On March 25, 1994, the company filed a shelf registration
statement with the Securities and Exchange Commission ("the
Commission") for the registration of $500 million of preferred
securities to be issued by a finance subsidiary and guaranteed
by the company. If and when the registration statement is
declared effective by the Commission, these securities may be
offered from time to time pursuant to the Commission's shelf
registration rules. Except as may otherwise be noted in any
offering documents related to such securities, the proceeds
from any sale of these securities would be loaned from the
subsidiary to the company and used for general corporate
purposes.
Pursuant to shelf registration statements declared effective by
the Commission during 1993, the company may offer and sell up
to an additional $550 million of securities.
Dividends Declared
On February 25, 1994, the Board of Directors declared a
quarterly dividend of $.69 per share of common capital stock
for shareholders of record at the close of business on April
29, 1994, payable May 15, 1994.
<PAGE> 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In Re: Attorneys General Antitrust Litigation
______________________________________________
The description of this litigation is contained in Note 12 of Notes
to Financial Statements on page 14.
Other Litigation
________________
Aetna is continuously involved in numerous other lawsuits arising,
for the most part, in the ordinary course of its business operations
either as a liability insurer defending third-party claims brought
against its insureds or as an insurer defending coverage claims
brought against itself, including lawsuits related to issues of
policy coverage and judicial interpretation.
One such area of coverage litigation involves legal liability for
asbestos and environmental-related claims. These lawsuits and other
factors make reserving for asbestos and environmental-related claims
subject to significant uncertainties.
While the ultimate outcome of the litigation described herein cannot
be determined at this time, management does not believe it likely
that such litigation, net of reserves established therefor and giving
effect to reinsurance, will result in judgments for amounts material
to the financial condition of the company, although it may affect
results of operations in future periods. Litigation related to
asbestos and environmental claims is subject to significant
uncertainties; therefore management is unable to determine whether
the effects on operations in future periods will be material.
Item 5. Other Information.
a. NAIC IRIS Ratios
The NAIC "IRIS" ratios cover 12 categories of financial data
with defined acceptable ranges for each category. The ratios
are intended to provide insurance regulators "early warnings"
as to when a given company might warrant special attention. An
insurance company may fall out of the acceptable range for one
or more ratios and such variances may result from specific
transactions that are in themselves immaterial or eliminated at
the consolidated level. Two of Aetna Life and Casualty
Company's significant subsidiaries had more than two IRIS
ratios outside of NAIC acceptable ranges for 1993.
Aetna Life Insurance Company ("ALIC") fell outside acceptable
ranges for 1993 for : (i) the Net Change in Capital and Surplus
Ratio which is calculated by dividing the change in capital and
surplus between the prior and the current year (net of any
capital and surplus paid in) by the prior year capital and
surplus; (ii) the Gross Change in Capital and Surplus Ratio
which is calculated by dividing the change in capital and
surplus between the prior and the current year by the prior
year capital and surplus; (iii) the Adequacy of Investment
Income Ratio which compares investment income to credited
interest; and (iv) the Real Estate and Mortgage Loans to Cash
and Invested Assets Ratio which is calculated by dividing real
estate and mortgage loans by cash and invested assets.
<PAGE> 39
Item 5. Other Information (Continued)
a. NAIC IRIS Ratios (Continued)
The Aetna Casualty and Surety Company ("AC&S") fell outside of
acceptable ranges for 1993 for: (i) the Two-year Overall
Operating Ratio, which is a combination of a two-year combined
ratio minus a two-year investment income ratio; (ii) the Change
in Surplus which measures the increase or decrease in surplus
levels during the year; (iii) the Ratio of Liabilities to
Liquid Assets which measures the liquidity of a company; and
(iv) the Two-year Reserve Development to Surplus Ratio. The
two-year reserve development is the sum of the current reserve
for losses incurred more than two years prior plus payments on
those losses during the past two years minus the reserve that
had been established for those losses two years earlier. This
amount is divided by the surplus that existed two years prior
to arrive at the Two-year Reserve Development to Surplus Ratio.
Management does not believe that ALIC or AC&S will warrant
special attention by the regulators. Management also does not
believe that the factors causing the ratios to fall outside of
the acceptable ranges will have a significant impact on future
operations of the Company.
b. Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth Aetna's ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and preferred
stock dividends for the periods indicated.
<TABLE>
<CAPTION>
3 Months Ended Years ended December 31
____________________________________
March 31, 1994 1993 1992 1991 1990 1989
______________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.... 2.16 (a) .42(b) 2.13 3.03 4.13
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 2.16 (a) .42(b) 2.13 3.03 4.05
<FN>
(a) Aetna reported a pretax loss from continuing operations in 1993 which was
inadequate to cover fixed charges by $1.1 billion.
(b) Earnings were inadequate to cover fixed charges by $112.8 million in 1992.
</TABLE>
For purposes of computing both the ratio of earnings to fixed charges
and the ratio of earnings to combined fixed charges and preferred
stock dividends, "earnings" represent consolidated earnings from
continuing operations before income taxes, cumulative effect
adjustments and extraordinary items plus fixed charges and minority
interest. "Fixed charges" consist of interest (and the portion of
rental expense deemed representative of the interest factor).
Preferred stock dividends, which are not deductible for income tax
purposes, have been increased to a taxable equivalent basis. This
adjustment has been calculated by using the effective tax rate of the
applicable year. All shares of Aetna's preferred stock were redeemed
in 1989 and, as a result, for the three months ended March 31, 1994
and for the years ended December 31, 1993, 1992, 1991 and 1990 the
ratios of earnings to combined fixed charges and preferred stock
dividends were the same as the ratios of earnings to fixed charges.
<PAGE> 40
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(12) Statement Re Computation of Ratios.
(12.1) Computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and
preferred stock dividends for the three months ended
March 31, 1994 and for the years ended December 31,
1993, 1992, 1991, 1990 and 1989.
(15) Letter Re Unaudited Interim Financial Information.
(15.1) Letter from KPMG Peat Marwick acknowledging
awareness of the use of a report on unaudited
interim financial information, dated
May 13,1994.
(b) Reports on Form 8-K
None.
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Aetna Life and Casualty Company
_______________________________
(Registrant)
Date May 13, 1994 By Robert E. Broatch
_________________________________
(Signature)
Robert E. Broatch
Senior Vice President, Finance
and Corporate Controller
<PAGE> 1
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
3 Months Ended
(Millions) March 31, 1994 1993 1992 1991 1990 1989
______________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 56.4 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 $ 663.8
Add back fixed charges............ 49.4 171.0 194.3 221.5 229.0 211.6
Minority interest................ .9 7.0 8.6 5.9 4.9 (1.9)
________ _________ ________ ________ ________ ________
Income (loss) as adjusted..... $ 106.7 (969.4) $ 81.5 $ 470.9 $ 693.5 $ 873.5
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Fixed charges:
Interest on indebtedness....... $ 23.3 77.4 $ 81.4 $ 110.9 $ 119.9 $ 113.2
Portion of rents representative
of interest factor............ 26.1 93.6 112.9 110.6 109.1 98.4
________ _________ ________ ________ ________ ________
Total fixed charges........... $ 49.4 171.0 194.3 221.5 229.0 211.6
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Preferred stock dividend
requirements.................... - - - - - $ 3.9
________ _________ ________ ________ ________ ________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 49.4 171.0 $ 194.3 $ 221.5 $ 229.0 $ 215.5
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Ratio of earnings to fixed
charges......................... 2.16 (5.67) 0.42 2.13 3.03 4.13
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 2.16 (5.67) 0.42 2.13 3.03 4.05
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
</TABLE>
<PAGE> 1
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Life and Casualty Company
Hartford, Connecticut
Gentlemen:
Re: Registration Statements No. 2-73911, 2-91514, 33-12993,
33-49543, 33-50427, 33-52819 and 33-52819-01
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
April 28, 1994 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11
of the Act.
By KPMG PEAT MARWICK
_________________________
(Signature)
KPMG Peat Marwick
Hartford, Connecticut
May 13, 1994
