<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 September 30, 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 _____
_____
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 September 30, 1994
________________ _____________________
Common Capital Stock 112,641,905
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 Auditors' Review Report 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 51
Item 5. Other Information. 52
Item 6. Exhibits and Reports on Form 8-K. 53
Signatures 54
<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 9 Months Ended
September 30 September 30
____________________________ ____________________________
(Millions, except share data) 1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenue:
Premiums................................. $ 2,858.7 $ 2,699.3 $ 8,440.0 $ 8,010.4
Net investment income.................... 1,111.2 1,212.9 3,358.7 3,715.4
Fees and other income.................... 446.9 375.4 1,356.0 1,198.8
Net realized capital gains (losses)...... (31.7) 40.5 (51.0) 73.3
___________ ___________ ___________ ___________
Total revenue........................ 4,385.1 4,328.1 13,103.7 12,997.9
___________ ___________ ___________ ___________
Benefits and expenses:
Current and future benefits.............. 3,136.9 2,956.6 9,369.0 9,090.4
Operating expenses....................... 870.4 892.8 2,749.8 2,708.4
Amortization of deferred policy
acquisition costs....................... 199.9 193.5 562.4 571.5
___________ ___________ ___________ ___________
Total benefits and expenses.......... 4,207.2 4,042.9 12,681.2 12,370.3
___________ ___________ ___________ ___________
Income from continuing operations before
income taxes, extraordinary item and
cumulative effect adjustments............. 177.9 285.2 422.5 627.6
Federal and foreign income taxes (benefits):
Current.................................. (27.6) 74.9 (53.2) 161.8
Deferred................................. 76.1 (15.3) 168.2 (49.9)
___________ ___________ ___________ ___________
Total federal and foreign
income taxes........................ 48.5 59.6 115.0 111.9
___________ ___________ ___________ ___________
Income from continuing operations before
extraordinary item and cumulative effect
adjustments............................... 129.4 225.6 307.5 515.7
Discontinued operations, net of tax........ - - - 27.0
___________ ___________ ___________ ___________
Income before extraordinary item
and cumulative effect adjustments... 129.4 225.6 307.5 542.7
Extraordinary loss on debenture redemption,
net of tax................................ - - - (4.7)
Cumulative effect adjustments, net of tax.. - - - 227.8
___________ ___________ ___________ ___________
Net income........................... $ 129.4 $ 225.6 $ 307.5 $ 765.8
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
Results per common share:
Income from continuing operations before
extraordinary item and cumulative
effect adjustments...................... $ 1.15 $ 2.03 $ 2.73 $ 4.65
Discontinued operations, net of tax...... - - - .25
___________ ___________ ___________ ___________
Income before extraordinary item
and cumulative effect adjustments... 1.15 2.03 2.73 4.90
Extraordinary loss on debenture
redemption, net of tax.................. - - - (.04)
Cumulative effect adjustments, net of tax - - - 2.06
___________ ___________ ___________ ___________
Net income........................... $ 1.15 $ 2.03 $ 2.73 $ 6.92
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
Dividends declared....................... $ .69 $ .69 $ 2.07 $ 2.07
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
Weighted average common shares outstanding. 112,854,480 111,345,929 112,899,393 110,720,400
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Millions) 1994 1993
_____________ ____________
<S> <C> <C>
Assets:
Investments:
Debt securities:
Held for investment, at amortized
cost (fair value $2,090.6 and
$2,704.2)....................... $ 2,059.3 $ 2,557.8
Available for sale, at fair value
(amortized cost $37,063.2 and
$36,933.6)...................... 35,723.0 38,868.9
Trading securities, at fair value
(1993 amortized cost $119.0)..... - 117.8
Equity securities, at fair value
(cost $1,319.3 and $1,238.1)....... 1,688.6 1,658.9
Short-term investments.............. 599.4 669.9
Mortgage loans...................... 12,716.0 14,839.2
Real estate......................... 1,390.6 1,315.8
Policy loans........................ 517.3 490.7
Other............................... 1,089.8 936.8
__________ __________
Total investments............... 55,784.0 61,455.8
Cash and cash equivalents............. 2,664.9 1,557.8
Reinsurance recoverables and
receivables.......................... 4,953.5 4,840.7
Accrued investment income............. 735.5 782.6
Premiums due and other receivables.... 1,872.1 1,664.9
Federal and foreign income taxes:
Current............................. 66.3 124.0
Deferred............................ 1,350.8 1,282.9
Deferred policy acquisition costs..... 1,963.1 1,867.0
Other assets.......................... 2,188.7 1,756.3
Separate Accounts assets.............. 23,827.9 24,704.7
__________ __________
Total assets.................... $ 95,406.8 $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>
September 30, December 31,
(Millions, except share data) 1994 1993
_____________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits.................. $ 17,820.0 $ 17,597.6
Unpaid claims and claim expenses........ 17,541.1 17,112.2
Unearned premiums....................... 1,613.5 1,502.2
Policyholders' funds left with the
company................................ 24,399.5 27,592.2
__________ __________
Total insurance reserve liabilities. 61,374.1 63,804.2
Dividends payable to shareholders....... 77.7 77.4
Short-term debt......................... 147.1 35.7
Long-term debt.......................... 1,132.3 1,160.0
Other liabilities....................... 2,941.3 3,162.1
Minority and participating
policyholders' interests............... 168.0 172.5
Separate Accounts liabilities........... 23,708.6 24,581.7
__________ __________
Total liabilities................... 89,549.1 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 112,641,905
and 112,200,567 outstanding)........... 1,417.5 1,422.0
Net unrealized capital gains (losses)... (632.1) 648.2
Retained earnings....................... 5,177.5 5,103.3
Treasury stock, at cost (2,297,370 and
2,738,708 shares)...................... (105.2) (130.4)
__________ __________
Total shareholders' equity.......... 5,857.7 7,043.1
__________ __________
Total liabilities and
shareholders' equity............... $ 95,406.8 $100,036.7
__________ __________
__________ __________
Shareholders' equity per common share... $ 52.00 $ 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
Nine Months Ended September 30, 1994 Total Stock Gains (Losses) 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............................ 307.5 307.5
Net change in unrealized capital gains
and losses.......................... (1,280.3) (1,280.3)
Common stock issued for benefit plans
(441,338 shares).................... 25.2 25.2
Loss on issuance of treasury stock.... (4.5) (4.5)
Common stock dividends declared....... (233.3) (233.3)
_____________________________________________________________________
Balances at September 30, 1994 $5,857.7 $1,417.5 $ (632.1) $5,177.5 $ (105.2)
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
Nine Months Ended September 30, 1993
___________________________________________________________________________________________________________
Balances at December 31, 1992 $7,238.3 $1,417.7 $ 259.6 $5,777.9 $ (216.9)
___________________________________________________________________________________________________________
Net income............................ 765.8 765.8
Net change in unrealized capital gains
and losses.......................... 389.2 389.2
Common stock issued for benefit plans
(1,365,950 shares).................. 59.2 59.2
Loss on issuance of treasury stock.... (.5) (.5)
Common stock dividends declared....... (230.6) (230.6)
_____________________________________________________________________
Balances at September 30, 1993 $8,221.4 $1,417.2 $ 648.8 $6,313.1 $ (157.7)
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
9 Months Ended
September 30,
___________________
(Millions) 1994 1993
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 307.5 $ 765.8
Adjustments to reconcile net income to net
cash used for operating activities:
Cumulative effect adjustments.................................. - (227.8)
Extraordinary loss on debenture redemption..................... - 4.7
Decrease (increase) in accrued investment income............... 42.4 (66.0)
Increase in premiums due and other receivables................. (190.4) (556.1)
Increase in reinsurance recoverables and receivables........... (94.4) (15.4)
Increase in deferred policy acquisition costs.................. (132.9) (102.7)
Depreciation and amortization.................................. 142.9 152.0
(Decrease) increase in federal and foreign income taxes........ (7.2) 233.0
Net (decrease) increase in other assets and other liabilities.. (558.5) 124.8
Increase in insurance reserve liabilities...................... 465.9 553.8
Net sales (purchases) of debt trading securities............... 52.3 (2,165.4)
Increase in minority interest.................................. (18.6) (2.8)
Gain on sale of subsidiary..................................... - (15.0)
Net realized capital losses (gains)............................ 51.0 (73.3)
Amortization of net investment discount........................ (66.3) (108.1)
Other, net..................................................... (1.3) (140.7)
_________ __________
Net cash used for operating activities....................... (7.6) (1,639.2)
_________ _________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 16,659.5 3,862.0
Debt securities held for investment............................ 5.6 -
Equity securities.............................................. 496.7 655.1
Mortgage loans................................................. 123.2 205.7
Real estate.................................................... 449.7 234.8
Short-term investments......................................... 45,409.7 49,966.3
Investment repayments of:
Debt securities available for sale............................. 2,804.6 4,268.9
Debt securities held for investment............................ 498.2 -
Mortgage loans................................................. 1,662.6 1,711.3
Cost of investments in:
Debt securities available for sale............................. (19,657.4) (10,334.3)
Debt securities held for investment............................ (5.3) -
Equity securities.............................................. (595.4) (550.8)
Mortgage loans................................................. (211.9) (164.4)
Real estate.................................................... (31.4) (64.5)
Short-term investments......................................... (45,386.9) (49,144.6)
Proceeds from disposal of subsidiary.............................. - 93.1
Increase in property, plant & equipment........................... (97.2) (104.2)
Net decrease in Separate Accounts................................. 3.7 1.8
Other, net........................................................ (189.1) 146.8
_________ _________
Net cash provided by investing activities....................... 1,938.9 783.0
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 2,526.3 2,953.4
Withdrawals of investment contracts............................... (3,220.9) (3,136.8)
Issuance of long-term debt........................................ 66.5 665.7
Stock issued under benefit plans.................................. 20.7 58.7
Repayment of long-term debt....................................... (91.9) (456.7)
Net increase in short-term debt................................... 110.4 20.6
Dividends paid to shareholders.................................... (233.3) (229.8)
_________ _________
Net cash used for financing activities.......................... (822.2) (124.9)
_________ _________
Effect of exchange rate changes on cash and cash
equivalents....................................................... (2.0) (14.3)
_________ _________
Net increase (decrease) in cash and cash equivalents................. 1,107.1 (995.4)
Cash and cash equivalents, beginning of period....................... 1,557.8 2,415.0
_________ _________
Cash and cash equivalents, end of period............................. $ 2,664.9 $ 1,419.6
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 81.4 $ 62.9
_________ _________
_________ _________
Income taxes received (paid)...................................... $ 117.4 $ (69.7)
_________ _________
_________ _________
<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) Revenue Recognition
Property-casualty premiums are generally recognized as revenue on
a pro rata basis over the policy term. Certain policies allow the
company to charge additional premiums as a result of recognizing
additional claim and expense costs under the policies. Such
premiums are recognized when the related losses are provided.
For universal life and certain annuity contracts, charges assessed
against policyholders' funds for the cost of insurance, surrender
charges, actuarial margin and other fees are recorded as revenue
in fees and other income. Other amounts received for these
contracts are reflected as deposits and are not recorded as
revenue. Life insurance premiums, other than premiums for
universal life and certain annuity contracts, are recorded as
premium revenue when due. Related policy benefits are recorded in
relation to the associated premiums or gross profit so that
profits are recognized over the expected lives of the contracts.
Group Health and Life premiums are generally recorded as premium
revenue over the term of coverage. Some group contracts allow for
premiums to be adjusted to reflect emerging experience. Such
premiums are recognized as the related experience emerges. Fees
for contracts providing claim processing services only are
recorded over the period the service is provided and are reflected
in fees and other income.
(3) 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 attributable to FASB
Interpretation No. 39 of $377 million are included in other assets
at September 30, 1994.
<PAGE> 9
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Accounting Changes (Continued)
In 1993, the company adopted, retroactive to January 1, 1993,
Financial Accounting Standard ("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 nine months ended September 30, 1993.
Adoption of FAS No. 112 had no impact on income from continuing
operations before extraordinary item and cumulative effect
adjustments for the three and nine months ended September 30,
1993.
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 and morbidity
assumptions that reflect current company and industry experience.
Management believes that this change better 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). Additionally, it is consistent with the practice of
the company's principal competitors and is permitted by state
regulatory authorities. 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
nine months ended September 30, 1993. The change in accounting
for workers' compensation life table indemnity reserves had no
impact on income from continuing operations before extraordinary
item and cumulative effect adjustments for the three and nine
months ended September 30, 1993. The company's reserves for
workers' compensation life table indemnity claims at September 30,
1994 were 22.5% 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 nine
months ended September 30, 1993. The effect of the change for the
nine months ended September 30, 1993 was an increase to income
from continuing operations before extraordinary item and
cumulative effect adjustments of $3.3 million ($.03 per share).
<PAGE> 10
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) 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. In October
1994, the FASB issued FAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures, which
amends FAS No. 114 to allow a creditor to use existing methods for
recognizing income on impaired loans. Both statements 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 these statements.
In October 1994, the FASB issued FAS No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments. This statement requires disclosure of amounts,
nature and terms of derivative financial instruments that are not
subject to existing accounting standards. This statement is
effective for 1994 financial statements.
(5) 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 this decision, the
company established a reserve of $1,270 million at December 31,
1993, for anticipated future losses on these products. Losses on
discontinued products for the three and nine months ended
September 30, 1994 were charged to the reserve and did not affect
the company's results of operations.
<PAGE> 11
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Discontinued Products (Continued)
Results of discontinued products included in the Consolidated
Statement of Income were as follows (in millions):
<TABLE>
<CAPTION>
Charged to
Guaranteed Single- Reserve for
Investment Premium Future
Three months ended September 30, 1994 Contracts Annuities Total Losses Net*
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Premiums $ - $ 2.5 $ 2.5 $ - $ 2.5
Net investment income 155.9 107.7 263.6 - 263.6
Net realized capital losses (73.7) (19.5) (93.2) 93.2 -
Interest earned on receivable
from continuing business 4.8 7.1 11.9 - 11.9
Other income 2.8 6.0 8.8 - 8.8
__________________________________________________________________
Total revenue 89.8 103.8 193.6 93.2 286.8
__________________________________________________________________
Current and future benefits 190.0 110.3 300.3 (17.2) 283.1
Operating expenses 2.9 0.8 3.7 - 3.7
__________________________________________________________________
Total benefits and expenses 192.9 111.1 304.0 (17.2) 286.8
__________________________________________________________________
Results of discontinued products $ (103.1) $ (7.3) $ (110.4) $ 110.4 $ -
__________________________________________________________________
__________________________________________________________________________________________________________
Charged to
Guaranteed Single- Reserve for
Investment Premium Future
Nine months ended September 30, 1994 Contracts Annuities Total Losses Net*
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Premiums $ - $ 47.2 $ 47.2 $ - $ 47.2
Net investment income 483.4 323.5 806.9 - 806.9
Net realized capital losses (130.8) (45.9) (176.7) 176.7 -
Interest earned on receivable
from continuing business 14.4 20.9 35.3 - 35.3
Other income 9.3 12.4 21.7 - 21.7
__________________________________________________________________
Total revenue 376.3 358.1 734.4 176.7 911.1
__________________________________________________________________
Current and future benefits 582.7 374.2 956.9 (53.6) 903.3
Operating expenses 5.1 2.7 7.8 - 7.8
__________________________________________________________________
Total benefits and expenses 587.8 376.9 964.7 (53.6) 911.1
__________________________________________________________________
Results of discontinued products $ (211.5) $ (18.8) $ (230.3) $ 230.3 $ -
__________________________________________________________________
__________________________________________________________________________________________________________
<FN>
* Amounts are reflected in the Consolidated Statement of Income, except for interest of $11.9 million
and $35.3 million for the three and nine months ended September 30, 1994, respectively, earned on the
receivable from continuing business which is eliminated in consolidation.
</TABLE>
Deposits of $30.9 million and $199.4 million were received under
pre-existing GIC contracts for the three and nine months ended
September 30, 1994, respectively. In accordance with FAS No. 97,
such deposits are not included in premiums or revenue.
<PAGE> 12
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Discontinued Products (Continued)
Assets and liabilities of discontinued products included in the
Consolidated Balance Sheets were as follows (in millions):
<TABLE>
<CAPTION>
September 30, 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 $ 3,806.5 $ 3,244.6 $ 7,051.1 $ 4,690.9 $ 3,578.1 $ 8,269.0
Mortgage loans 2,909.8 1,635.4 4,545.2 3,468.2 1,950.9 5,419.1
Real estate 555.2 108.2 663.4 534.5 - 534.5
Short-term and other investments 635.3 114.3 749.6 399.7 72.8 472.5
______________________________________________________________________
Total investments 7,906.8 5,102.5 13,009.3 9,093.3 5,601.8 14,695.1
Current and deferred income taxes 272.1 138.0 410.1 253.7 26.2 279.9
Receivable from continuing
business 404.4 455.9 860.3 390.0 435.0 825.0
Other 23.1 23.9 47.0 7.6 1.3 8.9
______________________________________________________________________
Total assets $ 8,606.4 $ 5,720.3 $14,326.7 $ 9,744.6 $ 6,064.3 $15,808.9
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
Future policy benefits $ - $ 5,052.0 $ 5,052.0 $ - $ 5,079.1 $ 5,079.1
Policyholders' funds left with
the company 8,110.8 - 8,110.8 8,976.6 - 8,976.6
Reserve for future losses on
discontinued products 388.5 651.2 1,039.7 600.0 670.0 1,270.0
Other 107.1 17.1 124.2 168.0 315.2 483.2
______________________________________________________________________
Total liabilities $ 8,606.4 $ 5,720.3 $14,326.7 $ 9,744.6 $ 6,064.3 $15,808.9
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
</TABLE>
Net unrealized capital gains and losses 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 on the Consolidated Balance Sheets.
The reserve for anticipated 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, future investment results, 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> 13
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Discontinued Products (Continued)
At September 30, 1994 and December 31, 1993, estimated future
after-tax capital losses of approximately $131 million and $190
million ($201 million and $292 million, pretax), respectively,
attributable to mortgage loans and real estate supporting GICs,
and $51 million and $70 million ($79 million and $108 million,
pretax), respectively, attributable to mortgage loans and real
estate supporting SPAs were expected to be charged to the reserve
for future losses. Included in the $130.8 million and $45.9
million of net realized capital losses (pretax) on GICs and SPAs,
respectively, for the nine months ended September 30, 1994, are
losses from the sales of bonds of $40 million and $17 million,
respectively. As a result of selling bonds and realizing losses,
the anticipated future losses associated with negative interest
margins is expected to be reduced in the future. Projections of
future investment results took into account both industry and
company data and were based on recent performance of mortgage loan
and real estate assets, projections regarding certain levels of
future defaults and prepayments, and assumptions regarding future
real estate market conditions, which assumptions management
believes are reasonable. Management continues to believe that the
reserve for anticipated future losses will be adequate to provide
for the future losses associated with the run-off of the
liabilities.
The activity in the reserve for anticipated future losses on
discontinued products for the nine months ended September 30, 1994
was as follows (in millions):
<TABLE>
<CAPTION>
Guaranteed Single-
Investment Premium
Contracts Annuities Total
_____________________________________________________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1993 $ 600.0 $ 670.0 $ 1,270.0
Loss on discontinued products (211.5) (18.8) (230.3)
______________________________________________
Reserve at September 30, 1994 $ 388.5 $ 651.2 $ 1,039.7
______________________________________________
_____________________________________________________________________________________
</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.
<PAGE> 14
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Discontinued Products (Continued)
Receivables of $860.3 million and $825.0 million to fund 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 September 30, 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 nine months ended September 30,
1994 was as follows (in millions):
<TABLE>
<CAPTION>
Guaranteed Single-
Investment Premium
Contracts Annuities Total
_____________________________________________________________________________________
<S> <C> <C> <C>
Receivable at December 31, 1993 $ 390.0 $ 435.0 $ 825.0
Interest earned 14.4 20.9 35.3
______________________________________________
Receivable at September 30, 1994 $ 404.4 $ 455.9 $ 860.3
______________________________________________
_____________________________________________________________________________________
</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> 15
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Severance and Facilities Charges
During the three and nine months ended September 30, 1994, the
company charged costs of $80 million and $131 million,
respectively, to the severance and facilities reserve established
in 1993 related to its cost reduction actions. Of the
approximately 4,000 positions expected to be eliminated,
approximately 2,600 had been eliminated by September 30, 1994 and
the related severance benefits charged against the reserve. The
remaining headcount reductions are expected to be completed by the
first half of 1995. The annual after-tax savings of approximately
$200 million related to these and other cost reduction actions are
expected by 1995. The total estimated savings of approximately
$200 million are expected to benefit individual segments by 1995
as follows:
<TABLE>
<CAPTION>
<S> <C>
Health and Life Insurance and Services................ $ 80
Financial Services.................................... 5
Commercial Property-Casualty Insurance and Services... 90
Personal Property-Casualty............................ 25
International......................................... -
_____
Total estimated savings............................... $ 200
_____
_____
</TABLE>
(7) Investments
Net investment income includes amounts allocable to experience
rated contractholders of $186.2 million and $228.9 million for the
three months ended September 30, 1994 and 1993, respectively, and
$574.3 million and $707.5 million for the nine months ended
September 30, 1994 and 1993, respectively. Interest credited to
contractholders is included in current and future benefits.
Net realized capital gains and losses include losses of $26.1
million and $43.3 million for the three months ended September 30,
1994 and 1993, respectively, and losses of $136.2 million and
$71.1 million for the nine months ended September 30, 1994 and
1993, respectively, allocable to experience rated contractholders.
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 policyholders' funds left
with the company.
During the nine months ended September 30, 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.
<PAGE> 16
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(8) Federal and Foreign Income Taxes
Net unrealized capital gains and losses are presented in
shareholders' equity net of deferred taxes. At September 30,
1994, $431 million of net unrealized capital losses on available
for sale debt and equity securities were reflected in
shareholders' equity without deferred tax benefits. For federal
tax reporting purposes, capital losses are deductible only against
capital gains in the period of sale or during the carryback and
carryforward periods (three and five years, respectively). Due to
the expected full utilization of capital gains in the carryback
period and the uncertainty of future capital gains, deferred tax
benefits related to the $431 million of net unrealized losses were
not reflected in shareholders' equity. This had no impact on net
income for the three and nine months ended September 30, 1994.
In August 1993, the Omnibus Budget Reconciliation Act of 1993
(OBRA) was enacted which resulted in an increase in the federal
corporate tax rate from 34% to 35%, retroactive to January 1,
1993. Federal income tax expense for the three and nine months
ended September 30, 1993, included a deferred tax benefit of $27.4
million, offset by an increase in current taxes of $5.6 million,
resulting from the enactment of OBRA.
(9) Reinsurance
Ceded earned premiums were $.3 billion and $.2 billion for the
three months ended September 30, 1994 and 1993, respectively and
$.9 billion and $.8 billion for the nine months ended September
30, 1994 and 1993, respectively. Ceded current and future
benefits were $.2 billion and $.1 billion for the three months
ended September 30, 1994 and 1993, respectively, and $.9 billion
for both the nine months ended September 30, 1994 and 1993.
(10) Debt
Effective July 27, 1994, the company entered into new credit
facilities aggregating $1 billion with a group of worldwide banks.
One $500 million facility terminates in July 1995 and the other
$500 million facility terminates in July 1999. Various interest
rate options are available under each facility and any borrowings
mature on the expiration date of the applicable credit commitment.
The company pays facility fees ranging from .08% to .375% per
annum under the short-term credit agreement and from .1% to .5%
per annum under the medium-term credit agreement, depending upon
the company's long-term senior unsecured debt rating. The
commitments require the company to maintain shareholders' equity,
excluding net unrealized capital gains and losses, of at least
$5.0 billion. These facilities also support the company's
commercial paper borrowing program.
On June 15, 1993, the company redeemed $200 million principal
amount of its 8 1/8% Debentures whose scheduled maturity was 2007.
The company recognized an extraordinary loss on the debenture
redemption of $4.7 million (after taxes of $2.4 million).
<PAGE> 17
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Debt (Continued)
During the third quarter of 1993, the company issued $200 million
of 6 3/8% Notes due in 2003, $200 million of 6 3/4% Debentures due
in 2013 and $200 million of 7 1/4% Debentures due in 2023. The
proceeds were primarily used to repay commercial paper borrowings,
a significant portion of which was incurred in connection with the
retirement of debt discussed above. The remaining proceeds were
used for general corporate purposes. A total of $550 million of
securities remains available for sale under two effective shelf
registration statements.
Pursuant to a shelf registration statement declared effective by
the Securities and Exchange Commission ("the Commission") a
finance subsidiary may offer and sell up to $500 million of
preferred securities, guaranteed by the company. The proceeds
from any sale of these securities would be loaned from the
subsidiary to the company and, except as may otherwise be noted in
any offering documents related to such securities, used for
general corporate purposes.
(11) Sale of Subsidiaries
On June 30, 1993, the company completed the sale of its U.K. life
and investment management operations. The company realized an
after-tax loss of $12.0 million on the sale as well as $37.4
million of tax benefits from cumulative operating losses of the
subsidiary not previously tax benefited.
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.
(12) Supplemental Cash Flow Information
Significant non-cash investing and financing activities include
acquisition of real estate through foreclosures of mortgage loans
amounting to $462 million and $254 million for the nine months
ended September 30, 1994 and 1993, respectively.
(13) Earnings Per Share
Earnings per share are computed using net income divided by the
weighted average number of common shares outstanding, including
common share equivalents. There is not a significant difference
between primary and fully diluted earnings per share.
<PAGE> 18
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(14) 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
as such is unable to determine whether or not 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-related 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. Asbestos and
environmental-related loss and loss adjustment expense reserves,
as reflected on the Consolidated Balance Sheets, were as follows
(pretax and before reinsurance; in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
______________________________________________________________________
<S> <C> <C>
Environmental Liability $ 409 $ 234
Asbestos Bodily Injury 278 248
Asbestos Property Damage 29 29
_______________________________
Total Asbestos and
Environmental-Related Reserves $ 716 $ 511
_______________________________
______________________________________________________________________
</TABLE>
Commercial General Liability
The company has noted evidence of adverse loss developments in its
commercial general liability line of business. The company
believes that such developments largely are attributable to the
unusual frequency and size of claims in this line of business.
The company also believes that the unusual frequency and size of
construction defect claims brought against contractor
policyholders (observed by the company in 1994) and the increasing
size of other types of claims brought against contractor
policyholders (observed by the company to be continuing in 1994)
are contributing to these loss developments. While the company
believes that it is reasonably possible that these adverse loss
developments will continue, the company did not note additional
evidence of such adverse loss development in the third quarter.
If these adverse loss developments continue, they would adversely
affect the company's future results of operations, although the
company is unable at this time to estimate the extent to which
results would be affected. Management has and continues to review
the factors contributing to these developments (by, for example,
segregating and examining data on a policyholder by policyholder
basis) and to adjust its reserves as more current data becomes
available.
<PAGE> 19
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(15) 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 alleged 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 sought unspecified treble damages and broad injunctive
relief.
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.
<PAGE> 20
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(15) Litigation (Continued)
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.
On October 5, 1994, all of the plaintiffs signed a letter
evidencing a settlement in principle of the litigation with all
the defendants, including Aetna. The agreement provides that the
defendants will pay plaintiffs an aggregate of $36 million plus
the costs of class notice (currently estimated at $2 million).
Aetna's share of the settlement is not material. The settlement
is subject to court approval and notice to the class members.
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, such litigation (other than
that related to asbestos and environmental-related claims, which
is subject to significant uncertainties), net of reserves
established therefor and giving effect to reinsurance, is not
expected to result in judgments for amounts material to the
financial condition of the company, although it may adversely
affect results of operations in future periods. Future results
are expected to be adversely affected by losses for asbestos and
environmental-related claims and litigation expense. Due to
significant uncertainties, management is unable to determine
whether or not such effects on operations in future periods will
be material.
<PAGE> 21
Independent Auditors' 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
September 30, 1994, and the related condensed consolidated
statements of income for the three-month and nine-month periods
ended September 30, 1994 and 1993, and the related condensed
consolidated statements of shareholders' equity and cash flows for
the nine-month periods ended September 30, 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 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.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
October 26, 1994
<PAGE> 22
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) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 2,858.7 $ 2,699.3 5.9% $ 8,440.0 $ 8,010.4 5.4%
Net investment income................ 1,111.2 1,212.9 (8.4) 3,358.7 3,715.4 (9.6)
Fees and other income................ 446.9 375.4 19.0 1,356.0 1,198.8 13.1
Net realized capital gains (losses).. (31.7) 40.5 - (51.0) 73.3 -
_________ _________ _________ _________
Total revenue.................... 4,385.1 4,328.1 1.3 13,103.7 12,997.9 .8
Current and future benefits.......... 3,136.9 2,956.6 6.1 9,369.0 9,090.4 3.1
Operating expenses................... 870.4 892.8 (2.5) 2,749.8 2,708.4 1.5
Amortization of deferred policy
acquisition costs................... 199.9 193.5 3.3 562.4 571.5 (1.6)
_________ _________ _________ _________
Total benefits and expenses...... 4,207.2 4,042.9 4.1 12,681.2 12,370.3 2.5
_________ _________ _________ _________
Income from continuing operations
before income taxes, extraordinary
item and cumulative effect
adjustments......................... 177.9 285.2 (37.6) 422.5 627.6 (32.7)
Income taxes......................... 48.5 59.6 (18.6) 115.0 111.9 2.8
_________ _________ _________ _________
Income from continuing operations
before extraordinary item and
cumulative effect adjustments....... 129.4 225.6 (42.6) 307.5 515.7 (40.4)
Discontinued operations, net of tax.. - - - - 27.0 (100.0)
_________ _________ _________ _________
Income before extraordinary item and
cumulative effect adjustments....... 129.4 225.6 (42.6) 307.5 542.7 (43.3)
Extraordinary loss on debenture
redemption, net of tax.............. - - - - (4.7) 100.0
Cumulative effect adjustments,
net of tax.......................... - - - - 227.8 (100.0)
_________ _________ _________ _________
Net income....................... $ 129.4 $ 225.6 (42.6) $ 307.5 $ 765.8 (59.8)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (20.2) $ 29.1 - $ (35.7) $ 48.9 -
_________ _________ _________ _________
_________ _________ _________ _________
Results per common share:
Income from continuing operations
before extraordinary item and
cumulative effect adjustments....... $ 1.15 $ 2.03 (43.3) $ 2.73 $ 4.65 (41.3)
Discontinued operations, net of tax.. - - - - .25 (100.0)
_________ _________ _________ _________
Income before extraordinary item and
cumulative effect adjustments....... 1.15 2.03 (43.3) 2.73 4.90 (44.3)
Extraordinary loss on debenture
redemption, net of tax.............. - - - - (.04) 100.0
Cumulative effect adjustments,
net of tax.......................... - - - - 2.06 (100.0)
_________ _________ _________ _________
Net income....................... $ 1.15 $ 2.03 (43.3) $ 2.73 $ 6.92 (60.5)
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
Overview
________
Net income was $129 million and $308 million for the three and
nine months ended September 30, 1994, respectively, compared with
$226 million and $766 million for the same periods a year ago.
There are a number of factors impacting the comparison of third
quarter and year-to-date 1994 and 1993 results.
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Results for the three and nine months ended September 30, 1994
included after-tax catastrophe losses of $28 million and $181
million, respectively. Year-to-date 1994 catastrophe losses
related primarily to the Los Angeles earthquake and the severe
winter weather occurring in January and February. Catastrophe
losses in the third quarter of 1994 resulted primarily from the
company's revised estimate of such losses. Catastrophe losses for
the three and nine months ended September 30, 1993 were $18
million and $65 million (after-tax), respectively.
Third quarter and year-to-date results in 1994 also reflected
losses related to prior year reserve development in the Commercial
Property-Casualty segment. Such losses were largely
environmental-related and were $68 million and $185 million (after
tax and net of reinsurance) for the three and nine months ended
September 30, 1994, respectively, compared with $34 million and
$70 million, respectively, in the same periods of 1993. (Please
see "Commercial Property-Casualty" on pages 31 through 34.)
Results for the nine months ended September 30, 1994 included
after-tax reductions of prior year loss reserves in the personal
auto business of $61 million compared with $9 million for the same
period a year ago. (Please see "Personal Property-Casualty" on
pages 35 and 36.)
Third quarter and year-to-date results in 1993 included losses on
discontinued products of $38 million and $11 million ($13 million
and $15 million excluding net realized capital gains and losses),
respectively. Results of discontinued products for the three and
nine months ended September 30, 1994 were charged against the
reserve for anticipated future losses and did not impact the net
income of the company. (Please see pages 28 through 30 for a
discussion of discontinued products.)
In August 1993, the Omnibus Budget Reconciliation Act of 1993
(OBRA) was enacted, increasing the federal corporate tax rate from
34% to 35% retroactive to January 1, 1993. Federal income tax
expense for the three and nine months ended September 30, 1993
included a deferred benefit of $27 million, offset by an increase
in current taxes of $6 million, resulting from the enactment of
OBRA.
Year-to-date net income in 1993 reflected 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).
Year-to-date net income in 1993 included 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 and a $5 million extraordinary loss on
redemption of debentures.
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Income from continuing operations before extraordinary item and
cumulative effect adjustments for the three and nine months ended
September 30, 1994 decreased by $96 million and $208 million,
respectively, compared with the same periods a year ago.
Net realized capital losses were $20 million and $36 million
(after-tax) for the three and nine months ended September 30,
1994, respectively, compared with net realized capital gains of
$29 million and $49 million, respectively, for the same periods a
year ago.
Net Realized Capital Gains and Losses
Net realized after-tax capital gains and losses included in the
results of continuing operations, allocable to experience rated
pension contractholders, and supporting discontinued products for
the three and nine months ended September 30 were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
_______________________________ ______________________________
1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Net realized capital gains (losses)
from sales................................. $ (1.4) $ 110.4 $ 26.0 $ 298.4
Realized capital losses from additions to
reserves for mortgage loans and real estate (17.9) (79.2) (59.9) (244.3)
Realized capital losses from write-downs
of debt and equity securities.............. (.9) (2.1) (1.8) (5.2)
_______ _______ _______ _______
Net realized capital gains (losses) from
continuing operations...................... $ (20.2) $ 29.1 $ (35.7) $ 48.9
_______ _______ _______ _______
_______ _______ _______ _______
Net realized capital losses allocable to
experience rated pension contractholders
(excluded above)........................... $ (16.9) $ (28.1) $ (88.5) $ (46.4)
_______ _______ _______ _______
_______ _______ _______ _______
Net realized capital losses on assets
supporting discontinued products
(excluded above)........................... $ (60.5)* ** $(114.8)* **
_______ _______ _______ _______
_______ _______ _______ _______
<FN>
* Net realized capital losses of $60.5 million and $114.8 million for the three and nine months
ended September 30, 1994, respectively, on assets supporting discontinued products were charged
to the reserve for future losses on discontinued products. (Please see "Financial
Services - Discontinued Products" on page 28.)
** Net realized capital losses of $24.6 million and gains of $4.1 million for the three and nine
months ended September 30, 1993, respectively, on assets supporting discontinued products are
included in the $29.1 million and $48.9 million of capital gains, respectively, shown above.
</TABLE>
Net realized capital gains from sales for the nine months ended
September 30, 1994, as presented above, include a $14 million gain
resulting from the sale of a portion of an unconsolidated
subsidiary. Net realized capital gains from sales for the three
and nine months ended September 30, 1993 were primarily
attributable to bond sales. Net realized capital gains from sales
for the nine months ended September 30, 1993 also included a $12
million loss on the sale of the U.K. life and investment
management operations.
<PAGE> 25
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) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 1,499.1 $ 1,243.2 20.6% $ 4,302.7 $ 3,661.4 17.5%
Net investment income............... 145.3 148.2 (2.0) 430.4 442.9 (2.8)
Fees and other income............... 335.6 279.2 20.2 1,008.1 867.2 16.2
Net realized capital gains (losses). (8.6) 33.6 - (29.7) 25.6 -
_________ _________ _________ _________
Total revenue.................... 1,971.4 1,704.2 15.7 5,711.5 4,997.1 14.3
Current and future benefits......... 1,323.7 1,065.8 24.2 3,771.1 3,255.8 15.8
Operating expenses.................. 501.7 453.8 10.6 1,501.7 1,313.2 14.4
Amortization of deferred policy
acquisition costs.................. 6.2 6.1 1.6 15.4 14.1 9.2
_________ _________ _________ _________
Total benefits and expenses...... 1,831.6 1,525.7 20.0 5,288.2 4,583.1 15.4
_________ _________ _________ _________
Income before income taxes.......... 139.8 178.5 (21.7) 423.3 414.0 2.2
Income taxes........................ 52.2 65.6 (20.4) 157.7 147.7 6.8
_________ _________ _________ _________
Income before cumulative
effect adjustments................. $ 87.6 $ 112.9 (22.4) $ 265.6 $ 266.3 (.3)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)........ $ (5.9) $ 21.0 - $ (20.0) $ 12.7 -
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
Health and Life Insurance and Services income before cumulative
effect adjustments for the three and nine months ended September
30, 1994 decreased by $25 million and $1 million, respectively,
compared with the same periods a year ago. Excluding net realized
capital gains and losses, results for the three and nine months
increased $2 million and $32 million, respectively, from the prior
year.
Third quarter and year-to-date 1994 results (excluding net
realized capital gains and losses) reflected favorable medical
claim experience and increased premium and fee revenue due to
growth in the number of managed care members, partially offset by
an increase in managed care-related operating expenses to meet
both current and future needs.
The number of members covered under health care arrangements was
15.7 million and 15.0 million at September 30, 1994 and December
31, 1993, respectively. The number of managed care-related
members was 6.9 million and 5.4 million at September 30, 1994 and
December 31, 1993, respectively.
Although enactment of comprehensive health care reform legislation
at the federal level was a key priority of both the Clinton
Administration ("the Administration") and many members of Congress
in 1994, Congress adjourned without passing new legislation. The
company anticipates that the Administration and others will re-
introduce health care reform legislation in 1995. The company
also expects that health care reform efforts will continue at the
state level. Since the company's managed care business is
centered around local markets where state regulation plays a
significant role, the company continues to monitor these efforts
closely. At this time management is unable to predict the nature
of any such legislation, the outcome of any such initiatives, or
what effect any resulting legislation would have on the company's
health business.
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Financial Services
__________________
Operating Summary
(Millions) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums........................... $ 61.4 $ 62.1 (1.1)% $ 189.3 $ 170.0 11.4%
Net investment income.............. 679.8 755.9 (10.1) 2,056.5 2,306.0 (10.8)
Fees and other income.............. 60.4 52.6 14.8 188.9 157.3 20.1
Net realized capital gains (losses) (7.3) (23.5) 68.9 (9.4) 5.5 -
_________ _________ _________ _________
Total revenue................... 794.3 847.1 (6.2) 2,425.3 2,638.8 (8.1)
Current and future benefits........ 692.0 767.1 (9.8) 2,101.6 2,302.6 (8.7)
Operating expenses................. 79.4 91.9 (13.6) 242.6 283.3 (14.4)
Amortization of deferred policy
acquisition costs................ 5.8 4.5 28.9 17.1 11.4 50.0
_________ _________ _________ _________
Total benefits and expenses..... 777.2 863.5 (10.0) 2,361.3 2,597.3 (9.1)
_________ _________ _________ _________
Income (loss) before income taxes.. 17.1 (16.4) - 64.0 41.5 54.2
Income tax (benefits) expenses..... (3.1) (8.1) 61.7 6.7 1.5 -
_________ _________ _________ _________
Income (loss) before cumulative
effect adjustments................ $ 20.2 $ (8.3) - $ 57.3 $ 40.0 43.3
_________ _________ _________ _________
_________ _________ _________ _________
Deposits not included in premiums
above (a)........................ $ 1,215.6 $ 1,456.0 (16.5) $ 3,898.2 $ 4,107.7 (5.1)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)...... $ (4.7) $ (12.5) 62.4 $ (7.3) $ 6.8 -
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital losses, net
of tax, allocable to experience
rated pension contractholders
(excluded above)................. $ (19.5) $ (26.6) 26.7 $ (84.6) $ (43.8) (93.2)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital losses, net
of tax, on assets supporting
discontinued products
(excluded above)................. $ (60.5)(b) (c) - $ (114.8)(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 $60.5 million and $114.8 million for the three and nine months ended
September 30, 1994, respectively, on assets supporting discontinued products were charged to the
reserve for anticipated future losses on discontinued products.
(c) Net realized capital losses of $24.6 million and gains of $4.1 million for the three and nine months
ended September 30, 1993, respectively, on assets supporting discontinued products are included in
the $12.5 million capital loss and $6.8 million capital gain shown above.
</TABLE>
Total Segment Results
Financial Services income before cumulative effect adjustments for
the three and nine months ended September 30, 1994 increased by
$29 million and $17 million, respectively, compared with the same
periods a year ago. Excluding net realized capital gains and
losses, results for the three and nine months increased $21
million and $31 million, respectively, from the prior year.
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Third quarter and year-to-date 1993 results included losses
(excluding net realized capital gains and losses) on discontinued
products of $13 million and $15 million, respectively. Year-to-
date results of discontinued products in 1993 included $28 million
of gains on futures contracts and other one-time adjustments.
Results of discontinued products for the three and nine months
ended September 30, 1994 were charged against the reserve for
future losses and did not impact the net income of the segment.
(Please see page 28 for a discussion of the results of
discontinued products.)
Excluding the effects of net realized capital gains and losses,
total segment results for the three and nine months ended
September 30, 1994 reflected increased earnings in both the
continuing large case pension businesses and in the annuity and
small case pension businesses, as compared with the same periods a
year ago. Third quarter and year-to-date results in 1994
benefited from lower operating expenses. Third quarter and year-
to-date results in 1994 also reflected decreases in net investment
income, partially offset by reductions in interest credited to
contractholders. The decline in net investment income was driven
principally by lower yields on the bond portfolio, and is expected
to continue. Year-to-date results in 1993 reflected $10 million
of non-recurring charges.
Pension and annuity assets under management were $65.9 billion and
$66.6 billion, at September 30, 1994 and 1993, respectively.
Assets under management attributable to fully guaranteed and
experience rated lines of business decreased, while assets
attributable to non-guaranteed lines of business increased, from
September 30, 1993 to September 30, 1994.
Experience Rated Product Lines
Pursuant to the terms of the company's experience rated pension
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 changes 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.
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large case experience rated pension contractholder and participant
directed withdrawals were as follows (excluding transfers to other
company products) for the three and nine month periods ended
September 30 (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
_______________________________ _______________________________
1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments: (1)......... $ 274.6 $ 263.5 $ 776.5 $ 802.0
________ ________ ________ ________
________ ________ ________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments (2).......... $ 70.0 $ 248.2 $ 382.0 $ 738.4
________ ________ ________ ________
________ ________ ________ ________
Participant directed withdrawals... $ 96.6 $ 50.1 $ 205.2 $ 172.7
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed in accordance with
contract schedules.
(2) Contractholder withdrawals in 1993 included withdrawals made 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 efforts by contractholders to diversify among
investment managers.
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 this decision, the
company established a reserve of $1,270 million at December 31,
1993 for anticipated future losses on these products. Losses on
discontinued products for the three and nine months ended
September 30, 1994, 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 and nine months ended
September 30 were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30
__________________________________________
1994 1993
_________________________________ _____
GICs SPAs Total Total
____ ____ _____ _____
<S> <C> <C> <C> <C>
Negative interest margin (a)............. $ (22.2) $ (.1) $ (22.3) $ (24.6)
Net realized capital losses.............. (47.8) (12.7) (60.5) (24.6)
Interest earned on receivable from
continuing operations.................. 3.1 4.6 7.7 -
Other, net............................... (.6) 1.2 .6 11.6
________ ________ ________ ________
Results of discontinued products,
after-tax.............................. $ (67.5) $ (7.0) $ (74.5) $ (37.6)
________ ________ ________ ________
________ ________ ________ ________
Results of discontinued products, pretax. $ (103.1) $ (7.3) $ (110.4) $ (63.3)
________ ________ ________ ________
________ ________ ________ ________
</TABLE>
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30
__________________________________________
1994 1993
_________________________________ _____
GICs SPAs Total Total
____ ____ _____ _____
<S> <C> <C> <C> <C>
Negative interest margin (a)............. $ (64.6) $ (2.3) $ (66.9) $ (65.2)
Net realized capital gains (losses)...... (85.0) (29.8) (114.8) 4.1
Interest earned on receivable from
continuing operations.................. 9.3 13.6 22.9 -
Non-recurring gains on futures contracts. - - - 18.8
Other, net............................... 2.9 6.2 9.1 31.3
________ ________ ________ ________
Results of discontinued products,
after-tax.............................. $ (137.4) (12.3) $ (149.7) $ (11.0)
________ ________ ________ ________
________ ________ ________ ________
Results of discontinued products, pretax. $ (211.5) $ (18.8) $ (230.3) $ (22.4)
________ ________ ________ ________
________ ________ ________ ________
<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 nine months ended September 30, 1994
was as follows (pretax, in millions):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1994
____________________________________
GICs SPAs Total
____ ____ _____
<S> <C> <C> <C>
Reserve at December 31, 1993..... $ 600.0 $ 670.0 $1,270.0
Loss on discontinued products.... (211.5) (18.8) (230.3)
________ ________ ________
Reserve at September 30, 1994.... $ 388.5 $ 651.2 $1,039.7
________ ________ ________
________ ________ ________
</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. At September 30, 1994 and December 31, 1993, estimated
future after-tax capital losses of $131 million and $190 million
($201 million and $292 million, pretax), respectively,
attributable to mortgage loans and real estate supporting GICs,
and $51 million and $70 million ($79 million and $108 million,
pretax), respectively, attributable to mortgage loans and real
estate supporting SPAs were expected to be charged to the reserve
for future losses. Included in the $85 million and $30 million of
net realized capital losses on GICs and SPAs, respectively, for
the nine months ended September 30, 1994, are losses from the
sales of bonds of $26 million and $11 million, respectively. As a
result of selling bonds and realizing losses, the anticipated
future losses associated with negative interest margin is expected
to be reduced in the future. Calculation of the losses on
discontinuance required projection of both the amount and the
timing of cash flows over approximately the next 30 years,
including projections of, among other things, future investment
results, participant withdrawal and mortality rates, and cost of
asset management and customer service. Projections of future
investment results took into account both industry and company
data and were based on recent performance of mortgage loan and
real estate assets, assumptions regarding levels of future
defaults and prepayments, and assumptions regarding future real
estate market conditions, which assumptions management believes
reasonable. Management continues to believe that the reserve for
anticipated future losses will be adequate to provide for the
future losses associated with the run-off of the liabilities.
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
At September 30, 1994 and December 31, 1993, assets under
management supporting GICs were $7.9 billion and $9.1 billion,
respectively. Assets under management supporting SPAs at
September 30, 1994 and December 31, 1993 were $5.1 billion and
$5.6 billion, respectively.
Scheduled contract maturities and benefit payments and participant
directed withdrawals on GICs and SPAs for the three months ended
September 30 were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30
_______________________________________________
1994 1993
____________________________________ _____
GICs SPAs Total Total
____ ____ _____ _____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1).......... $ 424.0 $ 135.6 $ 559.6 $ 584.5
________ ________ ________ ________
________ ________ ________ ________
Participant directed withdrawals... $ 29.8 $ - $ 29.8 $ 49.4
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
</TABLE>
Scheduled contract maturities and benefit payments and participant
directed withdrawals on GICs and SPAs for the nine months ended
September 30 were as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended September 30
_______________________________________________
1994 1993
____________________________________ _____
GICs SPAs Total Total
____ ____ _____ _____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments: (1)......... $1,507.7 $ 399.5 $1,907.2 $1,767.2
________ ________ ________ ________
________ ________ ________ ________
Participant directed withdrawals... $ 155.9 $ - $ 155.9 $ 187.3
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
</TABLE>
Cash required to meet the above payments was provided by earnings
on, sales of, and scheduled payments on, invested assets.
(Please see "General Account Investments" on page 38 for a
discussion of investments supporting discontinued products.)
<PAGE> 31
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) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 753.2 $ 751.9 .2 $ 2,282.0 $ 2,335.7 (2.3)%
Net investment income............... 176.6 188.2 (6.2) 524.4 577.9 (9.3)
Fees and other income............... 25.8 29.8 (13.4) 84.8 106.3 (20.2)
Net realized capital gains (losses). (17.1) 21.1 - (13.8) 56.9 -
_________ _________ _________ _________
Total revenue.................... 938.5 991.0 (5.3) 2,877.4 3,076.8 (6.5)
Current and future benefits......... 665.7 617.7 7.8 2,137.1 1,959.4 9.1
Operating expenses.................. 188.5 199.7 (5.6) 630.9 678.0 (6.9)
Amortization of deferred policy
acquisition costs.................. 95.0 92.1 3.1 267.1 270.1 (1.1)
_________ _________ _________ _________
Total benefits and expenses...... 949.2 909.5 4.4 3,035.1 2,907.5 4.4
_________ _________ _________ _________
Income (loss) before income taxes... (10.7) 81.5 - (157.7) 169.3 -
Income tax (benefits) expenses...... (8.5) (1.3) - (75.6) 11.4 -
_________ _________ _________ _________
Income (loss) before cumulative
effect adjustments.................. $ (2.2) $ 82.8 - $ (82.1) $ 157.9 -
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)......... $ (11.3) $ 12.9 - $ (9.2) $ 36.4 -
_________ _________ _________ _________
_________ _________ _________ _________
Statutory combined loss and
expense ratio (1).................. 125.6% 111.9% - 129.6% 115.7% -
_________ _________ _________ _________
_________ _________ _________ _________
GAAP combined loss and expense
ratio (1).......................... 118.8% 111.9% - 127.2% 115.2% -
_________ _________ _________ _________
_________ _________ _________ _________
Catastrophe loss ratio
(included in combined ratios above) 3.3% 2.8% - 7.2% 2.2% -
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
(1) The difference between the statutory and GAAP combined loss and expense ratios for the three and nine
months of 1994 primarily reflects the establishment of a reserve for statutory purposes for severance
and facilities charges which were previously reserved for on a GAAP basis.
</TABLE>
Commercial Property-Casualty Insurance and Services results before
cumulative effect adjustments for the three and nine months ended
September 30, 1994 decreased $85 million and $240 million,
respectively, compared with the same periods a year ago.
Excluding net realized capital gains and losses, results for the
three and nine months decreased $61 million and $194 million,
respectively, from the prior year.
Catastrophe losses for the three and nine months ended September
30, 1994 were $16 million and $105 million, respectively, compared
with $14 million and $34 million for the same periods a year ago.
Third quarter catastrophe losses in 1994 included $12 million ($32
million pretax and before reinsurance) resulting from the
company's revised estimate of its losses incurred from the Los
Angeles earthquake. Year-to-date catastrophe losses in 1994
included $100 million ($309 million pretax and before reinsurance)
from the Los Angeles earthquake and the severe winter weather
occurring in January and February of 1994.
Three and nine month results in 1994 also reflected reduced
operating expenses and lower net investment income (driven by
lower interest rates) than in the same periods a year ago.
Premium revenue for the nine months ended September 30, 1994 was
approximately 2 percent lower than in the same period a year ago,
due to stricter general liability underwriting, reduced workers'
compensation exposure (in certain states where that business does
not offer the potential to achieve acceptable financial returns)
and the current competitive marketplace.
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Commercial Property-Casualty Insurance and Services (Continued)
_______________________________________________________________
Third quarter and year-to-date results in 1993 benefited from a
net tax benefit of $22 million related to the enactment of OBRA in
August 1993 (primarily from revaluing the deferred tax asset).
Third quarter and year to-date results in 1994 reflected losses
related to prior year reserve development which were $34 million
and $115 million higher (after-tax and net of reinsurance) than in
the same periods of 1993. Such losses during the three and nine
months ended September 30, 1994 were primarily for environmental-
related, general and product liability claims. During the third
quarter of 1994, $30 million ($49 million pretax and before
reinsurance) was added to environmental claims reserves. Of the
amount added to environmental-related claims reserves in the third
quarter of 1994, $23 million ($37 million pretax and before
reinsurance) related to estimated indemnity-related liabilities
and $7 million ($12 million pretax and before reinsurance) related
to litigation expenses.
The company continues to gather and analyze developing legal and
factual information on known environmental-related claims and to
reassess its reserving techniques in order to determine whether it
can reasonably estimate the likelihood and amount of its liability
for such claims. For instance, as claims in litigation mature and
approach the trial stage, the company obtains information that may
allow it to estimate exposure on certain of the claims involved in
the litigation and policyholders may seek to settle their claims
with the company. As a result of the company's reserving and
information gathering processes, which are on-going, the company
has increased its environmental-liability reserves in 1994. The
estimation of reserves for reported environmental claims is
difficult and likely to change as additional information emerges.
The company is continuously involved in lawsuits regarding policy
coverage and judicial interpretation of legal liability for
environmental pollution, asbestos-related and other long-term
exposure claims. The lack of developed case law, as evidenced by
the coverage lawsuits, is one of the significant uncertainties
that affects the company's ability to estimate future losses for
these types of claims. The company and the insurance industry are
litigating issues that will ultimately determine, in many cases,
whether and to what extent insurance coverage exists. Certain
insureds have presented the company with particularly large claims
for coverage in coverage dispute cases due primarily to the number
of sites alleged to be covered, the nature of the business
conducted and the alleged scope of coverage. Two cases involving
such insureds are scheduled to begin trial before juries in early
1995 with respect to a portion of the sites alleged to be subject
to coverage.
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Commercial Property-Casualty Insurance and Services (Continued)
_______________________________________________________________
Numerous liability claims for bodily injury have been asserted
against major producers of asbestos and asbestos products, some of
which are insureds of the company. Also, over the last few years,
asbestos bodily injury claims have been filed by plaintiffs
against entities that installed products that contained asbestos
and/or produced products that contained asbestos, and some
producers have attempted to recharacterize asbestos bodily injury
product liability claims in an effort to avoid applicable policy
coverage limits. The company is currently involved in binding
arbitration with one such major producer that had exhausted
applicable policy limits on asbestos products claims and is
awaiting the arbitrator's decision, which is appealable to a panel
of arbitrators. In addition to bodily injury claims, property-
damage claims have been brought against the company's insureds
seeking reimbursement for the expense of replacing insulation
material and other building components made of asbestos.
Because of significant legal and factual uncertainties and the
likelihood that these uncertainties will not be resolved in the
near future, management is unable to make a reasonable estimate as
to the ultimate amount or reasonable range of losses for
environmental and asbestos-related claims. Future results of the
company are expected to be affected adversely by losses for
environmental and asbestos-related claims and related litigation
expenses. Management is unable to determine whether or not such
effect will be material to the company's future results, liquidity
and/or capital resources.
Congress was scheduled to reauthorize the Superfund law in 1994,
but adjourned before voting on it, so the reauthorization will now
be scheduled for the 1995-1996 Congress. There continues to be
substantial dissatisfaction among insurance and business groups
and others with the current law, particularly with respect to the
law's cleanup requirements and liability provisions, and there is
general recognition that major reforms are needed. If legislation
comparable to the 1994 bills were enacted, it could reduce the
insurance industry's and the company's potential environmental
liability exposure related to Superfund, in return for new federal
taxes on the insurance industry. However, Superfund reform would
not directly affect the numerous environmental liability claims
against the company resulting from state and other federal
environmental cleanup programs. At this time, it is too early to
determine whether the law will be reauthorized and reformed in
1995-1996, what the substance of the enacted legislation will be,
or what the effect of any such reforms will be on the company.
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Commercial Property-Casualty Insurance and Services (Continued)
_______________________________________________________________
The company has noted evidence of adverse loss developments in its
commercial general liability line of business. The company
believes that such developments largely are attributable to the
unusual frequency and size of claims in this line of business.
The company also believes that the unusual frequency and size of
construction defect claims brought against contractor
policyholders (observed by the company in 1994) and the increasing
size of other types of claims brought against contractor
policyholders (observed by the company to be continuing in 1994)
are contributing to these loss developments. While the company
believes that it is reasonably possible that these adverse loss
developments will continue, the company did not note additional
evidence of such adverse loss development in the third quarter.
If these adverse loss developments continue, they would adversely
affect the company's future results of operations, although the
company is unable at this time to estimate the extent to which
results would be affected. Management has and continues to review
the factors contributing to these developments (by, for example,
segregating and examining data on a policyholder by policyholder
basis) and to adjust its reserves as more current data becomes
available.
For additional discussion of property-casualty reserves, please
see the company's 1993 Annual Report to Shareholders, 1993 Form
10-K, March 31, 1994 Form 10-Q and June 30, 1994 Form 10-Q.
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Personal Property-Casualty
__________________________
Operating Summary
(Millions) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 325.1 $ 371.1 (12.4)% $ 1,007.7 $ 1,127.1 (10.6)%
Net investment income............... 40.8 46.3 (11.9) 122.1 146.5 (16.7)
Fees and other income............... 1.0 2.7 (63.0) 5.0 7.3 (31.5)
Net realized capital gains (losses). 1.3 6.3 (79.4) (4.0) 1.1 -
_________ _________ _________ _________
Total revenue.................... 368.2 426.4 (13.6) 1,130.8 1,282.0 (11.8)
Current and future benefits......... 254.7 270.7 (5.9) 759.8 870.9 (12.8)
Operating expenses.................. 25.8 46.0 (43.9) 118.0 146.6 (19.5)
Amortization of deferred policy
acquisition costs.................. 78.0 77.2 1.0 221.8 233.7 (5.1)
_________ _________ _________ _________
Total benefits and expenses...... 358.5 393.9 (9.0) 1,099.6 1,251.2 (12.1)
_________ _________ _________ _________
Income before income taxes.......... 9.7 32.5 (70.2) 31.2 30.8 1.3
Income taxes........................ 1.6 6.1 (73.8) 6.8 .7 -
_________ _________ _________ _________
Income before cumulative
effect adjustments................. $ 8.1 $ 26.4 (69.3) $ 24.4 $ 30.1 (18.9)
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)........ $ 1.0 $ 3.6 (72.2) $ (2.7) $ .2 -
_________ _________ _________ _________
_________ _________ _________ _________
Statutory combined loss and
expense ratio (1).................. 126.8% 106.7% - 115.8% 112.8% -
_________ _________ _________ _________
_________ _________ _________ _________
GAAP combined loss and expense
ratio (1).......................... 108.6% 105.5% - 109.5% 111.7% -
_________ _________ _________ _________
_________ _________ _________ _________
Catastrophe loss ratio
(included in combined ratios above) 5.9% 1.7% - 10.6% 4.1% -
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
(1) The difference between the statutory and GAAP combined loss and expense ratios for the three and nine
months of 1994 primarily reflects the settlement of Proposition 103 claims for statutory purposes which
had previously been reserved for on a GAAP basis.
</TABLE>
Personal Property-Casualty results before cumulative effect
adjustments for the three and nine months ended September 30, 1994
decreased $18 million and $6 million, respectively, from the same
periods a year ago. Excluding net realized capital gains and
losses, results for the three and nine months ended September 30,
1994 decreased $16 million and $3 million, respectively, over the
same periods a year ago.
Catastrophe losses for the three and nine months ended September
30, 1994 were $11 million and $76 million, respectively, compared
with $4 million and $31 million for the same periods a year ago.
Year-to-date catastrophe losses in 1994 included $71 million ($125
million pretax and before reinsurance) resulting from the Los
Angeles earthquake and the severe winter weather occurring in
January and February of 1994. Third quarter catastrophe losses in
1994 included $10 million ($16 million pretax and before
reinsurance) from the company's revised estimate of such losses.
Third quarter and year-to-date results in 1994 also reflected a
reduction in operating expenses ($10 million from non-recurring
items) from the same periods a year ago, primarily due to exiting
of unprofitable markets and management's continuing focus on
lowering costs. Partially offsetting this favorable impact to
income for the same periods of 1994 is lower net investment income
and higher reinsurance costs.
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Personal Property-Casualty (Continued)
______________________________________
Premiums decreased during the three and nine months ended
September 30, 1994, primarily due to an 11% reduction in personal
automobile policies-in-force over the same periods a year ago,
reflecting the company's effort to withdraw from, or reduce
exposure to, personal automobile insurance in certain states where
management has concluded that it is not in the company's best
interest to continue selling personal automobile insurance.
Year-to-date results in 1994 included after-tax reductions of
prior year loss reserves of $61 million compared with reductions
of prior year loss reserves of $9 million for the same period a
year ago. These reductions in prior year loss reserves reflected
favorable loss trends experienced in the personal auto business.
Reserve releases also included $10 million related to the New
Jersey Market Transition Facility. The company released these
reserves because its potential liability to fund this residual
automobile insurance market mechanism has been significantly
limited as a result of the settlement of litigation between the
insurance industry and the State of New Jersey.
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
International
_____________
Operating Summary
(Millions) Three Months Ended September 30 Nine Months Ended September 30
__________________________________ __________________________________
1994 1993 % Change 1994 1993 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 219.9 $ 271.0 (18.9)% $ 658.3 $ 716.2 (8.1)%
Net investment income............... 68.7 74.3 (7.5) 225.3 242.1 (6.9)
Fees and other income............... 24.1 11.1 117.1 69.2 60.7 14.0
Net realized capital gains (losses). - 3.0 (100.0) 5.9 (15.8) -
_________ _________ _________ _________
Total revenue.................... 312.7 359.4 (13.0) 958.7 1,003.2 (4.4)
Current and future benefits......... 200.8 235.3 (14.7) 599.4 701.7 (14.6)
Operating expenses.................. 75.0 101.4 (26.0) 256.6 287.3 (10.7)
Amortization of deferred policy
acquisition costs.................. 14.9 13.6 9.6 41.0 42.2 (2.8)
_________ _________ _________ _________
Total benefits and expenses...... 290.7 350.3 (17.0) 897.0 1,031.2 (13.0)
_________ _________ _________ _________
Income (loss) before income taxes... 22.0 9.1 141.8 61.7 (28.0) -
Income tax expenses (benefits)...... 6.3 (2.7) - 19.4 (49.4) -
_________ _________ _________ _________
Income before cumulative
effect adjustments................. $ 15.7 $ 11.8 33.1 $ 42.3 $ 21.4 97.7
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)........ $ .7 $ 4.1 (82.9) $ 3.5 $ (7.2) -
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
International income before cumulative effect adjustments for the
three and nine months ended September 30, 1994 increased $4
million and $21 million, respectively, compared with the same
periods a year ago. Net realized capital losses for the nine
months ended September 30, 1993 included an after-tax capital loss
of $12 million realized on the sale of the U.K. life and
investment management operations. Excluding net realized capital
gains and losses, results for the three and nine months ended
September 30, 1994 increased $7 million and $10 million,
respectively, compared with the same periods a year ago.
Third quarter and year-to-date results in 1994 reflect increased
earnings in the Pacific Rim and Canada. Year-to-date results in
1994 also reflected increased earnings from the company's
increased investment in a Mexican insurance operation. Nine month
results in 1993 reflected losses from the U.K. life and investment
management operations and a $37 million tax benefit from prior
year operating losses on those operations. Year-to-date results
in 1993 were adversely affected by additions to loss and loss
expense reserves for prior accident years of $20 million. These
reserve additions reflected emerging losses in casualty, property
and marine excess of loss coverage written by the company's U.K.
reinsurance operation. The losses arose principally from prior
year catastrophes in the discontinued marine line of business and
from various non-U.S. property business exposures. The reserve
additions also resulted from the refinement of the methodology
used to establish and evaluate loss reserves for this business and
from the availability of better information.
Results for the three and nine months ended September 30, 1994
reflect the company's change in accounting for an affiliate from
the consolidated basis of accounting to the equity basis of
accounting. This change resulted in decreases in total revenue of
13% and 5% for the three and nine months ended September 30, 1994,
respectively, and decreases in total benefits and expenses of 14%
and 5%, respectively, compared to the same periods of 1993. This
change did not impact results of the segment in 1994.
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
General account invested assets, net of related impairment
reserves or write-downs, at September 30, 1994 and December 31,
1993 were as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
_________________________________
<S> <C> <C>
Debt securities....................... $ 37,782.3 $ 41,544.5
Mortgage loans........................ 12,716.0 14,839.2
Real estate........................... 1,390.6 1,315.8
Equity securities..................... 1,688.6 1,658.9
Short term and other.................. 2,206.5 2,097.4
_________________________________
Total invested assets.............. $ 55,784.0 $ 61,455.8
_________________________________
_________________________________
</TABLE>
The decline in invested assets from December 31, 1993 to September
30, 1994 related principally to debt securities and mortgage
loans. The decrease in debt securities was due principally to
changes in market values of such securities. Interest rates rose
from December 31, 1993 to September 30, 1994, causing a decrease
in the value of debt securities and resulting in the change from
unrealized gains to unrealized losses during this period. Debt
securities included unrealized capital gains of $1.9 billion at
December 31, 1993, compared with unrealized capital losses of $1.3
billion at September 30, 1994. Of such unrealized capital losses
at September 30, 1994, $97 million and $442 million related to
assets supporting discontinued products and experience rated
pension contractholders, respectively.
The decrease in mortgage loans principally reflected prepayments
and payments at maturity on mortgage loans. The decrease in
mortgage loans also reflects the company's foreclosure of $462
million of mortgage loans (net of write-offs). Included in these
foreclosures was a $220 million loan secured by an office
building. The company maintained a specific reserve of $80
million relating to this loan which was provided for in prior
years. The property was written down at the time of foreclosure
to its estimated fair value.
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Aetna's investment objective is to fund policyholder and certain
corporate liabilities in a manner which enhances shareholder
value, subject to appropriate risk constraints. It is the
company's intention that this investment objective be met by a mix
of investments which matches the characteristics (e.g., duration,
cash flow variability) of the liabilities they support;
diversifies the types of investment risks in its portfolios by
interest rate, liquidity, credit and equity price risk; and
achieves asset diversification by investment type, industry,
issuer and geographic location. The company regularly projects
duration and cash flow characteristics of its liabilities and
makes appropriate adjustments in the portfolios of assets which
support the liabilities. Interest rate risk is managed within a
tight duration band, and credit risk is managed by maintaining
high average bond ratings and diversified sector exposure. In
pursuing its investment and risk management objectives, the
company utilizes assets whose market value is at least partially
determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short term or long term),
exchange rates, prepayment rates, equity markets or credit
ratings/spreads. The amortized cost and fair value of these
securities, included in the $37.8 billion debt securities
portfolio, as of September 30, 1994 was as follows (in millions):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
_________ _______
<S> <C> <C>
Collateralized mortgage obligations (including
interest-only and principal-only strips)...... $ 3,619.1 $ 3,496.0
Treasury and agency strips:
Principal..................................... 1,154.4 961.0
Interest...................................... 106.6 90.6
LIBOR notes..................................... 25.0 24.8
Yen notes....................................... 22.4 20.7
Warrants to purchase debt securities............ 20.8 4.3
Mandatorily convertible preferred stock......... 17.9 17.4
</TABLE>
Using financial modeling and other techniques, the company
regularly evaluates the appropriateness of the investments
relative to the company's management-approved investment
guidelines and the business objectives of the portfolios
(including evaluating the interest rate, liquidity, credit and
equity price risk resulting from derivative and other portfolio
activities). During the three and nine months ended September 30,
1994, the company operated within such investment guidelines by
maintaining a mix of investments that diversifies its assets and
matches the characteristics of the liabilities which they support.
(Please see a discussion of the company's hedging activities on
pages 47 and 48.)
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Debt Securities
As of September 30, 1994 and December 31, 1993, the company's
investments in debt securities represented 68% of total general
account invested assets and were as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
________________________________
<S> <C> <C>
Supporting discontinued products $ 7,051.1 $ 8,269.0
Supporting experience rated products 11,472.8 11,763.8
Supporting remaining products 19,258.4 21,511.7
________________________________
Total $37,782.3 $41,544.5
________________________________
________________________________
</TABLE>
Included in the company's total debt security balances at
September 30, 1994 and December 31, 1993 were the following
categories of debt securities (in millions):
<TABLE>
<CAPTION>
September 30, 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 $ 1,900.5 $ 438.8 23.1% $ 1,970.1 $ 449.6 22.8%
Problem debt securities 198.1 21.2 10.7 196.1 26.6 13.6
Potential problem debt
securities 118.4 45.7 38.6 191.0 65.1 34.1
</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. Individual debt securities are
written down for other than temporary declines in value.
The company does not accrue interest on problem debt securities
when management believes the likelihood of collection of interest
is doubtful. Lost investment income on problem debt securities
for the three and nine months ended September 30 was as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
___________________ ___________________
1994 1993 1994 1993
_______ _______ ______ _______
<S> <C> <C> <C> <C>
Allocable to discontinued products $ 1.0 $ .5 $ 2.9 $ 3.1
Allocable to contractholders $ .2 $ .4 $ .6 $ 1.5
Allocable to remaining products $ .9 $ .3 $ 3.6 $ 2.0
</TABLE>
<PAGE> 41
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
At September 30, 1994 and December 31, 1993, the carrying value
(fair value) of collateralized mortgage obligations ("CMOs") was
$3.5 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 September 30,
1994 and December 31, 1993, approximately 89% and 91%,
respectively, 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.
Mortgage Loan Investments
As of September 30, 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>
September 30, December 31,
1994 1993
_______________________________
<S> <C> <C>
Supporting discontinued products $ 4,545.2 $ 5,419.1
Supporting experience rated products 4,034.4 4,732.7
Supporting remaining products 4,136.4 4,687.4
_______________________________
Total $12,716.0 $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.
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
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 September 30, 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*... $ 418.1 $ 375.0 $ 793.1 $ 639.8 $ 400.0 $1,039.8
Allocable to contractholders 196.6 ** 196.6 268.5 ** 268.5
________ ________ ________ ________ ________ ________
Total..................... $ 614.7 $ 375.0 $ 989.7 $ 908.3 $ 400.0 $1,308.3
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
<FN>
* Includes total reserves of $464.4 million ($232.3 million of specific reserves and $232.1 million
of general reserves) allocated to discontinued products at September 30, 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. (Please see "Financial Services" on
page 29 for a discussion of anticipated future capital losses on assets supporting discontinued
products.)
** The general reserve at September 30, 1994 and December 31, 1993 excluded reserves for losses of
$234.2 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>
For the periods shown below, after-tax mortgage loan impairment
expense was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
___________________ ___________________
1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Allocable to discontinued products $ 27.5* $ 42.3 $ 57.8* $101.8
Allocable to contractholders** $ 2.1 $ 13.5 $ 41.4 $ 58.2
Allocable to remaining products $ 17.8 $ 26.9 $ 60.2 $102.3
<FN>
* Impairment expense allocable to discontinued products for the three and nine months
ended September 30, 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>
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Included in the company's total mortgage loan balances at
September 30, 1994 and December 31, 1993 were the following
categories of mortgage loans (in millions):
<TABLE>
<CAPTION> Balances at September 30, 1994
_____________________________________________________________
Supporting Experience Supporting
Rated Pension Contracts Discontinued Products
_______________________ ______________________
Total Amount % of Total Amount % of Total
_____ ______ __________ ______ __________
<S> <C> <C> <C> <C> <C>
Problem loans........... $1,002.1 $ 272.3 27.2% $ 407.5 40.7%
Restructured loans (1).. 1,145.8 363.5 31.7 482.7 42.1
Potential problem and
restructured loans..... 907.5 380.2 41.9 298.3 32.9
________
Total................ $3,055.4
________
________
Impairment reserves..... $ 989.7
________
________
Impairment reserves as
a percentage of total.. 32.4%
________
________
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>
Problem loans........... $1,116.0 $ 387.8 34.7% $ 410.8 36.8%
Restructured loans (1).. 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%
________
________
<FN>
(1) During the nine month period ended September 30, 1994, $335.7 million of loans which
had been restructured, after write-offs of $144.9 million, were classified as performing.
Of these loans, $69.1 million, after write-offs of $29.8 million, supported experience
rated pension contracts and $118.0 million, after write-offs of $66.8 million, supported
discontinued products. Please see page 44 for further discussion of such transfers.
</TABLE>
"Problem loans" are defined to be loans with payments over 60 days
past due, loans on properties in the process of foreclosure, loans on
properties involved in bankruptcy proceedings and loans on properties
subject to redemption. Loans on properties in the process of
foreclosure increased to $599 million at September 30, 1994 from $399
million at December 31, 1993.
"Restructured loans" are loans whose original contract terms have
been modified to grant concessions to the borrower and are currently
performing pursuant to such modified terms.
Restructured loans that have a market rate of interest at the time of
the restructure (which represents the interest rate the company would
charge for a new loan with comparable risk) and demonstrate
sustainable performance (as generally evidenced by six months of pre-
or post-restructuring payment performance in accordance with the
restructured terms) may be returned to performing status. Candidates
for such treatment are re-underwritten and must meet specific
guidelines which are intended to provide reasonable assurance that
the loan will perform in accordance with its contract terms. These
guidelines require (i) adequate debt service coverage throughout the
term of the loan, (ii) appropriate loan-to-value ratios based upon
collateral value at the time of restructuring and at projected
maturity of the loan, and (iii) reasonable protection against capital
expenditure risk associated with lease rollovers. In addition, such
restructured loans are designed to enhance the company's security
position in the collateral, maximize borrower commitment to the
property, and in many cases, ensure the company's participation in
any appreciation of the property as market conditions improve.
<PAGE> 44
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Prior to restructuring, such loans are generally classified and
accounted for as problem loans. However, in certain cases, loans may
be classified as potential problem loans if they are performing
pursuant to their existing loan terms at the time. Upon closing of
the restructure, any uncollectible portion of the loan is written off
against the impairment reserve and the remaining recorded investment
in the loan is classified as restructured until it is returned to
performing status.
During the three and nine months ended September 30, 1994, loans
which had been restructured, with a carrying value of $225 million
and $336 million, respectively, (net of write-offs of $101 million
and $145 million, respectively) and with an average current yield of
8% were classified as performing. The amount of the write-off
approximated the reserves related to these loans; therefore, there
was an immaterial effect on the Consolidated Statement of Income in
1994. Of the aforementioned loans, $51 million and $69 million,
respectively, (net of write-offs of $23 million and $30 million,
respectively) supported experience rated pension contracts and $56
million and $118 million, respectively, (net of write-offs of $40
million and $67 million, respectively) supported discontinued
products. No such transfers occurred in 1993 or in the first quarter
of 1994. The company anticipates that additional loans will be
reclassified to performing in future quarters if such loans
demonstrate sustainable performance (as described on page 43).
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 September 30 and the portion thereof actually recorded
as income for the three and nine months ended September 30 were as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ _________________
1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Income which would have been recorded
under original terms of loans.......... $ 59.2 $ 82.1 $166.5 $228.1
Income recorded......................... 22.9 41.9 83.4 108.8
______ ______ ______ ______
Lost investment income.................. $ 36.3 $ 40.2 $ 83.1 $119.3
______ ______ ______ ______
______ ______ ______ ______
Lost investment income allocated to
investments supporting discontinued
products (included above).............. $ 12.2 $ 22.5 $ 29.7 $ 62.9
______ ______ ______ ______
______ ______ ______ ______
Lost investment income allocated to
investments supporting experience rated
pension contracts (included above)..... $ 12.4 $ 10.9 $ 25.4 $ 32.6
______ ______ ______ ______
______ ______ ______ ______
</TABLE>
<PAGE> 45
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Real Estate Investments
At September 30, 1994 and December 31, 1993, Aetna's equity real
estate balances, net of write-downs and reserves, were as follows:
<TABLE>
<CAPTION> Balances at September 30, 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..... $ 388.9 $ 33.2 8.5% $ 91.8 23.6%
Properties held for sale... 1,001.7 241.6 24.1 571.6 57.1
________ ________ ________
Total equity real estate... $1,390.6 $ 274.8 19.8 $ 663.4 47.7
________ ________ ________
________ ________ ________
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>
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 the company's 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.
"Properties held for sale" is primarily comprised of assets
acquired through foreclosure. A new cost basis is established for
assets acquired through foreclosure equal to the fair value 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>
September 30, December 31,
1994 1993
_______________________________
<S> <C> <C>
Allocable to discontinued products $346.3 $298.3
Allocable to contractholders 192.5 228.3
Allocable to remaining products 173.8 242.9
_______________________________
Total $712.6 $769.5
_______________________________
_______________________________
</TABLE>
<PAGE> 46
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
For the periods shown below, total after-tax net realized capital
(gains) losses from real estate write-downs and increases
(decreases) in the valuation reserves were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
__________________ __________________
1994 1993 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Allocable to discontinued products $ -* $ 9.4 $ 13.8* $ 33.7
Allocable to contractholders** $ (.1) $ .4 $ 4.5 $ 5.3
Allocable to remaining products $ .1 $ .6 $ (.3) $ 6.5
<FN>
* Write-downs and impairment expense allocable to discontinued products for the three and
nine months ended September 30, 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>
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 $8.0 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 25% at September 30, 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 pursue plans to maximize returns and reduce portfolio
levels through loan restructurings and sales of foreclosed real
estate.
Management is seeing improvement in certain segments of the
commercial real estate market. While additional losses may emerge
in the company's mortgage loan and real estate portfolios, and may
increase to the extent recovery in this market is delayed,
management believes that the improvement in this market 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 $5.2 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 be greater
than anticipated and thus materially impact such results.
<PAGE> 47
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
_______________________________
Cash and cash equivalents at September 30, 1994 and December 31,
1993 were $2.7 billion and $1.6 billion, respectively. For the
nine months ended September 30, 1994, net cash used for operating
activities was $7.6 million. Net cash used for operating
activities of $1.6 billion during the first nine months of 1993
included $2.2 billion of cash used for net purchases of debt
trading securities.
For the first nine months of 1994, net cash provided by investing
activities was $1.9 billion and included a decrease of $23 million
in short-term investments. Net cash provided by investing
activities of $783 million for the nine months ended September 30,
1993 included $822 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 nine months of 1994 was $583 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 $1,355 million of mortgage loans scheduled to
mature during the first nine months of 1994, $964 million were not
paid as scheduled, a substantial portion of which supported large
case pension liabilities. Of the loans not paid as scheduled,
$434 million were extended at interest rates at least equal to
current market (average rate of 9% over an average extension
period of 6 years), $132 million were under forbearance
(continuing to make payments under original loan terms), $29
million were foreclosed upon and $369 million were under
discussion with borrowers at September 30, 1994. Of the $369
million of loans under discussion with borrowers, $207 million
were classified as problem or restructured loans at September 30,
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 26 through 30 for a
discussion of the liquidity requirements specific to the large
case pension business.
The company engages in hedging activity to manage foreign exchange
and interest rate risk. Such hedging activity has principally
consisted of using forward and futures contracts and interest rate
swaps.
<PAGE> 48
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
___________________________________________
The company utilizes foreign currency forward contracts to hedge
its foreign currency exposure (primarily Canada, Great Britain and
Malaysia) arising from certain investments in foreign affiliates
and non-dollar denominated investment securities. As of September
30, 1994, the company had contracts to sell $455 million of
foreign currencies to hedge foreign currency exposures arising
from net investments in foreign affiliates. As of September 30,
1994, the company also had contracts to sell $264 million of
foreign currencies to hedge foreign currency exposures arising
from investments in non-dollar denominated assets. The company
generally utilizes foreign currency contracts with terms of up to
three months.
At September 30, 1994, the company had unhedged foreign currency
exposures of $407 million and $26 million related to net
investments in foreign affiliates and investments in non-dollar
denominated assets, respectively, for which effective markets for
hedging vehicles do not currently exist.
As of September 30, 1994, the company had futures contracts,
acquired as hedges, to purchase $137 million of U.S. Treasury
securities with unrecognized losses of $4 million (pretax).
The company utilizes interest rate swaps to manage certain
exposures related to changes in interest rates. This swap
activity includes transactions which were entered into in prior
years where the company acts as an intermediary for issuers whose
debt the company has guaranteed (Please see Footnote 16 of the
company's 1993 Annual Report to Shareholders for a discussion of
Financial Guarantees) to allow them to convert variable rate debt
to a fixed rate, with the company retaining no interest rate risk.
Interest rate swap activity also includes exchanging variable rate
asset returns for fixed rate returns.
The notional amount of the interest rate swaps with unrecognized
gains at September 30, 1994 was $386 million with an estimated
fair value of $15 million. The notional amount of the interest
rate swaps with unrecognized losses at September 30, 1994 was $529
million with an estimated fair value of $(21) million.
Instruments used for hedging may be subject to market and credit
risk. Market risk is the risk that future changes in market
prices may make a financial instrument less valuable. Credit risk
arises from the potential inability of counterparties to perform
under the terms of the contracts. Management does not believe
that the current level of hedging activity will have a material
effect on the company's liquidity or results of operations.
(Please see "General Account Investments" on page 39.)
Pursuant to a shelf registration statement declared effective by
the Securities and Exchange Commission ("the Commission") a
finance subsidiary may offer and sell up to $500 million of
preferred securities, guaranteed by the company. The proceeds
from any sale of these securities would be loaned from the
subsidiary to the company and, except as may otherwise be noted in
any offering documents related to such securities, used for
general corporate purposes.
Pursuant to other shelf registration statements declared effective
by the Commission during 1993, the company may offer and sell up
to an additional $550 million of securities.
<PAGE> 49
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
___________________________________________
On June 15, 1993, the company redeemed $200 million principal
amount of its 8 1/8 % Debentures whose scheduled maturity was
2007. The company recognized an after-tax extraordinary loss of
$5 million on the early redemption. On July 17, 1993, $137
million of the company's 7 3/4% Eurodollar Notes due 2016 were
redeemed at par at the option of the holders thereof.
During the third quarter of 1993, the company issued $200 million
of 6 3/8% Notes due in 2003, $200 million of 6 3/4% Debentures due
in 2013 and $200 million of 7 1/4% Debentures due in 2023. The
proceeds were primarily used to repay commercial paper borrowings,
a significant portion of which was incurred in connection with the
retirement of debt discussed above. The remaining proceeds were
used for general corporate purposes.
Dividends Declared
On September 30, 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 October 28,
1994, payable November 15, 1994.
Other Matters
_____________
For additional discussion of income taxes and severance and
facilities charges, please see the company's 1993 Annual Report to
Shareholders, 1993 Form 10-K, March 31, 1994 Form 10-Q and June
30, 1994 Form 10-Q. The following is intended to supplement those
discussions.
Income Taxes
Net unrealized capital gains and losses are presented in
shareholders' equity net of deferred taxes. At September 30,
1994, $431 million of net unrealized capital losses on available
for sale debt and equity securities were reflected in
shareholders' equity without deferred tax benefits. For federal
tax reporting purposes, capital losses are deductible only against
capital gains in the period of sale or during the carryback and
carryforward periods (three and five years, respectively). Due to
the expected full utilization of capital gains in the carryback
period and the uncertainty of future capital gains, deferred tax
benefits related to the $431 million of net unrealized losses were
not reflected in shareholders' equity. This had no impact on net
income for the three and nine months ended September 30, 1994, but
has the potential to adversely affect future results if and when
such losses are realized.
<PAGE> 50
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Other Matters (Continued)
_________________________
Severance and Facilities Charges
During the three and nine months ended September 30, 1994, the
company charged costs of $80 million and $131 million,
respectively, to the severance and facilities reserve established
in 1993 related to its cost reduction actions. Of the
approximately 4,000 positions expected to be eliminated,
approximately 2,600 had been eliminated by September 30, 1994 and
the related severance benefits charged against the reserve. The
remaining headcount reductions are expected to be completed by the
first half of 1995. The annual after-tax savings of approximately
$200 million related to these and other cost reduction actions are
expected by 1995. The total estimated savings of approximately
$200 million are expected to benefit individual segments by 1995
as follows:
<TABLE>
<CAPTION>
<S> <C>
Health and Life Insurance and Services................ $ 80
Financial Services.................................... 5
Commercial Property-Casualty Insurance and Services... 90
Personal Property-Casualty............................ 25
International......................................... -
_____
Total estimated savings............................... $ 200
_____
_____
</TABLE>
<PAGE> 51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In Re: Stepak v. Aetna Life and Casualty Company et al.
________________________________________________________
On October 22, 1990, a shareholder filed a lawsuit in United
States District Court for the District of Connecticut ("District
Court"). The suit, which was filed on behalf of a class of
company shareholders, named as defendants Aetna Life and Casualty
Company ("Aetna") and certain present and former Aetna officers
and directors.
The suit alleges that the defendants fraudulently and in violation
of federal securities laws failed, among other things, to
adequately disclose alleged deterioration in the value of mortgage
loan and real estate investment portfolios and that the plaintiff,
acting in reliance upon such allegedly misleading public
statements, purchased Aetna common stock at artificially inflated
prices. The suit seeks certification of the class and
compensatory and punitive damages.
In November 1990, the plaintiff filed an amended complaint. The
defendants moved to have the amended complaint dismissed. The
plaintiff subsequently filed a second amended complaint, and in
August 1991 the District Court denied the defendants' motion to
dismiss this complaint. In the interim, the plaintiff dropped all
but two of the original individual defendants. Subsequently, a
class was conditionally certified composed of purchasers of Aetna
common stock during the period from February 16, 1989 through
November 13, 1990, with some exceptions.
Aetna answered the complaint, denying all substantive averments,
and the parties engaged in substantial discovery. On September 8,
1994, the District Court entered a final judgment in favor of all
defendants. The plaintiff has filed an appeal from that judgment
to the United States Court of Appeals for the Second Circuit.
Aetna believes that the suit is neither supported as a matter of
fact nor as a matter of law and, with the other defendants, will
continue to contest vigorously the litigation.
In Re: Attorneys General Antitrust Litigation
______________________________________________
The description of this litigation is contained in Note 15 of
Notes to Financial Statements on page 19.
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.
<PAGE> 52
Other Litigation (Continued)
____________________________
While the ultimate outcome of the litigation described herein
cannot be determined at this time, such litigation (other than
that related to asbestos and environmental-related claims, which
is subject to significant uncertainties), net of reserves
established therefor and giving effect to reinsurance, is not
expected to result in judgments for amounts material to the
financial condition of the company, although it may adversely
affect results of operations in future periods. Future results
are expected to be adversely affected by losses for asbestos and
environmental-related claims and litigation expense. Due to
significant uncertainties, management is unable to determine
whether or not such effects on operations in future periods will
be material.
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth 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>
Nine Months Ended Years ended December 31
____________________________________
September 30, 1994 1993 1992 1991 1990 1989
__________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.... 4.26 (a) .42(b) 2.13 3.03 4.13
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 4.26 (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 nine months ended September 30, 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> 53
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
(10.1) Letter Agreement, dated September 20, 1994, between
Aetna Life and Casualty Company and Patrick W. Kenny.
(10.2) Aetna Life and Casualty Company 1994 Non-Employee
Director Deferred Stock Plan, incorporated herein by
reference to the company's proxy statement, filed on
March 18, 1994 (the "1994 Proxy Statement").
(10.3) Aetna Life and Casualty Company 1994 Stock Incentive
Plan, incorporated herein by reference to the
company's 1994 Proxy Statement.
(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 nine months ended
September 30, 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 LLP acknowledging
awareness of the use of a report on unaudited
interim financial information, dated
October 28,1994.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE> 54
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 October 28, 1994 By ROBERT E. BROATCH
(Signature)
Robert E. Broatch
Senior Vice President, Finance
and Corporate Controller
<PAGE> 1
September 20, 1994
Patrick W. Kenny
33 Fulton Place
West Hartford, CT 06107
Dear Pat:
The purpose of this letter is to set out the agreement that we have
reached as a result of our discussions regarding the cessation of your
full-time, active service as Group Executive and Chief Financial Officer
of Aetna Life and Casualty Company and its affiliates (collectively, the
"Company"). This agreement is subject to the approval of the Company's
Board of Directors. We have agreed that the last day of active service
will be December 30, 1994, or such earlier date as the Company shall
designate (in which case, your employment status will be changed to a
paid leave of absence until December 30, 1994 and your last day of
active service will be considered as December 30, 1994 notwithstanding
any such paid leave of absence.)
On January 2, 1995 you will begin a period of salary continuation at the
rate of $425,000 per year (your current annual base compensation). Your
benefits will be as described in Attachment A of this letter (which is a
part of this agreement). On May 3, 1996 your period of salary
continuation payments (i.e., 70 weeks) will cease. After May 3, 1996
your status will be that of a retired employee, eligible to participate
in all benefits then generally made available by the Company to
similarly situated retired executives.
During the first 13 weeks of the salary continuation period, you will be
eligible to participate in all normal Company benefit programs. For the
remaining period of salary continuation, you will be eligible to
continue in such programs other than sick pay, long-term disability, ISP
and vacation day accrual on the same basis as active employees.
We agree that in the event of your death prior to May 3, 1996, any and
all obligations under this agreement shall continue and any remaining
payments shall be made to your spouse.
You also agree that in exchange for the extension of salary continuation
payments equivalent in value to a period of 28 weeks of your regular
rate of compensation beyond the period for which you would otherwise be
eligible under current Company plans and policies (i.e., 42 weeks) and
for certain supplementary pension benefits and other consideration
described in Attachment A:
<PAGE> 2
you (for yourself and any other person claiming or deriving a right
from you) forever release and discharge Aetna Life and Casualty
Company and its affiliates (and the directors, employees and agents of
Aetna Life and Casualty Company and its affiliates) from any and all
liability, claims, demands and causes of action (by whatever name
called and whether known or unknown) which you had, have, or may have,
arising out of:
(i) your employment with the Company;
(ii) the cessation of such employment; or
(iii) any act, omission, occurrence or other matter related to such
employment or cessation of employment,
up to and including the effective date of this agreement. This
release includes, but is not limited to, claims under the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in
Employment Act, any other claims under federal, state or local law,
and claims for attorney's fees, costs and the like.
You promise that you will not institute a claim or charge of
employment discrimination with any agency or sue the Company, or its
directors, employees or agents, concerning any claim you have released
pursuant to this agreement. You agree that if you violate this
promise, you will be liable for, and will pay, all costs and expenses
of defending against the claim or suit, including reasonable
attorney's fees, incurred by the Company and those associated with the
Company. Further, you agree to sign an additional release on or about
December 30, 1994, substantially the same as the release contained
herein, for the period from the date upon which you sign this letter
to December 30, 1994.
In consideration of the payments and other benefits provided by the
Company under this agreement, you promise that:
a) you will cooperate with all reasonable requests made by the Company,
its subsidiaries or counsel, for assistance, including making
yourself available for interviews with Company counsel regarding
matters within the scope of or related to your duties while at the
Company;
b) you will not, for yourself or any other person or entity, directly
or indirectly, divulge, communicate or in any way make use of any
confidential, or proprietary information acquired in the performance
of your service for the Company without the prior written consent of
an appropriate Company officer;
c) you will not, without the prior written consent of an appropriate
Company officer (which shall not be unreasonably withheld) for a
period of two years following the date of this agreement, enter the
employ of, work with, or perform service for any person or entity
which is in direct competition with the Company;
<PAGE> 3
d) you will not disclose to any person or entity the terms and
conditions of, or any information acquired in connection with, this
agreement, without the prior written consent of an appropriate
Company officer, other than your legal, financial or career advisors
and the members of your immediate family, if they agree to maintain
confidentiality; and
e) you will not, for a period of one year after December 30, 1994,
directly or indirectly induce any employee, insurance agent,
insurance broker, or broker-dealer of the Company to be employed by
another organization or perform services elsewhere or solicit the
trade of any customers of the Company.
You acknowledge that you:
a) have been advised to consult an attorney before signing this
agreement and that you have had the opportunity to consult with an
attorney of your choice;
b) have had the opportunity to consider, for at least 45 days, this
agreement and the information provided by the Company as to the group
of employees to whom it has offered and with whom it has individually
negotiated similar agreements (as of the date indicated on such
information), any eligibility factors and time limits that were
applied, the job titles, and ages of such employees and the ages of
employees in your job class with whom the Company has not negotiated;
and
c) have read this agreement in its entirety, understand its terms and
knowingly and voluntarily consent to its terms and conditions.
The agreement will become effective on the eighth day following the date
you sign it and will supersede the letter agreement between you and the
Company dated December 1, 1987. You may revoke this agreement at any
time prior to its effective date by giving written notice of revocation
to me.
AETNA LIFE AND CASUALTY COMPANY
Date: September 29, 1994 By /s/ Ronald E. Compton
__________________ _____________________________
Ronald E. Compton
Title: Chairman
Date: September 28, 1994 /s/ Patrick W. Kenny
__________________ _____________________________
Patrick W. Kenny
<PAGE> 4
Attachment A
Salary Continuation As per second and third paragraphs of letter.
Stock Options Ineligible for additional awards. During salary
continuation: exercises governed by rules for active
employees. Exercises governed by rules for early
retirees thereafter.
Bonus Eligible for consideration for the 1994 performance
year; ineligible thereafter.
ACEShares Subject to the approval of the Committee on
Compensation and Organization, unvested award (upon
signing of the ACEShares Agreement) will vest based on
active service with the Company on a prorated basis
according to schedule provided performance
requirements are met.
Executive Life Continues during salary continuation provided that the
Split Dollar Agreement is not terminated. It should
be noted that this arrangement is under current
review. One of the options under consideration is
termination. In the event of such termination, no
further premium will be paid by the Company. At the
earlier of the end of salary continuation or the
termination of the Split dollar Agreement, Aetna may
withdraw its contribution and the policy may be
continued thereafter upon payment of full premium, if
any, without Company contribution. Nothing contained
herein shall limit the Company's rights as outlined in
the Split Dollar Agreement.
Medical/Dental Eligible to continue group medical/dental and life
insurance coverage, if any, through May 3, 1996.
Eligible for retiree benefits, as then in effect,
thereafter.
Retirement Plan Accruals under retirement plans continue during salary
continuation. Pension benefit will be calculated on
the basis of 25 years of service and attainment of
age 55.
ISP Active participation may continue during initial 90
day (13 weeks) salary continuation period.
<PAGE> 5
Attachment A (Continued)
Outplacement To be provided by the Company. In addition,
reimbursement of reasonable job search activities
(e.g., travel, lodging, and meals) pursuant to Company
expense reimbursement guidelines not to exceed
$15,000.00; provided, however, that reimbursement will
end upon the earlier of the acceptance of a position
or May 3, 1996.
Sick Pay and Long-Term
Disability Ineligible after expiration of first 13 weeks of
salary continuation.
Vacation Lump sum payment for accrued but unused vacation
days (up to a maximum of 25 days) no later than
December 30, 1994.
<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>
9 Months Ended
(Millions) September 30, 1994 1993 1992 1991 1990 1989
__________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 422.5 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 $ 663.8
Add back fixed charges............ 131.9 171.0 194.3 221.5 229.0 211.6
Minority interest................ 7.8 7.0 8.6 5.9 4.9 (1.9)
________ _________ ________ ________ ________ ________
Income (loss) as adjusted..... $ 562.2 (969.4) $ 81.5 $ 470.9 $ 693.5 $ 873.5
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Fixed charges:
Interest on indebtedness....... $ 71.1 77.4 $ 81.4 $ 110.9 $ 119.9 $ 113.2
Portion of rents representative
of interest factor............ 60.8 93.6 112.9 110.6 109.1 98.4
________ _________ ________ ________ ________ ________
Total fixed charges........... $ 131.9 171.0 194.3 221.5 229.0 211.6
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Preferred stock dividend
requirements.................... - - - - - $ 3.9
________ _________ ________ ________ ________ ________
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 131.9 171.0 $ 194.3 $ 221.5 $ 229.0 $ 215.5
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Ratio of earnings to fixed
charges......................... 4.26 (5.67) 0.42 2.13 3.03 4.13
________ _________ ________ ________ ________ ________
________ _________ ________ ________ ________ ________
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 4.26 (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
October 26, 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 LLP
_____________________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
October 28, 1994
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period ended
September 30, 1994 for Aetna Life & Casualty Company and is qualified in its
entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 35,723
<DEBT-CARRYING-VALUE> 2,059
<DEBT-MARKET-VALUE> 2,091
<EQUITIES> 1,689
<MORTGAGE> 12,716
<REAL-ESTATE> 1,391
<TOTAL-INVEST> 55,784
<CASH> 2,665
<RECOVER-REINSURE> 4,954
<DEFERRED-ACQUISITION> 1,963
<TOTAL-ASSETS> 95,407
<POLICY-LOSSES> 17,820
<UNEARNED-PREMIUMS> 1,614
<POLICY-OTHER> 17,541
<POLICY-HOLDER-FUNDS> 24,400
<NOTES-PAYABLE> 1,132
<COMMON> 1,418
0
0
<OTHER-SE> 4,440
<TOTAL-LIABILITY-AND-EQUITY> 95,407
8,440
<INVESTMENT-INCOME> 3,559
<INVESTMENT-GAINS> (51)
<OTHER-INCOME> 1,356
<BENEFITS> 9,369
<UNDERWRITING-AMORTIZATION> 562
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 423
<INCOME-TAX> 115
<INCOME-CONTINUING> 308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308
<EPS-PRIMARY> 2.73
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>There is not a significant difference between primary and fully diluted
earnings per share.
</FN>
</TABLE>
